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Volume 2 - Opinions of Counsel SBEA No. 115

Opinions of Counsel index

Taxes (collection, court order enjoining) (delinquent taxes of bankrupt railroad) - U.S. Code, Title 11; Real Property Tax Law, § 938(2):

Pursuant to U.S. Code, Title 11, § 35, a discharge in bankruptcy releases a bankrupt from all of his provable debts except taxes which become legally due and owing by the bankrupt within the three years preceding bankruptcy.

Our opinion has been requested relating to the liability of the State for certain delinquent taxes against real property to which the State now holds title in the Village of Cleveland.

Specifically, the real property was previously owned by the New York Ontario and Western Railroad. In 1937 the railroad filed a petition of bankruptcy, and the subsequent period of receivership consisted of twenty years. The Village of Cleveland now believes that certain real property taxes which were not paid during this period should be satisfied by the State.

The basic starting point in a discussion of bankruptcy law must be the factor of the supremacy of Federal law in relation to State and local statutes. Clause 4 of section 8 of Article I of the United States Constitution provides that the Congress shall have power to establish uniform laws on the subject of bankruptcy throughout the United States. Pursuant to this authorization, Congress has periodically passed, and the President has approved, statutes relating to bankruptcy, the current form of which is known as the Bankruptcy Act (U.S. Code, Title 11, § 1-1103).

There are two basic principles of bankruptcy law as it relates to the accumulation and discharge of state and local tax liens. First, interest and penalties do not accrue against a tax lien subsequent to the date of Bankruptcy (New York v. Saper, 336 U.S. 328, 69 S.Ct. 554, 93 L.Ed. 710). Second, a discharge in bankruptcy releases a bankrupt from all his provable debts except taxes which became legally due and owing by the bankrupt within the three years preceding bankruptcy (Bankruptcy Act, § 17 (U.S. Code, Title 11, § 35)).

The information which has been supplied to us indicates that the delinquent taxes for which the Village seeks satisfaction were those which became due and owing in the years 1938 through 1941 and 1950 through 1955.

The report of the New York State Department of Law in regard to this acquisition contains the following determination:

“The railroads concerned herein were in reorganization in the Federal Court since 1937. The United States of America commenced its action to liquidate the railroads in January 1957. On May 11, 1957, the U.S. District Court entered an order directing the Receivers of the Railroads to offer the property of the railroads for sale to the highest bidder. In late June the sale was held and the premises concerned herein were bid in by Stanley G. Falk, who assigned his bid to Herman Caro, the claimant herein. On July 11, 1957, the said Court entered an order accepting the Falk-Caro bid and directing that a deed be delivered. The deeds herein were dated November 25, 1957 and recorded November 26, and 27, 1957.

“All these orders and deeds refer to each other and recited the premises were to be sold ‘free and clear of all liens and encumbrances, including liens, claim to lien and obligations accruing to any State, if any, arising out of the operation or ownership of the railroads’; hence the Law Department takes the position that the lien of the taxes that became a lien on January 1, 1957, and all prior taxes were no longer liens on the premises but were transferred to the proceeds of sale in the words of the Court orders ‘that the proceeds of sale shall be received subject to any liens existing upon the aforesaid properties at the time of sale and that the receivers shall segregate such proceeds in a capital account or accounts to be applied or disposed of as this Court by further order may direct.’ Thus, the investigations of this office were limited to the taxes which became a lien after January 1, 1957.”

In view of the foregoing discussion of the Bankruptcy Law, we certainly concur with the report of the New York State Department of Law, and it is our opinion that liens for delinquent taxes for the years 1938 through 1941 and 1950 through 1955 are no longer enforceable.

March 16, 1973

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