The opinion of the court was delivered by: WOOD
The Referee refused to rehear the matter and he dismissed this petition whereupon the trustee filed the instant petition for review with this Court.
The question of postponement of liens arises because on the date of the filing of the petition for arrangement there existed in the Bureau of Corporation Taxes, Department of Revenue, Commonwealth of Pennsylvania, liens of record for unpaid corporate taxes.
The trustee asserts that the liens of the Commonwealth of Pennsylvania existed on October 31, 1962,
the date Lehigh Valley Mills, Inc., filed its petition for arrangement under Chapter XI of the Bankruptcy Act.
It is further asserted by the trustee that under Pennsylvania law liens for unpaid corporate taxes are superior to all other liens on the property in question from the date of settlement, assessment or determination. Act of August 19, 1953, P.L. 1146, § 6; 72 P.S. 1401 (Supp.1963). Such liens, it is argued, are subject to postponement under § 67, sub. c of the Bankruptcy Act, and under the decision in In re Quaker City Uniform Company, 238 F.2d 155 (3 Cir. 1956), the postponement of such statutory liens for corporate taxes will postpone the liens of the perfected security interests of the Small Business Administration in payment to those claims given priority under § 64, sub. a(1) and (2) of the Bankruptcy Act.
The trustee is not concerned whether the taxes are ever paid. The trustee's concern is to keep the fund realized on the sale of the collateral available for the payment of administrative expenses and wage claims, which he considers his duty under In re Quaker City Uniform Co., supra.
The Small Business Administration (Administration) is an agency of the Federal Government created to encourage free competition and to preserve the economic well being and security of the Nation. Small Business Act, 15 U.S.C.A. § 631, 633. Small Business Administration v. McClellan, 364 U.S. 446, 81 S. Ct. 191, 5 L. Ed. 2d 200 (1960). Pursuant to this policy the Administration participated in a $ 100,000 loan to the Bankrupt to the extent of 51 per cent. The remaining 49 per cent was advanced by the Girard Trust Corn Exchange Bank of Philadelphia (24%) and The First National Bank of Allentown to the extent of 25 per cent. The mortgage and bond and the note were made payable to The First National Bank of Allentown which acted as servicing agent for the loan and which held securities for the payment of the loan.
A security agreement dated June 4, 1962 covers all the inventory and accounts receivable of the Bankrupt. The First National Bank of Allentown was the secured party and the Bankrupt is the debtor. A financing statement covering the inventory and accounts receivable was filed in the Prothonotary's Office of Lehigh County on May 29, 1962 and in the Office of the Secretary of the Commonwealth on May 31, 1962.
This perfected security interest was assigned to the Administration by The First National Bank of Allentown in accordance with the terms of the participation agreement between the banks and the Administration. The Administration then moved to reclaim the personal property covered by this security agreement and financing statement and to dispose of the same at a Commercial Code sale. This authority was granted by the Referee's order of September 10, 1963.
'Whether liens in favor of the Commonwealth of Pennsylvania for taxes, which may be subject to postponement under Section 67(c) of the Bankruptcy Act, will set in motion a circuity of liens such as was found to exist in Quaker City Uniform Co., Inc. (3rd Circuit, 1956), 238 F.2d 155, and render the lien or security interest of Small Business Administration to a position following costs of administration, priority wage claims and the liens for taxes of the Commonwealth of Pennsylvania?
'The Referee held that the circuity of liens which had been set in motion by the lien of the landlord's distraint in Quaker City Uniform case had not taken place here.'
At the outset it is necessary to determine whether Federal or State law controls the disposition of this matter. 'Except in situations where federal law has spoken, priority among liens is determined by the law of the state.' In re Quaker City Uniform Co , supra, 238 F.2d at p. 157. In that case the competing liens were held by a chattel mortgagee and a landlord. No federal lien was involved.
The Federal law in this area is in part contained in 15 U.S.C.A. § 646 of the Small Business Act dealing with liens, as follows:
'Any interest held by the Administration in property, as security for a loan, shall be subordinate to any lien on such property for taxes due on the property to a State, or political subdivision thereof, in any case where such lien would, under applicable State law, be superior to such interest if such ...