On July 31, 1962, Tamasha Town and Country Club ("Tamasha") filed a petition for an arrangement under section 322, Chapter XI of the Bankruptcy Act ("Act"). (11 U.S.C. Sec. 722.) Operations were continued under "debtor in possession" status. Tamasha's First Amended Plan of Arrangement was confirmed on January 21, 1965. In accordance with the plan of arrangement, $14,000 was deposited by Tamasha to pay the priority creditors, pursuant to section 337(2) of the Act. (11 U.S.C. Sec. 737(2).) However, before any significant payments1 were made from this fund,2 the ailing company succumbed altogether and was adjudicated bankrupt on November 4, 1965.3 The trustee then transferred the unpaid deposits to the trustee's account.

On January 27, 1970, the United States filed a priority claim of $6,774.09 and a claim of $7,603 as an expense of administration. Both claims represent accrued and unpaid taxes. With respect to the priority claim, $5,328.95 is pre-Chapter XI debt, tax obligations which arose before the filing of the petition for an arrangement. The remaining $9,048.144 is post-Chapter XI debt, tax obligations which accrued after the filing of the petition and during the now aborted plan of arrangement period. The referee required the trustee to satisfy the priority tax claim ($6,774.09) prior to any other distribution and allowed the expense of administration claim ($7,603) to share pro rata with other such claims.5

The trustee does not dispute the ruling on the expense of administration claim. He argues, however, that $1,445.14 of the priority claim (the post-Chapter XI filing portion) should also be treated as an expense of administration and that the remaining $5,328.95 (pre-Chapter XI debt) should not be given a superpriority, but should be treated in accordance with section 64(a) of the Act. (11 U.S.C. Sec. 104(a).) Claims for taxes accrued before the Chapter XI filing are given a fourth priority under section 64(a), well behind costs and expenses of administration. We hold that segregation of funds under a plan of arrangement, absent actual transfer, does not establish priorities that survive an adjudication of bankruptcy.

The trust fund theory advanced by the Government here is similar to that rejected in United States v. Randall (1971) 401 U.S. 513, 91 S.Ct. 991, 28 L.Ed.2d 273. In Randall, the Government's general trust fund theory was bolstered by reference to the explicit trust created by the Internal Revenue Code (26 U.S.C. Sec. 7501(a)). The Court held that the Bankruptcy Act is "an overriding statement of federal policy on this question of priorities" and made reference to "the strong policy of Sec. 64(a)(1) of the Bankruptcy Act." (401 U.S. at 515, 517, 91 S.Ct. at 992, 994; see also Nicholas v. United States (1966) 384 U.S. 678, 691, 86 S.Ct. 1674, 1683, 16 L. Ed.2d 853.) The opinion traced the history of legislative change which has continuously subordinated tax claims and elevated the priority of administrative costs and expenses, concluding "We think the statutory policy of subordinating taxes to costs and expenses of administration would not be served by creating or enforcing trusts which eat up an estate, leaving little or nothing for creditors and court officers whose goods and services created the assets." (401 U.S. at 517, 91 S.Ct. at 994.) The rationale and holding in Randall compel reversal here.

The Government would distinguish Randall on three bases: (1) Randall involved the interplay of two federal acts, while the instant case involves only the Bankruptcy Act; (2) in Randall no fund for taxes was actually segregated; and (3) the plan of arrangement in the instant case aborted after judicial confirmation, and therefore after the parties' rights had vested. None of these factors is determinative.

The trust asserted in Randall was that specifically created by 26 U.S.C. Sec. 7501(a).6 Here the Government asks us to enforce an implied trust, said to be found in the nexus of sections 337(2) and 367(2) of the Bankruptcy Act.7 However, the Randall rule depends on the effect of the trust claimed, and not on its alleged source. We will not create or enforce an implied trust which would accomplish a reversal of the congressional policy favoring administration expenses over tax claims as fully as would the express trust in Randall. Nor does the Randall rule depend upon isolation of particular funds. In Randall, the trustee argued that since the debtor in possession had failed to segregate the taxes withheld, no trust in favor of the United States resulted. (401 U.S. at 515, 91 S.Ct. 991.) Instead of adopting this argument, the Court chose to place its ruling on the survey of legislative developments favoring administrative expenses over tax claims and on the overriding policy of section 64(a), as discussed above.

Finally, nothing is added to the Government's case by its assertion that the parties' rights "vest" upon confirmation of the plan of arrangement. Such a characterization merely restates the issue presented here. Normally, confirmation of a plan does not freeze the rights of the parties.8 Indeed, section 377(2) of the Act (11 U.S.C. Sec. 777(2)) provides that even after confirmation the court may adjudge the debtor in default and subject to bankruptcy proceedings.9 The parties cannot bind the ensuing bankruptcy court and avoid the statutory provisions of section 64(a) by their agreements under a plan of arrangement made at the very moment it becomes apparent that the future of the debtor is, at best, uncertain.10 The rule of this circuit is that where a debtor operating under a plan of arrangement is adjudicated bankrupt, the adjudication relates back to the filing of the original Chapter XI arrangement petition. (E. g., Miller v. Woolley (9th Cir. 1940) 141 F.2d 837, 841.) Any other rule would penalize the debtor attempting to redeem itself under a supervised plan of arrangement vis-a-vis the debtor proceeding directly to bankruptcy.11 No such result is contemplated by the Act or permitted by Randall.

Thus, none of the distinctions pressed by the Government persuade us to resurrect the sort of trust fund theories interred by Randall. This holding promotes the policy objective of preserving section 64(a) as an integrated system allocating priorities in bankruptcy. Refusing to create superpriorities also furthers the goal of sound administration in bankruptcy by continuing to insure the primacy of the costs and expenses necessary to liquidate, administer, and close the estate in bankruptcy. When the Chapter XI arrangement collapsed, accrued but unpaid taxes became subject to the priorities specified in section 64(a). The referee erred in permitting a priority tax claim of $6,774.09. Of this amount, $1,445.14 constitutes an expense of administration for the superseded arrangement period. The remaining $5,328.95 is pre-Chapter XI tax debt, and, as such, is to be accorded a fourth priority under section 64(a).

Reversed.

I respectfully dissent.

The majority, in reversing the Court below, relies upon United States v. Randall, 401 U.S. 513, 91 S.Ct. 991, 28 L. Ed.2d 273 (1971), which involved conflicting sections of the Internal Revenue Code1 and the Bankruptcy Act2 competing for the same fund.3

The Court held that because Congress did not so intend, Sec. 7501(a) does not create a trust for taxes withheld during an arrangement proceeding. The Court did not hold that a fund deposited pursuant to Sec. 337 of the Act (11 U.S.C. Sec. 737) was to be disbursed, after confirmation, in accordance with Sec. 64(a) rather than Sec. 367(2) of the Act4 (11 U.S.C. Sec. 767(2).) Moreover, it was not held that no trusts in bankruptcy were to be created or enforced.

Of course, we are guided by the reasoning of the Supreme Court as well as its holding. Underlying the Randall Court's application of the statutory policy of subordinating taxes to the costs and expenses of administration was the premise that to enforce the statutory trust under the facts of Randall would "eat up" the estate created by creditors and court officers.5 The fund here, though, is a Sec. 337 deposit for the payment of all priority creditors as distinguished from the accounts created in Randall. In the ordinary case,6 the fund deposited pursuant to Sec. 337 of the Act is not derived from the bankrupt's estate and is not created by the creditors entitled to priority under Sec. 64(a)(1), (2), (3).7

Under the facts of this case, neither the holding of Randall, nor the Court's reason for invoking the statutory policy is applicable.

In the absence of contrary authority to be found in the statutes or cases, I would give effect to the mandatory language of Sec. 367(2) of the Bankruptcy Act, and the orders of the Referee in Bankruptcy by imposing a constructive trust upon the fund to the extent that it should have been disbursed prior to the termination of the arrangement.8 This result avoids a strained construction of Randall and comports with the equitable nature of a Court of Bankruptcy.9