Vecchio, In re
| Citation | 20 F.3d 555 |
| Decision Date | 05 April 1994 |
| Docket Number | No. 1756,D,1756 |
| Parties | -1659, 62 USLW 2628, 25 Bankr.Ct.Dec. 769, Bankr. L. Rep. P 75,798 In re Edward G. VECCHIO and Carol A. Vecchio, also known as Carol Reed, Debtors. UNITED STATES of America, Appellant, v. Edward G. VECCHIO and Carol A. Vecchio, a/k/a Carol Reed, Appellees. ocket 93-5003. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Gary D. Gray, Attorney, Tax Div., Dept. of Justice, Washington, DC (Michael L. Paup, Acting Asst. Atty. General, Washington, DC; Gary R. Allen, Janice B. Geier, Attys., Tax Div., Dept. of Justice, Washington, DC; Mary Jo White, U.S. Atty. for the Eastern District of New York, of counsel), for appellant.
Robert L. Pryor, Mineola, NY (Lynn Welter Sherman, Pryor & Mandelup, Mineola, NY, of counsel), for appellees.
Before: WINTER, MINER, and WALKER, Circuit Judges.
The United States of America appeals from a judgment of the United States District Court for the Eastern District of New York (Leonard D. Wexler, Judge ) affirming
the decision of the bankruptcy court which held that priority claims under 11 U.S.C. Sec. 726(a)(1) lose their priority status if they are tardily filed. We reverse the judgment of the district court and remand for further proceedings.
On September 28, 1988, Edward and Carol Vecchio ("debtors") filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code. They listed in their schedule of debts two obligations owed to the Internal Revenue Service ("IRS"): one for $792 owed on their 1986 personal income taxes and the other for $25,000 owed as withholding tax due from New Market Manufacturing, Inc. ("New Market"). The debtors were 70% shareholders of New Market, which had filed an earlier Chapter 7 bankruptcy petition in February of 1988.
The Clerk of the United States Bankruptcy Court for the Eastern District of New York sent a notice of the filing to all creditors but instructed them that it was unnecessary to file a claim because there were insufficient assets for distribution. On November 22, 1989, the Clerk sent all creditors a notice that payment of a dividend might be possible because assets had been discovered. The notice fixed February 20, 1990 as the deadline for filing proofs of claim.
On January 31, 1990, the IRS filed a proof of claim for income taxes for the years 1984 and 1986, totalling $2,203.43. On April 25, 1990 and May 15, 1990, the IRS filed amended claims reasserting the individual taxes due and asserting for the first time a $17,256.51 claim for withholding and FICA taxes owed by New Market in 1987. The claim for withholding and FICA taxes was assessed against debtors individually under 26 U.S.C. Sec. 6672 which attaches personal liability to persons who willfully fail to collect, or truthfully account for and pay over a corporation's withholding and unemployment taxes. The IRS filed its amended claims as unsecured priority claims under 11 U.S.C. Sec. 507(a)(7)(C).
The bankruptcy trustee moved in the bankruptcy court to expunge the IRS claim for withholding and FICA taxes as untimely. The IRS responded that a priority claim, which is paid as part of the first-tier of distribution of an estate under 11 U.S.C. Sec. 726(a)(1), does not have to be timely filed in order to retain its priority status. The bankruptcy court refused to afford the IRS's claim priority status under Sec. 726(a)(1) because it was filed late. However, instead of expunging the claim, the court reclassified it as a non-priority claim that would receive third-tier distribution pursuant to Sec. 726(a)(3). The district court affirmed the bankruptcy court's decision, see United States v. Vecchio, 147 B.R. 303 (E.D.N.Y.1992), and this appeal followed.
This appeal turns primarily on our interpretation of Sec. 726(a) of the Bankruptcy Code which spells out the order in which the assets of a Chapter 7 bankruptcy estate are distributed to unsecured creditors. It states in relevant part:
(a) Except as provided in section 510 of this title [which governs the subordination of claims], property of the estate shall be distributed--
(1) first, in payment of claims of the kind specified in, and in the order specified in, section 507 of this title;
(2) second, in payment of any allowed unsecured claim, other than a claim of a kind specified in paragraph (1), (3), or (4) of this subsection, proof of which is--
(A) timely filed under section 501(a) of this title;
(B) timely filed under section 501(b) or 501(c) of this title; or
(C) tardily filed under section 501(a) of this title, if--
(i) the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under section 501(a) of this title; and
(ii) proof of such claim is filed in time to permit payment of such claim;
(3) third, in payment of any allowed unsecured claim proof of which is tardily filed under section 501(a) of this title (4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim;
other than a claim of the kind specified in paragraph (2)(C) of this subsection;
(5) fifth, in payment of interest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this subsection; and
(6) sixth, to the debtor.
This statutory scheme thus provides for ordered distribution to tiers of claims in the following manner: first, priority claims; second, unsecured claims that were either timely filed or tardily filed where the creditor did not have proper notice of the bankruptcy but was able to file in time to permit payment; third, tardily filed unsecured claims where the creditor did have proper notice or did not have proper notice but failed to file in time to permit payment; fourth, claims in the nature of fines, penalties, and forfeitures relating to punitive damages; and fifth, claims for appropriate interest. Any remaining assets revert to the debtor.
Claims in the first tier are the priority claims found in Sec. 507 of the Bankruptcy Code. The IRS argues that its claim for withholding and FICA taxes falls under Sec. 507(a)(7)(C), which refers to "a tax required to be collected or withheld and for which the debtor is liable in whatever capacity," and should therefore receive first-tier distribution pursuant to Sec. 726(a)(1). The trustee does not dispute the priority status of an IRS claim for withholding and FICA taxes under Sec. 507 or that the claim asserted by the IRS in this case falls within that category. Rather, the trustee argues that because the claim was untimely, it should be subordinated to the third tier and treated as an unsecured claim that was tardily filed after the creditor received proper notice of the bankruptcy.
We believe that the trustee's argument is at odds with the plain language of Sec. 726(a). Section 726(a)(1) accords priority status to claims specified in Sec. 507 without regard to the timeliness of their filing. In sharp contrast, subsections (a)(2) and (a)(3) of Sec. 726 categorize non-priority unsecured claims into those that are timely filed, those that are tardily filed where the creditor did not have proper notice of the bankruptcy, and those that are tardily filed where the creditor received proper notice of the bankruptcy. Thus, Congress plainly knew how to distinguish between timely and tardily filed claims, yet did not make that distinction for claims filed under Sec. 507. The absence of a timeliness distinction in Sec. 726(a)(1) strongly suggests that this subsection encompasses all priority claims whenever filed.
Legislative history mirrors this reading of Sec. 726(a). Explaining how this statute orders distribution of an estate, the House and Senate Reports both state as follows:
First, property is distributed among priority claimants, as determined by section 507, and in the order prescribed in section 507. Second, distribution is to general unsecured creditors. This class excludes priority creditors and the two classes of subordinated creditors specified below. The provision is written to permit distribution to creditors that tardily file claims if their tardiness was due to lack of notice or knowledge of the case. Though it is in the interest of the estate to encourage timely filing, when tardy filing is not the result of a failure to act by the creditor, the normal subordination penalty should not apply. Third distribution is to general unsecured creditors who tardily file.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 383 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6339; S.Rep. No. 989, 95th Cong., 2d Sess. 97 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5883. Although this history does not specifically address whether Sec. 726(a)(1) claims retain their priority status even if untimely filed, it draws no distinction between priority claims that are timely or tardily filed while doing so with regard to general unsecured claims. Moreover, it explicitly states that priority claims filed under Sec. 507 are "exclude[d]" The trustee asserts that the IRS's claim cannot fit within the first tier because it was untimely filed. But if not in the first tier, where does it belong? The claim is specifically foreclosed from the second tier because subsection (a)(2) expressly excludes "a claim of a kind specified in paragraph (1)." The legislative history confirms that the second tier "excludes priority creditors." H.R.Rep. No. 595, at 383; S.Rep. No. 989, at 97, 1978 U.S.C.C.A.N. at 5883, 6339.
from the second tier of distribution. Finally, it describes third-tier claims as...
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