Century Boat Co., In re

• Citation: 986 F.2d 154
• Decision Date: 19 February 1993
• Docket Number: No. 91-2270,91-2270
• Parties: -1020, 61 USLW 2563, 23 Bankr.Ct.Dec. 1700, Bankr. L. Rep. P 75,131 In re CENTURY BOAT COMPANY, Debtor. INTERNAL REVENUE SERVICE, Plaintiff-Appellant, v. CENTURY BOAT COMPANY, Defendant-Appellee, David G. Kipley, Trustee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 154

986 F.2d 154

71 A.F.T.R.2d 93-1020, 61 USLW 2563,

23 Bankr.Ct.Dec. 1700,

Bankr. L. Rep. P 75,131

In re CENTURY BOAT COMPANY, Debtor INTERNAL REVENUE SERVICE, Plaintiff-Appellant, v. CENTURY BOAT COMPANY, Defendant-Appellee David G. Kipley, Trustee.

No. 91-2270.

United States Court of Appeals Sixth Circuit.

Argued Aug. 4, 1992.

Decided Feb. 19, 1993.

Keith V. Morgan, U.S. Dept. of Justice, Tax Div., Gary R. Allen, Acting Chief (briefed), Kenneth L. Greene, Joel A. Rabinovitz (argued), U.S. Dept. of Justice, Appellate Section Tax Div., Washington, DC, Ruth Ann Ernst, John A. Smietanka, U.S. Atty., Office of the U.S. Atty., Grand Rapids, MI, for I.R.S.

David M. Kipley (argued and briefed), Brott, Conway & Kipley, Acme, MI, for David G. Kipley.

Edward D. Plato, Kohl, Secrest, Wardle, Lynch, Clark & Hampton, Farmington Hills, MI, for Century Boat Co.

Before: MARTIN and SILER, Circuit Judges; and DOWD, District Judge. ^*

BOYCE F. MARTIN, Jr., Circuit Judge.

The Internal Revenue Service filed an untimely proof of claim against the bankruptcy estate of Century Boat Company for unpaid federal taxes. The bankruptcy trustee for Century Boat objected to the claim on the basis of its untimeliness, and the bankruptcy court sustained the objection. The district court affirmed the decision of the bankruptcy court, holding that the failure of the Internal Revenue Service to file its proof of claim promptly after receiving notice of the bankruptcy deprived it of priority distribution under 11 U.S.C. § 726(a)(1). The Internal Revenue Service appeals the judgment of the district court. Because the Service's claim is entitled to priority until distribution of the estate, the claim does not lose this priority simply because the Service filed its claim in an untimely manner.

On December 15, 1986, three creditors of Century Boat filed a petition against the company for involuntary bankruptcy under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq. Century Boat did not contest the petition, and David G. Kipley was appointed interim trustee on December 18, 1986. The notice of the first meeting of creditors and of the bar date for filing proofs of claim was docketed on April 29, 1987. This notice set the first meeting of creditors for May 28, 1987 and established August 27, 1987 as the bar date for filing all claims against the estate. The schedule of creditors did not list the Internal Revenue Service as a creditor; therefore, the Service did not receive a copy of this notice.

The Internal Revenue Service received a letter from the trustee, dated December 2, 1987, notifying the Service that Century Boat was in bankruptcy and that the bar date for filing claims against the estate had passed. The trustee's letter also provided the Internal Revenue Service with the address of the bankruptcy court in the event that it decided to file a proof of claim. On April 26, 1988, the Internal Revenue Service was first served with the April 27, 1987 notice of the first meeting of creditors and the August 27, 1987 bar date. The bankruptcy court found that, at the latest, the Internal Revenue Service received notice of Century Boat's bankruptcy on April 26, 1988. As of April 26, 1988, Century Boat had not filed a Form 941 (Employer's Quarterly Federal Income Tax Return) for withholding and FICA taxes for the fourth quarter of 1986, nor had it filed its Form 940 (Employer's Annual Federal Unemployment Tax Return) for the payment of federal unemployment (FUTA) taxes for the 1986 tax year. Moreover, Century Boat's trustee did not file these returns on behalf of Century Boat. As a result, the Internal Revenue Service conducted an audit of Century Boat and filed both delinquent tax returns for Century Boat on March 14, 1989. On March 22, 1990, the Internal Revenue Service filed its first proof of claim against Century Boat for $237,965.75 in unpaid federal taxes. The Internal Revenue Service also asserted that this claim should receive priority distribution over the claims of other general unsecured creditors pursuant to 11 U.S.C. §§ 507(a)(7) and 726(a)(1). Subsequently, the Internal Revenue Service amended this claim to $116,839.55 on February 21, 1991. No distribution of Century Boat's estate has been made.

On April 22, 1990, the trustee filed an objection to the priority claim of the Internal Revenue Service on the ground that the Service had not timely filed the claim. On March 11, 1991, the bankruptcy court upheld the trustee's objection, relying on our decision in United States v. Cardinal Mine Supply, Inc., 916 F.2d 1087 (6th Cir.1990). Although it recognized that Cardinal Mine Supply allows untimely proofs of claim to retain their priority status in some circumstances, the bankruptcy court construed Cardinal Mine Supply to require prompt filing of a proof of claim once the creditor receives notice of the bankruptcy. Because the Internal Revenue Service had not filed its claim until two years after learning of Century Boat's bankruptcy, the bankruptcy court sustained the trustee's objection. The district court affirmed the judgment and reasoning of the bankruptcy court.

"[I]n appeals from the decision of a district court on appeal from the bankruptcy court, the court of appeals independently reviews the bankruptcy court's decision, applying the clearly erroneous standard to findings of fact and de novo review to conclusions of law." In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st Cir.1991). See also In re Martin, 761 F.2d 1163, 1166 (6th Cir.1985). Whether the proof of claim filed by the Internal Revenue Service receives priority despite its untimely filing is a question of law; therefore, we review the conclusion of the bankruptcy court in this case de novo. See Cardinal Mine Supply, 916 F.2d 1087.

In this case, the Internal Revenue Service is an unsecured creditor because neither a tax lien nor encumbered property secures Century Boat's obligation. "An unsecured creditor ... must file a proof of claim or interest ... for the claim or interest to be allowed." Bankr.R. 3002(a). In a chapter 7 liquidation, the creditor must file the proof of claim within 90 days after the first date set for the meeting of creditors. Bankr.R. 3002(c). The Bankruptcy Code, 11 U.S.C. § 507, establishes which claims against a bankrupt estate receive priority distribution and the order of priority. The Internal Revenue Service's claim for unpaid federal taxes in this case is entitled to priority under section 507(a)(7). Distribution of the estate follows the order established in 11 U.S.C. § 726, which provides in pertinent part,

(a) Except as provided in section 510 of this title, 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 (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, other than a claim of the kind specified in paragraph (2)(C) of this subsection;

. . . . .

Therefore, had the Internal Revenue Service received notice and timely filed its proof of claim, the claim would have received priority under section 507(a)(7), and the Internal Revenue Service would have received priority distribution under section 726(a)(1). The Internal Revenue Service, however, argues that our decision in United States v. Cardinal Mine Supply, Inc., 916 F.2d 1087 (6th Cir.1990), affords priority distribution for its claim under section 726(a)(1) whether or not the Internal Revenue Service meets the timeliness requirements established in Bankruptcy Rule 3002(c).

In Cardinal Mine Supply, we reviewed the priority scheme established in sections 507 and 726 in relation to an untimely proof of claim filed by the Internal Revenue Service for unpaid employment taxes against the debtor's estate. As in this case, the Internal Revenue Service did not receive notice of the bankruptcy until almost two years after the bar date for filing proofs of claims had passed. In Cardinal Mine Supply, the Internal Revenue Service filed its claim as a priority claim within 10 days after it learned that the debtor was in bankruptcy. To determine whether the Internal Revenue Service...