Brentwood Outpatient, Ltd., In re

• Decision Date: 13 December 1994
• Docket Number: 93-5609,Nos. 93-5484,s. 93-5484
• Citation: 43 F.3d 256
• Parties: , 32 Collier Bankr.Cas.2d 909, 26 Bankr.Ct.Dec. 540 In re BRENTWOOD OUTPATIENT, LTD., d/b/a Brentwood Outpatient Medical Center, Debtor. BONDHOLDER COMMITTEE, Appellee/Cross-Appellant, v. WILLIAMSON COUNTY, TENNESSEE, Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 256

43 F.3d 256

63 USLW 2415, 32 Collier Bankr.Cas.2d 909,

26 Bankr.Ct.Dec. 540

In re BRENTWOOD OUTPATIENT, LTD., d/b/a Brentwood Outpatient

Medical Center, Debtor.

BONDHOLDER COMMITTEE, Appellee/Cross-Appellant, v. WILLIAMSON COUNTY, TENNESSEE, Appellant/Cross-Appellee.

Nos. 93-5484, 93-5609.

United States Court of Appeals, Sixth Circuit.

Argued April 25, 1994.

Decided Dec. 13, 1994.

Richard A. Buerger (argued and briefed), Elisabeth M. Carson, Petersen, Buerger & Moseley, and William J. Yost (briefed) and Steve Jordan, Yost & Robertson, Franklin, TN, for plaintiff-appellant cross-appellee.

William L. Norton, III (argued and briefed) and Kevin T. Sommers, Boult, Cummings, Conners & Berry, Nashville, TN, for defendant-appellee cross-appellant.

Before: MERRITT, Chief Judge; and MILBURN and SILER, Circuit Judges.

MERRITT, Chief Judge.

Several questions about the handling of secured interests in bankruptcy and a constitutional question are presented in this Chapter 11 appeal and cross-appeal involving postpetition additions to local property taxes (penalties, costs and attorneys' fees) which became due under Tennessee law after the debtor in possession failed to pay local property taxes. The primary questions the parties raise are issues of statutory construction under Sec. 506(b) of the Bankruptcy Code concerning the allowance of claims against property which is more valuable than the secured claims against it. We must decide whether in a Chapter 11 proceeding a local government may collect statutory (1) costs and attorneys' fees and (2) penalties of 1/2% per month which accrue on delinquent property taxes after the filing of the bankruptcy petition; and (3) whether any allowable penalties, costs, and fees are due up to the time the delinquent property taxes are paid or only up to the effective date of the Chapter 11 plan. Plaintiff also raises a Tenth Amendment issue, arguing that any interference with its collection of these statutory additions to tax violates the State's reserved powers to tax local property.

I.

Brentwood Outpatient, Ltd., a medical clinic near Nashville, is a voluntary Chapter 11 debtor. The clinic, which owned a three-story, 60,000-square foot, $4 million medical facility on 2.7 acres, filed its petition under 11 U.S.C. Sec. 301 in August 1989. The building was financed through the issuance of local industrial revenue bonds owned by investors represented in this case by the "Official Bondholders Committee." Property taxes on the building for tax year 1989 became due and payable to Williamson County in October 1989, two months after the petition was filed. Under Tennessee law the taxes became delinquent on March 1, 1990, after which the county was entitled to collect interest at 1% per month and penalty of 1/2% per month, ¹ as well as costs and lawyers' fees. ² The parties and the courts below agree that all these taxes and additions to taxes were secured by a statutory first-in-priority lien on the medical facility property. ³

The County asserted a claim for $29,961.12 in base tax, $4,494.17 in statutory interest, $2,247.08 in statutory penalties, $2,996.11 in attorney's fees, and roughly $1,900 in court costs. The value of the real property in question exceeded the total tax claim, making the claim "oversecured." A plan of reorganization proposed by the Bondholders Committee was confirmed on May 14, 1991, effective June 1, 1991. The plan classified the County as a "Class 3" creditor and provided that its claims "shall be paid in cash, in full, on the effective date of the plan." Fourth Amended and Restated Plan, articles II and IV. After confirmation of the plan, the Bondholders Committee paid the base tax plus prepetition and postpetition interest but objected to payment of the statutory penalties, attorneys' fees, and costs. So the amount of money at issue is small, but the legal questions presented are significant, frequently repeated in bankruptcy litigation, and unsettled in the Sixth Circuit.

On December 18, 1991, the bankruptcy court, Judge Lundin, in a thoughtful opinion, allowed the payment of delinquent penalties against the objection of the Bondholders Committee but disallowed the payment of costs and fees; held that the County's entitlement to penalties would run only up to the effective date of the reorganization plan, not to the date of payment of the taxes; and allowed postpetition interest up to the date of payment. In re Brentwood Outpatient, Ltd., 134 B.R. 267 (Bankr.M.D. Tenn.1991). (More accurately, the bankruptcy court held that postpetition interest ceased to accrue on the effective date of the plan but that "[a]fter the effective date, Williamson County is entitled to interest through the date of payment to insure payment of the present value of its allowed secured claim." Id. at 274.) On March 17, 1993, the District Court, Judge Wiseman, again in a well-reasoned opinion, affirmed these rulings. In re Brentwood Outpatient, Ltd., 152 B.R. 727 (M.D. Tenn.1993). In its appeal, the County seeks priority for its statutory costs and fees and seeks to have the penalties accrue up to the date of payment. The Bondholders Committee seeks a ruling that tax penalties which accrue postpetition should not be allowed as a valid claim in bankruptcy.

II.

The parties and the courts below have all focused on Sec. 506(b) of Chapter 11 as the most important provision governing the validity of the tax claims in this case. That section provides:

To the extent that an allowed secured claim is secured by property the value of which ... is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.

11 U.S.C. Sec. 506(b) (emphasis added). Because this section on its face seems to give instructions pertaining only to consensual claims (claims "under the agreement"), we initially found it difficult to accept that it was dispositive in the case of a nonconsensual lien such as the instant tax claim. (A "consensual" claim is one arising from a negotiated agreement, such as a security agreement giving the creditor an interest in specified collateral. A "nonconsensual" claim is one arising without a specific agreement, such as a tax claim arising by statute or a judgment lien resulting from litigation.) If Sec. 506(b) controls this case, the result is that a commercial creditor is placed in a better position for the purposes of bankruptcy than a state in its taxing authority. This seems incongruous to us because under the construction given by the courts below a bank or other lender which enters into a security agreement can collect its costs and fees as itemized in the agreement, but a state entitled by statute to collect costs and fees is denied them because they arise by operation of law and not under an agreement. Both the policy and the result clearly seem unwise. However, a historical inquiry into this area of bankruptcy law convinces us that such is in fact the case and that like the courts below we are constrained to so hold. The historical development of bankruptcy law overcomes what we would consider to be sound policy.

Early in this century Justice Holmes wrote for a unanimous Supreme Court that the United States had adopted, along with the basic English bankruptcy system, the "English rule" that even secured claims in bankruptcy were not entitled to postpetition interest. Sexton v. Dreyfus, 219 U.S. 339, 343-44, 31 S.Ct. 256, 257, 55 L.Ed. 244 (1911). The English rule was thought to serve the interest of providing a "certain date" for winding up the affairs of the bankrupt and distributing the estate. Id. Sexton did not address the treatment of secured tax claims in bankruptcy, and our bankruptcy regime has of course been amended several times since then. In a case at midcentury involving a state tax claim, however, the Court found that "[t]he long-standing rule against post-bankruptcy interest [still] appears implicit in our current Bankruptcy Act." New York v. Saper, 336 U.S. 328, 332, 69 S.Ct. 554, 556, 93 L.Ed. 710 (1949). While taxes received preferred treatment under the 1898 Bankruptcy Act, see Swarts v. Hammer, 194 U.S. 441, 444, 24 S.Ct. 695, 696, 48 L.Ed. 1060 (1904); Michigan v. Michigan Trust Co., 286 U.S. 334, 344, 52 S.Ct. 512, 515, 76 L.Ed. 1136 (1932), Justice Jackson wrote in 1949 in Saper that "by the 1926 amendment and the [1938] Chandler Act, Congress assimilated taxes to other debts for all purposes, including denial of post-bankruptcy interest." Saper, 336 U.S. at 337, 69 S.Ct. at 559. "Our present statute contains no provision expressly repudiating ... the rule stopping interest [upon filing, which has] been followed for more than a century and a half," id. at 330, 69 S.Ct. at 556, and "the statute as amended did not contemplate any exception in favor of tax claims." Id. at 338, 69 S.Ct. at 559. See also Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 163, 67 S.Ct. 237, 240, 91 L.Ed. 162 (1946) ("[t]he general rule in bankruptcy and in equity receivership has been that interest on the debtors' obligations ceases to accrue at the beginning of proceedings").

Aside from concerns about the efficient administration of bankruptcy, the basic theory behind the "English rule" was that allowing postpetition additions penalized either the debtor, whose "fresh start" was impeded, or the other creditors, particularly unsecured creditors who could cite neither an agreement nor a statute as a basis on which to claim additions. As the Supreme Court has said, secured claims accruing postpetition interest would continue to "absorb the assets of a bankrupt estate whose funds were already inadequate to pay the principal of the debts owed by the estate." Nicholas v. United States, 384 U.S. 678, 683-84, 86 S.Ct. 1674, 1679, 16 L.Ed.2d 853 (1966); see also Vanston, 329 U.S. at 163-64, 67...