Deer Park, Inc., In re, 92-15802

• Decision Date: 06 December 1993
• Docket Number: No. 92-15802,92-15802
• Citation: 10 F.3d 1478
• Parties: -501, 62 USLW 2375, 94-1 USTC P 50,074, 30 Collier Bankr.Cas.2d 440, 25 Bankr.Ct.Dec. 25, Bankr. L. Rep. P 75,671 In re DEER PARK, INC., aka Deer Park Ski Area, Debtor, UNITED STATES INTERNAL REVENUE SERVICE, Appellant, v. CREDITORS COMMITTEE; Deer Park, Inc., Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1478

10 F.3d 1478

73 A.F.T.R.2d 94-501, 62 USLW 2375, 94-1

USTC P 50,074,

30 Collier Bankr.Cas.2d 440, 25 Bankr.Ct.Dec. 25,

Bankr. L. Rep. P 75,671

In re DEER PARK, INC., aka Deer Park Ski Area, Debtor UNITED STATES INTERNAL REVENUE SERVICE, Appellant, v. CREDITORS COMMITTEE; Deer Park, Inc., Appellees.

No. 92-15802.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Oct. 6, 1993.

Decided Dec. 6, 1993.

Gary D. Gray and James A. Bruton, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellant.

Gerald F. Ellersdorfer, San Francisco, CA, for appellees.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before: FERGUSON, THOMPSON and O'SCANNLAIN, Circuit Judges.

DAVID R. THOMPSON, Circuit Judge:

This is an appeal from the Bankruptcy Appellate Panel's ("BAP") decision in United States v. Deer Park, Inc. (In re Deer Park, Inc.), 136 B.R. 815 (9th Cir. BAP1992). The BAP affirmed an allocation order of the bankruptcy court which required the Internal Revenue Service ("IRS") to credit payments made to it in a liquidating plan of reorganization under Chapter 11 of the Bankruptcy Code, first to the withholding tax trust fund portion of the debtor's tax liability. Sufficient payments were made to satisfy this trust fund portion of the IRS's claim, but approximately $20,000 of the claim remained unpaid. The effect was that the debtor's president was relieved of his personal liability for payment of the trust fund taxes, while the IRS had only a possibility that the full amount of its claim would be paid.

The IRS appeals. We have jurisdiction under 29 U.S.C. Sec. 158(d) (1988), and we affirm.

FACTS

Deer Park, Inc. ("Deer Park") developed and built a ski resort at Lake Tahoe, California. Gerhard Stoll was Deer Park's president and controlling shareholder from 1980 until September, 1983, when Poma of America, Inc. ("Poma"), a secured creditor of Deer Park, gained control of the corporation and removed Stoll as president. On December 22, 1983, Stoll filed an involuntary Chapter 11 bankruptcy proceeding against Deer Park. Three months later, Poma relinquished control, and Stoll regained his position as president, which he still holds.

The IRS filed a claim in the Chapter 11 proceeding. The claim was for $94,202.31. It included employee withholding taxes which Deer Park had withheld from employee earnings, but which it had failed to pay over to the government. Stoll was personally liable for these taxes because he was the individual responsible to collect, account for and pay them over to the IRS. See 26 U.S.C. Sec. 6672(a) (Supp.1991). The taxes are referred to as "trust fund" taxes because 26 U.S.C. Sec. 7501(a) requires that they be held in trust for the federal government. See United States v. Energy Resources Co., 495 U.S. 545, 547, 110 S.Ct. 2139, 2141, 109 L.Ed.2d 580 (1990) (citing Slodov v. United States, 436 U.S. 238, 242-43, 98 S.Ct. 1778, 1783, 56 L.Ed.2d 251 (1978)).

The IRS's $94,202.31 tax claim consisted of a priority tax claim of $18,414.33, a secured claim of $72,669.13, and a general unsecured claim of $3,118.85. Deer Park's Chapter 11 liquidating plan of reorganization ("the Plan") provided for the payment in full of all priority and secured claims from $275,000 of proceeds from the sale of all of Deer Park's real property and other assets to Alpine Meadows Ski Corporation ("Alpine Meadows"). ¹ The Plan also provided that in the event Alpine Meadows were to re-sell the real property within five years of the close of escrow, Alpine Meadows would pay Deer Park 50% of the sales price exceeding $275,000, and if Alpine Meadows were to use the ski area portion of the property for downhill skiing within ten years of the close of escrow, Alpine Meadows would transfer to Deer Park a 25% equity interest in the entities conducting the operations in the ski area and would pay Deer Park 60% of the net operating cash flow until the payments reached $1.5 million. The Committee's Disclosure Statement cautioned there was no assurance or present indication that either event would occur.

Stoll negotiated the sale of Deer Park's real property and other assets to Alpine Meadows. He worked with the Creditors Committee ("the Committee") and on Deer Park's behalf without compensation, and continues to do so. He did so pursuant to an understanding with the Committee that his personal liability for the unpaid trust fund taxes would be discharged by payments to the IRS under the plan of reorganization.

Stoll and the Committee asserted in the bankruptcy court, as the Committee does on appeal, that he is the only person fully familiar with all aspects of Deer Park and its business. He has maintained contact with Alpine Meadows, the United States Forest Service, and local planning agencies; has worked to promote the reopening of Deer Park; and the Committee contends his services continue to be necessary because they provide the creditors with the best chance that the contingent payments specified in the Plan will be realized.

On October 16, 1985 the bankruptcy court approved the Committee's Plan of Reorganization. It divided the claims into ten classes. Priority claims were placed in Class 3, secured claims in Class 4. The Plan anticipated payment in full of all claims through Class 5 by the end of the three-year period Alpine Meadows was required to make payments under the Plan. This would have happened if the amounts of all claims had been accurately set forth in the Plan. Unfortunately, they were not.

The Plan erroneously listed the total Class 3 tax claims of the IRS as $72,591.02 instead of the correct amount of $94,202.31. ² This error came about because the Committee totalled the figures from the second page of the IRS Proof of Claim, but failed to add in the figures from the first page. The Committee erroneously included the $72,591.02 figure as the amount of the IRS claim when it submitted the Plan to the bankruptcy court for approval.

The bankruptcy court carried this error over into its December 15, 1986 order approving payment of priority tax claims in installments over the three-year payout from the sale to Alpine Meadows. One month later, the IRS learned that the court's order incorrectly listed its claim in the amount of $72,591.02 instead of $94,202.31. The IRS said nothing. Instead, it accepted installment payments under the Plan, and when the final payment was made it acknowledged it had received payment "in full satisfaction of the [IRS's] priority claim herein."

On June 14, 1990, Stoll learned of the mistake. An IRS agent informed him that the amount the IRS had received under the Plan was not sufficient to pay its entire tax claim in full, and as a result Stoll would have to pay the shortfall, which the IRS attributed to Deer Park's trust fund liability. In response, the Committee filed a motion with the bankruptcy court in the pending Chapter 11 proceeding to require the IRS to apply the payments it had received under the Plan first to Deer Park's trust fund tax liability so that Stoll's personal liability would be discharged.

The bankruptcy court granted the motion over the IRS's objection. The court found Stoll's services were necessary to the success of the Plan and ordered the IRS to allocate the payments it had received first to the trust fund tax portion of its claim. The result was that the IRS could not collect anything from Stoll, but had to await the possibility that it would be paid the balance of its claim out of future contingent payments specified in the Plan. The BAP affirmed the bankruptcy court, Deer Park, 136 B.R. 815, and this appeal followed.

ANALYSIS

In Energy Resources, the Court held that "a bankruptcy court has the authority to order the IRS to apply the payments to trust fund liabilities if the bankruptcy court determines that this designation is necessary to the success of a reorganization plan." Energy Resources, 495 U.S. at 548-49, 110 S.Ct. at 2141. The government argues that Energy Resources does not apply to a Chapter 11 plan which provides for liquidation. We disagree.

As explained by the BAP in its opinion, a debtor's continuing participation in a planned liquidation may be necessary to bring about maximum recovery for creditors. Deer Park, 136 B.R. at 818. Chapter 11 of the Bankruptcy Code provides that liquidation may be a form of reorganization, as opposed to a straight liquidation under Chapter 7. 11 U.S.C. Sec. 1129(a)(11) (1988).

The rationale for the Court's holding in Energy Resources, that a bankruptcy court may order the IRS to allocate tax payments to offset trust fund obligations where necessary for a successful reorganization, was explained in In re Gregory Engine & Machine Svcs., Inc., 135 B.R. 807 (Bankr.E.D.Tex.1992). There the court stated:

Although not stated by the Supreme Court, this Court is of the opinion that allowing [such an allocation] is necessary to the effective reorganization of a Chapter 11 debtor in that such a designation correspondingly reduces the responsible person liability of debtor's officers and managers. Given this result, these officers and managers have every incentive to assist in debtor's reorganization.

In re Gregory, 135 B.R. at 809.

We agree with this analysis in In re Gregory. It does not matter that the Chapter 11 reorganization plan is a liquidating plan, so long as the allocation of trust fund tax payments is necessary to the success of the reorganization.

The bankruptcy court found that Stoll's assistance was essential to the Plan. It is true that all of Deer Park's assets had been sold and all of the proceeds distributed to creditors. Nevertheless, the possibility of reopening Deer Park for downhill skiing existed and that was a fundamental part of the Plan approved by the creditors. If that occurred, it would dramatically increase the recovery for creditors. Stoll, because of his experience with Deer Park and his contacts with Alpine Meadows, the Forest...