Equibank, N.A. v. Wheeling-Pittsburgh Steel Corp.
| Decision Date | 22 August 1989 |
| Docket Number | WHEELING-PITTSBURGH,No. 88-3664,88-3664 |
| Citation | 884 F.2d 80 |
| Parties | , Bankr. L. Rep. P 73,095 EQUIBANK, N.A. and the Farmers' Home Administration, Appellants, v.STEEL CORPORATION, Appellee. |
| Court | U.S. Court of Appeals — Third Circuit |
John R. Bolton, Asst. Atty. Gen., J. Alan Johnson, U.S. Atty., Bea L. Witzleben (argued), J. Christopher Kohn, Tracy J. Whitaker, U.S. Dept. of Justice, Washington, D.C., for Farmers' Home Admin.
Peter N. Pross, Kincaid & McGrath, P.C., Pittsburgh, Pa., for Equibank.
Joan G. Dorgan (argued), Juliet E. Boniface, V. Suzanne Cook, Ronald W. Schuler, Buchanan Ingersoll, P.C., Pittsburgh, Pa., for Wheeling-Pittsburgh Steel Corp.
Before SLOVITER and BECKER, Circuit Judges, and POLLAK, District Judge. *
This bankruptcy appeal presents a number of involved questions of state (West Virginia) lien law and bankruptcy priority law. Certain pre-petition and post-petition real and personal property taxes in various states of lien perfection were paid, pursuant to a Bankruptcy Court-approved agreement for the sale of a steel mill owned by a Chapter 11 debtor in possession, out of the proceeds of sale. The question before us is whether the taxes should have been borne by the debtor-in-possession as a first priority administrative expense or a seventh priority expense payable out of the general fund of the estate, or by the secured creditor. Both the bankruptcy and district courts held that all real and personal property taxes due on the property in question, regardless of their lien status, were payable out of the sale proceeds received by the secured creditor appellants, Equibank, the lender, and the United States ("secured creditors"), which guaranteed the defaulted loan through the Farmers Home Administration, 1 rather than by the Chapter 11 debtor-in-possession, appellee Wheeling-Pittsburgh Steel Company ("Wheeling-Pitt").
Appellants remonstrate that the challenged decision deprives them of the adequate protection to which they are entitled as secured creditors and depreciates their security by reason of the mere passage of time and by charging them with tax payments which did not benefit them. Appellants contend that this is improper, or at least that the Bankruptcy Court erred in failing to conduct a hearing under section 506(c) of the Bankruptcy Code, 11 U.S.C. Sec. 506(c), to determine whether the taxes conferred any benefit on the secured creditor, before making its decision.
Wheeling-Pitt rejoins first that the 1985 real estate taxes in question were perfected liens, clearly chargeable to the secured creditors out of the proceeds of sale. Second, it submits that the other taxes in question: (a) post-petition (hence post-automatic stay) real estate taxes; and (b) pre-petition and post-petition personal property taxes, should not be paid out of the general fund because that would create a windfall for the secured creditors. In Wheeling-Pitt's submission, the equitable powers of the Bankruptcy Court under Sections 105 and 363 of the code militate against such a result. Moreover, it contends that requiring payment out of the estate would deter Chapter 11 debtors from selling property, resulting in the frequent abandonment of property to secured creditors who would be forced to sell at foreclosure sales out of which the taxes would have to be paid to furnish clear title, thus confirming the appropriateness of making the secured creditor responsible for taxes.
Although we agree that the secured creditors must bear the onus of payment of those real estate taxes that became liens prior to the filing of the bankruptcy petitions, and affirm on that point, in all other respects we will reverse and remand for hearings and findings under Secs. 503 and 506(c) of the Code.
Wheeling-Pitt owned and operated a steelmaking facility in Benwood, West Virginia ("Benwood plant") which produced steel pipe. In 1984 Wheeling-Pitt shut the plant and began looking for a purchaser. On April 16, 1985, Wheeling-Pitt filed a petition under Chapter 11 of the Bankruptcy Act resulting, as a matter of course, 11 U.S.C. Sec. 362 (1982), in an automatic stay of the creation, perfection, or enforcement of any lien against the property after the date of the filing of the petition. In July 1987, Wheeling-Pitt agreed to sell the Benwood plant to BIPCO Ltd. for $1,350,000. The sale took place on September 14, 1987, under the aegis of the bankruptcy court, and BIPCO was confirmed as the successful purchaser.
Under the agreement of sale, Wheeling-Pitt guaranteed to BIPCO a marketable and insurable fee simple title; hence BIPCO purchased the plant free and clear of claims, liens and encumbrances. Contract of Sale at 2, p 1.02. The bankruptcy court approved the sale, free and clear of liens, and ordered that any liens be paid out of the sale proceeds. 2 At the closing, the issue of who was responsible for the unpaid 1985 and 1987 real and personal property taxes arose. 3 Although there was no dispute that BIPCO was not liable for the taxes, the mortgagee bondholders (represented in this action by Equibank and the Farmers' Home Administration) and the debtor-in-possession could not agree whether the taxes were to be paid out of the proceeds of the sale, thereby reducing the mortgagees' receipt of funds, or by the estate as an administrative expense. The sum of $187,618.52, covering the total taxes due as of the date of the closing, was therefore escrowed (out of the sale proceeds) pending determination of the issue.
There is no dispute that the following taxes are due:
Year Personal Real Property
1985 $110,349.71 $50,938.14
1987 $ 12,497.82 $13,832.85
The bankruptcy court held that the taxes must be paid out of the proceeds of the sale, stating that the
mortgagee is entitled to receive the net proceeds of the sale of the collateral, but it is not entitled to receive an enhancement of the net proceeds of sale by the transfer of debtor's unencumbered assets in payment of prior tax liens on the collateral.
Bankr.Ct.Op. at 7 (Mar. 2, 1988); App. at 48. In sum, the bankruptcy court required the taxes to be paid out of the proceeds of the sale to prevent a windfall to the mortgagees. The court did not distinguish between real and personal property taxes or between perfected liens and unperfected liens.
On appeal, the district court agreed that there was no need to distinguish between those tax claims that had become liens and those that had not become liens. It affirmed the bankruptcy court on the theory that unless the taxes were taken out of the secured creditors' proceeds from the sale, they would receive a windfall. The district court stated that "the value of the property securing their interests had already been diluted by the tax claims before the sale to BIPCO" and therefore the taxes were the secured creditors' burden. Dist.Ct.Op. at 10 (July 20, 1988); App. at 62. The mortgagees have appealed.
Because only legal issues are presented in this appeal, our review of the district court's decision is plenary. See Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir.1981).
Both the bankruptcy court and the district court held that the 1985 and 1987 taxes deserve identical treatment. Neither focused its discussion on the provisions governing the creation of liens. We find the issue to be more complicated.
The bankruptcy code permits tax liens to remain attached to secured property as of the date of the petition and entry of the stay. See 11 U.S.C. Sec. 362. Where the liens are attached as of the date of the stay, the trustee has the power to sell the property free and clear of the liens by taking the liens out of the proceeds of sale. See 11 U.S.C. Sec. 363(b). The code also provides two options for payment of taxes that have not attained lien status as of the date of the entry of the stay. First, they may be payable by the trustee, either as first priority administrative expenses, see 11 U.S.C. Sec. 503(b)(1)(B)(i), or as seventh priority expenses, 11 U.S.C. Sec. 507(a)(1). Second, they may be payable by the secured creditor as payment for benefit received, see 11 U.S.C. Sec. 506(c).
We must first decide whether the 1985 and 1987 real and personal property taxes were liens at the time of the creation of the automatic stay. Taxes that are not secured by liens may be payable as administrative expenses under section 503. Section 503(b)(1)(B)(i) provides that administrative expenses are first priority expenses, payable out of the estate, and include "any tax incurred by the estate, except a tax of a kind specified in section 507(a)(7) of this title." 11 U.S.C. Sec. 503(b)(1)(B)(i). Section 507(a)(7) lists those taxes not allowed to be paid as first priority administrative expenses, but rather as seventh priority expenses; among them is "a property tax assessed before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition." 11 U.S.C. Sec. 507(a)(7)(B).
Taxes not secured by liens may also be payable by the secured creditor under section 506. Section 506(c) provides that
[t]he trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim.
11 U.S.C. Sec. 506(c). Section 506 thus mandates a two-step inquiry: (1) it must be determined whether the taxes are reasonable, necessary costs and expenses of preserving or disposing of the property and (2) whether they benefit the secured creditors. If the taxes are not determined to be the secured creditor's obligation under section 506(c), they would be payable either as first priority administrative expenses pursuant to section 503 or as seventh...
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