First Truck Lines, Inc., In re

• Decision Date: 16 June 1995
• Docket Number: No. 93-4311,93-4311
• Citation: 48 F.3d 210
• Parties: -1298, 95-1 USTC P 50,187, 32 Collier Bankr.Cas.2d 1658, 26 Bankr.Ct.Dec. 1069, Bankr. L. Rep. P 76,390 In re FIRST TRUCK LINES, INC., Debtor. UNITED STATES of America, Appellant, v. Thomas R. NOLAND, Trustee, Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 210

48 F.3d 210

75 A.F.T.R.2d 95-1298, 95-1 USTC P 50,187,

32 Collier Bankr.Cas.2d 1658, 26 Bankr.Ct.Dec. 1069,

Bankr. L. Rep. P 76,390

In re FIRST TRUCK LINES, INC., Debtor.

UNITED STATES of America, Appellant, v. Thomas R. NOLAND, Trustee, Appellee.

No. 93-4311.

United States Court of Appeals, Sixth Circuit.

Argued Nov. 9, 1994.

Decided March 2, 1995.

Rehearing and Suggestion for Rehearing

En Banc Denied

June 16, 1995.

Pamela M. Stanek, Asst. U.S. Atty., Cincinnati, OH, Gary D. Gray (briefed), Edward T. Perelmuter (argued), Gary R. Allen, Acting Chief (briefed), U.S. Dept. of Justice, Appellate Section Tax Div., Washington, DC, for appellant.

Thomas R. Noland (briefed), Robert B. Berner (briefed), Raymond J. Pikna, Jr. (argued), Altick & Corwin, Dayton, OH, for appellee.

Before: MARTIN and BATCHELDER, Circuit Judges; and ENSLEN, District Judge. ^*

MARTIN, J., delivered the opinion of the court, in which ENSLEN, D.J., joined. BATCHELDER, J. (p. 219), delivered a separate concurring opinion.

BOYCE F. MARTIN, Jr., Circuit Judge.

We have before us an appeal of the bankruptcy court's decision to equitably subordinate the Commissioner of Internal Revenue Service's claim for postpetition, nonpecuniary loss tax penalties to the claims of general unsecured creditors. For the following reasons we affirm the decision of the district court.

The debtor in this case, First Truck Lines, Inc., voluntarily filed for relief under Chapter 11 of the Bankruptcy Code on April 10, 1986. During the postpetition operation of its business, the debtor-in-possession did not pay to the Internal Revenue Service accrued Federal Insurance Contributions Act and Federal Unemployment Tax Act taxes. In June 1988, the debtor moved to convert the case to a Chapter 7 bankruptcy, and the bankruptcy court ordered conversion on August 1, 1988. Thomas R. Noland was appointed the Trustee. The debtor ceased operations thereafter, and liquidation of the estate assets did not produce sufficient funds to pay all creditors in full. The bar date for filing claims under Chapter 7 was December 1, 1988.

On November 22, 1988, the Internal Revenue Service filed a "Request for Payment of Administrative Expenses" claim ("Claim 102"). Claim 102 was comprised of accrued postpetition, preconversion taxes, interest, and penalties. On April 20, 1989, the Internal Revenue Service filed an additional "Request for Payment of Administrative Expenses" claim ("Claim 107"), amending Claim 102. The bankruptcy court permitted Claim 107 to partially amend Claim 102, adding a penalty for postpetition, unpaid Federal Unemployment Tax Act taxes.

Once litigation commenced, the Commissioner and the Trustee stipulated that the tax and interest portion of Claim 102, but not the tax penalty portion, were administrative expenses with priority under 11 U.S.C. Secs. 726(a)(1), 507(a)(1), and 503(b)(1) (1988). We take this stipulation to mean that all taxes and interest were in fact given a priority in the bankruptcy estate. The issue before the bankruptcy court, then, was whether administrative expense priority should be accorded to the postpetition tax penalties. The bankruptcy court held that, although postpetition tax, interest, and penalties were "administrative expenses" pursuant to 11 U.S.C. Sec. 503(b), the tax penalties were subject to the court's equitable subordination powers under 11 U.S.C. Sec. 510(c) (1988). The court then interpreted and applied its powers of equitable subordination to include the ability to subordinate a claim, not only in the case of creditor misconduct, but also in the case of postpetition, nonpecuniary loss tax penalties. In balancing the equities, the bankruptcy court reasoned that the Bankruptcy Code exhibited a preference for compensating actual losses, especially in a liquidation proceeding. Furthermore, the bankruptcy court reasoned that, unlike business creditors who had surrendered a valuable asset to the debtor, the United States had not suffered an actual pecuniary loss with regard to the penalties. The bankruptcy court concluded that the equities of the case required subordination of the Commissioner's tax penalty claim to the claims of general unsecured creditors. The district court agreed.

The central issue in this appeal is whether a bankruptcy court may, in a Chapter 7 case, equitably subordinate postpetition, nonpecuniary loss tax penalties to any other claim, including the claims of general unsecured creditors, in the absence of creditor misconduct: here, in the absence of misconduct by the Commissioner. No other Circuit has addressed this precise issue, although three other Circuits have determined that prepetition, nonpecuniary loss tax penalty claims could be equitably subordinated even in the absence of creditor misconduct. Burden v. United States, 917 F.2d 115 (3d Cir.1990) (Chapter 13 case); Schultz Broadway Inn v. United States, 912 F.2d 230 (8th Cir.1990) (liquidating Chapter 11 case); In re Virtual Network Servs. Corp., 902 F.2d 1246 (7th Cir.1990) (liquidating Chapter 11 case). Should we decide that postpetition, nonpecuniary loss tax penalty claims are also subject to equitable subordination in a Chapter 7 case even in the absence of creditor misconduct, we must also decide whether the bankruptcy court properly subordinated the tax penalty claim in this case.

The Commissioner argues that the bankruptcy court does not have the power to equitably subordinate the postpetition tax penalties in Claim 102 to the claims of general unsecured creditors. The Commissioner's primary assertion is that Congress has already balanced the equities with regard to postpetition tax penalty claims in a Chapter 7 case and has expressly awarded administrative expense priority to claims for postpetition taxes, interest and penalties under 11 U.S.C. Secs. 726(a)(1), 507(a)(1), and 503(b)(1)(B) and (C). The Commissioner contends that Congress was well aware that tax penalties, by their nature, are not related to the giving of value to the debtor. Thus, knowing that the only colorable argument that can be made for equitably subordinating postpetition, nonpecuniary loss tax penalty claims is that it is unfair and unjust to award the government higher priority for a claim not based on the extension of value to the debtor, Congress still gave tax penalties administrative expense priority. The argument continues that a bankruptcy court may not, based on the same equitable ground, disregard the will of Congress and grant equitable relief to general unsecured creditors by subordinating the tax penalty claim. The Commissioner concludes that the principles of equitable subordination enable a bankruptcy court to subordinate a postpetition tax penalty claim only in the presence of misconduct.

In support of this position, the Commissioner relies on our decision in In re Mansfield Tire & Rubber Co., 942 F.2d 1055 (6th Cir.1991), cert. denied, 502 U.S. 1092, 112 S.Ct. 1165, 117 L.Ed.2d 412 (1992), and on pre-1978 Supreme Court cases permitting equitable subordination of claims because of creditor misconduct. See Comstock v. Group of Institutional Investors, 335 U.S. 211, 68 S.Ct. 1454, 92 L.Ed. 1911 (1948); Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939); Taylor v. Standard Gas & Elec. Co., 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669 (1939). The Commissioner argues that our decision in Mansfield Tire requires us to reverse the district court. The Commissioner construes Mansfield Tire as expressly rejecting the proposition that bankruptcy courts may employ equitable subordination to override Congress's priority scheme based on the court's own view of equity. Id. at 1062. The view of the Commissioner, while partially correct, constitutes an incomplete understanding of Mansfield Tire. This Court also said in Mansfield Tire that, while a bankruptcy court may not impose its own view of equity where Congress has set priorities, Section 510(c) expressly permits a bankruptcy court to apply the "principles of equitable subordination" to subordinate a claim "otherwise susceptible to subordination, such as a penalty." Mansfield Tire, 942 F.2d at 1062 (citing 1978 U.S.C.C.A.N. 5787, 6452 (statement of Rep. Edwards); 1978 U.S.C.C.A.N. 6505, 6521 (statement of Sen. DeConcini)). In Mansfield Tire, we decided only whether a claim for an excise tax was the type of claim susceptible to subordination, and not whether a tax penalty claim was susceptible to subordination. As to the Supreme Court cases cited above, these do not address the precise question this Court must answer and do not preclude our holding that equitable subordination may be proper even in the absence of creditor misconduct.

The Trustee and the Commissioner agree that Congress has given postpetition tax penalties first priority as administrative expenses in a Chapter 7 case. 11 U.S.C. Secs. 726(a)(1), 507(a)(1), 503(b)(1)(C). This Court, in the case of In re Flo-Lizer, Inc., 916 F.2d 363, 366 (6th Cir.1990), reached the same conclusion, but we did not discuss the relationship between Section 510(c) and Section 503(b). Although the parties agree as to the priority of postpetition, nonpecuniary loss tax penalty claims, the parties disagree as to the effect of Section 510(c) on the tax penalty claim. The Trustee argues that the statutory treatment of a postpetition tax penalty as an administrative expense does not necessarily mean that the claim cannot be equitably subordinated under Section 510(c). The Trustee contends that 11 U.S.C. Sec. 726(a)(1) provides that all Chapter 7 distributions are subject to Section 510(c), and that Section 510(c), in turn, permits equitable subordination in the appropriate case. The Trustee then relies on our opinion in Mansfield Tire for the proposition that tax penalties are subject to equitable subordination. Mansfield Tire, 942 F.2d at 1062 (distinguishing tax claims, which are not ordinarily subject to equitable subordination, from penalties,...