Frank v. MICHIGAN EX REL. MICHIGAN UNEMP. AGENCY
| Decision Date | 24 November 1999 |
| Docket Number | No. 99-10333.,99-10333. |
| Parties | Randall L. FRANK, Plaintiff/Appellee, v. State of MICHIGAN, acting through the MICHIGAN UNEMPLOYMENT AGENCY DEPARTMENT OF CONSUMER & INDUSTRY SERVICES, Defendant/Appellant. |
| Court | U.S. District Court — Western District of Michigan |
Henry L. Knier, Jr., Lambert, Leser, Bay City, MI, for appellee.
Donna K. Welch, Michigan Department of Attorney General, Detroit, MI, for appellant.
This matter is before the Court on an appeal by the State of Michigan Unemployment Agency ("Appellant" or "UA") from a decision by the Bankruptcy Court ("BC"). The central issue is whether the BC erred in concluding that the UA's prepetition liens on Debtor's property do not attach to preference proceeds recovered by Trustee post-petition. For the reasons explained below, the Court AFFIRMS the decision.
Thompson Boat Co. ("Debtor") filed a Chapter 11 petition on May 19, 1993. The case was converted to Chapter 7 on August 19, 1994. Randall L. Frank ("Trustee") is the trustee of the Chapter 7 estate.
Prior to Debtor filing its bankruptcy petition, the UA had filed certain tax liens, pursuant to the Michigan Employment Security Act ("MESA"), M.C.L. § 421.15(e), for past due unemployment taxes in the Saginaw County Register of Deeds and the Michigan Secretary of State. After the Chapter 11 case was filed, Appellant filed a claim on September 22, 1993, for Debtor's unpaid unemployment contributions. When the case was converted, Appellant also filed an amended claim.
Upon conversion to Chapter 7, Trustee commenced a number of preference actions against Debtor's creditors. In so doing, Trustee recovered over $300,000.00. Thereafter, Trustee filed an Adversary Complaint to determine the validity and extent of Appellant's liens. In Count II, Trustee alleged that the preference proceeds recovered constitute post-petition property of the estate and are not subject to the UA's pre-petition liens. Trustee argued that, since only a trustee can bring a preference action, the UA could never have recovered the funds on its own, and the liens could not have attached to that property.1 The UA responded that the Bankruptcy Code only prevents security interests from attaching to property acquired post-petition, and that it does not prevent statutory liens from so doing. It claimed that under the applicable Michigan law, its liens attach and continue to attach to all property of an employer until the tax is paid.
Trustee then filed a Motion for Summary Judgment as to Count 11, asking the BC to find that: (1) the automatic stay provisions of the Bankruptcy Code prevented all liens from attaching post-petition to the recovered preference proceeds; (2) proceeds recovered as a result of a preference action are not proceeds of the UA's collateral within the meaning of the Code's provision allowing attachment in certain situations; and (3) the recovered preference proceeds are post-petition property of the estate which do not arise out of any of the secured creditor's collateral, and are preserved for equal distribution to all creditors.
The UA responded to the Motion, requesting the BC to rule that the perfected statutory liens attach to the preference proceeds. The UA took the position that Trustee could not avoid its liens under the relevant provisions of the Code and, therefore, the lien was perfected in property acquired post-petition. In other words, the UA claimed that any property acquired by the estate is subject to prepetition encumbrances of record. It further claimed that the Code's distribution scheme provides for the satisfaction of allowed claims secured by tax liens.
Trustee responded, claiming that the issue was not whether the liens were valid, but whether they attached to the postpetition preference proceeds. According to Trustee, the UA could not have encumbered these proceeds because these proceeds (and, in particular, the right to recover them) did not exist before the filing of the petition which gave Trustee the right to avoid preferences. At oral argument, when the UA claimed that Trustee was essentially seeking to impermissibly avoid a lien, the BC responded as follows:
Trustee is not saying, "You have a lien but we can set it aside as a preference or we can set it aside as a fraudulent transfer," Trustee is simply saying you don\'t have a lien on this asset because your statutory lien does not attach to assets that the trustee produces through the exercise of his Chapter 5 rights. So this is not an avoidance action. They don\'t give you that much. In order to have an avoidance action, they\'d have to assume that you do have a lien and agree that you do. They\'re saying you don\'t and never did have a lien.
On August 5, 1999, the BC issued an opinion granting Trustee's Motion for Summary Judgment on Count 11. The BC reasoned that Debtor and the estate are separate entities. At the same time, the preference provisions allow only Trustee, not Debtor, to avoid certain transfers, and the proceeds are recovered on behalf of the estate, not Debtor. According to the BC, since the statutory liens only attach to property of the employer, who is Debtor here, the liens do not reach post-petition property acquired by the estate. In other words, since Debtor did not "own" the right to pursue a preference action, the statutory liens could not be extended to attach to the proceeds recovered by such action.
The UA now appeals that decision.
The sole issue presented in this appeal is whether the BC erred in concluding that Appellant's pre-petition liens do not attach to proceeds recovered by Trustee as a result of post-petition preference actions. Both parties agree that the issue presents a purely legal question. As such, this Court's review is de novo. See In re Baker & Getty Financial Services, Inc., 106 F.3d 1255, 1259 (6th Cir.1997) (). Upon de novo review, this Court concludes that the BC did not commit an error of law, and, therefore, affirms the decision.
The Court agrees that the estate/debtor dichotomy applies to the preference provisions, thereby barring attachment of the proceeds by pre-petition liens. The distinct nature of the two entities has been previously recognized. For example, in In re Winom Tool & Die, Inc., 173 B.R. 613 (Bankr.E.D.Mich.1994), the court reasoned that in the absence of a trustee the debtor will act as the debtor in possession, but the debtor's identity is not completely merged into that of the debtor in possession. As such, "property interests may be held by the post-petition debtor in its own right (non-estate property) or as debtor in possession (estate property)." Id.
Admittedly, courts have disagreed as to the circumstances in which this dual entity concept is applicable. For example, courts in this district have found that the distinction even applies to the mutuality set-off provisions of 11 U.S.C. § 553.2 In re Walat Farms, Inc., 69 B.R. 529, 530 (Bankr. E.D.Mich.1987), while others find otherwise. Additionally, the Supreme Court, when discussing enforceability of collective bargaining agreements against a debtor-in-possession under Chapter 11, cast some doubt on the validity of the distinction, stating:
Obviously if the latter were a wholly "new entity," it would be unnecessary for the Bankruptcy Code to allow it to reject executory contracts under 11 U.S.C. § 365, since it would not be bound by such contracts in the first place. For our purposes, it is sensible to view the debtor-in-possession as the same "entity" which existed before the filing of the bankruptcy petition, but empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have done absent the bankruptcy filing.
NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984). Nonetheless, there is no good reason to disturb the debtor/trustee dichotomy in this particular context.
First of all, Appellant does not show that any court has ever rejected its application in the context of preference actions by a trustee. Moreover, courts interpreting Bildisco completely disagree about its effect on the dual entity theory. Some courts have specifically rejected the theory altogether, see e.g., In re Ontario Locomotive & Indus. Ry. Supplies, 126 B.R. 146, 147 (Bankr.W.D.N.Y.1991) (), while others have concluded that Bildisco is limited to the context in which it arose. Indeed, the court in Patton v. John Deere Co. (In re Durham), 87 B.R. 300, 302 (Bankr.D.Del.1988), stated that Bildisco merely declared that "for the purposes of § 365"3 a debtor-in-possession is not a new entity. However, the court declined to reject the dichotomy in a 11 U.S.C. § 552(b)4 case, reasoning: 87 B.R. at 302. Given the clear conflict of interpretation, Appellant's claim that the duality concept does not apply is not persuasive.
Further, the BC's opinion contains a well-reasoned analysis as to why the dichotomy should not be rejected in the context of the avoidance of preference transfers. As the BC points out, the power to avoid is specifically given to Trustee, rather than Debtor. Moreover, a review of other provisions of the Code reveals that when the legislature intended to give powers to a debtor, it knew how to do so. See e.g., 11 U.S.C. § 522(h) (). As such, the Court can infer that Congress did not intend for the power to avoid preferences to belong to...
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