In re Active Steel Erectors, Inc.

• Decision Date: 16 October 1985
• Docket Number: Bankruptcy No. 3-82-00251.
• Citation: 53 BR 851
• Parties: In re ACTIVE STEEL ERECTORS, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Alaska

53 B.R. 851 (1985)

In re ACTIVE STEEL ERECTORS, INC., Debtor.

Bankruptcy No. 3-82-00251.

United States Bankruptcy Court, D. Alaska.

October 16, 1985.

Thomas J. Yerbich, Yerbich & Associates, Anchorage, Alaska, for debtor.

David T. LeBlond, Asst. Atty. Gen., Anchorage, Alaska, for State of Alaska, Employment Sec. Div.

OPINION

J. DOUGLAS WILLIAMS, II, Bankruptcy Judge.

This matter is before the Court on the debtor's motion pursuant to § 505¹ of the Bankruptcy Code to determine the state unemployment tax rate that is applicable to the debtor. For the reasons hereinafter stated the court finds that the State of Alaska is precluded by the terms of the debtor's plan and by the Supremacy Clause, Art. VI of the United States Constitution, from assessing and collecting from the debtor the penalty rate provided by AS 23.20.280.

FACTS

On November 22, 1982, Active Steel Erectors, Inc. ("debtor") filed a Chapter 11 petition under the Bankruptcy Code. The Alaska Department of Labor, Employment Security Division ("ESD"), is the agency charged by law with the responsibility of administering the Alaska Employment Security Act. On August 29, 1984, an order was entered confirming the debtor's Chapter 11 plan. The confirmed plan was accepted by ESD and, as a part of the plan, ESD waived all penalties for non-payment and/or late filing.

At the time the debtor filed its Chapter 11 petition there were unpaid state unemployment tax contributions which were past due. ESD has filed a claim for $91,942.56. The debtor has paid all unemployment taxes which have accrued since the filing of the Chapter 11 petition.

On or about December 7, 1984, ESD notified the debtor that its tax rate for 1985 was to be the penalty C rate which is 5.4%, the highest rate provided by law. By the terms of the State statute, the penalty rate cannot go into effect until at least six months after a default has taken place.² The rate assignment was based on the debtor's failure to pay employment security taxes prior to its filing of the Chapter 11 petition. The debtor timely sought review of the determination. Debtor's application for review and redetermination was denied and a timely appeal was taken to the Commissioner of Labor. The Commissioner found that the penalty C rate was the appropriate rate and that "the fact that the tax imposed is burdensome" to the debtor was not grounds for a more favorable tax rate. Therefore, on May 10, 1985, the Commissioner denied the appeal.

LAW

The issue presented is whether the State of Alaska is precluded by either the provisions of the confirmed plan or the Supremacy Clause of the United States Constitution from raising the debtor's unemployment tax rate to the highest rate permitted by state law because of the failure of the debtor to make certain tax payments prior to filing its Chapter 11 petition.³ Section 505 of the Code provides in pertinent part that the bankruptcy court:

may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

Section 1129(a)(9)(C)⁴ of the Bankruptcy Code provides that an employment tax on wages shall be dealt with as follows in a Chapter 11 plan, absent agreement to a different treatment:

The holder of such claim will receive on account of such claim deferred cash payments, over a period not exceeding six years after the date of assessment of such claim, of a value, as of the effective date of the plan, equal to the allowed amount of such claim.

Sections 502(i), 507(a)(7), and 1141(d) of the Bankruptcy Code when read in conjunction with each other provide in pertinent part that a "claim that does not arise until after the commencement of the case for an unemployment tax entitled to priority under section 507(a)(7)⁵ of this title shall be determined, and shall be allowed . . . the same as if such claim had arisen before the date of the filing of the petition" and shall be discharged by the confirmation of a plan whether or not a claim is filed, or allowed, or the holder of such claim has accepted the plan.

Pursuant to subsections (b) and (c) of § 1141 of the Code the confirmation of the plan has vested all property of the estate in the debtor and the property dealt with in the plan, subject to certain provisions not relevant here, is free and clear of all claims and interests of the creditors except as otherwise provided in the plan or in the order of confirmation. Thus control of the property upon confirmation passes from the debtor in possession back to the debtor in its capacity as a debtor.

The Commissioner of Labor in his opinion denying debtor's appeal refers to the rate as being a "`penalty' C rate". The penalty rate, even though applied to non-bankruptcy debtors as well as bankruptcy debtors, is still in conflict with the provisions of the Bankruptcy Code when applied to a debtor with a confirmed plan.⁶ Congress has specified in § 1129(a)(9)(C) a means by which a tax creditor can be fully satisfied by a debtor. Since the taxes in question must be fully paid in value as of the effective date of the plan, § 1129(a)(9)(C) when read in conjunction with § 1141(d)(1) supersedes any conflicting provisions of the state statutes. See the Supremacy Clause, Art. VI of the United States Constitution. Congress has legislated a provision that is the equivalent of payment as of the date the bankruptcy petition was filed and that discharges the debt by virtue of the confirmation of a plan. Thus, the state statutory scheme must yield to the paramount federal law.

The taxes which the State is attempting to collect under AS 23.20.280(c) (the highest rate penalty provision) simply constitute an addition or penalty which relates to the pre-petition unemployment taxes of the debtor. Even if otherwise permissible they would be discharged pursuant to § 1141(d)(1) upon the confirmation of a debtor's plan, and any lien claim for same would be voided by § 1141(c).⁷ Moreover, pursuant to § 1141(a) of the Code, the State is bound by the terms of the debtor's plan and the plan expressly provides that "any and all penalties for non-payment, late payment and/or late filing" are to be waived.

It is well settled that state law must not be allowed to pervert or override the distributive provisions of the bankruptcy laws. Elliott v. Bumb, 356 F.2d 749 (9th Cir.1966), cert. denied 385 U.S. 829, 87 S.Ct. 67, 17 L.Ed.2d 66 (1966); see also Perez v. Campbell, 402 U.S. 637, 649, 91 S.Ct. 1704, 1711, 29 L.Ed.2d 233 (1971); In re Anchorage International Inn, Inc., 718 F.2d 1446 (9th Cir.1983).⁸ As indicated above, to the extent the penalty rate exceeds the rate that would otherwise be imposed had the debtor paid in cash its pre-petition taxes, it is discharged by § 1141.⁹ Such a direct conflict with the Bankruptcy Code requires the state law to yield. See In re Petite Auberge Village, Inc., 650 F.2d 192 (9th Cir.1981).

The state certainly has a legitimate goal in inducing compliance with its unemployment tax laws by imposing a penalty rate on delinquent parties. The unemployment fund serves a very worthy and necessary social goal. The fund helps to mitigate the consequences of unemployment by its payments to workers who are unable to find employment.¹⁰ Thus, the holding of this case is a very narrow one. Only a debtor with a confirmed Chapter 11 plan whose plan in conjunction with the provisions of § 1141 of the Code discharges any tax penalty that is asserted in contravention of § 1129(a)(9)(C) will be able to avoid the penalty rate. When § 1129(a)(9)(C) fully satisfies a tax creditor with the present value of its claim, the legislative policies of Congress in encouraging the rehabilitation of distressed businesses must outweigh the needs of a state to extract its penalty. In an extreme case the operation of a statute such as Alaska's, if permitted to be utilized in contravention of the policies herein enunciated, would act as a club to force a debtor to treat preferentially a state tax collector in violation of the principle of equality of distribution which underlies our bankruptcy laws. In the instant case, the debtor estimates that the net effect of the penalty rate during the six year period of the plan under § 1129(a)(9)(C) is to increase its taxes by $66,948.00 over what they would otherwise be. Under the ESD's view of the law, the only way to avoid the penalty is to immediately pay the pre-petition taxes. As the debtor argues, the position of ESD is a blatant attempt to coerce the debtor into granting ESD a super-priority over other creditors — a priority not granted ESD under the Bankruptcy Code. Thus, the state statute relied upon by ESD is contrary to federal bankruptcy law in its application to the instant case and therefore must yield to the paramount law. See Elliott v. Bumb, supra at 755.

Both parties cite In re Pine Knob Investment, 20 B.R. 714, 7 C.B.C.2d 281, (Bkrtcy. E.D.Mich.1982); however, other than establishing that an employment security contribution is a tax, Pine Knob does not shed any light on the central issue in the instant case.¹¹Pine Knob does not discuss a post-confirmation situation nor does it appear to deal with a penalty rate. More applicable is In re Gurwitch, 37 B.R. 513 (Bkrtcy.S.D. Fla.1984) which held that the Internal Revenue Service was bound by the terms of the debtor's Chapter 11 plan as the exclusive means of collecting a tax penalty from the assets of the debtor.¹²

CONCLUSION

For the reasons stated herein ESD is precluded from imposing the penalty tax rate upon the debtor. There is no direct conflict between the state statute in question and the Bankruptcy Code until a plan is confirmed. Under the operation of the state statute up until the confirmation of a plan, a debtor-in-possession is treated like any other employer.¹³ If...