In re Co-Build Companies, Inc.
Citation | 21 BR 635 |
Decision Date | 14 July 1982 |
Docket Number | Bankruptcy No. 75-287. |
Parties | In re CO-BUILD COMPANIES, INC. a/k/a West Indies Enterprises, Inc., Bankrupt. |
Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Arthur E. Sklar, Levine, Staller & Sklar, P.A., Atlantic City, N.J., for Sanford and Joy Miller, Officer of the debtor corporation.
Stuart H. Savett, Harold E. Kohn, P.A., Philadelphia, Pa., for debtor, Co-Build Companies, Inc. a/k/a West Indies Enterprises, Inc.
Marvin Krasny, Adelman & Lavine, Philadelphia, Pa., for trustee, Richard I. Rubin.
Richard I. Rubin, Philadelphia, Pa., trustee.
The issue at bench is whether an officer of the debtor corporation is entitled to be subrogated to the government's tax claim against the debtor where the government has collected funds from the officer to pay that claim. We conclude that the officer is entitled to be subrogated to the government's tax claim.
The facts of the instant case are as follows:1 On February 18, 1975, Co-Build Companies, Inc. ("the debtor") filed a petition for an arrangement under chapter XI of the Bankruptcy Act ("the Act").2 The Internal Revenue Service ("the I.R.S.") filed priority proofs of claim against the debtor in those proceedings for the amount of taxes due to it by the debtor.3
Sanford Miller ("Miller") was an officer of the debtor prior to the date it filed its petition and during a period when the debtor failed to pay the taxes due to the I.R.S. Consequently, the I.R.S. notified Miller that it intended to penalize him (as a person in the debtor corporation who was required to collect, account for and pay over withholding and other taxes to the I.R.S.) for failing to take the appropriate action to ensure that the debtor paid those taxes.4 Pursuant to that notice, the I.R.S. subsequently applied $23,727.55 of a tax refund due to Miller to repay the tax claim owed by the debtor. As a result, Miller has filed the instant application for an order subrogating him to the tax claim of the I.R.S. against the debtor.
In the case of American Surety Co. v. Bethlehem National Bank,5 the United States Supreme Court explained the doctrine of subrogation:
Among the oldest of these equitable doctrines evolved by the courts is the rule of subrogation whereby one who has been compelled to pay a debt that ought to have been paid by another is entitled to exercise all remedies which the creditor possessed against that other.6
Subrogation is not a matter of strict right but is purely equitable in nature, dependent upon the facts and circumstances of each particular case.7 The courts will not use the doctrine of subrogation (1) where it would be inequitable to do so, (2) where it would work injustice to others having equal equities or (3) where it would operate to defeat another's legal rights.8
The case of Dayton v. Stanard9 was the first case in which the United States Supreme Court applied the doctrine of subrogation to a government right to priority. In Dayton, the Supreme Court held that bona fide purchasers at an invalid tax sale, who had paid the taxes on the property, should be compensated for their loss. Accordingly, the court allowed the purchasers to be subrogated to the government's priority in the bankrupt's assets for the price paid by them at the invalid tax sale.10
In the case of In re Rogers,11 the United States District Court for the Southern District of California held that a claim for a payment made prior to bankruptcy by a surety on a bond given by the bankrupt to secure the payment of taxes was entitled to priority under § 64(a)(4) of the Act. The District Court gave an extensive review of cases where a party had sought to be subrogated to tax claims against a bankrupt or debtor:
In In re Columbia Tobacco Co., Inc.13 the United States District Court for the Eastern District of New York also held that a bankrupt's surety, who had paid state and local taxes owed by the bankrupt corporation, was entitled to the governments' priorities in the distribution of the bankrupt's estate. In this regard, the court stated:
The priority which pertains to the sovereign is not hedged about by such divinity that it cannot accrue to those who, as sureties, place the government in funds, through the payment of taxes. Dayton v. Stanard, 241 U.S. 588, 36 S.Ct. 695, 60 L.Ed. 1190; Fidelity & Casualty Co. v. Massachusetts Mutual Life Ins. Co., 4 Cir., 74 F.2d 881; In re Baltimore Pearl Hominy Co., 4 Cir., 5 F.2d 553. See also Restatement of the Law — Restitution Sec. 162 f.14
Applying the reasoning of the above cases to the case at bar, we conclude that the doctrine of subrogation is applicable and that Miller is entitled to a claim against the debtor corporation in the amount of the taxes paid by him for the debtor corporation ($23,727.55) and with the same priority under § 64(a)(4) that the I.R.S. would have been entitled to. Although Miller was not a surety for the debtor to secure the payment of taxes, as were the claimants in Rogers and Columbia Tobacco, Miller was certainly not a "mere volunteer."15 Furthermore, since there is nothing special about the government's tax priority under § 64(a)(4),16 we conclude that the doctrine of subrogation applies herein. Pursuant to that doctrine, Miller as one who has been compelled to pay a debt of the debtor corporation to the I.R.S., is entitled to exercise all the remedies which the I.R.S. possessed against the debtor, including the right to a priority claim under § 64(a)(4).17
1 This opinion constitutes the findings of fact and conclusions of law required by Rule 752 of the Rules of Bankruptcy Procedure.
2 While the Bankruptcy Act has been superseded by the Bankruptcy Code as of October 1, 1979, the provisions of the Act still govern petitions filed before that date. The Bankruptcy Reform Act of 1978, Pub.L.No.95-598, § 403, 92 Stat. 2683 (1978).
3 Section 64(a)(4) of the Act provided:
a. The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates, and the order of payment...
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