In re Compton Corp., Bankruptcy No. 782-00055
| Decision Date | 27 June 1984 |
| Docket Number | Bankruptcy No. 782-00055,Adv. No. 784-7024.,782-00054 |
| Citation | 40 BR 875 |
| Parties | In re COMPTON CORPORATION, Debtor. In re GRATEX CORPORATION, Debtor. COMPTON CORPORATION, By and Through Walter KELLOGG, Trustee, and Gratex Corporation, By and Through Charles Dick Harris, Trustee, Plaintiffs, v. The UNITED STATES of America, DEPARTMENT OF ENERGY, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
David R. Snodgrass, Philip J. Nicholson, Dallas, Tex., for Compton/Gratex.
Arthur S. Weissbrodt, Thomas A. Schweitzer, U.S. Dept. of Energy, Washington, D.C., for DOE.
On April 4, 1984, this Court conducted an evidentiary hearing on the motion of Walter Kellogg, Trustee in Bankruptcy of Compton Corporation, seeking to subordinate the claim of the United States, Department of Energy ("DOE") on the ground that it is a claim for a penalty under Section 726(a)(4) of the Bankruptcy Code. In the alternative, the Trustee sought to subordinate the DOE claim under Section 510(c) of the Bankruptcy Code.
Two issues are before the Court. The first issue is whether Section 726(a)(4) of the Bankruptcy Code applies to the case at bar. The second issue is whether the DOE claim is a penalty or is for restitution. This Court rules that Section 726(a)(4) does apply and that the DOE claim is a penalty. Therefore, the DOE claim must be subordinated to all other creditors' claims.
An involuntary petition under Chapter 7 of the Bankruptcy Code was filed against the Debtor, Compton Corporation, in May 1982. The Debtor promptly converted to Chapter 11 and attempted to continue its business of crude oil purchasing and saltwater hauling. These efforts were not successful. In August, 1982, an interim trustee under Chapter 11 was appointed, and liquidation of the assets of Compton Corporation commenced.
Compton Corporation's assets had consisted, principally, of tractor trucks and trailers used to pick up crude oil and saltwater, and numerous pipeline injection facilities and storage facilities. Pursuant to blanket approval orders entered in these proceedings, almost all of these assets have been sold. Likewise, all crude oil on hand at the time this case was filed has been liquidated. As a result the Estate of the Debtor, Compton Corporation, is now comprised of substantial cash deposits and an immaterial amount of hard assets yet to be liquidated.
For the most part the creditors having claims against the Estate are unpaid royalty and working interest owners of producing oil wells from which Debtor removed crude oil in the months immediately preceding the involuntary petition. There are several thousand of these claimants. Other claims are for taxes, utilities and trade materials and services.
On January 7, 1983, the DOE filed proofs of claims in these proceedings asserting liability to the DOE of $6,065,681.93 for alleged overcharges. These alleged overcharges were apparently in violation of Federal pricing statutes and regulations pertaining to Compton Corporation's sales of crude oil prior to January 1981. Since the hearing on this case on April 4, 1984, the DOE has initiated its own claim determination proceeding before the Office of Hearings and Appeals. DOE issued a Proposed Remedial Order ("PRO") on April 26, 1984, which requires "Compton Gratex" to deliver to DOE a certified check in the amount of $8,851,300.93 plus interest within twenty days for the alleged overcharges. Notice of this PRO was published in the Federal Register on May 16, 1984. To date, the DOE has not identified those persons who are allegedly due these overcharges by the Debtor, but insists that they are due and that the Debtor is subject to daily fines and penalties as well as more severe sanctions for non-payment.
Without including the claim asserted by DOE, it is probable that those creditors having claims for royalties, working interests, taxes, utilities, trade materials, services and the like will receive an ultimate dividend approximating fifty percent. If the DOE's claim is included in full, the dividend to the claimants will be approximately twenty-five percent or less.
None of the parties involved in this case has filed a plan of reorganization to date. Any such plan will constitute a liquidating reorganization since almost all of the assets have already been liquidated.
Section 726 of the Bankruptcy Code is the general distribution section for liquidation cases. This section dictates the order in which distribution of property of the estate by priorities where it has been reduced to money by the trustee. Distribution to general unsecured creditors follows payment to priority creditors. Section 726(a)(4) provides that penalty claims shall be subordinated in payment to all other claims except equity claims. The Debtor, Compton Corporation, asserts that Section 726(a)(4) is applicable to this case. The DOE argues that this section is not applicable here because it falls under Subchapter II of Chapter 7 of Title 11, United States Code Annotated. In furtherance of its argument, the DOE contends that Section 103(b) of the Bankruptcy Code provides that it is applicable only to Chapter 7 cases.
The DOE refers the Court to some of the legislative history pertaining to Section 726(a)(4) and the cases of In re Community Hospital of Rockland County, 5 B.R. 7 (Bankr.S.D.N.Y.1979), aff'd, 5 B.R. 11 (D.C.S.D.N.Y.1980) and In re Roamer Linen Supply, Inc., 30 B.R. 932 (Bankr.S.D.N.Y. 1983), in support of its argument. This Court does not contest the rulings in these cases. However, it is this Court's opinion that these cases are distinguishable from the case at hand. The Community Hospital and Roamer Linen cases hold that Section 724(b) of the Bankruptcy Code is inapplicable to reorganization cases under Chapter 11 concerning the subordination of federal tax liens to administrative expenses and wage claims. The Debtor's, Compton Corporation, case is distinguishable from the Community Hospital and Roamer Linen cases in that a wholly different provision of the Bankruptcy Code, Section 726(a)(4), is at issue. The cases cited by the DOE concern Section 724 which speaks to the avoidance or non-avoidance of tax liens. Section 726 sets out the sequence for the distribution of property of the estate. In particular, Section 726(a)(4) provides for the allowance of "secured and unsecured claims for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages . . . to the extent that the fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss". 11 U.S.C.A. § 726(a)(4). This case also differs in that virtually all of the assets of the Debtor, Compton Corporation, have been liquidated. It is this Court's view that no assets will remain for any sort of reorganization by the Debtor. Although this case was filed under the reorganization provisions of the Bankruptcy Code, it is similar to a liquidation case.
Moreover, the DOE ignores "the best interest of the creditors test" incorporated by Section 1129(a)(7) which requires that, unless they otherwise consent, claimants shall receive no less under a Chapter 11 plan of reorganization than they would receive in a Chapter 7 liquidation case. In the interest of justice, fairness, and equity, the Court is required by this section of the Code to review what the creditors will receive in the liquidation of the estate with or without the subordination of the DOE's claim. The claim for alleged overcharges, if allowed and not subordinated, would cause the creditors of the estate to receive considerably less than they are entitled to from the Debtor. These are creditors who dealt with the Debtor directly on a personal level, who invested time, money, materials and services, and who have experienced a loss. The DOE's claim is for money allegedly due to unknown persons who may have suffered overcharges on their purchases of crude oil from the Debtor. The non-subordination of the DOE claim is not in the best interest of the creditors. It is this Court's opinion that Section 726(a)(4) is applicable to this case.
The second issue before this Court is whether DOE's claim is a penalty or is it restitution. DOE seeks to have the Debtor disgorge over $8,000,000 of alleged illegal overcharges made with respect to the sale of crude oil prior to Debtor's bankruptcy proceeding. It is the view of this Court that the DOE's claim for disgorgement is a penalty and not restitution.
The former Bankruptcy Act provided that a penalty claim would be disallowed in a bankruptcy proceeding, except to the extent that the penalty claimant had suffered some pecuniary loss. Under the Bankruptcy Reform Act of 1978, such claims are no longer disallowed but are merely subordinated to the claims of those who have suffered actual pecuniary loss. Bankruptcy case law under the former Bankruptcy Act delimiting the concept of "penalty" is still the law. Controlling precedent defines a Bankruptcy penalty as a claim without actual pecuniary loss to the claimant.
The Fifth Circuit defined a bankruptcy penalty in U.S. v. Moore, 366 F.2d 243 (5th Cir.1966), wherein the Government asserted a claim against the debtor for violation of cotton marketing quotas. The Government argued that this assessment was not a penalty but was instead a civil debt, designed to discourage overproduction of cotton. Further, the Government emphasized that the IRS had determined that the cotton marketing quota assessment was, for the farmer, payment of an ordinary and necessary farming expense rather than payment of a penalty for income tax purposes. The Fifth Circuit rejected all definitions of penalty for other purposes and held that for purposes of bankruptcy, all claims against a debtor are barred except those based on actual pecuniary loss to the claimant.
In In Re: Thrift Packing Company, 100 F.Supp. 907 (D.C.N.D...
To continue reading
Request your trial