In re Al Copeland Enterprises, Inc., Bankruptcy No. 91-12575-FM.

• Decision Date: 11 October 1991
• Docket Number: Bankruptcy No. 91-12575-FM.
• Citation: 133 BR 837
• Parties: In re AL COPELAND ENTERPRISES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Western District of Texas

133 B.R. 837 (1991)

In re AL COPELAND ENTERPRISES, INC., Debtor.

Bankruptcy No. 91-12575-FM.

United States Bankruptcy Court, W.D. Texas, Austin Division.

October 11, 1991.

Mark Browning, Asst. Atty. Gen., Bankruptcy Section, Atty. Gen. of State of Tex., Austin, Tex.

R. Glen Ayers, Jr., Cox & Smith, Inc., San Antonio, Tex., for Committee of Unsecured Creditors.

Adrian M. Overstreet, Overstreet, Winn & Edwards, P.C., Austin, Tex., for debtor-in-possession.

John H. Tate, II, Oppenheimer, Rosenberg, Kelleher & Wheatley, Inc., San Antonio, Tex. (J. Ronald Trost, P.C., Sidley & Austin, Los Angeles, Cal., Thomas E. Pitts, Jr., Sidley & Austin, New York City, of counsel), for Canadian Imperial Bank of Commerce.

MEMORANDUM OPINION

FRANK R. MONROE, Bankruptcy Judge.

On August 9, 1991, the Court held a hearing on the State of Texas' Amended Motion for Adequate Protection of Interest in Trust Funds. In its Motion, the State requested that sales taxes collected prepetition by the Debtor be determined trust funds and be entitled to statutory interest provided by state law until paid. The Debtor admitted its liability for the principal amount of the taxes owed but resisted any payment of interest and opposed the tax claims' characterization as a trust fund claim.

This Court has jurisdiction of this contested matter pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(a) and (b)(1), 28 U.S.C. § 151, and the standing Order of Reference in this District. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). The Court has considered the pleadings of the parties, the evidence established at the hearing, the briefs of the parties, and the Court's own independent research. Accordingly, this Memorandum Opinion shall constitute Findings of Fact and Conclusions of Law under Bankruptcy Rule 7052 as made applicable to contested matters under Bankruptcy Rule 9014.

Findings of Fact

1. This proceeding was commenced by the filing of a voluntary petition by the Debtor under Chapter 11 on April 12, 1991.

2. The Debtor's estate owes the State of Texas the sum of $1,059,504.39 by reason of sales taxes the Debtor collected pre-petition from February 25, 1991 to March 24, 1991, which taxes came due and payable post-petition on April 22, 1991. The Debtor's estate owes the State of Texas $757,646.99 for sales taxes the Debtor collected pre-petition from March 25, 1991 through April 12, 1991, which taxes were due and payable post-petition on May 20, 1991.

3. As the Debtor collected the sales taxes, it deposited them into local bank accounts in the cities where collected. Those accounts were then swept on most banking days into a central clearing account. Ultimately the taxes were placed into a concentration account maintained at Chemical Bank. All funds in the concentration account in excess of projected daily cash needs were then invested in overnight repurchase agreements through an investment account at Texas Commerce Bank — Dallas, N.A. The average interest rate earned by the Debtor on invested funds between April 22, 1991 and August 1, 1991 was five percent (5%).

4. As of April 12, 1991, the Debtor owed no withheld federal income taxes, Federal Insurance Contribution Act taxes, or other known forms of federal "trust fund" taxes.

5. The debtor-in-possession's failure to timely pay these taxes is not the result of any intentional wrongdoing. The debtor-in-possession has not resisted payment of the principal amount of the tax claims themselves but has only requested that the State obtain authority from this Court for it to pay the same. The debtor-in-possession did not, however, take any affirmative steps on its own to pay the sales tax claims on a timely basis.

6. At the hearing the Court ordered the debtor-in-possession to immediately pay the State the principal amount of the tax claims at issue here, the total sum of $1,817,151.38.

Issues

1. Are the sales taxes collected by the Debtor trust funds, and, therefore, not property of the estate?

2. Is the State of Texas entitled to interest on the "trust fund" portion of its claim?

Conclusions of Law & Discussion

1. Trust Funds. Section 111.016 of the Texas Tax Code grants trust fund status to sales tax receipts in the hands of the party collecting them. Specifically, this section provides that,

"Any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected."

Tex.Tax Code Ann. § 111.016 (Vernon Supp.1991) (emphasis added). The trust language of this section, added effective July 21, 1987, clarified the status of collected sales tax receipts because the Texas Tax Code provision dealing in general with the collection of sales taxes by retailers at the point of purchase does not contain "trust fund" language. See Tex.Tax Code Ann. § 151.052 (Vernon 1982).¹ Now, with the amendment of § 111.016, there is no question that collected sales taxes are trust funds. See In re Gulf Consolidated Services, Inc., 110 B.R. 267, 268 (Bankr. S.D.Tex.1989).

This Court is bound by substantive state law on this issue. As such, the Court concludes that the sales taxes collected by the Debtor as set forth in the Findings hereinabove came into the hands of the Debtor as trust funds for the State of Texas.

Since the sales taxes collected by the Debtor were trust funds, then, to the extent they remained in the Debtor's possession on the petition date, they are not property of the Debtor's estate. 11 U.S.C. § 541(d); Begier v. I.R.S., 496 U.S. 53, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). The Begier court analyzed the language of 26 U.S.C. § 7501, an Internal Revenue Provision which states:

"Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States."

26 U.S.C. § 7501 (1986).

The Supreme Court concluded that this language creates a trust at the time of the withholding. Begier, 110 S.Ct. at 2264. Further, and of greater significance, citing a prior opinion as support, the Supreme Court concluded that § 7501 did not "mandate segregation as a prerequisite to the creation of a trust. . . . Petitioner's suggestion that we read a segregation requirement into § 7501 would mean that an employer could avoid creation of a trust simply by refusing to segregate." Id. ("There is no general requirement that the withheld sums be segregated from the employer's general funds." (citing Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 1783, 56 L.Ed.2d 251 (1978))).

Begier was a preference case in which the trustee attempted to recover the Debtor's pre-petition payment of trust fund taxes to the IRS from its general, non-segregated monies. In construing Congress' intent behind § 541(d) of the Bankruptcy Code, the Supreme Court concluded that "the limitation that the funds must `have been properly held for payment' is satisfied `if the debtor is able to make the payments'."

Id. 110 S.Ct. at 2267.

Further, even though the trust funds had been commingled with the debtor's own money, "the debtor's act of voluntarily paying its trust fund obligation therefore is alone sufficient to establish the required nexus between the `amount' held in trust and the funds paid." Id. at 2267. The result was that the trustee was unable to recover the alleged preference since the payment in question was not a transfer of property of the debtor, but a transfer of the res of the trust to its beneficial owner. Id.

The result in Begier and the rationale the Supreme Court used to reach this result is consistent with pre-existing trust law which had held that "the beneficiary may trace those trust assets and recover them from anyone but a bona fide purchaser for value." In re Mahan & Rowsey, Inc., 817 F.2d 682, 684 (10th Cir.1987) (beneficiary of trust allowed to recover trust assets improperly transferred by the trustee of the trust). That court also stated that "this trust pursuit will even allow tracing of trust funds into a commingled mass." Id. (citing 76 Am.Jur.2d Trusts § 261 (1975)).

The language of § 7501 of the Internal Revenue Code is similar to that of § 111.016 of the Texas Tax Code; therefore, a compatible application of Begier and Mahan & Rowsey requires that the State of Texas prove that the trust funds were collected by the Debtor, that on the date of the filing of this Chapter 11 proceeding, April 12, 1991, the Debtor had sufficient funds on hand equal to or in excess of the amount of such trust funds, and that, at all times during the interim period between collection and filing for bankruptcy, the Debtor had sufficient funds on hand to fully pay the trust fund claims. This latter requirement is imposed because if the balance of cash on hand on any interim day was less than the amount of the trust fund claims, then the trust fund claims are limited to that "lowest intermediate balance." Mahan & Rowsey, 817 F.2d at 684-85. Stated another way, once the trust fund is depleted, it cannot be replenished. 4 Collier on Bankruptcy para. 541.14, at 541-79 to 541-80, 541-80 n. 13 (15th ed. 1991) (at footnote 13, citing Schuyler v. Littlefield, 232 U.S. 707, 34 S.Ct. 466, 58 L.Ed. 806 (1914); Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924)).

The evidence produced at the hearing established that the sales taxes were collected by the Debtor. Further, the State properly identified the Debtor's various bank accounts into which the sales taxes were deposited and then traced them into their ultimate repository, the concentration account at Chemical Bank from which the nightly repurchase agreements were purchased at TCB. Further, the Debtor's daily combined cash balances during the...