In re Elkins Energy Corp.

• Decision Date: 12 July 1984
• Docket Number: Bankruptcy No. 79-00063-B.
• Court: U.S. Bankruptcy Court — Western District of Virginia
• Parties: In re ELKINS ENERGY CORPORATION, Debtor.

40 B.R. 888 (1984)

In re ELKINS ENERGY CORPORATION, Debtor.

Bankruptcy No. 79-00063-B.

United States Bankruptcy Court, W.D. Virginia, Big Stone Gap Division.

July 12, 1984.

Robert T. Copeland, Abingdon, Va., and James E. Nunley, Bristol, Va., for debtor.

Robert W. Detrick, Bristol, Va., James W. Elliott, Jr., Bristol, Va., Trustee.

Michael A. Bragg, Bristol, Va., for Coy & Regina Mullins.

MEMORANDUM OPINION AND ORDER

H. CLYDE PEARSON, Bankruptcy Judge.

Elkins Energy Corporation, Debtor herein which was engaged in the coal mining business, filed a voluntary petition in this court on August 3, 1979, seeking relief under Chapter XI of the Bankruptcy Act of 1898. On October 8, 1980, a Proof of Claim (# 107) in the amount of $156,000.00 was filed by Coy and Regina Mullins. The Mullins' claim sought priority as a pre-petition tax claim under § 64(a)(4) of the Act by virtue of subrogation. A Plan was confirmed, but the case was subsequently converted to Chapter IV liquidation. The Trustee filed an objection to the Mullins' claimed priority right to subrogation.

Upon hearing the objection and consideration of briefs submitted by the parties in support of their positions, the court renders the following decision denying the Trustee's objection as to a portion of the claim.

At all times relevant to this proceeding, Regina Mullins was employed by the Debtor as a key staff member of the office personnel and bookkeeper. She was neither a stockholder nor officer of the Debtor corporation. As a member of the principal office personnel and bookkeeper, Mullins was aware of the Debtor's financial difficulties as evidenced by the frequent and substantial overdrafts in the Debtor's checking account.

On December 11, 1978, Mullins and her husband were approached by the principal officers of Elkins Energy who indicated that they were seriously delinquent in the payment of certain payroll taxes which had been duly assessed by the IRS and, if these taxes were not paid, the company would have to shut down and they would go to jail. Mullins testified at trial that Charles Elkins, president of Elkins Energy, asked her to lend $150,000.00 to the corporation in order to pay the delinquent taxes.

Mullins, faced with the protection of her favorable employment position and the compelling circumstances presented, did on December 12, 1978 borrow $156,000.00 from Cumberland Bank & Trust. The Mullinses signed a short-term 90-day note with interest at 12½ percent annually. To secure the loan, the Mullinses gave the bank a Deed of Trust on their personal residence. Net loan proceeds of $150,768.00 were deposited into Mrs. Mullins' checking account. The short-term loan was to be a temporary arrangement in order to take care of the IRS liability and then repaid.

On the same day, December 12th, Mullins wrote a check for $150,000.00 payable to Elkins Energy and delivered the same to Charles Elkins. Charles Elkins, as president of the Debtor, signed a 90-day note for $156,000.00 (with interest at 12½ percent) payable to Coy and Regina Mullins.

A third transaction occurred on December 12, 1978. Elkins Energy paid $54,160.55 to the Internal Revenue Service (IRS) through its agent, who was physically present in the Debtor's offices to receive the tax payment and clear the pending tax emergency. From that date until January 3, 1979, a total of $158,616.10 was paid to IRS on delinquent taxes. Another $60,551.98 was paid on January 22, 1979 and on February 2, 1979. These payments essentially brought the Debtor current on payroll taxes.

Elkins Energy paid the interest on its debt to the Mullinses until the time the Chapter XI petition was filed; no principal payments were ever made. Approximately $32,000.00 was paid upon the Mullins' claim under the confirmed Chapter XI Plan, all of which was in turn paid by the Mullinses upon their note to Cumberland Bank & Trust. When the Mullinses were unable to pay off their note to the bank, foreclosure proceedings were initiated and the Mullinses subsequently deeded their residence over to the bank in satisfaction of their obligation.

Coy and Regina Mullins contend that the funds lent to the Debtor were used to pay taxes due IRS and, as subrogees to IRS, they are entitled to a priority claim against the Debtor. The Trustee objects on two grounds: (1) that there is no evidence to prove that the Mullins loan was used to pay taxes; and (2) even if the money was used to pay taxes, § 64(a)(4) makes no provision for the transfer of tax priority status under the theory of subrogation.

From the evidence presented at trial, this court concludes that the Mullins loan was, in fact, used to pay Debtor's delinquent payroll taxes to the extent of $54,160.55, shown without question to have been paid from the Mullins' funds.

We turn now to the question of whether the government's right to a priority tax claim may be transferred to a non-governmental claimant by virtue of subrogation. Section 64(a)(4) does not provide the answer; nor are the courts which have considered the issue in agreement. See 3A Collier on Bankruptcy, ¶ 64.408 (14th ed. 1975).

The rule of subrogation, whereby a party paying another's debt is entitled to exercise the remedies of the original creditor against the debtor, is among the oldest of equitable doctrines. In 73 Am.Jur.2d, § 22, the treatise states:

"The flexibility of the remedy by subrogation and its constantly expanding application preclude the possibility of an exhaustive enumeration of the classes of persons who are entitled to subrogation. Certain exclusions and inclusions are, however, generally recognized. The excluded classes are composed of those who discharge debts on which their liability is primary, and those whose position is that of volunteers or strangers. It has been said that from the very nature of subrogation it could never have been intended for the relief of those who were in a condition in which they were at liberty to elect whether they would or would not be bound. Recognized inclusions are of those who, like sureties or guarantors, pay the debt of another in the performance of a legal duty imposed by contract or rules of law; those who pay the obligation of another for the purpose of protecting their own rights or interests, or supposed interests; those who pay the debt of another under an agreement for subrogation to the right of the creditor; those who pay on the invitation of the public and whose payment is favored by public policy; and persons whose funds or property have been misapplied by an agent or other fiduciary, or have otherwise been used in such a way as to enrich others unjustly."

Section 23 of said treatise states that the equitable doctrine of subrogation in its strict sense does not apply to volunteers or intermeddlers who, without any duty, moral or otherwise, pay the debts or discharge the obligations of another.

In § 24, the same treatise defines a volunteer in the following language:

"Generally speaking, the party making payment is a volunteer if, in so doing, he has no right or interest of his own to protect, and acts without obligation, moral or legal, and without being requested by anyone liable on the obligation. (Gosnell v. Garner, 198 Ark. 989, 132 S.W.2d 187; Kramer v. American Fidelity & Casualty Co. Mun.Ct.App.Dist. Col. 165 A.2d 924; Martin v. Martin, 164 Ill. 640, 45 N.E. 1007.) A volunteer may be, but is not necessarily, one who has had nothing to do with the transaction out of which the debt grew." emphasis added

"One is not a volunteer when he has an interest of his own to protect."

Further, it is stated:

"One is not a volunteer within the rule here considered where he pays the debt at the instance, solicitation, or request of the person whose liability he discharges, or of that person\'s agent or representative."

In § 25, the treatise further states:

"The right of subrogation is not necessarily confined to those who are legally bound to make the payment, but extends as well to persons who pay the debt in self-protection, since they might suffer loss if the obligation is not discharged. A person who has an interest to protect by making the payment is not regarded as a volunteer. In this class are included subsequent encumbrancers paying off a prior encumbrance, though only when they do so to protect their own interest. The extent

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