In re Frank Meador Buick, Inc., Bankruptcy No. 7-80-00436.
| Decision Date | 14 April 1986 |
| Docket Number | Bankruptcy No. 7-80-00436. |
| Parties | In re FRANK MEADOR BUICK, INC., Debtor. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Virginia |
Hutcherson, Rhodes & Furrow, Rocky Mount, Va., for debtor.
Willis, Damico & Apgar, Roanoke, Va., for Ray Dobbins.
Plunkett & Logan, Roanoke, Va., for L.O. Brown.
U.S. Atty., Roanoke, Va., for IRS.
George A. McLean, Jr., Roanoke, Va., Trustee.
This case is before the Court on remand from the United States Court of Appeals for the Fourth Circuit for consideration of what effect the conversion of the case to a case under 11 U.S.C. Chapter 7 had on a previous Order of Distribution entered by this Court on May 27, 1983) In re Frank Meador Buick, Inc., 31 B.R. 28 (Bankr.W. D.VA 1983).
Briefly stated, the facts appear as follows. Frank Meador Buick, Inc. filed its Chapter 11 petition in this Court on April 23, 1980. On December 18, 1980, an Order was entered confirming the proposed plan of reorganization.
Thereafter, the reorganized company became delinquent in payment of withheld employee income taxes and Federal Insurance Contribution Act (FICA) taxes for the third and fourth quarters of 1981 and the first quarter of 1982. The company was also delinquent in Form 940 Federal Unemployment Tax Act taxes for 1981.
On June 14 and 16, 1982, the IRS properly filed and perfected tax liens for these taxes together with penalties and interest. The unpaid balances reflected on the lien notices are as follows:
3rd Quarter 1981 $21,173.42
4th Quarter 1981 23,535.23
1st Quarter 1982 11,192.70
1981 940 Taxes 1,976.03
Other amounts incurred post-confirmation and the creditors owed are as follows:
Ray Dobbins $60,830.54Rent
L.O. Brown 12,937.98Rent
Virginia
Employment
Commission Employment
(VEC) 779.60Taxes
Advertising
Houck Advertising 8,000.00Expense
Shenandoah Tire 276.10
Air Products 143.56
By entry of an Order on June 28, 1982, this Court approved the bulk sale of the corporation's inventory to Charles H. Johnson for $70,000.00. The sale was made "free of liens with all liens as to their validity, amount, and priority impressed upon the proceeds as hereafter determined by the Court." The proceeds were placed in an interest bearing escrow account pending further Court Order.
On September 27, 1982, the Court ordered partial distribution to two secured creditors in satisfaction of their security interests in the inventory, withholding distribution of the remaining $40,599.89. On May 27, 1983, this Court entered an Order of Distribution (hereinafter referred to as the 1983 Order of Distribution) directing the Trustee to distribute the funds to the U.S. Bankruptcy Court for postage expenses and to the IRS for costs incurred at the direction of this Court for an appraisal of the inventory conducted prior to sale. Distribution was also ordered to Counsel for the Creditors' Committee, Debtor's Counsel, and Counsel for a secured creditor who had an interest in the inventory. The Court directed further distribution pro rata for the "actual and necessary administrative expenses" of Ray Dobbins, L.O. Brown, IRS, VEC, Houck Advertising, Shenandoah Tire, and Air Products, as no issue was raised as to these claims. The essential issue at the time was one of equitable marshaling only. See 31 B.R., at 30.
The Distribution Order was appealed to the United States District Court for the Western District of Virginia by the party denied marshaling and affirmed on January 11, 1984. Thereafter, IRS appealed the Order of the District Court to the Fourth Circuit Court of Appeals. While pending in that court, the case, upon Debtor's motion, was converted to a case under Chapter 7 on July 17, 1984. Upon the conversion, IRS moved the Fourth Circuit to dismiss its appeal as moot and remand the case for further action. On October 23, 1984, the Court of Appeals granted the motion and entered an Order vacating the Orders of the Bankruptcy and District Courts "to the extent that they determine the priority and the status of the claim of the Internal Revenue Service." The case was remanded (emphasis added)
Hearing was held by this Court on March 18, 1986 for a determination of an appropriate Order pursuant to the Fourth Circuit's remand. The Trustee reported a balance on hand of $51,363.35. The Court, by consent of the parties, entered an Order permitting the Trustee to disburse $1,388.47 for the Trustee's fee in the Chapter 7 administration, as well as the postage and appraisal expenses and attorneys' fees previously ordered distributed in the 1983 Order of Distribution. The Court also allowed distribution to a post-petition wage claimant entitled to priority status under § 507(a)(3). Prior to argument, the Court announced to Counsel that in light of the Fourth Circuit's directive, it considered the matter as one "before the court to completely rule on all matters involving distribution of the funds in the hands of the Trustee", and that they should make their recommendations accordingly. Following hearing, the issues were taken under advisement and Counsel were given a period of time within which to ask leave to present additional evidence on any matters relating to the case in accordance with their view of the remand. No request has been filed.
Briefly stated, claimants Ray Dobbins and L.O. Brown contend that their claims for rent in the post-confirmation/pre-conversion period should be paid as outlined in the 1983 Order of Distribution, which labeled them as administrative expenses. As such, they would be paid under § 507(a)(1) ahead of the IRS. Counsel for the Debtor contends that the expenses incurred post-confirmation are unsecured claims and not administrative in nature and that the IRS is entitled to payment under § 507(a)(7)(A) prior to payment of these general unsecured claims. The IRS also contends that post-confirmation expenses are not administrative expenses, but advocates that distribution should be made in accordance with 11 U.S.C. § 724(b).
11 U.S.C. Section 103 outlines the applicability of the Chapters of Title 11 in Bankruptcy proceedings. Section 103(b) provides that subchapters I and II of Chapter 7 apply only in cases under that Chapter. Thus, upon conversion of a case from a case under Chapter 11 to a case under Chapter 7, §§ 701-728 become applicable. It is necessary to examine these provisions to determine what effect conversion had upon the 1983 Order of Distribution.
The provision relevant to this litigation is § 724, which outlines the treatment of certain liens. Section 724(b) provides:
It is recognized that § 724(b) is inapplicable to a case under Chapter 11, but may be applied, as in this instance, when the case is converted to a case under Chapter 7. Matter of Community Hospital of Rockland County, 5 B.R. 7, 5 C.B.C.2d 895, 5 B.C.D. 1115 (Bankr.S.D.NY 1979), aff'd 5 B.R. 11, 5 B.C.D. 1172 (S.D.NY 1980); In re Roamer Linen Supply, Inc., 30 B.R. 932 (Bankr.S.D.NY 1983). The effect of § 724(b) is to treat a tax lien as a claim ahead of the priority for taxes under § 507(a)(7) and after the other priorities outlined under § 507(a) rather than as a secured claim. 4 Collier on Bankruptcy, ¶ 724.031 at 724-6 (15th Ed.1985); 124 Cong.Rec.H 11,098 (daily edition, Sept. 28, 1978), S 17,415 (daily edition, Oct. 6, 1978). Accordingly, the tax lien is treated as a claim between the sixth and seventh priorities of § 507(a). 124 Cong.Rec.H 11,098 (daily edition, Sept. 28, 1978); Bnk-L.Ed., Code Commentary and Analysis, § 32:17.
In simple terms, § 724(b) provides that property or proceeds of such property that is subject to a tax lien shall be distributed first to the holders of liens senior to the tax lien. § 724(b)(1); 4 Collier on Bankruptcy, supra, at 724-7; Pearlstein v. Small Business Administration, 27 B.R. 153, 8 C.B.C.2d 267 (D.D.C.1982). Second, distribution is made to the priority claimants of § 507(a)(1)-(a)(6) up to the amount of the tax claim secured by the lien. § 724(b)(2). In other words, under § 724(b)(2), money representing the amount of the tax lien should be set aside. 4 Collier on Bankruptcy, supra, The priority claimants of § 507(a)(1)-(1)(6) step into the shoes of the tax collector and are entitled to payment up to that amount. H.Rep. No. 95-595,...
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