In re Goldblatt Bros., Inc.
| Decision Date | 10 October 1989 |
| Docket Number | Adv. No. 88 A 302.,Bankruptcy No. 81 B 7075 |
| Citation | 106 BR 522 |
| Parties | In re GOLDBLATT BROS., INC., Debtor. UNSECURED CREDITORS' COMMITTEE OF GOLDBLATT BROS., INC., Plaintiff, v. UNITED STATES of America (DEPARTMENT OF TREASURY, INTERNAL REVENUE SERVICE), and State of Illinois (Department of Revenue), Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Steven R. Radtke, Chill, Chill & Radtke, P.C., Chicago, Ill., for plaintiff.
James Newbold, Sp. Asst. Atty. Gen., Revenue Litigation Div., Chicago, Ill., for State of Ill.
Richard M. Prendergast, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., Lauren Gore, Dist. Counsel's Office, I.R.S., Chicago, Ill., for U.S.
On June 15, 1981 Goldblatt Bros., Inc. (the "Debtor") filed its voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. By order of August 23, 1983, the Debtor's Second Amended Plan of Reorganization (the "Plan") was confirmed. The Plan provided in part for creation of a bank account, the "Creditors' Deposit Account" (the "CDA"), to be administered by the Unsecured Creditors' Committee of Goldblatt Brothers, Inc. (the "Committee"). The Plan provided that the CDA is to be used to pay certain administrative and priority claims in full and to pay pro rata those parties holding general unsecured nonpriority claims ("Class 3 Allowed Claims").1 Following confirmation of the Plan, the CDA was created and funded. On April 22, 1988, the Committee filed the instant Adversary Complaint against both the United States, Department of Treasury, Internal Revenue Service (the "United States") and the State of Illinois, Department of Revenue ("Illinois"). The Complaint seeks declaratory judgment that the Committee is not responsible for paying federal or state income tax on interest earned on money held in the CDA, or for filing federal or state income tax returns related to this fund.2
The United States and Illinois (collectively "the Movants") each moved to dismiss the complaint. Movants contend that a bankruptcy court lacks jurisdiction to adjudicate the Committee's federal and state income tax responsibilities regarding the CDA. For reasons stated below, those motions are denied.
To evaluate Movants' arguments, it is first necessary to consider attributes of the CDA as set forth in the confirmed Plan. The Plan defined the CDA as "the bank account to be established pursuant to Section 2 of Article V of the Plan." Section 2, Article V in turn provided that as soon as practicable following confirmation, Debtor was to deposit the specified sum into the Creditors' Deposit Account to be established in the name of the Committee at Exchange National Bank. The Plan explicitly provided that "on the Deposit Date, all obligations of Debtor . . . with reference to Class 3 Allowed Claims shall be fully settled, satisfied and discharged as of the Confirmation Date." Art. IV, § 1.
Once Debtor funded the CDA, the ongoing duty of administering those classes of claims to be satisfied out of the CDA shifted from Debtor to the Committee. The Plan stated that "the Committee shall survive the confirmation of the Plan and continue to function in accordance with the authority and obligations provided under the Plan until all sums on deposit in the Deposit Accounts are finally distributed." Art. VII, § 1. These functions are fleshed out in Article V, § 2, which provided in part:
Subject to the continuing jurisdiction of the Court, the Committee is hereby authorized to administer the CDA for the sole benefit of those creditors whose claims are payable out of the CDA . . . and in that connection, the Committee shall have the authority (i) subject to approval of the Court, to retain additional counsel to discharge its responsibilities under this Section, (ii) to review the claims scheduled by or filed against the Debtor in this case which are payable out of the CDA in order to determine the extent, if any, to which each such claim shall be an Administrative Claim or an Allowed Claim, as the case may be, (iii) to contest all or any part of any claim payable out of the CDA provided, however, that all objections to such claims shall be filed with the Court within 120 days after the Deposit Date, or as soon as practicable thereafter. . . .
(emphasis added). The Plan thereby assigned to the Committee the responsibility for evaluating, contesting and administering claims "payable out of" the CDA, all under this Court's jurisdiction.
For the first 120 days following deposit of money into the CDA, Debtor was required to furnish the Committee with all information it had relevant to claims, and to make its personnel available for depositions and testimony on such matters without charge. Article V, 2. Upon completing its review of claims filed against the Debtor, the Committee was and remains required under the Plan to make payouts to the different classes of creditors entitled to payment from the CDA. Art. IV, § 1; Art. V, § 2(v)-(vii). Those classes include certain administrative claims allowed under 11 U.S.C. § 503(b), certain priority claims involving pre-petition wages under 11 U.S.C. § 507(a)(3), (5), the Committee's reasonable expenses incurred in administering the CDA, and the Class 3 Allowed Claims. Id. In the interim period between funding and payout, the Committee is required to invest the CDA funds in "readily marketable obligations" of the United States or in certificates of time deposits issued by certain banks. Art. V, § 5. Earnings therefrom become part of the CDA. Should the earnings be taxable, the Committee would be obliged to pay such taxes out of the CDA as expenses incurred in administering the CDA.
The confirmed Plan has been implemented essentially as required. In mid-August of 1985 the Debtor deposited approximately $7 million in the CDA. Shortly thereafter, an initial distribution of $3 million was dispersed to those creditors with allowed claims against the CDA. The Committee now represents that all claims evaluation has been completed, and that administrative and priority claims have been paid in full. About $5 million remains in the CDA to be distributed pro rata to creditors holding Class 3 Allowed Claims upon resolution of the present tax dispute. The Committee is withholding final distribution of this sum in order to avoid any possible subsequent imposition of penalties and potential personal liability on Committee members or their attorneys. Neither the United States nor Illinois has filed a claim in bankruptcy against the Debtor, Committee, or CDA related to the post-confirmation interest earned by the CDA.
It appears that substantial interest has accrued on the money invested in the CDA. Neither Debtor nor the Committee has filed a federal or state income tax return or paid federal or state income tax with respect to such interest. The Plan does not specifically address such possible taxes or the filing of such returns.
The government Movants focus on the jurisdictional grant set forth in 11 U.S.C. § 505. Section 505(a)(1) provides in part that "the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction." (emphasis added). Movants point out that the broad language of § 505(a)(1) has been interpreted by recent case law to authorize a bankruptcy court to determine only the tax liability of a debtor under Title 11 U.S.C., but not that of other parties. Movants argue that the Committee and CDA comprise an entity distinct from Debtor because Debtor's liability to its general unsecured creditors was discharged under the Plan when it deposited funds in the CDA. Therefore, they reason that this Court lacks subject matter jurisdiction under § 505(a)(1).
This Court concludes, however, that § 505's specific jurisdictional grant should not be read in isolation from general statutory provisions authorizing bankruptcy courts to adjudicate controversies. Accordingly, we turn first to those general jurisdictional provisions.
Original jurisdiction over bankruptcy is conferred on federal district courts under 28 U.S.C. § 1334. This section provides for exclusive original jurisdiction in federal district court over cases filed under Title 11 U.S.C. and nonexclusive original jurisdiction for proceedings (1) arising under Title 11, (2) arising in cases under Title 11, and (3) related to cases under Title 11. Although a proceeding falling within any one of the foregoing categories is sufficient to vest the district court with subject matter jurisdiction, the distinction between "arising under" and "arising in" on one hand and "related to" cases on the other is relevant to determine the authority of a bankruptcy court to adjudicate the proceeding and enter final enforceable orders.
This distinction is set forth in 28 U.S.C. § 157 which was enacted in response to Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982).3 Marathon held that the referral of the district court's entire subject matter jurisdiction to non-article III decision makers under 28 U.S.C. § 1471(c) the predecessor to § 157 was unconstitutional.4
Section 157 provides in part that "bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 . . . and may enter appropriate orders and judgments. . . ." 28 U.S.C. § 157(b)(1). A bankruptcy judge may also hear "a proceeding that is not a core proceeding but that is otherwise related to a case und...
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