In re Goody's LLC

• Decision Date: 13 May 2014
• Docket Number: Case No. 09–10124 (CSS)
• Citation: 508 B.R. 891
• Parties: In re: Goody's LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

508 B.R. 891

In re: Goody's LLC, et al., Debtors.

Case No. 09–10124 (CSS)

United States Bankruptcy Court, D. Delaware.

Signed May 13, 2014

Young Conaway Stargatt & Taylor, LLP, M. Blake Cleary, Margaret B. Whiteman, Jaime Luton Chapman, Andrew L. Magaziner, Rodney Square, 1000 North King Street, Wilmington, DE 19801, Counsel for the Liquidating Agent.

U.S. Department of Justice, Kathryn Keneally, Assistant Attorney General, Ann E. Nash, Trial Attorney, Tax Division, P.O. Box 227, Ben Franklin Station, Washington, DC 20044.

Chapter 11

(Jointly Administered)

OPINION¹

Sontchi, J.

INTRODUCTION

Before the Court is a motion filed by the Debtors ² to enforce the Plan injunctions and to determine the Debtors' liability for certain employment taxes. Pursuant to the Debtors' Plan, the Debtors made distributions to employees on behalf of pre-petition wages earned by those employees. As part of the distributions, the Debtors withheld various amounts from those distributions for federal taxes. After the distributions, the Debtors electronically submitted the amounts withheld to the IRS and filed the appropriate tax returns. The Debtors subsequently requested that the amounts paid be designated to the Trust Fund Liability taxes. Instead, the IRS applied the amounts paid to the Employer Liability taxes (that also related to the distributed amounts) and the IRS then sought the unpaid portion of the Trust Fund Liability from the Liquidating Agent as “responsible person.” Additionally, the IRS did not file a proof of claim by the applicable bar date for the Employer Liability taxes.

Herein, the Court finds that the IRS's claim for Employer Liability is a pre-petition claim but that the IRS did not need to file a proof of claim by the Bar Date for such liability. As such, the IRS's claim for Employer Liability taxes is not barred. Furthermore, the Court is without sufficient evidence to designate the tax payment to the Trust Fund Liability. As such, the Court denies the Motion, with prejudice, in part, and without prejudice, in part.

STATEMENT OF FACTS

A. General Background

On January 13, 2009, each of the above-captioned debtors (the “Debtors”) commenced a case by filing a petition for relief in this Court under chapter 11 of the Bankruptcy Code. Until the effective date of the Plan (discussed infra ), the Debtors continued to manage their property as debtors in possession pursuant to §§ 1107 and 1108 of the Bankruptcy Code.

On March 16, 2009, each of the Debtors filed its Schedules of Assets and Liabilities (collectively, the “Schedules” and each a “Schedule”) and Statement of Financial Affairs (collectively, the “Statements” and each a “Statement”). ³ Goody's LLC listed the IRS on Schedule E as an unliquidated, unsecured priority claimant.⁴ Thereafter, the Court established various bar dates for prepetition claims.⁵ The Internal Revenue Service (“IRS”) was served with notice of the Bar Date and a proof of claim form indicating that the Debtors had scheduled the IRS's claim as an unliquidated, unsecured priority claim in Goody's LLC's Schedules.⁶ The Bar Date notice stated that any entity with a prepetition claim listed as “unliquidated” that “desires to participate in these chapter 11 cases or share in any distribution in these chapter 11 cases” must file a proof of claim before the applicable Bar Date.

The IRS did not file a proof of claim related to the taxes at issue in this matter.

On December 23, 2009, the Debtors filed the Plan and related disclosure statement.⁷ Thereafter, on March 3, 2010 (the “Confirmation Date”), the Court entered an order confirming the Plan.⁸ The Plan went effective on November 4, 2010.⁹

Pursuant to Section 6.2 of the Plan, as of the Confirmation Date:

[a]ny Claim that was required to be filed by the Bar Date or the Administrative Expense Claims Bar Date (as the case may be) that is instead filed after such applicable Bar Date or Administrative Expense Claim Bar Date shall be deemed disallowed without further action or order of the Bankruptcy Court or the Debtors.¹⁰

The Plan also contains a satisfaction provision which states, in part: “The treatment of and consideration to be received by holders of Allowed Claims pursuant to this Plan shall be in full satisfaction of such holders' respective Claims against the Estates.” ¹¹ The Plan also contained an injunction against collection of pre-petition claims.¹²

On the Effective Date, pursuant to the terms of the Plan, David Peek was appointed as Liquidating Agent (as defined in the Plan).¹³ The Plan contains a limitation of liability of various people, including the Liquidating Agent.¹⁴ The Plan further provides for indemnification of the Liquidating Agent for claims related to his duties.¹⁵

B. Factual History

Pursuant to the terms of the Plan, the Debtors paid allowed wage claims (the “Wages Claims”) on December 17, 2010 and February 18, 2011. The Debtors withheld employment taxes from the Wage Claims (the “Withheld Amounts”). Goody's LLC, one of the Debtors, filed the requisite 941 tax returns reporting the taxes associated with the Wage Claims.¹⁶

The Debtors deposited all Withheld Amounts with the IRS utilizing the Electronic Federal Tax Payment System (the “EFTPS”). The Withheld Amounts that have been paid were equal to the employees' shares of both the applicable employment taxes and income taxes (the “Trust Fund Liability”).

Thereafter, the Debtors requested that the IRS apply the remitted Withheld Amounts to the Trust Fund Liability. As it happens, the IRS applied the Withheld Amounts to the employer liability obligation (the “Employer Liability”), which the IRS claims arose as a result of the payment of the Wage Claims. The IRS further asserted that the Trust Fund Liability remains outstanding.

Although this issue is not presently before the Court, the IRS sent a notice pursuant to which it asserted that it was investigating whether any individuals, including Mr. Peek, should be treated as “responsible persons” liable for unpaid trust fund taxes.¹⁷ The Debtors claim that any such liability incurred by Mr. Peek related to the Trust Fund Liability will trigger the indemnification provisions of the Plan.

The Debtors assert that the amounts must be applied to the Trust Fund Liability because the IRS did not file a claim for the Employer Liability and that the IRS is now barred by the applicable Bar Dates and the Plan Injunction from seeking any payment on account of Employer Liability. The Debtors further assert that even if the IRS has a valid claim for the Employer Liability, the Court should designate the tax payment to the Trust Fund Liability.

C. Procedural Posture

The Debtors filed the Motion Pursuant to §§ 105 and 505 of the Bankruptcy Code for Entry of an Order Enforcing the Plan Injunctions and Determining the Debtors' Liability for Certain Employment Taxes (the “Motion”), ¹⁸ to which the U.S. Department of Justice, Tax Division (referred to herein as the “IRS”) responded.¹⁹ The Court heard oral argument on the Motion ²⁰ and took the matter under advisement. The Motion is ripe for the Court's consideration.

ANALYSIS

A. Trust Fund and Non–Trust Fund Taxes

Employment tax is comprised of trust fund and non-trust fund taxes. The Internal Revenue Code requires employers to withhold federal income and social security taxes from salaries and wages of employees.²¹ An employer is required to remit these withheld amounts to the government on behalf of the employee.²² Employers hold these taxes for the benefit of and in trust for the United States, as a result, these taxes are typically called “trust fund taxes” (referred to herein as the “Trust Fund Liability”). Employers are also responsible to match the amount of Social Security and Medicare taxes and remit these amounts to the government.²³ As these amounts are the employer's responsibility, rather than amounts withheld from an employee's pay, these amounts are referred to as nontrust fund taxes (referred to herein as the “Employer Liability”).

The United States has no recourse against individual employees for the “trust fund taxes,” as such, Congress created a statutory remedy to ensure that trust fund tax revenues were not lost.²⁴ “An employer who fails to pay taxes withheld from its employees' wages is ... liable for the taxeswhich should have been paid.” ²⁵ These individuals are referred to as “responsible persons” and the penalty may be up to 100% of the unpaid taxes. ²⁶ Liability for the “trust fund” taxes attaches when the individual is the responsible person and willfully fails to collect and pay over the taxes that are due.²⁷ Thus, the IRS has an incentive to apply the Debtors' tax payment to the Employer Liability (i.e. non-trust fund taxes) and then seek the Trust Fund Liability from the responsible person—thereby collecting the full amount of the taxes owed.²⁸

As set forth above, the Debtors remitted the Withheld Amounts to the IRS. The IRS applied these remitted funds to the Employer Liability (rather than the Trust Fund Liability as requested by the Debtors). Furthermore, the IRS alleges that Mr. Peek is a “responsible person.” As a result, the IRS is holding a personal tax refund otherwise owed to Mr. Peek for the tax year 2012 while the IRS investigates whether such refund should be applied to the Trust Fund Liability. The IRS's imposition of liability to Mr. Peek would, in turn, trigger a claim by him against the Debtors, pursuant to the indemnification provisions in the Plan.

As a result, the Debtors are seeking an order enforcing the Plan injunctions and determining that the Debtors are not responsible for the Employer Liability.²⁹ The Debtors argue that the IRS should have filed a proof of claim related to the Employer Liability and, as a result of this failure, is not entitled to recover the Employer Liability. This would result, as a practical matter, in the IRS applying the Withheld Amounts to the Trust Fund Liability, thereby not impacting Mr. Peek or...