In re Great Food Great Fun, LLC

• Decision Date: 28 May 2020
• Docket Number: BK 17-11557 CLB, BK 17-11558 CLB
• Citation: 616 B.R. 471
• Parties: IN RE GREAT FOOD GREAT FUN, LLC, d/b/a Wing City Grille, Debtor, and In re Professional Hospitality, LLC, d/b/a Village Casino Restaurant, Debtor.
• Court: U.S. Bankruptcy Court — Western District of New York

616 B.R. 471

IN RE GREAT FOOD GREAT FUN, LLC, d/b/a Wing City Grille, Debtor,

and

In re Professional Hospitality, LLC, d/b/a Village Casino Restaurant, Debtor.

BK 17-11557 CLB, BK 17-11558 CLB

United States Bankruptcy Court, W.D. New York.

Signed May 28, 2020

Andreozzi Bluestein LLP, Daniel F. Brown, Esq., of counsel, 9145 Main Street, Clarence, New York 14031, Attorney for Debtors

Office of the New York State Attorney General, Louis J. Testa, Esq., of counsel, Civil Recoveries Bureau, Bankruptcy Litigation Unit, The Capitol, Albany, New York 12224, Attorneys for New York State Department of Taxation and Finance

DECISION & ORDER

Bucki, Chief U.S.B.J., W.D.N.Y.

Section 1141(c) of the New York Tax Law provides that upon a failure to adhere to noticing requirements, the bulk purchaser of business assets may be held personally liable for certain tax obligations of the seller. Pursuant to this provision, the debtors in these proceedings assumed liability for sales taxes that their predecessors had a duty to remit. In now objecting to the proofs of claim filed by the State of New York, the debtors contest only the priority status of the obligation.

Between 2004 and 2010, Steven Carlson was the owner of Car-Kid Development, Inc., and Carlson Food Enterprises, Inc. Both of these corporations operated restaurants but failed to remit significant sales taxes collected from their customers on behalf of the State of New York. In 2011, for no consideration, Steven Carlson caused his corporations to transfer all of their assets to Best Wings, LLC, a New York Corporation owned by his son, Andrew Carlson. Thereafter, Andrew Carlson caused Best Wings, LLC, to transfer the assets previously owned by Car-Kid Development, Inc., to Great Food Great Fun, LLC; and to transfer the assets previously owned by Carlson Food Enterprises, Inc., to Professional Hospitality, LLC. Again, no consideration was exchanged.

On July 24, 2017, Great Food Great Fun, LLC ("Great Food") and Professional Hospitality, LLC ("Professional Hospitality") filed petitions for relief under Chapter 11 of the Bankruptcy Code. In both cases, the New York State Department of Taxation and Finance promptly filed a proof of claim for sales taxes that Car-Kid Development and Carlson Food Enterprises had failed to remit. Great Food and Professional Hospitality now object to these proofs of claim.

New York Tax Law § 1141(c) includes the following provision:

"Whenever a person required to collect tax shall make a sale, transfer, or assignment in bulk of any part or the whole of his business assets, otherwise than in the ordinary course of business, the purchaser, transferee or assignee shall at least ten days before taking possession of the subject of said sale, transfer or assignment, or paying therefor, notify the tax commission by registered mail of the proposed sale and of the price, terms and conditions thereof whether or not the seller, transferrer or assignor, has represented to, or informed the purchaser, transferee or assignee that he owes any tax pursuant to this article, and whether or not the purchaser, transferee, or assignee has knowledge that such taxes are owing, and whether any such taxes are in fact owing."

Section 1141(c) further provides that in the event of a failure to complete the above stated noticing procedure, the purchaser, transferee or assignee "shall be personally liable for the payment to the state of any such taxes theretofore or thereafter determined to be due to the state from the seller, transferrer or assignor." Pursuant to the statute, however, this personal liability "shall be limited to an amount not in excess of the purchase price or fair market value of the business assets sold, transferred or assigned to such purchaser, transferee, or assignee, whichever is higher."

Best Wings, LLC, failed to give the New York State Tax Commission a timely notice of its acquisition of assets from Car-Kid Development, Inc., and from Carlson Food Enterprises, Inc. As a consequence, Best Wings, LLC, became personally liable for the outstanding sales taxes that its predecessors had failed to remit, but in an amount limited to the greater of the purchase price or the fair market value of the transferred assets. Because Best Wings paid no consideration, it became liable for the fair market value of the assets. Subsequently, Great Food and Professional Hospitality similarly failed to notify the Tax Commission of their acquisition of assets. Again, because no consideration was exchanged, Great Food and Professional Hospitality became liable for their predecessors' unpaid taxes up to the fair market value of the transferred assets.

The New York State Department of Taxation and Finance now calculates that by reason of the bulk sale provisions of New York Tax Law § 1141(c), Great Food is liable for an unsecured priority obligation of $176,889.65, on account of a portion of the sales taxes owed by Car-Kid Development, Inc.; and that Professional Hospitality is liable for an unsecured priority obligation of $252,053.59, on account of a portion of the sales taxes owed by Carson Food Enterprises, Inc. The debtors do not dispute the amount that is due and owing. Rather, their sole remaining contention is that these claims should be allowed only as general unsecured obligations, without priority.

Discussion

Section 507 of the Bankruptcy Code recognizes the priority of certain claims. In relevant part, subdivision (a) of this section provides as follows:

"The following expenses and claims have priority in the following order: ... (8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for .... (C) a tax required to be collected or withheld and for which the debtor is liable in whatever capacity."

Thus, under subparagraph (C), the eighth priority extends to taxes that satisfy two conditions. First, the tax must be one that is required to be collected or withheld. Notably, this first prong relates only to the nature of the tax, without regard to the identity of the party...