In re Hospitality Associates of Laurel
| Decision Date | 21 August 1997 |
| Docket Number | Bankruptcy No. 86-249. |
| Citation | 212 BR 188 |
| Parties | In re HOSPITALITY ASSOCIATES OF LAUREL, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Hampshire |
Stephen Darr, KPMG Peat Marwick, Boston, MA, Chapter 7 Trustee.
Grenville Clark, Gray, Wendell & Clark, Manchester, NH, for Debtor.
Dennis Bezanson, Portsmouth, NH, for Trustee.
Geraldine Karonis, Office of U.S. Trustee, Manchester, NH, for U.S. Trustee.
Avery Ellis, U.S. Dept. of Justice, Tax Division, Washington, DC, David L. Broderick, U.S. Attorney's Office, Concord, NH, Mae Lew, Boston, MA, for U.S.I.R.S.
The principal question presented for decision by the Court in this case relates to whether an unpaid administrative tax liability claim by the Internal Revenue Service, stemming from the chapter 11 stage of this case in 1988, is entitled to include interest running on that claim from that time until the conclusion this year of the succeeding chapter 7 liquidation under the applicable Bankruptcy Code provisions for distribution of a bankruptcy estate. The case presents an important issue of statutory construction when the "plain meaning" of the statutory provisions in question is clear unless clouded by an "ambiguity" that may be real or may stem only from a conclusory mote in the eye of the judicial beholder.
This case was filed as a chapter 11 proceeding on June 4, 1986 and was converted to chapter 7 on January 26, 1989. Prior to conversion, on October 5, 1988, the IRS filed a proof of claim no. 69 asserting unpaid taxes stemming from the first quarter of 1988 in the amount of $27,934.20, plus interest through September 30, 1988 of $1,279.14, plus penalties of $3,491.35, for a grand total of $32,704.69. When the trustee's liquidation of this estate was complete, and he was on the verge of providing for a final distribution to creditors, the IRS filed claim no. 86 on April 21, 1995 which asserts that it amends claim no. 69 and claims a total tax liability unpaid as a chapter 11 administrative expense of $65,580.05.1 This claim includes the same principal tax liability of $27,934.20, but increases the interest claimed from the original amount of $1,279.14 to $29,460.65 by claiming accrued interest to within ten days of the filing of claim no. 86 in 1995. Further interest would accrue until the date of actual distribution on the claim.2 The claim also increases the penalties from the original $3,491.35 to $8,185.203 but again with regard to the same liability and same tax periods in 1988.
The chapter 7 trustee filed an objection to claim no. 86 on November 9, 1995. (Court Doc. No. 206) In addition to contending that as a matter of law the claimant was not entitled to allowance of interest on the claim the trustee also contended that even if allowable both the interest and the penalties should be equitably subordinated to other claimants on the particular facts of this case. The Court conducted a hearing on the trustee's objection on January 9, 1996, heard oral argument on June 10, 1996, allowed further briefing by the parties, and thereafter took the matter under advisement in view of the importance of the decision on this issue to the administration of bankruptcy estates generally. The government has not previously in this district asserted that chapter 11 administrative tax claims not only generate allowable interest, but also that such accruing of interest would continue beyond conversion of the case to chapter 7, and indeed to the conclusion of the chapter 7 liquidation and actual payment upon the claim.
The trustee seeks to avoid confronting the statutory question regarding entitlement to interest by contending that even if allowable both the interest and the penalties on the administrative tax claim in this case should be equitably subordinated to the other creditors under § 510(c) of the Bankruptcy Code. However, the Supreme Court has recently instructed federal judges in United States v. Noland, ___ U.S. ___, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996), that the Courts have no warrant to equitably subordinate — on a categorical basis — claim entitlements in derogation of the scheme of priorities enacted by Congress in the Bankruptcy Code. ___ U.S. at ___, 116 S.Ct. at 1528. The Noland decision involved an attempt to avoid the first priority given to administrative tax claims by a generalized concept of equitable subordination. The case itself did not involve any question of the priority of interest on such claims. In the present case, the only particularized ground asserted for equitable subordination of interest by the trustee was his contention that the IRS added the claim for interest belatedly in 1995 after the liquidation of the estate had been accomplished and should be equitably subordinated on that ground. Transcript, June 10, 1996, pp. 40-41. That contention is simply incorrect on the facts. As noted above, the IRS in its original proof of claim in 1988 clearly asserted a claim for interest and penalties on its unpaid administrative tax liability. The Court therefore rules that there is no basis on the facts of this case to support equitable subordination of either the interest or the penalties included in the subject administrative tax claim.
The Court accordingly must proceed to address the key question of law as to whether the Bankruptcy Code requires payment of interest upon administrative tax claims stemming from the chapter 11 stage of a bankruptcy case that ultimately goes into liquidation under chapter 7 of the Bankruptcy Code.
Section 726(a)(1) of the Bankruptcy Code provides that in distribution of the property of the estate — in a chapter 7 liquidation — payment shall first be made to priority claims as specified in § 507 of the Code before any distribution to general unsecured prepetition claims against the estate. Section 507(a)(1) of the Code in turn provides that the first priority in distribution shall be to "administrative expenses allowed under § 503(b) of this title. . . .". Reference to the pertinent language of § 503(b) indicates first priority is given to "administrative expenses. . . . including" various categories of such expenses. Subsection (b)(1)(A) thereunder refers to "the actual and necessary costs and expenses of preserving the estate" and subsections (b)(1)(B) and (b)(1)(C) specifically deal with administrative tax liabilities and provides that priority for that category extends to "any tax. . . . and. . . . any fine, penalty, or reduction in credit relating to a tax. . . ." incurred by the estate. Finally § 726(b)(5) provides for a fifth priority, in distribution of the property of a chapter 7 estate, after payment of all administrative claims, and all prepetition unsecured claims, for the payment "fifth, in payment of interest at the legal rate from the date of filing of the petition on any claim paid under paragraph (1). . . . of this subsection. . . .". As noted above, the claims paid under the paragraph referenced in this language includes the class of administrative claims payable pursuant to sections 503 and 507 of the Bankruptcy Code.
Reading these statutory provisions with a clear head untainted by any exposure to the case law would lead to the obvious conclusion that by the plain terms of the statutory provisions involved an administrative tax liability is to be paid first but that any interest on that administrative liability is to be deferred and paid only as a fifth priority. On first blush there does not appear to be any ambiguity in this statutory construct.
If any resort to legislative history were required to resolve any ambiguity that may be present in these statutory provisions, that investigation would reveal that the Senate version of what ultimately became § 503(b) specifically included the language "any taxes, including interest thereon" but that this language was not included in the House version and was not included in the final enactment. See In re Stack Steel & Supply Co., 28 B.R. 151, 156 (Bankr.W.D.Wa.1983).
The Court of Appeals for the First Circuit in a recent decision in In re Jarvis, 53 F.3d 416, 419 (1st Cir.1995) gave as guidance for appropriate statutory construction the following:
If possible, a statute should be construed in a way that conforms to the plain meaning of its text. See, e.g., Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469 474, 112 S.Ct. 2589, 2594, 120 L.Ed.2d 379 (1992); Pritzker v. Yari, 42 F.3d 53, 67-68 (1st Cir.1994), cert. denied,514 U.S. 1108, 115 S.Ct. 1959, 131 L.Ed.2d 851 (1995); United States v. Holmquist, 36 F.3d 154 at 159 (1st Cir.1994). There are, of course, certain exceptions to this rule. See, e.g., United States Nat\'l Bank v. Independent Ins. Agents of Am., Inc., 508 U.S. 439, 461, 113 S.Ct. 2173, 2186, 124 L.Ed.2d 402 (1993) (); Sullivan v. CIA, 992 F.2d 1249, 1252 (1st Cir.1993) (). The case at bar does not require us to probe the exceptions to the general rule. When a statute\'s language is ambiguous, however, a court must often venture into extratextual territory in order to distill an appropriate construction. See Pritzker, 42 F.3d at 67; see also Sullivan v. CIA, 992 F.2d 1249, 1252 (1st Cir.1993) ().
The Supreme Court, in United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), has instructed that statutory provisions in the Bankruptcy Code are to be read and implemented as written unless the result is "demonstrably at odds with the intentions of its drafters." 489 U.S. at 242, 109 S.Ct. at 1031 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 3250, 73 L.Ed.2d 973 (1982)).
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