In re Hudson Valley Ambulance Serv., Inc.
| Decision Date | 11 June 1981 |
| Docket Number | Bankruptcy No. 81 B 20204. |
| Citation | 11 BR 860 |
| Parties | In re HUDSON VALLEY AMBULANCE SERVICE, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
John S. Martin, Jr., U.S. Atty., New York City, for government; Stuart M. Bernstein, Asst. U.S. Atty., New York City, of counsel.
Miller & Miller, Haverstraw, N.Y., for debtor.
DECISION ON ORDER TO SHOW CAUSE RE TURNOVER OF MONIES DUE TO DEBTOR
Once again the Bankruptcy Court is presented with the all too familiar conflict between the Government's right to collect unpaid taxes and a debtor-in-possession's need to use funds levied upon in order to attempt to rehabilitate its business operations on a profitable basis, notwithstanding its history of financial depression.
The debtor, Hudson Valley Ambulance Service, Inc., is engaged in the business of providing ambulance services principally in Orange and Rockland Counties in New York State. It also has authority to provide service in other counties as well. The major part of its business involves transportation of patients, for which payment is made by Blue Cross/Blue Shield of Greater New York or the Departments of Social Services of the counties in which transportation is furnished. Such payments are made pursuant to Medicare, Medicaid or private health policies.
On March 31, 1981 and April 1, 1981 immediately before the date when the debtor filed its petition for relief under Chapter 11 of the Bankruptcy Code on April 1, 1981, the Internal Revenue Service of the United States levied upon accounts receivable due to the debtor from Blue Cross/Blue Shield and from the County of Rockland, Department of Social Services. This was done in order to satisfy the debtor's delinquent federal tax liabilities, which the parties agreed amounted to $330,525.50. The Blue Cross/Blue Shield receivables total $38,358.16. The Rockland County Department of Social Services owe the sum of $24,164.86. Of the total receivables, namely $62,523.02, it was stipulated that $14,114.12 represent services performed by the debtor after the filing of its Chapter 11 petition. Accordingly, this court entered an order on June 4, 1981, that payment be made to the debtor, notwithstanding the I.R.S. levies. Thus the controversy here relates to the $48,405.90 which remain subject to the levies previously issued in connection with the debtor's past due tax liability of $330,525.50.
The debtor argues that the levied upon accounts receivable are essential to its continued existence because it is unable to pay withholding taxes or Social Security payments, telephone service or the cost of gasoline to operate the ambulances needed in the business. The debtor has been threatened with a discontinuance of telephone and electric service. It cannot obtain gasoline for its vehicles nor can it continue to operate unless it meets its payrolls. Hence, it sought a turnover of the receivables covered by the levies on the ground that these funds are property of the estate within the meaning of Code § 541, which it desires to use in accordance with Code § 363, subject to the concept of adequate protection.
The Government argues that the debtor retains only limited rights with respect to these funds, and does not have the right of possession, which dooms its turnover application.
Code § 541(a)(1) defines the phrase "property of the estate" to consist of "all legal or equitable interests of the debtor in property as of the commencement of the case." Code § 542(a) then recites that an entity "in possession, custody, or control during the case, of property that the trustee may use, sell or lease under Section 363 of this title . . . shall deliver to the trustee, and account for, such property or the value of such property . . .". Additionally, Code § 363(c)(1) provides in part that if the business of the debtor is authorized to be operated under Section 1108 () then the debtor "may use property of the estate in the ordinary course of business without notice or a hearing." (Emphasis added)
The debtor contends that the accounts receivable covered by the pre-petition levies are "property of the estate" which it may use in accordance with Code § 363(c)(1), subject to its providing adequate protection, as required under Code § 363(e) to satisfy the restriction as to "cash collateral" stated in Code § 363(c)(2).
The Government concedes that the scope of Code § 541 is now broader than the predecessor provisions in Section 70(a) of the former Bankruptcy Act, in the sense that the debtor need not prove possession or constructive possession of property in order to obtain it for the benefit of the estate, as was required under Phelps v. United States of America, 421 U.S. 330, 95 S.Ct. 1728, 44 L.Ed.2d 201 (1975). In that case it was held that the Government's levy and seizure resulted in the Government being an adverse claimant over whom the Bankruptcy Court had no summary jurisdiction because the debtor was not deemed to have constructive possession of the funds. However, the Government observes that Code § 541 does not confer additional property interests on the debtor and that the estate acquires only the debtor's interests in property; it does not acquire interests greater than the debtor had, so that if the debtor's interests in property are limited, then the estate acquires only those limited interests. The legislative history with respect to Code § 541(a)(1) supports this conclusion:
"Though this paragraph § 541(a)(1) will include choses in action and claims by the debtor against others, it is not intended to expand the debtor\'s rights against others more than they exist at the commencement of the case." Emphasis added
H.R.Rep.No.95-595, 95th Cong., 1st Sess., p. 467; S.Rep.No.95-989, 95th Cong., 2d Sess., p. 82, U.S.Code Cong. & Admin.News 1978, pp. 5787, 5868.
However, the Government did not have absolute title to the funds in question. As of the commencement of this case the debtor did have certain, albeit limited, rights in the property. The debtor had a right of redemption under 26 U.S.C. § 6337(a); the debtor was entitled to notice of sale with respect to the property in accordance with 26 U.S.C. § 6335(b); the debtor had a right to receive any surplus proceeds pursuant to 26 U.S.C. § 6342 and certainly the debtor would be entitled to all the levied funds if it later turned out that the assessment was invalid. Thus, the debtor still retained significant rights in the property in question. As stated in Troy Industrial Catering Service v. Michigan, 2 B.R. 521, 5 B.C.D. 1243 (Bkrtcy.E.D.Mich., 1980), "Seizure by the Secretary of Treasury is merely a step in the collection process." It should be noted that in the instant case there was no seizure; only the service of a levy.
While Code § 541(a)(1) does not expand the debtor's rights against others, Code § 542(a) does. A third party must now turn over to the debtor property that the debtor "may use, sell or lease under Section 363." Before the adoption of 28 U.S.C. § 1471(e), which gives the Bankruptcy Court jurisdiction over all of the debtor's property, wherever located, a mortgagee who acquired possession through the appointment of a receiver could not only oust the Bankruptcy Court from exercising summary jurisdiction, Emil v. Hanley, 318 U.S. 515, 63 S.Ct. 687, 87 L.Ed. 594 (1942), but such secured creditor could proceed with the foreclosure unimpaired by the debtor's residual claim to use the property, as now exists under Code § 363, or the debtor's right to stay the foreclosure, as now expressed in Code § 362, or the debtor's right to a turnover of property of the estate, as is now authorized under Code §§ 542 and 543. Hence, it is not the broad definition of "property of the estate" that enlarges the debtor's rights; it is the fact that even limited rights are recognized as sufficient to classify the property affected by such rights as "property of the estate." The debtor's turnover rights are then derived from Code §§ 542 and 543, which require others, including custodians holding property of the estate, to turnover such property to the debtor, subject to the concept of adequate protection reflected in Code § 363(e).
The Government relies on three cases which support the proposition that the debtor's limited rights after the I.R.S. levy and seizure do not include the debtor's right to use, sell or lease the levied property and therefore the I.R.S. may not be ordered to turn over the levied property under Code § 542. In re Avery Health Center, Inc., 8 B.R. 1016, 7 B.C.D. 210 (D.C.W.D.N.Y.1981); In re Winfrey Structural Concrete Co., 5 B.R. 389, 6 B.C.D. 695 (Bkrtcy.D.Col.1980); and In re Parker GMC Truck Sales, Inc., 6 B.C.D. 899 (S.D.Ind.1980). These three cases, plus a fourth and a more recent case which the Government did not cite, In re Donald Calhoun Douglas, 10 B.R. 283, 7 B.C.D. 690 (Bkrtcy.N.D.Neb.1981) all involve the actual seizure of inventory and equipment. As previously noted, there was no seizure in this case and the property in question concerns cash proceeds under accounts receivable. These four courts found that the debtor had no right to possession of the seized property. Indeed, in the Winfrey case, supra, the court noted that the seizure of property is "tantamount" to a transfer of ownership, citing U.S. v. Pittman, 449 F.2d 623, 626 (7 Cir. 1971). However it is clear that the concept of "property of the estate" is not concerned with who has title or possession; it expressly embraces all legal or equitable interests of the debtor in property wherever located, as of the commencement of the case. Nevertheless, all four cases concluded that the debtor's right of possession or use were interests in property which the debtor did not have at the commencement of the case and therefore could not be restored after the filing of the petition. However, all cases agree that the debtor retained significant other...
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