In re Lapiana
| Citation | 100 BR 998 |
| Decision Date | 19 May 1989 |
| Docket Number | 88-C-2336,Adv. No. 85-A-1231.,Bankruptcy No. 81-B-7077 |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | In re Vincent LAPIANA and Barbara Lapiana, Debtors. Vincent LAPIANA and Barbara Lapiana, Plaintiff, v. BANK OF RAVENSWOOD, et al., Defendants. |
On January 25, 1988, Judge Schwartz of the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, ("Bankruptcy Court") issued a Memorandum Opinion and Order holding that the Internal Revenue Service ("IRS") was not entitled to post-petition interest on its pre-petition oversecured tax claim against the estate of Vincent and Barbara LaPiana ("Debtors"). At the time of its decision, the Bankruptcy Court recognized that there was a split of authority over whether § 506(b) of the Bankruptcy Code, 11 U.S.C. § 506(b), authorized payment of post-petition interest to holders of nonconsensual lien claims, such as the tax claim asserted by the IRS in these proceedings. The Bankruptcy Court decided not to enter this debate and chose, instead, to rest its decision denying the IRS post-petition interest on equitable grounds. The Bankruptcy Court held that "while the IRS has every right to bring this claim for interest and penalties, . . . it has slept on its rights by not taking steps to obtain disbursement from the former trustee." Memorandum Opinion and Order dated January 25, 1988 (hereinafter "Op.") at 8. Presently pending before the Court is the IRS' appeal of Judge Schwartz's decision.
Subsequent to the Bankruptcy Court's decision, the United States Supreme Court granted certiorari in In re Ron Pair Enterprises, Inc., 828 F.2d 367 (6th Cir.1987), cert. granted, ___ U.S. ___, 108 S.Ct. 1218, 99 L.Ed.2d 420 (1988), and agreed to resolve the question of whether § 506(b) entitles a creditor to receive post-petition interest on a nonconsensual oversecured claim allowed in a bankruptcy proceeding. This Court stayed its ruling on the fully-briefed appeal pending the Supreme Court's decision. On February 22, 1989, the Supreme Court held in United States v. Ron Pair Enterprises, Inc., ___ U.S. ___, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), that § 506(b) does entitle a creditor to receive post-petition interest on its nonconsensual oversecured claim. Thereafter, on February 25, 1989, this Court requested supplemental memoranda from the parties discussing the impact of the Ron Pair ruling on the pending appeal. See February 28, 1989 Minute Order. After reviewing the excellent legal memoranda submitted by the parties and for the reasons set forth below, the Court reverses the Bankruptcy Court opinion and remands for further proceedings consistent with this Opinion.
Prior to the commencement of the bankruptcy case, the Debtors jointly owned the beneficial interest in two parcels of real estate located at 30 Regent Lane, Lincolnshire, Lake County, Illinois (the "Regent Property") and 1586 Holiday Drive, Sandwich, LaSalle County, Illinois (the "Holiday Property"). In the adversary proceeding in the Bankruptcy Court, two secured creditors, the IRS and Millard G. Lee ("Lee"), asserted competing claims against the proceeds from the sale of the Regent Property.
Lee is the holder of a judgment lien against the Debtors in the amount of $497,392.60 obtained on August 18, 1980. After receiving his judgment, Lee recorded his lien on August 29, 1980 and served citations to discover assets on the Debtors on September 3, 1980. The Debtors subsequently filed a motion to open the August 18, 1980 judgment.
At the commencement of this case, the IRS held a claim against the Debtors arising out of the Debtors' failure to pay their 1979 income taxes. On August 25, 1980, the IRS made an assessment of the LaPiana's income tax liability for the year ended December 31, 1979 in the amount of $85,076.12. On December 31, 1980, and on January 2, 1981, the IRS filed its notice of federal tax lien with the Recorder of Deeds for Lake County and LaSalle County which listed $70,474.89 as the unpaid balance of assessment. The filing of these notices perfected the IRS' lien claims against both the Regent Property and the Holiday Property.
On June 15, 1981, the Debtors filed a voluntary joint Chapter 11 bankruptcy petition which was later converted, by order of the Bankruptcy Court dated June 3, 1982, from a Chapter 11 proceeding into a Chapter 7 proceeding. After the conversion, Lawrence M. Cooper was appointed trustee ("Trustee"). At the time the Debtors filed their petition, the IRS claimed a balance owed of $75,440.32 on its federal tax lien claim. This $75,440.32 consisted of $59,455.66 in principal, $9,142.13 in pre-petition interest, $20.00 in fees, and $6,822.53 in pre-petition penalties. The IRS maintained that interest and penalties continued to accrue, post-petition, on the principal amount of its tax claim.
On October 5, 1981, the Debtors filed an adversary complaint in the Bankruptcy Court for authority to sell the Holiday Property free and clear of liens, claims and encumbrances. Bankruptcy Judge Fisher authorized the sale of the Holiday Property for $200,000 and the payment of the mortgage liens with the sale proceeds, but reserved the issue of the priority of liens with respect to the $74,000 remaining proceeds. In the adversary proceeding, Lee had filed a crossclaim seeking a determination that he held a valid lien against the proceeds of that sale and that his lien was superior to that of the IRS. On June 16, 1983, Judge Fischer entered a judgment order holding that the IRS' lien was superior to Lee's lien and that Lee's lien was superior to the interests, if any, of the Debtors or the Trustee. In re LaPiana, 31 B.R. 738 (Bankr.N.D.Ill.1983). Judge Fischer reasoned that the Debtors' motion to open Lee's judgment had subordinated Lee's lien to that of the IRS. Id. at 743-44. On September 27, 1983, Judge Fischer entered an order authorizing and directing the Trustee to disburse the net proceeds from the sale of the Holiday Drive Property to the IRS.
It was not until almost two years later, on May 27, 1985, that the Trustee, in compliance with the September 27, 1983 order, disbursed $60,000 to the IRS. The $60,000 disbursement was more than $14,000 less than the original proceeds available for distribution to the IRS. The Trustee was subsequently indicted for embezzling from the estate the balance of the Holiday Drive Property proceeds. A new trustee was appointed on June 30, 1987.
On October 9, 1985, the Debtors filed a complaint in Bankruptcy Court before Bankruptcy Judge Schwartz for authority to sell the Regent Lane Property free and clear of all claims with valid liens attaching to the proceeds. On October 31, 1985, the Bankruptcy Court entered an order authorizing the sale of the Regent Lane Property for $175,000 and reserved the issue of the priority of lien claims. The property was sold for $175,000 and the proceeds of the sale were used to pay off the first mortgage and an assignment of the Debtor's beneficial interest. The remaining proceeds in the amount of $72,122.27 were placed in a segregated interest-bearing account.
The IRS asserted a claim to the remaining proceeds. According to the IRS, the $60,000 from the sale of the Holiday Drive Property did not satisfy its claim against the Debtors. Although the principal balance of the 1979 tax liability, $59,455.66, had been extinguished, the IRS claimed it was entitled to pre-petition interest, penalties, and post-petition interest on the initial tax liability. Lee contended that the $60,000 payment satisfied the principal amount of the Debtor's tax liability and disputed the IRS's right to any post-petition interest. The only issue addressed by the parties before Judge Schwartz was whether the IRS was entitled to post-petition interest.
The Bankruptcy Court recognized the conflict among the authorities that had considered the question of whether oversecured federal tax lien claims accrue postpetition interest under the Code, but expressly chose not to enter this debate, finding it "unnecessary to do so on the facts" before it. Op. at 8. Instead, the Bankruptcy Court chose to balance the equities of the IRS and Lee, the two creditors competing for the Regent Property proceeds. In discussing the IRS' claim to the proceeds, the Bankruptcy Court stated:
If the IRS were granted its claim, it would receive over $132,000 on an initial tax liability of $63,674.72, while Lee would receive nothing. While the IRS has every right to bring this claim for interest and penalties, the Court notes that it has slept on these rights by not taking steps to obtain disbursement from the former trustee. The Internal Revenue Manual presently specifies procedures for the general monitoring and periodic review of bankruptcy cases in which the IRS has filed a claim.
Op. at 8-9. Contrasting Lee's actions with those of the IRS, the Bankruptcy Court stated:
Lee, on the other hand, took necessary steps to protect his right to collect from the Debtors. Having received his judgment on August 18, 1980, Lee served citations to discover assets on August 29, 1980. But for the fact that the Debtors moved to open the judgment, Lee\'s citation to discover assets would have established Lee\'s priority to the proceeds of both Holiday Drive and Regent Lane.
Op. at 9. Based on these circumstances, the Bankruptcy Court held that "it is fair that Lee share in the proceeds of Regent Lane." Id. The Bankruptcy Court awarded the IRS the balance of its pre-petition interest, $9,142, and its $20 lien fee, and subtracted $544.34, the excess of the $60,000 over the principal tax liability of $59,455.66.2 The total payment to the IRS out of the Regent Lane proceeds authorized by the Bankruptcy Court was $8,617.79, with the remainder of the proceeds to be paid to Lee.
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