In re Marfin Ready Mix Corp.

• Decision Date: 28 April 1998
• Docket Number: Bankruptcy No. 095-72189-511.
• Citation: 220 BR 148
• Parties: In re MARFIN READY MIX CORP., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

220 B.R. 148 (1998)

In re MARFIN READY MIX CORP., Debtor.

Bankruptcy No. 095-72189-511.

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

April 28, 1998.

Weinberg, Kaley, Gross & Pergament, L.L.P., by Marc A. Pergament, Garden City, NY, for Debtors/Movants.

Paul A. Crotty by Kathleen J. Cahill, Corporation Counsel of City of New York, New York City.

OPINION

(Motion for Order Disallowing Claim and Determining Tax Liability)

MELANIE L. CYGANOWSKI, Bankruptcy Judge.

BACKGROUND

Marfin Ready Mix Corp. ("Marfin" or "Debtor") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on July 26, 1995. Marfin owns real property located at 180-25 Liberty Avenue, Jamaica, New York (the "Property"). The City of New York, Department of Finance (the "City"), has assessed real property taxes against the Property which have not been paid. The City, in accordance with applicable statutory law, charges an interest rate of approximately 18% compounded daily on delinquent real estate taxes. Debtor's Affirmation In Support, ¶ 8. The City has charged this rate on the unpaid balance owing by the Debtor since approximately 1994, contending that it is statutorily entitled to do so until the tax bill is paid.

The Debtor argues that the rate is too high, and by way of the present motion pursuant to 11 U.S.C. §§ 105, 505 and 506, asks this Court to (a) reduce the City's claim with respect to unpaid real estate taxes for the tax years 1993/94, 1994/95 and 1995/96; (b) determine the interest rate to be charged by the City on delinquent real estate taxes, up to the date of filing and thereafter through full payment under a plan of reorganization; and (c) determine the propriety of the City's compounding of interest on the Debtor's delinquent real estate taxes. See Debtor's Affirmation In Support, ¶ 2.

The City has not filed a proof of claim. Id., ¶ 9. However, the City asserts in its papers that as of March 26, 1996, real estate taxes, water and sewer charges, and related charges, including interest at the statutory rate for real property taxes through April 30, 1996, and for water to March 27, 1996, have accrued on the Property in the amount of $213,259.45. This amount allegedly includes postpetition taxes of $49,358.07.

Insofar as is relevant here, the Debtor's plan of reorganization provides that the City will be paid in seventy-two equal monthly installments, plus interest at a rate fixed by this Court.¹ Unsecured creditors will be paid 5% of their claims in a lump sum in full satisfaction of their claims. The Debtor's sole shareholder, owed just over $100,000 for "shareholder loans and unpaid salary," will be paid 5% of his claim following the lump sum payment to unsecured creditors, and will be repaid in full after all payments are made to all senior classes of creditors. The sole shareholder will also receive 100% of the stock in the reorganized debtor in exchange for a cash infusion of $2,500.

The City has opposed the Debtor's motion, and both parties have briefed the issues. The following constitutes the Court's findings of fact and conclusions of law to the extent required by Fed.R.Bankr.P. 7052(a).

DISCUSSION²

While the parties contest the interest rate to be applied to the delinquent taxes, neither distinguishes between the three distinct interest concepts which are implicated by the Debtor's motion. The City's claim to interest can be broken down into the following parts: (i) interest which accrued prepetition pursuant to Section 11-224 of the New York City Administrative Code ("Administrative Code")³; (ii) interest which accrues postpetition, but preconfirmation, pursuant to 11 U.S.C. § 506(b); and (iii) interest which must be paid postconfirmation during the pendency of the Debtor's plan pursuant to 11 U.S.C. § 1129.

Rather than objecting to each interest component, the Debtor launches several general attacks on the City's claim to 18% interest and argues that this Court has the equitable power to lower that rate on the grounds that (i) some portion of the 18% interest is really a disguised penalty; and (ii) the 18% rate is not "reasonable," and should be lowered to approximately 9%.

The City argues, of course, that the 18% statutory rate is the appropriate figure for all prepetition and postpetition time periods. Its principal contentions may be summarized as follows:

• since the Bankruptcy Code does not prescribe the appropriate rate of interest, the Court is bound to apply state law which, in this case, dictates an 18% rate;

• no portion of the 18% constitutes a "penalty," as the Administrative Code provides for the assessment of penalties in provisions separate and apart from those relating to interest; and

• the Debtor\'s reliance on a reasonable market rate might be persuasive if applied to a lending institution, but not when applied to an involuntary creditor, such as a sovereign which is seeking revenue to defray the costs of government.

A. The Claim for Taxes Accruing Prepetition and the Interest Rate to be Applied

1. Interest Rate for the Prepetition Period

The Debtor's initial argument is that a portion of the 18% rate is a disguised penalty, despite the fact that the Administrative Code does not label it as such. A penalty is that portion of a tax obligation which is punitive, not compensatory, in nature. See In re Hovan, Inc., 96 F.3d 1254, 1259 (9th Cir.1996). The purpose of interest is to compensate for the loss of monetary value, while a penalty is typically charged for a failure to act by a certain deadline. Id. The City bristles at the Debtor's characterization of the statutory rate as a penalty, contending that its rationale in determining the interest rate is not to punish, but simply to cover the cost of using the City's money. NYC's Mem. In Opp., at 20. The City's assertion goes largely unsubstantiated, but the Debtor's claim that the rate includes a punitive aspect is equally conclusory and bare of evidentiary support.

The most telling evidence of whether the interest rate applied by the City includes a punitive portion is found in the Administrative Code itself. First, while the Court is certainly not bound by the statutory label, the Court considers the label as some evidence of the character of the charge. This is particularly true where, as here, the statute contains a separate provision which characterizes a different charge as a penalty. Section 11-407 of the Administrative Code, entitled "Redemption," also speaks to the consequences of nonpayment of taxes. Id. Subsection (c) of § 11-407 reads, in relevant part: "A late redemption payment shall consist of all taxes and charges owing on said parcel, the lawful interest thereon to the date of payment and a penalty of five percent of said payment of taxes, charges and interest. . . ." (emphasis added).

The Court believes that this passage supports the view that when the State's legislators wanted to impose a penalty for nonpayment, they made a specific provision for it in the statute. The Court of Appeals for the Ninth Circuit relied on similar reasoning in its Hovan decision, when it described tax penalties levied in addition to interest as being punitive. In re Hovan, Inc., supra, 96 F.3d at 1258 (quoting In re Healis, 49 B.R. 939, 942 (Bankr.M.D.Pa.1985)). While § 11-407 levies the penalty as a result of late redemption rather than late payment, the fact that the penalty charge is recited explicitly lends credibility to the notion that the legislators did not intend any part of the interest rate imposed by § 11-224 to be punitive.

Secondly, the Administrative Code specifically links the interest rate to be charged on unpaid taxes to the prevailing market rates on commercial loans. Section 11-224 specifically requires the banking commission to consider, in its calculation of the rate to be charged, the "prevailing interest rates charged for commercial loans extended to prime borrowers by commercial banks operating in the city" and ties the City's rate to those figures. This language is consistent with the notion that the City's motivation is to compensate itself for the time value of money, and not to punish recalcitrant taxpayers.

Thirdly, the Court relies on the exhaustive analysis set forth in In re Navis Realty, Inc., 193 B.R. 998 (Bankr.E.D.N.Y.1996) (Holland, J.), which need not be repeated here. Upon scrutinizing the very statute at issue here, namely, § 11-224, the Navis Realty court held that no portion of the interest rate set forth therein constitutes a penalty.⁴

Lastly, the Debtor has not presented any evidence whatsoever, in the form of case law or legislative history, to support its claim that a portion of the interest rate constitutes a penalty. In re Liuzzo, 204 B.R. 235, 239 (Bankr.N.D.Fla.1996) (creditors should receive the interest rate dictated by the statutes under which their liens arise, unless the debtor presents evidence that "the statutory interest rate is a penalty or the application of the statutory rate would lead to an inequitable or unconscionable result").

Furthermore, with respect to pre petition interest, the Debtor has failed to identify any legal consequence which might follow were it successful in arguing that a portion of the 18% constitutes a penalty. While it may be true that in a Chapter 7 case, a trustee may avoid any lien that secures a claim for prepetition penalties to the extent that the penalties are not compensation for actual pecuniary loss, see 11 U.S.C. §§ 724(a), 726(a)(4), a parallel provision does not exist in chapter 11. In re Specialty Cartage, Inc., 115 B.R. 164, 167 (Bankr.N.D.Ind.1989), aff'd on other grounds, 113 B.R. 484 (N.D.Ind.1990) (holding that §§ 724 and 726 do not apply in chapter 11; "Congress fully intended that the Code and the bankruptcy court would recognize and respect the validity of a lien securing a claim for penalties in Chapter 11, even though that lien would receive dramatically different treatment under Chapter 7"); In re...