In re Marietta Baptist Tabernacle
| Decision Date | 20 August 1981 |
| Docket Number | Bankruptcy No. B75-1066A,B75-1067A. |
| Citation | 13 BR 715 |
| Parties | MARIETTA BAPTIST TABERNACLE and Marietta Christian Schools, Debtors. MARIETTA BAPTIST TABERNACLE and Marietta Christian Schools, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
Stacey W. Cotton, Cotton, Katz, White & Palmer, P.A., Atlanta, Ga., for plaintiffs.
Gerald B. Leedom, Washington, D.C., for defendant.
This matter comes before us on defendant's motions for summary judgment. The facts and issues are similar in each motion, and will be combined for determination herein.
The present matter had its beginnings in debtors Chapter XI arrangement filed in 1975. A plan was confirmed in late 1975 and the arrangement estate was closed on December 14, 1979 by this Court.
In that case the defendant filed Proofs of Claims for unpaid unemployment taxes. These were fully paid by the debtors pursuant to an agreement between debtors and IRS.
In April 1980, the case was re-opened to consider debtor/plaintiffs complaint to determine dischargeability of debt. The IRS, since the tax debt itself was paid off under the agreement, has been attempting to collect pre-petition penalties and post-petition interest that arose from that tax debt. Thus the plaintiff's complaint. Plaintiffs contend that their personal liability for post-petition interest and pre-petition penalties has been discharged, or, if owed, should be payable in monthly installments in the same manner as the tax debts themselves. (See agreement, exhibit "C" in 8/19/80 Stipulation.) Plaintiffs further contend that even if the interest and penalties are owed by them, that the defendants should be estopped from collecting these debts because the IRS representatives did not indicate that there were in existence additional claims that the IRS would assert against the plaintiff.
The defendant contends that plaintiffs are personally liable for all interest and penalties, that the agreement under which the tax debt itself was paid was in no way meant to cover these present claims, and that therefore they should not be limited by that agreement in their collection efforts.
1. Is the Government entitled to collect from the debtors personally on a claim for post-petition interest arising out of a non-dischargeable tax debt?
2. Is the Government entitled to collect from the debtors personally on a claim for pre-petition penalties arising out of a nondischargeable tax debt? If they are,
3. Should the Government be estopped from collecting these debts?
4. If not, are these debts covered by the agreement covering the tax debt payment itself, and if so, should this court require the debtor to be paid under that agreement?
Section 17(a) of the Bankruptcy Act of 1898 (11 U.S.C. § 35) provides that "A discharge in Bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as (1) are taxes which become legally due and owing by the bankrupt to the United States within three years preceding bankruptcy." Section 371 (11 U.S.C. § 771) applies the non-dischargeability provisions to Chapter XI arrangements. The claim in this case is for post petition interest accruing on a nondischargeable tax debt that was paid in debtor/plaintiffs Chapter XI arrangement. The case has been reopened to determine whether or not the defendant can collect on a claim for pre-petition penalties and post-petition interest arising from this debt.
In regard to the claim for interest the Supreme Court held in New York v. Saper, 336 U.S. 328, 69 S.Ct. 554, 93 L.Ed. 710 (1949) that in a liquidation proceeding interest runs only to the date of the bankruptcy. In an Eighth Circuit case, U.S. v. General, 188 F.2d 80 (), the Court held that in a Chapter XI arrangement interest runs only to date of bankruptcy also. However in Bruning v. U.S., 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1963), addressing the issue of post-petition interest, the Supreme Court made a distinction in a liquidation proceeding between the bankrupt estate and the debtor personally. It was held that the prohibition of interest running beyond the date of bankruptcy applied only to the bankrupt estate. The interest claim itself survives and can be asserted against the debtor personally. The reasons for not allowing the interest claim to be proved against the estate — the inconvenience of administration and prejudice to creditors — are not present when the claim is asserted against the debtor personally. Thus it distinguishes Saper. As to the debtor's argument that to allow the United States to collect this debt would interfere with the purpose of the Act to give the debtor a fresh start, the Court said that Section 17 As to the interest, "initially, one would assume that Congress, in providing that a certain type of debt should survive bankruptcy proceedings as a personal liability of the debtor, intended personal liabilities to continue as to the interest on that debt as well as to its principal amount."
The Supreme Court has not however ruled on the issue of whether or not the Bruning rationale would apply in a Chapter 11 arrangement proceeding. Defendant in his brief in support of his motion for summary judgment cites cases from the second and third circuits which have extended the Bruning rationale to Chapter 11 proceedings. In support of its motion for summary judgment the United States has cited the Second Circuit case of In re: Johnson Electrical Corporation, 442 F.2d 281 (1971). The facts in that case are similar to the facts in the case before us. The United States filed a tax claim in Johnson Electrical Corporation's Chapter 11 arrangement which under Section 17 of the Act was not dischargeable. The claim was fully paid under the arrangement. The Government then moved to collect post petition interest on that claim. The Court by Judge Friendly basically reiterated the reasoning expressed in Bruning v. United States. The Court at no time addressed the issue (if any) as to whether or not the Bruning rationale would be appropriate in a Chapter 11 arrangement. It was simply applied to the case. One basis asserted in Johnson for disregarding Bruning was that in Bruning only a partial payment of the original tax claim had been made. In Johnson and in this case the entire tax claim had been paid. The Court in Johnson felt that this distinction was not sufficiently substantial to change the result.
The case of Eby v. U.S., 456 F.2d 923 (3 Cir., 1972) extended the Bruning rationale to Chapter 11 arrangements in that circuit. Stating again the principle that post petition interest cannot be collected out of the bankrupt's estate, the Court went on to use the Bruning distinction between payments out of the debtor's estate and payments from the debtor personally. In Eby as in Johnson the taxes were paid in full and the Eby court did not consider this to be an important enough factor to distinguish it from Bruning. Eby also restates the principle that the problem of financing Government overrides the purpose of the Bankruptcy Act in providing the debtor with a fresh start.
Defendants cite a recent case from the Second Circuit, In re: Jaylaw Drug, 621 F.2d 524 (1980) which follows Johnson and Eby but addresses the question of whether or not there is any distinction to be made between a liquidation proceeding and an arrangement for purposes of applying Bruning. The Court in Jaylaw Drug said that the reasons advanced in Bruning for not allowing interest claims to be collected out of the estate but only to be collected from the debtor personally are "Not based on any inherent differences between the two" (the estate and the debtor personally) at 528.
Jaylaw is the case relied on to some extent by the Plaintiff as authority for not extending Bruning. "It is arguable that the extension of the Bruning principle to arrangements under Chapter XI was not quite so inevitable as we and the Third Circuit assumed. In ordinary bankruptcy there is a sharp distinction between the estate and the bankrupt. The estate, after payment of administration expenses, is distributed to creditors; the bankrupt emerges with none of the assets of the estate and continues with only exempt and after-acquired assets which had never formed part of it. In some arrangements a major part of what had been the "estate" continues to remain in the hands of the arranged debtor. In such cases the rule that while post-petition interest cannot be collected from the "estate", it can be collected from the former debtor after the Chapter XI proceeding is terminated, may appear to be lacking in reality.
"Despite this, we see no sufficient reason to part from our decision in Johnson Electric even if this panel had the power to do so, which it does not."
In Collier, (14th Ed. Vol. 3A) at p. 1868-1869), it is stated ...
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