In re Markos Gurnee Partnership
| Decision Date | 27 April 1995 |
| Docket Number | Bankruptcy No. 91 B 17242,91 B 18792 and 91 B 18793. Adv. No. 94 A 00023. |
| Citation | 182 BR 211 |
| Parties | In re MARKOS GURNEE PARTNERSHIP, Diplomat North, Inc., and PCS Hotels, Debtors. Joel A. SCHECHTER, Plaintiff, v. STATE OF ILLINOIS, DEPARTMENT OF REVENUE, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
COPYRIGHT MATERIAL OMITTED
Brad Berish, Adelman, Gettleman & Merens, Ltd., Chicago, IL, for Joel Schechter, plaintiff and former Chapter 11 Trustee.
Catherine Steege, Chapter 7 Trustee, Jenner & Block, Chicago, IL.
James Newbold, Asst. Atty. Gen., Litigation Div., Chicago, IL, for Dept. of Revenue.
AMENDED MEMORANDUM OF DECISION
This adversary proceeding arises from the failure of a Chapter 11 trustee to pay state taxes that he collected from customers of a hotel and restaurant business owned by the debtors. In a prior adversary proceeding, this court ruled that the unpaid taxes did not constitute a trust fund held for the benefit of the state. State of Illinois v. Steege (In re Markos Gurnee Partnership), 163 B.R. 124 (Bankr.N.D.Ill.1993). In the present proceeding, the Chapter 11 trustee seeks a declaratory judgment that he is not personally liable for the unpaid taxes. While acknowledging that there is a live dispute between the parties, the state contests the trustee's right to relief, both on the merits and on the ground that this court lacks jurisdiction over the dispute. The material facts are uncontested. For the reasons set forth below, the court enters judgment for the trustee.
On August 14, 1991, Markos Gurnee Partnership filed a voluntary petition under Chapter 11 of the Bankruptcy Code. Three weeks later, on September 5, two related entities — Diplomat North, Inc., and PCS Hotels, Inc. — also filed for relief under Chapter 11. Shortly thereafter, Joel Schechter was appointed Chapter 11 trustee in each of the three cases, and in November 1991, the cases were substantively consolidated. The estate created by the cases included a hotel and a restaurant. Schechter operated the hotel and restaurant for over a year, from the date of his appointment until December 17, 1992, when the cases were converted to Chapter 7. As Chapter 11 trustee, Schechter collected two types of state taxes from customers of hotel and restaurant: a "sales" tax pursuant to the Illinois Use Tax Act (Ill.Rev.Stat.1991, ch. 120, para. 439.1, now codified at 35 ILCS 105/1 et seq. (1993)), and a hotel tax pursuant to the Illinois Hotel Operators' Occupation Tax Act (Ill.Rev.Stat.1991, ch. 120, para. 481b.31, now codified at 35 ILCS 145/1 et seq. (1993)). Schechter submitted monthly tax returns to the Illinois Department of Revenue for each of these taxes. However, for the first three months of operation, and for the last two, Schechter did not remit the taxes with the returns, and these taxes remain unpaid. The unpaid taxes (not including any applicable taxes and penalties) are as follows:
Year Month Sales Tax Hotel Tax Total
1991 October $ 5,763.90 $ 7,052.40 $12,816.30
November 4,806.20 7,044.05 11,850.25
December 5,145.77 3,920.51 9,066.28
1992 November 4,737.00 6,372.56 11,109.56
December 3,434.00 4,062.37 7,496.37
__________ __________ __________
Total $28,451.89 $23,886.87 $52,338.76
The deadline for payment of the 1991 taxes had expired before the conversion of the cases to Chapter 7, but the deadline for the November and December 1992 taxes had not. Schechter knew that the taxes had not been paid, but he was also aware of other unpaid administrative expenses. On December 17, 1992, the date of the conversion, Schechter presented a motion for authority to pay the final payroll of the employees of the debtors, totalling approximately $50,000. The Illinois Department of Revenue received notice of the motion and did not object. The motion was granted and the employees were paid. After the conversion, Schechter turned over the balance of the assets of the estates — more than $82,000 — to the new Chapter 7 trustee. At the time of the conversion, the only other unencumbered assets of the estate were receivables of less than $50,000, while there were outstanding administrative claims in the Chapter 11 case in excess of $315,000. Thus, the Chapter 11 case appeared to be administratively insolvent at the time it was converted.
In the course of the Chapter 7 administration, the Illinois Department of Revenue filed a claim for the unpaid taxes, and also filed a complaint against the Chapter 7 trustee to determine whether the state had an equitable interest in the Chapter 11 funds turned over to that trustee. On December 7, this court entered judgment against the Department, holding that it had a claim against the assets of the Chapter 7 estate only as an administrative creditor in the Chapter 11 case. Thereafter, the Department issued a "Notice of Intent to Issue a Notice of Penalty Liability" against Schechter in his personal capacity, and has acknowledged that it will seek payment from Schechter personally.
Schechter filed the present adversary proceeding to obtain a declaratory judgment that he is not personally liable for the unpaid taxes. The Department initially responded with a motion to dismiss, contending that this court lacked jurisdiction to determine the issues. The court stated its intention to deny the motion, and thereafter, the parties filed cross motions for summary judgment, based on a joint statement of uncontested facts that is reflected in the foregoing findings. Both the motion to dismiss and the summary judgment motions have been briefed by the parties, and this decision addresses the issues raised in each of the motions.
Under 28 U.S.C. § 1334(b) adversary proceedings are within the jurisdiction of the district court if they "arise under" the Bankruptcy Code (Title 11, U.S.C.), or if they "arise in" or are "related to" a case under the Code.1 Such adversary proceedings may be referred to a bankruptcy judge pursuant to 28 U.S.C. § 157(a), and have been so referred pursuant to General Rule 2.33 of the United States District Court for the Northern District of Illinois. The parties to the present proceeding are in dispute about whether this proceeding arises under the Bankruptcy Code or arises in the Markos Gurnee bankruptcy cases. For the reasons set forth below, the court finds that the proceeding does so arise, and that it is a "core proceeding" in which, pursuant to 28 U.S.C. § 157(b)(1) and (b)(2)(A), a bankruptcy judge may enter final judgment.
The liability of bankruptcy trustees is a complex issue. The Bankruptcy Code does not directly address trustee liability, but rather appears to incorporate concepts that developed under the Bankruptcy Act of 1898. Those concepts, in turn, were based on judicial adaptations of rules developed for common law trustees and receivers. The result is a set of confusing and somewhat contradictory precedents. See generally E. Allan Tiller, Personal Liability of Trustees and Receivers in Bankruptcy, 53 Am.Bankr.L.J. 75 (1979) (). To decide the question raised by the present case — whether a trustee is personally liable for failing to pay taxes incurred by the estate — it is necessary to distinguish some general principles of trustee liability in bankruptcy.
1. For purposes of standing in litigation, an estate in bankruptcy is viewed as a distinct entity, but not as a legal person. Thus, the estate can sue or be sued, but only in the name of its trustee. Such an action involves only the trustee's "official capacity," so that the estate, rather than the trustee personally, is liable.
It is a general principal of the common law that only "legal persons" may sue or be sued. See Puerto Rico v. Russell & Co., 288 U.S. 476, 480, 53 S.Ct. 447, 449, 77 L.Ed. 903 (1933) (). At common law, the estate created by a trust agreement or a will is not a legal person, and so has no capacity to sue or be sued. Lazenby v. Codman, 116 F.2d 607, 609 (2d Cir.1940) (); Hanson v. Birmingham, 92 F.Supp. 33, 41 (N.D.Iowa 1950) (). Instead, the trustee is the proper party to any lawsuit involving a trust. Navarro Savings Ass'n. v. Lee, 446 U.S. 458, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980) (). Moreover, because the common law did not consider a trust estate as an entity separate from the trustee, any judgment obtained in litigation against a common law trustee would bind the trustee personally. Vass v. Conron Bros. Co., 59 F.2d 969 (2d Cir.1932) (); Hanson v. Birmingham, 92 F.Supp. at 41 ().
In bankruptcy, it was never doubted that the trustee, rather than the debtor's estate, was the proper party in litigation involving the estate. However, there developed a second principle, at variance with the usual common law rule, that in such litigation, the bankruptcy estate, as a separate entity, was the real party in interest, with the trustee serving merely as a representative. Thus, the trustee is not personally liable to judgment, but rather is liable only "in an official capacity," so that any judgment is payable only out of the estate assets.
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