In re Del Mission Ltd.
| Decision Date | 10 July 1990 |
| Docket Number | Adv. No. 90-90018-H7,Bankruptcy No. 87-07589-H7. |
| Parties | In re DEL MISSION LIMITED, Debtor. Harold S. TAXEL, Trustee for Del Mission Limited, Plaintiff, v. The STATE OF CALIFORNIA EMPLOYMENT DEVELOPMENT DEPARTMENT; the State of California State Board of Equalization; and Does 1 Through 20, inclusive, Defendants. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Southern District of California |
Jeffry A. Davis and David J. Lustberg, Gray, Cary, Ames & Frye, San Diego, Cal., for Trustee Taxel.
John K. Van De Kamp, Atty. Gen., of the State of Cal., Arthur C. De Goede, Asst. Atty. Gen., Los Angeles, Cal., for defendants.
Presently pending is the State of California's motion to dismiss the trustee's complaint, and the trustee's motion for summary judgment. Harold S. Taxel ("Taxel") is the trustee for the Chapter 7 debtor, Del Mission Limited. The California Employment Development ("EDD") and the California State Board of Equalization ("the Board") are administrative agencies of the State of California and the defendants in the trustee's action for recovery of over payment of penalties and interest, and for imposition of sanctions for violation of the automatic stay.
At issue is whether the trustee in a bankruptcy proceeding can recover payments required by the State as a condition to its allowing the sale of a liquor license. The payments consisted of unpaid taxes and post-petition interest and penalties on pre-petition claims. Also at issue is whether the State violated the automatic stay under 11 U.S.C. § 362(a)(6) when it failed to obtain relief from stay before demanding such payments.
This court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334 and § 157 and General Order No. 312-D of the United States District Court, Southern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), and (O).
Del Mission Limited ("Del Mission") filed a Chapter 11 case on October 20, 1987. The bankruptcy case was subsequently converted to a case under Chapter 7 on April 17, 1989.
Plaintiff Taxel, was appointed as Del Mission's Chapter 11 trustee by order of this court entered July 7, 1988. Taxel continued to act as the trustee in Del Mission's bankruptcy case subsequent to the conversion, and brought this action as a representative of the estate pursuant to 11 U.S.C. § 323.
On November 23, 1988, this court entered its order approving the sale of the debtor's business and its off-premises liquor license, free and clear of liens in interest, pursuant to 11 U.S.C. § 363(f). The approved sale was for the sum of $185,000 cash, plus an additional amount equal to the wholesale price of the inventory of the business.
On December 22, 1988, pursuant to a "notice of amounts due and conditional release" sent by the Board, and dated December 20, 1988, Taxel paid $68,128.07 to the Board for alleged outstanding taxes, interest and penalties. This payment was required by the Board before it would allow the liquor license transfer to proceed. The $68,128.07 payment was comprised of unpaid taxes in the amount of $49,336.27, interest in the amount of $11,408.79 and penalties in the amount of $7,383.01.
On December 22, 1988, Taxel paid $14,244.86 to the EDD for alleged outstanding taxes, interest, and penalties required by the EDD to be paid in order to transfer Del Mission's liquor license. This payment was comprised of unpaid taxes in the amount of $11,363.86, interest in the amount of $1,319.00, and penalties in the amount of $1,562.00. These payments were made under protest by Taxel. On July 7, 1989, Taxel requested a refund from the Board of $8,768.00 for pre-petition penalties, and $5,468.00 for post-petition interest on the pre-petition taxes. On the same date, Taxel requested a refund from the EDD of $842.00 for pre-petition taxes. The total amounts of the refunds requested from the Board and the EDD were $14,236.00 and $1,368.00, respectively.
The EDD denied Taxel's request for a refund in the amount of $1,368.00. The Board also denied Taxel's claim for a refund in the amount of $14,236.00.
The State continues to withhold the monies that were paid by the bankruptcy estate.
The trustee seeks to recover money paid to the state for delinquent taxes and post-petition interest and penalties on pre-petition claims. The trustee maintains: 1) the State was not entitled to collect the portions of the interest that represented post-petition interest on the pre-petition claims, according to 11 U.S.C. § 502(b)(2); and 2) the State's claims for pre-petition penalties were inappropriate because such penalties must be subordinated to the interest of unsecured creditors according to 11 U.S.C. § 726(a)(4) and there were insufficient funds to pay all unsecured creditors in full. Further, the trustee seeks a determination that the State violated the automatic stay when it refused to allow the sale of the debtor's liquor license without payment of the delinquent taxes and post-petition interest and penalties.
The State maintains that the power to restrict the sale of the license is governed by California Business and Professions Code § 24049, and that the State statute overrides conflicting bankruptcy provisions. The State also urges that the Bankruptcy Code does not disallow the payment of post-petition interest and penalties. This court disagrees.
The court's holding is three-fold: 1) the State is entitled to the portion of the payments attributable to unpaid taxes; 2) the trustee is entitled to recover payments made to the State for post-petition interest and penalties; and 3) the State violated the automatic stay provisions of the Code by not seeking relief from stay before demanding the subject payments.
Delinquent Taxes:
The only amounts payable under California Business and Professions Code § 24049, as a condition to the transfer of a liquor license by the trustee in bankruptcy, are taxes due and interest accrued to the date of filing of the bankruptcy petition. State Board of Equalization v. Stodd, 500 F.2d 1208 (9th Cir.1974). The State is entitled to collect tax claims as a condition to the transfer of liquor licenses which are assets of a bankrupt estate, so long as such taxes remain delinquent. Matter of Professional Bar Co., Inc., 537 F.2d 339, 341 (9th Cir.1976).
Federal bankruptcy law is applied to determine priorities among creditors with respect to distribution of the estate as diminished by such collections. Id. The State is entitled to the tax claims under the priority scheme as set forth in 11 U.S.C. § 726(a)(1).1
Accordingly, the Board and the EDD are entitled to retain the portion of the payments attributable to unpaid taxes in the amounts of $49,336.27 and $11,363.86, respectively.
Post-Petition Interest and Penalties:
The post-petition interest payments were inappropriate under § 502 of the Code. 11 U.S.C. § 502(b)(2)2 provides that a claim shall be allowed except to the extent that such claim is for unmatured interest. Interest on taxes due pre-petition ceases to accrue as of the date of the filing of the bankruptcy petition. In re Petite Auberge Village, Inc., 650 F.2d 192 (9th Cir.1981); In re Nite Lite Inns, 13 B.R. 900, 911 (Bankr.S.D.Cal.1981).
The penalty payments were also inappropriate in light of the fact that there were insufficient funds in the estate to pay all unsecured creditors in full. 11 U.S.C. § 726(a)(4)3 provides that a creditor with an allowed claim for any penalty is subordinated to the interests of unsecured creditors, among other claimants. Thus, where, as in this case, there are insufficient funds in the estate to pay 100% of all unsecured claims, a creditor with an allowed claim for penalties is not entitled to receive payment on these penalties.
Additionally, the State relies on United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) to support its argument that post-petition interest is an allowable claim. It is a general rule that administrative claims should not include interest as part of such claims. In re Peaches Records & Tapes, Inc., 102 B.R. 193 (9th Cir. BAP 1989). However, the United States Supreme Court in Ron Pair held that an exception to the general prohibition against post-petition interest payments exists only where the creditor's pre-petition claim is oversecured. The United States Supreme Court, construing 11 U.S.C. § 506(b), explained:
The relevant phrase in § 506(b) is:
"There shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose." "Such claim" refers to an oversecured claim. The natural reading of the phrase entitles the holder to an oversecured claim to post-petition interest. . . .
109 S.Ct. at 1030 (emphasis added).
The State presented no evidence that its claim was oversecured. Thus, the State's reliance on Ron Pair is misplaced. Under § 506(b) and Ron Pair, secured creditors are entitled to interest on their claim only out of the "security cushion." The record supports no such security cushion. Undersecured creditors may not recover interest from the estate's unencumbered assets before unsecured creditors have recovered any principal. See, In re Peaches Records & Tapes, Inc., 102 B.R. 193 (9th Cir. BAP 1989); United Savings Assn. v. Timbers of Inwood Forest, 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). Furthermore, the State's claim is not secured.
Additionally, 11 U.S.C. § 726(a)(4) provides that distribution to creditors with an allowed claim for penalties is subordinated to payment to unsecured creditors. Since there are insufficient funds in the estate to pay 100% of all unsecured claims, the State was not entitled to receive payment on the pre-petition penalties, and therefore should be required to return the amounts received to the bankruptcy estate.
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