In re Process Pipe Fabricators, Inc., Case No. 06-10536-M (Bankr. N.D.Okla. 5/1/2009)

• Decision Date: 01 May 2009
• Docket Number: Case No. 06-10536-M.
• Parties: IN RE: PROCESS PIPE FABRICATORS, INC., Chapter 11, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Oklahoma

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IN RE: PROCESS PIPE FABRICATORS, INC., Chapter 11, Debtor.

Case No. 06-10536-M.

United States Bankruptcy Court, N.D. Oklahoma.

May 1, 2009.

MEMORANDUM OPINION

TERRENCE L. MICHAEL, Bankruptcy Judge

THIS MATTER comes before the Court pursuant to the Debtor's Second Amended Objection to Claim of the Department of the Treasury—Internal Revenue Service, Claim No. 7, as Amended.¹ Process Pipe Fabricators, Inc. ("Debtor"), acting as debtor-in-possession, objects to Claim No. 7-8, as amended on October 15, 2008, filed by the United States on behalf of the Internal Revenue Service ("IRS"). For the reasons set forth below, the Debtor's objection is overruled.

Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C.A. § 1334(b).² Reference to the Court of this bankruptcy case is proper pursuant to 28 U.S.C.A. § 157(a). This is a core proceeding as contemplated by 28 U.S.C.A. § 157(b)(2)(B).

Findings of Fact

Debtor filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code on May 8, 2006. Debtor continues to manage its property as debtor-in-possession, although active operations of the business have ceased. No trustee, examiner, or official committee has been appointed.

1. The Gastech Judgment

Debtor was an Oklahoma corporation that assembled gas transmission units for offshore and onshore gas transmission facilities.³ Beginning in 1992, Debtor developed a business relationship with Gastech Engineering Corporation ("Gastech"). From 1992 to 1994, Debtor entered subcontracts with Gastech in which Debtor agreed to fabricate transmission equipment for Gastech's clients. The parties agreed that the clients would pay Gastech directly and Gastech agreed to reimburse Debtor for its work. The agreement did not operate as the parties intended, and Gastech frequently neglected to pay Debtor in a timely manner. Debtor's financial situation deteriorated to the point that it was forced to seek Chapter 11 bankruptcy protection from its creditors in 1994,⁴ largely because Debtor was unable to collect invoices owed by Gastech. In addition, Debtor did not pay federal employment taxes from March 31, 1992, to March 21, 1996. By March 1996, Debtor owed $354,520 in unpaid federal employment taxes, interest, and penalties (the "Assessment").

Between July 20 and November 11, 1996, Debtor submitted six invoices to Gastech totaling $256,641 (the "Gastech Invoices"). Gastech did not pay any part of those invoices. After representatives from Debtor met with the IRS to discuss payment of Debtor's tax liability, Debtor agreed to permit the IRS to seize sufficient accounts receivable to pay its tax deficiency. On August 16, 1996, October 23, 1996, and April 15, 1999, the IRS served Gastech with notices of levy on all property or rights to property of Debtor, including the Gastech Invoices. Debtor did not assign its right to payment from Gastech to the IRS.

Gastech proceeded to make nominal payments to the IRS in response to the levies. Unsatisfied, the IRS, using its authority under I.R.C. §§ 7401 and 7402(a),⁵ filed suit against Gastech pursuant to I.R.C. § 6332(d)(1) alleging failure to honor the levies and seeking a judgment of personal liability for the face value of the Gastech Invoices (the "Gastech Litigation").⁶ The issue before the court was whether Gastech was liable to Debtor for the full face value of the Gastech Invoices, and thus whether the invoices represented property of Debtor that were the proper targets of the IRS levy.⁷ On March 6, 2001, the court entered a judgment against Gastech (the "Gastech Judgment"), which read in its entirety:

In this action to enforce a levy brought by the United States pursuant to 26 U.S.C. §§6332(d)(1) and 7402(a), for the reasons set forth in the Court's order dated January 25, 2001, judgment is entered in favor of the United States of America, Plaintiff, and against Gas[t]ech Engineering Corporation, Defendant, in the amount of $309,112.64 plus costs. This amount includes accrued interest and payments through February 28, 2001. Interest continues to accrue after February 28, 2001, at the underpayment rate established by 26 U.S.C. § 6621 pursuant to 26 U.S.C. § 6332(d)(1).⁸ The Gastech Judgment gave the IRS a judgment lien against Gastech.⁹ Gastech appealed the decision.

While the appeal was pending, Gastech and the IRS entered into a settlement agreement (the "Settlement Agreement").¹⁰ The Settlement Agreement required Gastech to pay the IRS $167,000 plus interest, with an initial installment of $15,000 upon execution of the Settlement Agreement, followed by monthly payments over the next 72 months. Among the terms of the Settlement Agreement, it was recited that the "[l]itigation pertain[ed] to the enforcement of levies served upon Gas[t]ech for amounts claimed by the United States as being due and owing by Gas[t]ech to [Debtor]."¹¹ The Settlement Agreement settled "all matters pertaining to the dispute identified in the pleadings in the Litigation."¹² Under its terms, Gastech dismissed its appeal and became liable for the full amount of the Gastech Judgment, which was $309,112.64 as of February 28, 2001, plus interest, which was final and non-appealable.¹³ The IRS agreed that upon the receipt of the $167,000 plus interest paid under the terms of the Settlement Agreement, it would accept that amount in full accord and satisfaction of Gastech's liability to the IRS and would file a "Release and Satisfaction of Judgment" with the district court.¹⁴ At no time did the IRS consult with, discuss, or seek approval from Debtor prior to entering into the Settlement Agreement with Gastech. Gastech made payments pursuant to the Settlement Agreement from March 28, 2002, to March 19, 2007.

Between May 6, 2004, and November 9, 2004, Debtor remitted checks to the IRS, and the IRS collected funds from other sources related to Debtor in an amount to satisfy all taxes, penalties, and interest associated with the Assessment. As of November 10, 2004, Debtor's liability to the IRS that was the basis of the Gastech Judgment had been satisfied. Notwithstanding this fact, pursuant to the Settlement Agreement Gastech made five additional payments to the IRS of $3,068.44 each on November 16, 2004, October 2, 2006, March 5, 2007, March 16, 2007, and March 19, 2007.¹⁵ Those funds were applied to other outstanding tax liabilities of Debtor and of Process Mechanical LLC.¹⁶ None of these payments were returned to Gastech.

2. The Overpayment Litigation

On November 10, 2004, Debtor filed six claims with the IRS requesting a refund of all amounts that it believed it had overpaid for periods between December 31, 1993, and September 30, 1996, including overpayments for taxes, penalties, and interest covered by the Assessment. The IRS did not grant any of the requested refunds. On November 15, 2004, Process Pipe filed a complaint against the United States in the United States District Court for the Northern District of Oklahoma ("District Court") seeking recovery of an alleged overpayment in the amount of $33,750, plus costs and statutory accruals, said amount representing federal employment tax, penalty, and interest paid for the calendar quarter ending March 31, 1996.¹⁷ On June 2, 2005, Debtor filed a second complaint in the District Court for the recovery of an alleged overpayment in the amount of $351,073.75, plus costs and statutory accruals, said amount representing federal employment taxes, penalties, and interest paid for the calendar quarters ending December 31, 1993; March 31, 1994; June 30, 1994; December 31, 1994; June 30, 1996; and September 30, 1996.¹⁸ The two actions were eventually consolidated (referred to collectively as the "Overpayment Litigation").¹⁹ In the consolidated action, Debtor requested a refund of amounts paid, alleging that the federal employment taxes, penalties, and interest for all of the calendar quarters noted above were erroneously and illegally assessed against and collected from Debtor. Debtor further asserted that the denial of its claims for refund was arbitrary, factually unsupported, and without basis in law for the reason that the IRS was negligent in accepting a settlement of $167,000 from Gastech, and that Debtor should be credited with the full value of the Gastech Judgment.

Four opinions were entered in the Overpayment Litigation. First, in response to a motion to dismiss by the United States, the District Court ruled that Debtor had fully paid its taxes and had sufficiently stated a claim for a tax refund.²⁰ Second, following the rule established by the United States Court of Appeals for the Ninth Circuit in Stead v. United States,²¹ the District Court found that ownership of the Gastech Invoices did not transfer to the IRS upon issuance of the notices of levy, and that Debtor was not entitled to a credit against its tax obligations for the full face value of the Gastech Invoices.²² Third, the District Court ruled that the controlling issue in the case was the value of the Gastech Invoices in the hands of the IRS, and whether the IRS had acted reasonably when it accepted a settlement far below the amount of the Gastech Judgment.²³ Finally, the District Court granted summary judgment in favor of the IRS, finding that the IRS did not bear the risk of loss of value of the Gastech receivables when it did not immediately move to enforce or collect the Gastech Invoices, and that the IRS's decision to settle the appeal of the Gastech Judgment was reasonable.²⁴ The District Court concluded that Debtor could not prevail on its claim for a tax refund.

Upon the conclusion of the Overpayment Litigation and after the initiation of Debtor's current bankruptcy case, the United States filed a Satisfaction of Judgment and Release of Lien (the "Release and Satisfaction") in the Gastech Litigation.²⁵ The Release and Satisfaction was not served on Debtor. The Release and Satisfaction states:

The judgment entered March 7,...