In re Rimmer Corp.
| Decision Date | 11 December 1987 |
| Docket Number | Adv. No. 87-0256S.,Bankruptcy No. 85-01959K |
| Citation | 80 BR 337 |
| Parties | In re RIMMER CORPORATION t/a The Deluxe Diner, Debtor. Fred ZIMMERMAN, Trustee, Plaintiff, v. COMMONWEALTH of PENNSYLVANIA, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Paul N. Mashmeyer, Philadelphia, Pa., for plaintiff.
Prince Atlee Thomas, Philadelphia, Pa., for defendant.
Edward Sparkman, Philadelphia, Pa., trustee.
This adversarial proceeding, brought by the Chapter 7 Trustee of the Debtor to recover an alleged preferential transfer from the Debtor to the Defendant Commonwealth for tax liabilities, turns on whether the Trustee has met the requirement set forth in 11 U.S.C. § 547(b)(5), which recites that the creditor must receive more as a result of the transfer than it would have received in a liquidation of the Debtor. Because the Defendant stands in a senior lien position and would have stood to recover at least the amount of the alleged preferential transfer had the Debtor been liquidated at the time of the filing of its petition, assuming return of the transfer payment, we hold that the requirement of § 547(b)(5) is not met, and hence that the Defendant must prevail.
The underlying bankruptcy case was filed as a Chapter 11 proceeding by the Debtor, then operating a diner in centercity Philadelphia, on May 15, 1985. However, on July 17, 1986, the case was converted to a Chapter 7 proceeding, and the next day the Plaintiff in this action was appointed as the Trustee.
The instant proceeding was commenced against the Defendant Commonwealth of Pennsylvania by the Plaintiff on March 17, 1987. After several continuances, we urged the parties to settle or try this matter on September 29, 1987. On that day, they appeared before us with a comprehensive Stipulation of Facts, incorporating therein a Stipulation regarding numerous documents which the parties agreed could be admitted into the record. On September 30, 1987, we entered an Order confirming a briefing schedule to which the parties had agreed: the Plaintiff would file an opening Brief by October 30, 1987; the Defendant, its Brief by November 23, 1987; and the Plaintiff, a reply Brief by November 30, 1987.
The parties' fact Stipulation provided that, on August 15, 1984, the Defendant filed, in appropriate fashion in state court, a tax lien for unpaid sales and use taxes for all periods from September, 1981, through July, 1983, in the total amount of $70,152.95.
The only creditor whose secured status was arguably senior to the Defendant was one Robert McMahan, an officer of the Debtor, who had allegedly obtained a security interest against all equipment, furnishings, inventory, accounts receivable, and general tangibles of the Debtor on March 4, 1985. However, the parties further stipulated that McMahan had improperly failed to file a copy of his purported security interest "in the county of the Debtor's assets." We note that the Plaintiff has brought suit against McMahan at Adversary No. 87-0907S, seeking to recover a post-petition payment of $15,674.12 which the Debtor, while in possession, paid to McMahan on or about May 20, 1986, on account of this purported security interest.
On May 10, 1985, the Defendant executed on its lien and closed the diner. That same day, the Debtor paid the $28,000.00 transfer in issue to the Defendant from its general funds. Rather than pay the balance due that day to the Defendant, the Debtor chose to file its Chapter 11 petition on May 15, 1985.
The parties stipulated that, as of May 15, 1985, the Debtor's assets and liabilities were as follows:
Assets
Cash transferred to Defendant $ 28,000.00
Other Cash 500.00
All other assets 11,480.00
___________
Total $ 39,980.00
Liabilities
Internal Revenue Service $ 71,334.50
Defendant 70,152.95
City taxes 11,780.00
Allegedly secured debt to McMahan 17,000.00
Unsecured trade debt 21,944.25
___________
Total $192,211.70
The Defendant argues two defenses: (1) State law provisions that sales and use taxes constitute a trust fund for the state in the hands of a taxpayer, see 73 P.S. § 7225 and 62 PA.CODE § 34.2(d), exclude such funds from property of the Debtor's estate, thus making them property of the Defendant and entitling it to retain the payment; and (2) The Debtor fails to meet the requirement of 11 U.S.C. § 547(b)(5), which provides as follows:
The first defense is a mirror image of that rejected by us in an earlier case involving the same Defendant, In re Miller's Auto Supplies, Inc., 75 B.R. 676 (Bankr.E.D.Pa.1987) (). In Miller, following our earlier dictum in In re American International Airways, Inc., 70 B.R. 102, 105 (Bankr.E.D.Pa.1987) (), we held that we would find the existence of a tax trust fund exempting funds payable to a taxing authority from the property of the Debtor's estate only where the taxing authority could trace funds of the Debtor actually segregated for the purpose of paying the taxes in issue. Since, in the statement of the case in Miller, there was no indication that funds had been or had not been so segregated, we found the transfer there, otherwise agreed to be preferential, to in fact be preferential.
We note reinforcement of the accuracy of that decision by the first Court of Appeals decision to consider the question, Drabkin v. District of Columbia, 824 F.2d 1102 (D.C.Cir.1987). Our reasoning in AIA, as applied in Miller, is expressly noted by the Drabkin court with approval. Id. at 1110 n. 27.
Furthermore, the facts in favor of the Defendant's position on this theory are weaker here than in Miller. Here, the parties stipulated that the $28,000.00 allegedly preferential payment was made from the Debtor's general funds and not from segregated funds. In Miller, the questions of the source and segregation of the funds were unanswered and the case was decided strictly on the allocation of the burden of proof. Here, the position of the Defendant is revealed as a contention that, simply because the state legislature and a state regulatory body provide that amounts due to it are to be considered as trust funds, they must be considered as such, irrespective of the actions of the "trustee"—debtor which in fact treat the funds to be paid to meet these obligations differently. An attempt by a state legislature and state agency to attempt to serve itself with establishment of a priority position for the state in a bankruptcy by its own act of legislation therefore emerges. We continue to believe that priorities in distribution of funds of a Debtor's estate are established exclusively by the federal Bankruptcy Code except where the Code itself indicates to the contrary, and that attempts of the state to circumvent the Code's priorities must be deemed ineffectual. In that way, the "principle of equal distribution in a bankruptcy proceeding," one of bankruptcy's fundamental precepts, is furthered. See AIA, 70 B.R. at 105.
However, the Defendant fares much better in asserting its second defense. For, in order to prevail in meeting the criterion of § 547(b)(5), the Plaintiff is forced to confront the undisputed principle that a payment to a secured creditor is not preferential. See, e.g., In re Missionary Baptist Foundation of America, Inc., 796 F.2d 752, 759 (5th Cir.1986); In re Mason & Dixon Lines, Inc., 65 B.R. 973, 977 (Bankr. M.D.N.C.1986); In re Zachman Homes, Inc., 40 B.R. 171, 172 (Bankr.D.Minn.1984); and In re Hale, 15 B.R. 565, 567 (Bankr.S. D.Ohio 1981).
The Plaintiff attempts to avoid the application of this principle here by arguing, first, that the significant time for constructing the hypothetical liquidation of the Debtor's estate is the date on which the petition is filed, as opposed to considering postpetition developments. See, e.g., In re Tenna Corp., 801 F.2d 819, 821-23 (6th Cir.1986); In re Independent Clearing House Co., 41 B.R. 985, 1013 (Bankr.D. Utah 1984); and Zachman, supra, 40 B.R. at 173. Secondly, he points out that, per 11 U.S.C. § 506(a), the security interest of an undersecured party is measured by the value of the secured property rather than the amount of the claim. See, e.g., In re Prescott, 805 F.2d 719, 726 (7th Cir.1986); Barash v. Public Finance Corp., 658 F.2d 504, 507-09 (7th Cir.1981); In re Auto-Train Corp., 49 B.R. 605, 609-11 (D.D.C.1985); and In re Fitzgerald, 49 B.R. 62, 64-65 (Bankr.D.Mass.1985). That this principle applies to...
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