In re Rocky Mountain Refractories

• Decision Date: 25 October 1996
• Docket Number: Bankruptcy No. 94B-21665.
• Citation: 205 BR 307
• Parties: In re ROCKY MOUNTAIN REFRACTORIES, Tax I.D. Number XX-XXXXXXX, Debtor.
• Court: U.S. Bankruptcy Court — District of Utah

205 B.R. 307 (1996)

In re ROCKY MOUNTAIN REFRACTORIES, Tax I.D. Number XX-XXXXXXX, Debtor.

Bankruptcy No. 94B-21665.

United States Bankruptcy Court, D. Utah, Central Division.

October 25, 1996.

Joel T. Marker, McKay, Burton & Thurman, Salt Lake City, UT, for Stephen W. Rupp, Trustee.

Scott M. Matheson, Jr., United States Attorney, Mark H. Howard, Special Assistant United States Attorney, Salt Lake City, UT, for U.S.

Stephen W. Lewis, Assistant Attorney General, Salt Lake City, UT, for Utah State Tax Commission.

Mary Ellen Sloan, Salt Lake County Attorney, Salt Lake City, UT, for Salt Lake County.

Winston M. Faux, Utah Department of Employment Security, Salt Lake City, UT, for Utah Department of Employment Security.

Stephen G. Stoker, Stoker & Swinton, Salt Lake City, UT, for Debtor.

MEMORANDUM DECISION AND ORDER

JUDITH A. BOULDEN, Bankruptcy Judge.

There are two issues in this case. First, should interest sought by a claimant be allowed on administrative trade and tax claims incurred by a debtor in possession during a chapter 11 case? Second, if allowed, should the interest claims be paid at the same priority as the underlying claims after the chapter 11 case is converted to a case under chapter 7? This Court concludes that interest accrued on certain administrative claims during the chapter 11 case up until the date the case is converted to chapter 7 should be allowed, and that the interest portion of the claims has the same priority as the underlying claims.

UNDISPUTED FACTS

Rocky Mountain Refractories (Debtor) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on April 4, 1994. After incurring in excess of $350,000 in unpaid administrative claims,¹ the Court converted the chapter 11 case to a chapter 7 case on September 29, 1995. Stephen W. Rupp was appointed as the Chapter 7 trustee (Trustee). Pursuant to the Trustee's request, the Court fixed May 1, 1996 as the bar date to file requests for payment of administrative expense claims.

The Tax Claims

The following governmental entities (collectively, the Tax Claimants) filed proofs of claim against the Debtor's estate which the Court deems to be requests for payment of administrative expense claims pursuant to section 503(a) of the Bankruptcy Code:²

                Claimant                    Claim No.   Date Filed     Tax & Penalties  Interest
                Salt Lake County Assessor3     65      Sept. 14, 1995    $ 2,596.10     $  305.00
                Internal Revenue Service       68       Jan. 10, 1996    $71,692.86     $8,362.50
                Utah State Tax Commission     106      April 29, 1996    $29,030.84     $1,430.43
                Utah Department of
                Employment Security           111      May 30, 19964      $ 8,032.03      $  929.29
                

The Tax Claimants assert that their respective administrative expense claims (collectively, the Tax Claims) bear statutory interest at the following rates:⁵ Salt Lake County Assessor (SLCA) at 11¼% per annum; Internal Revenue Service (IRS) at the variable rate set forth in 26 U.S.C. § 6621; and Utah Department of Employment Security (UDES) at 1% per month. The SLCA, IRS, UDES and, presumably, the Utah State Tax Commission (USTC), also maintain that interest accrues from the date that their respective Tax Claims were incurred during the chapter 11 case, through conversion, until paid by the Trustee in the chapter 7 case.

The Trustee objected to the Tax Claims arguing that the interest asserted in each claim should not be allowed as a first priority claim under sections 507(a) and 723(a)(1), but rather should be allowed priority under section 726(a)(5). By affording the Tax Claimants' interest claims priority under section 726(a)(5), they would effectively be paid as a fourteenth priority claim, because claims afforded priority under section 507(a), section 726(a)(2)-(4) and chapter 7 administrative expense claims would be paid prior to the interest claims. See 11 U.S.C. §§ 507(a) & 726(a)-(b). The IRS and SLCA filed written responses to the Trustee's objection, and the IRS, SLCA and UDES appeared at the hearing on the objection held on July 29, 1996. The Tax Claimants assert that, pursuant to decisions of the United States Courts of Appeals for the Fourth, Sixth, Ninth and Eleventh Circuits, interest on administrative expense claims should be allowed and paid according to the same priority as the underlying claim. See Varsity Carpet Serv., Inc. v. Richardson (In re Colortex Indus., Inc.), 19 F.3d 1371 (11th Cir.1994); United States v. Flo-Lizer, Inc. (In re Flo-Lizer, Inc.), 916 F.2d 363 (6th Cir.1990); United States v. Ledlin (In re Mark Anthony Const., Inc.), 886 F.2d 1101 (9th Cir.1989); United States v. Cranshaw (In re Allied Mechanical Sers., Inc.), 885 F.2d 837 (11th Cir.1989); United States v. Friendship College, Inc. (In re Friendship College, Inc.), 737 F.2d 430 (4th Cir.1984); see also Small Business Admin. v. Preferred Door Co. (In re Preferred Door Co.), 990 F.2d 547 (10th Cir.1993) (acknowledging rules established in above cases); Fullmer v. United States (In re Fullmer), 962 F.2d 1463, 1467 n. 4 (10th Cir.1992) (same).

The Trade Claim

On February 6, 1996, Jerry W. Brailsford, a trade creditor of the Debtor, filed a proof of claim which was designated as claim number 88 (Trade Claim). On its face, the Trade Claim seeks payment of $17,504.38 as an unsecured nonpriority claim for goods sold during 1994 and 1995. The documents attached to the Trade Claim demonstrate that it is for goods sold to the Debtor prior to and during the Debtor's chapter 11 case, plus interest on unpaid amounts for goods sold to the Debtor during the Debtor's chapter 11 case.

The Trustee objected to the Trade Claim asserting that it should be reclassified into a pre and postpetition claim, and that $1,062.88, constituting the stipulated amount of interest on the postpetition portion of the claim, should be afforded priority under section 726(a)(5) (Interest Trade Claim). The rate used to determine the amount of interest is not stated in the Trade Claim or in the Trustee's objection, but presumably accrues at a contract or state statutory rate. At a hearing held on July 29, 1996, the Court sustained the Trustee's objection in part, reclassifying the Trade Claim, but reserving judgment on the allowance of and priority to be afforded to the Interest Trade Claim.

The Court took the Trustee's objection to the Tax Claims and Interest Trade Claim under advisement. The Court has jurisdiction to issue a final order in this matter pursuant to 28 U.S.C. §§ 157 and 1334, and this matter is a core proceeding under 28 U.S.C. § 157(b)(2)(B). The Court has now considered the memoranda and arguments of counsel and made an independent review of applicable law. Based thereon, the Court concludes that the interest incurred during this chapter 11 case on these administrative expense claims is allowable, but that such interest stopped accruing when the case was converted to a case under chapter 7, and that the interest incurred during the chapter 11 case must be paid at the same priority as the underlying administrative expense claims.⁶

ANALYSIS

The Tax and Trade Claims Are Entitled To Interest Until Conversion Of The Case

Since the resolution of the issues in this case requires analysis of an involved network of Bankruptcy Code provisions, the place to begin is with the language of the statute. United States v. Ron Pair Enter., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1030-31, 103 L.Ed.2d 290 (1989). In this case, the Tax Claims and the Trade Claim assert administrative expense claims. Section 503(b), which governs the allowance of administrative expenses, states, in relevant part, that:

(b) After notice and a hearing, there shall be allowed administrative expenses . . . including —

(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case;

(B) any tax —

(i) incurred by the estate . . . and

(C) any fine, penalty or reduction in credit relating to a tax of a kind specified in subparagraph (B) of this paragraph. . . .

11 U.S.C. § 503(b)(1)(A)-(C). Section 507(a)(1) provides that administrative expense claims allowed under section 503(b) are afforded first priority of payment. 11 U.S.C. § 507(a)(1).⁷

There is no provision in section 503(b) or any other section of the Bankruptcy Code that governs the allowance of interest on administrative expense claims incurred in a chapter 11 case. See In re John Clay & Co., 43 B.R. 797, 812 (Bankr.D.Utah 1984) (recognizing this point); compare section 502(b)(2) (disallowing claims for unmatured, or postpetition, interest on prepetition claims). The allowance of interest on administrative expense claims should not be read summarily into the statute especially in light of the well-known principle that administrative expense priority is to be "narrowly construed `because the presumption in bankruptcy cases is that the debtor's limited resources will be equally distributed among . . . creditors.'" Isaac v. Temex Energy, Inc. (In re Amarex, Inc.), 853 F.2d 1526, 1530 (10th Cir.1988) (quoting Trustees of Amalgamated Ins. Fund v. McFarlin's, 789 F.2d 98, 100 (2d Cir.1986)); see Begier v. Internal Rev. Serv., 496 U.S. 53, 58, 110 S.Ct. 2258, 2262, 110 L.Ed.2d 46 (1990) ("Equality of distribution among creditors is a central policy of the Bankruptcy Code."); General American Trans. Corp. v. Martin (In re Mid Region Petroleum, Inc.), 1 F.3d 1130, 1134 (10th Cir.1993) (administrative expense priorities should fit within the categories listed in section 503(b)). This narrow reading of section 503(b) is supported by the fact that section 503(b)(1)(B) and (C) expressly classify postpetition taxes and fines, penalties and credit reductions on such taxes as administrative expenses, but do not include interest on such taxes. Resolution of the issue in this case is not so simple, however, because binding precedent compels the allowance of...