In re Scott Cable Communications, Inc., Bankruptcy No. 98-51923.

• Decision Date: 11 December 1998
• Docket Number: Bankruptcy No. 98-51923.
• Citation: 227 BR 596
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re SCOTT CABLE COMMUNICATIONS, INC., Debtor.

227 B.R. 596 (1998)

In re SCOTT CABLE COMMUNICATIONS, INC., Debtor.

Bankruptcy No. 98-51923.

United States Bankruptcy Court, D. Connecticut.

December 11, 1998.

COPYRIGHT MATERIAL OMITTED

Daniel H. Golden, Brian Cogan, Stroock & Stroock & Lavan, LLP, New York City, for Scott Cable Communications.

Craig I. Lifland, Zeisler & Zeisler, P.C., Bridgeport, CT, for Scott Cable Communications.

Deirdre A. Martini, Assistant United States Attorney, United States Department of Justice, Bridgeport, CT, for the Internal Revenue Service.

John V. Cardone, United States Department of Justice, Tax Division, Washington, D.C., for the Internal Revenue Service.

George Davis, Weil Gotshal & Manges, New York City, for Interlink.

Elizabeth Austin, Pullman & Comley, LLC, Bridgeport, CT, for Interlink.

Ira H. Goldman, Shipman & Goodwin, L.L.P., Hartford, CT, for Indentured Trustee and Jr. PIK Note Holders.

MEMORANDUM AND ORDER ON OBJECTION TO CONFIRMATION

ALAN H.W. SHIFF, Chief Judge.

Scott Cable Communications, Inc. seeks confirmation of a Prepackaged Liquidating Chapter 11 Plan ("Plan"). The United States of America on behalf of the Internal Revenue Service ("IRS") has objected.

BACKGROUND

Scott Cable, which was organized under the laws of Texas, is a corporation headquartered in Stamford, Connecticut. It is engaged in the ownership and operation of nine cable television systems in ten states. On February 14, 1996, Scott Cable filed a chapter 11 case in the District of Delaware. In re Scott Cable Communications, Inc., Case No. 96-172 (Bankr.D. DE 1996). That court confirmed a plan which "contemplated the likelihood of a sale of Scott Cable's assets on or before December 31, 1999." Disclosure Statement § III(D) at 7. In the latter part of 1997, Scott Cable received an offer from InterLink Communications LLLP to purchase its assets. On July 10, 1998, Scott Cable and InterLink executed an Asset Purchase Agreement ("Agreement") "pursuant to which InterLink agreed to purchase substantially all of Scott Cable's cable television systems and related assets for the sum of $165,000,000" ("Sale"). Disclosure Statement § III(H) at 12. The Agreement further stated that:

the closing will occur no later than November 30, 1998, unless either party . . . elects to extend such date for up to an additional six months (not beyond May 31, 1999). . . . Notwithstanding the above, unless InterLink consents to an earlier Closing, the Closing shall occur no sooner than 60 days after entry of the order confirming the Plan, and is expressly conditioned on such confirmation occurring.

Disclosure Statement § III(H)(iv) at 15. On August 17, 1998, the Plan and a corresponding disclosure statement were disseminated. On October 1, 1998, Scott Cable ("Debtor") filed the disclosure statement and Plan, with a certification of the prepetition solicited votes. The Plan incorporates the Agreement, including the requirement that the closing of the Sale occur after the confirmation order.¹

The Plan proposes a distribution that will pay all of the allowed secured claims of Finova Capital Corporation and the Senior Subordinated Secured PIK Note Holders (the first and second lienholders), a percentage of the allowed secured claims of Junior Subordinated Secured PIK Note Holders ("Jr. PIK Note Holders"), and "all administrative, priority, and unsecured creditors from the recoveries that would otherwise be payable to the Jr. PIK Note Holders . . ." see Agreement, Article V at 13 - 16; see also Debtor's Response to the Internal Revenue Service's Objection to Plan Confirmation ("Debtor's Response") at 2.² The Plan does not provide for the payment of any federal or state tax liability because Scott Cable "believes that since any claims for taxes attributable to the sale arise subsequent to confirmation of the plan, they need not be provided for in the plan. . . ." Disclosure Statement § VIII(B) at 49 (attached as Appendix A); see also Plan § 11.4 at 28. The Plan further provides for releases, injunctions, and limitations of liability, which are intended to protect several entities, including directors, officers, and Jr. PIK Note Holders, from future tax liability arising out of the Sale, and bind taxing authorities so that they may not pursue any such claims. Disclosure Statement §§ IV(D)(1)-(3) at 28-29. The effective date of the Plan is the closing date of the Sale. Id. § IV(J) at 37-38. On November 13, 1998, the court authorized the Sale. On November 16, 1998, the IRS objected to confirmation of the Plan.

DISCUSSION

The bankruptcy code provides that "the court shall confirm a plan only if all of the following requirements are met. . . ." 11 U.S.C. § 1129(a). The IRS objects to confirmation for the reason that the Plan fails to provide for the payment of the capital gains tax attributed to the Sale as an administrative expense, see 11 U.S.C. § 1129(a)(9)(A). The IRS has also objected because the Plan provides for an injunction in violation of the Anti-Injunction Act, see 26 U.S.C. § 7421(a), and its principal purpose is to avoid taxes, see 11 U.S.C. § 1129(d).³

A. Administrative Expense

The Debtor argues that since the allowed amount of the secured debt, $173,812,820,⁴ exceeds the purchase price of the assets, there is no possibility of a distribution to the IRS. That prompts the Debtor to chide the IRS as "a spoiler of the worst kind" and "a petulant child who cannot get his way and seeks to create (economic) harm to other parties-in-interest." Debtor's Response at 1. The Debtor's position suggests that the priority accorded to taxing authorities and other administrative claimants, see 11 U.S.C. § 1129(a)(9)(A), should not be asserted if there are insufficient estate assets to satisfy those claims. The argument is a non sequitur. As the IRS argues, even if the proceeds are insufficient to satisfy the capital gains tax, confirmation of the Plan will adversely effect its right to pursue other responsible parties, see infra at 601-02; see also Transcript at 45. Moreover, the IRS has the right, if not the duty, to assert the application of bankruptcy and other applicable law which is intended to promote its taxing authority and prevent its erosion. Section 1129(a)(9)(A) provides:

Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that —

(A) with respect to a claim of a kind specified in section 507(a)(1) . . ., on the effective date of the plan, the holder of such claim will receive on account of such claim cash equal to the allowed amount of such claim. . . .

11 U.S.C. § 1129(a)(9)(A) (1994).

The Debtor characterizes the IRS's objection as an attempt to defeat the bankruptcy code's priority scheme. That argument overlooks the preferred status of administrative claims. The code's confirmation scheme elevates allowed administrative claims to a dominant priority such that unless the holders agree to a different treatment, a plan cannot be confirmed without full payment of those claims even if there are no estate assets to pay them. See Pan Am Corp. v. Delta Air Lines, Inc., 175 B.R. 438, 456, 508 (S.D.N.Y.1994) (referring to § 1129(a)(9)(A) as the "administrative solvency" requirement, which is "the ability of the . . . estate to satisfy administrative claims at the confirmation hearing.").

Code section 507(a)(1) provides a first priority for "administrative expenses allowed under section 503(b). . . ." See also City of New York v. R.H. Macy & Co. (In re R.H. Macy & Co.), 176 B.R. 315, 316 (S.D.N.Y. 1994) ("The plain meaning of section 503(b) is that taxes incurred by an estate are entitled to an administrative expense treatment. . . ."). The Debtor concedes that a capital gains tax is an administrative expense within the purview of § 503(b)(1)(B) if it accrues during the administration of the estate. See Debtor's Response at 4. See also In re Goffena, 175 B.R. 386, 391 (Bankr. D.Mont.1994). The Debtor further concedes that a taxable event will take place upon the closing of the Sale, but because the Plan mandates that the confirmation order occur before the closing, it argues that it has no capital gains tax liability and compliance with § 1129(a)(9)(A) is not required. Put another way, the Debtor will not incur a capital gains tax administrating the estate because the tax will accrue after the administration period. Thus the analysis must focus on whether the administrative period ends upon the confirmation of the Plan.

Section 114(b) defines the duration of the administrative period as follows:

Except as otherwise provided in the plan or the order of the court confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.

11 U.S.C. § 1141(b) (emphasis added).

An administrative period should extend beyond an order confirming a liquidating plan to the completion of the liquidation process unless there is a transfer of a debtor's benefits and burdens of ownership to another entity that completes the process. See, e.g., Holywell Corp. v. Smith, 503 U.S. 47, 112 S.Ct. 1021, 1024, 117 L.Ed.2d 196 (1992) (trustee as assignee who liquidates the debtor's property must pay income tax attributable to corporate debtor's property). The Debtor contends that confirmation of the Plan will vest the property of the estate in the "reorganized" debtor, the administration period will end, and the "reorganized" debtor will conclude the Sale. Those conclusions are belied by the fact that the Plan does not provide for the liquidation of the estate property until the postconfirmation closing of the Sale.

Contrary to the Debtor's assertions, the creation of the Scott Cable Liquidating Administrative Trust ("Trust"),⁵ under which Scott Cable Management⁶ was appointed to serve as trustee, does not alter the reality that the administrative period will continue beyond confirmation of the Plan. The Trust is merely a nominal transferee. The Order approving the Sale ...