In re Soltan

• Decision Date: 20 May 1999
• Docket Number: Bankruptcy No. 897-83401-478.
• Citation: 234 BR 260
• Parties: In re Brian D. SOLTAN, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

234 B.R. 260 (1999)

In re Brian D. SOLTAN, Debtor.

Bankruptcy No. 897-83401-478.

United States Bankruptcy Court, E.D. New York.

May 20, 1999.

COPYRIGHT MATERIAL OMITTED

Neil H. Ackerman, Ackerman & Terry, LLC, Westbury, NY, Chapter 7 Trustee.

Flower & Medalie, Bay Shore, NY, by Jeffrey Herzberg, Special Counsel for Trustee.

U.S. Department of Justice, Tax Division, Washington, D.C., by Bartholomew Cirenza, trial attorney.

Zachary W. Carter, United States Attorney, Eastern District of New York, Brooklyn, NY, by F. Franklin Amanat, Assistant U.S. Attorney.

Robert J. Cimino, Suffolk County Attorney, Hauppauge, NY, by Janice Shea, Assistant County Attorney.

Scheinberg, Finno & Schwartz, P.C., Brooklyn, NY, by Ralph B. Finno, for Beneficial Mtg. Corp.

DECISION ON TRUSTEE'S MOTION TO DISTRIBUTE SALE PROCEEDS UNDER 11 U.S.C. § 724(b) AND FOR INTERIM COMPENSATION

DOROTHY EISENBERG, Bankruptcy Judge.

Before the Court are two separate motions brought by Neil H. Ackerman, Esq., the Chapter 7 Trustee ("Trustee") in this case. The first motion is the Trustee's motion pursuant to 11 U.S.C. § 724(b) which seeks, "an order subordinating the tax claims and other liens to the payment of the administrative claims in accordance with § 724(b) of the Bankruptcy Code" and "an order as to the appropriate distributions of the remaining net sales proceeds in accordance with said provision." The second motion is the Trustee's application, pursuant to 11 U.S.C. §§ 326, 330, 331, 507(a)(1) and 724(b)(2) for an order awarding interim compensation to the Trustee and Trustee's counsel, together with the reimbursement for expense in connection with the sale of one of the assets of this Debtor's estate.

Opposition was filed by the United States Attorney on behalf of the Government, i.e. the Internal Revenue Service ("IRS"). Suffolk County objected to the subordination of their real property tax claims. The IRS opposes the Trustee's motion seeking a distribution of administrative expenses to the Trustee and Trustee's counsel and to the Trustee's application for distribution pursuant to § 724(b), claiming that the distribution is premature and inappropriate at this time based on the fact that the Trustee has not as yet liquidated all of the Debtor's property, nor can the Trustee identify all of the costs of administration in this case at this time. The government also disagrees with the Trustee's method of calculation in regard to a distribution due to the Trustee based on § 724(b) of the Bankruptcy Code and seeks a determination of this Court as to the appropriate method of distribution when all prerequisite information is available.

Suffolk County objects to its treatment by the Trustee in his Plan of Distribution, claiming that all county real property taxes that arise subsequent to the filing of the petition are to be deemed an administration expense and a secured interest in the real property. Since several important issues have been raised, the Court will address all of the issues that are present before it at this time.

ISSUES PRESENTED

1. Whether it is appropriate at this time in the case pursuant to 11 U.S.C. § 724(b) to pay preferential administration expenses and counsel fees to the Trustee and Trustee's counsel in connection with liquidating one asset of an estate before all of the estate's assets have been completely administered and before the fee applications and any other administrative expenses are finally determined.

2. Whether Suffolk County is entitled to receive payment for unpaid post-petition property taxes as an administration claim and how this would effect the distribution to all lien creditors pursuant to 11 U.S.C. § 724(b).

3. Whether it is appropriate at this time for the Court to order the subordination of all tax liens to these administrative claims.

4. In the event a distribution is to be made pursuant to 11 U.S.C. § 724(b), what is the proper analysis and computation to be applied to the various lien claims from the proceeds obtained from the sale of the assets.

FACTS

The Debtor filed a petition under Chapter 7 of the Bankruptcy Code on May 7, 1997. On Schedule "A", the Debtor listed two parcels of real property, a residential property at 120 Elder Road, Islip, New York (the "Elder Road Property") with a current market value of $650,000 owned by the Debtor in fee simple, and occupied by him and his family as his residence; and a commercial property (a gas station/body shop) located at 109 Carlton Avenue, East Islip, New York (the "Carlton Avenue Property"), with a claimed market value of $400,000. According to the Debtor's schedules, both properties were encumbered by mortgages, tax liens and judgment liens in the total amount of $1,071,650.00.¹ The Debtor also identified other personal property.

A number of creditors asserted secured claims against the estate. These included:

1. IRS (for pre-petition income tax liability);

2. State of New York (for pre-petition income tax liability);

3. County of Suffolk (for unpaid pre-petition property tax assessments).

4. A first and second mortgage on the Elder Road Property —

a. the first of which was held by Bethpage Federal Credit Union ("BFCU"); and

b. the second mortgage held by Beneficial Mortgage Corporation ("Beneficial") (both mortgages were in arrears and BFCU had commenced a foreclosure action and obtained a judgment of foreclosure and sale, pre-petition);

5. Five judgment lien holders.

Neil H. Ackerman, Esq., was appointed Chapter 7 Trustee in this case. Although the two mortgagees moved to vacate the stay in order to foreclose on this property, the Trustee opposed their request, indicating that he believed that there may be equity in the property which would inure to the benefit of other creditors over and above the amounts due to the mortgagees. The Court denied the motions to vacate stay without prejudice in order to provide a reasonable period of time for the Trustee to obtain an offer that could benefit the estate. With leave of the Court, the Trustee engaged various auctioneers, marketers and brokers in order to market the Elder Road Property on behalf of the Debtor's estate. None of these resulted in any substantial offer on the real property over and above what may have been due to the mortgagees. Meanwhile, the Debtor himself tried to market the Elder Road Property without the use of a realtor or broker of any kind and was able to obtain an offer and an executed contract to purchase the Elder Road Property for $635,000. This offer was greater than the Trustee's own appraisal and appeared to be a very good arms-length offer for the property. The Trustee then took time to attempt to obtain an even higher offer, but ultimately noticed this offer for sale at the offering price, or for any higher or better offer, and placed the issue of the sale before this Court.

The Trustee moved to sell the Elder Road Property to the purchaser on an "as is" basis for $635,000, free and clear of all liens or claims with all such claims to attach to the proceeds of the sale. Included in the motion was a request that the tax liens secured by the property be "subordinated" in the manner required by 11 U.S.C. § 724(b). In addition, the motion sought a declaration from the Court to the effect that "no interest is accruing post-filing date on any judgment or tax lien." The Trustee represented in this motion that all of the judgment liens will be satisfied and that the tax warrants will be partially satisfied by the sale of the real property at the $635,000 sale price. The Trustee further did not seek to distribute the entire net proceeds of the Elder Road Property to all of the various secured creditors of the estate. The Trustee indicated that "only the mortgage lien debt will be paid out of the sale proceeds" and requested permission to pay David M. Maltz, Auctioneer ("Maltz"), one percent commission and to reimburse himself out of the net proceeds for insurance expenses that he had incurred on both the Elder Road Property and the Carlton Avenue Property. He further indicated that he intended to sell the Carlton Avenue Property, which would provide sufficient funds for the full satisfaction of the lien and secured creditors, if any. Subsequently, the Trustee noticed his intention to abandon the estate's interest in the Carleton Avenue Property pursuant to 11 U.S.C. § 554, since he was unable to find a purchaser for the said property despite his own efforts and the efforts of his professionals to market same. The Court entered an Order authorizing the abandonment of the Carleton Avenue Property on May 14, 1999. Additionally, the Trustee stated in his sale motion that he intended to pursue other matters in the case which could result in a distribution to unsecured creditors.

In response to the Trustee's motion, the United States did not object to the Trustee's sale of the property or to its subordination as contemplated by 11 U.S.C. § 724(b). It did object, however, to any payment to the Trustee and the other proposed distributees pursuant to § 724(b) on the basis that it was premature and that the Trustee was incorrect in arguing that post-petition interest was not accruing. The United States further objected to the Trustee being reimbursed out of proceeds from this sale for all insurance expense incurred by the Trustee on behalf of this and other property. Suffolk County objected to the sale, to the subordination of its tax claim, and to the argument against the accrual of post-petition interest because the Trustee had failed to treat the post-petition interest and the assessment of post-petition real property taxes as administrative expenses of the estate.

After a hearing, the Court entered an Order dated September 11, 1998, which authorized the Trustee to sell the Elder Road Property to the purchaser for $635,000 on an "as is" basis, free and clear of liens or claims, with all such liens or claims to attach to the proceeds of the sale, and...