In re Whiting Pools, Inc., Bankruptcy No. 81-20063

Decision Date28 April 1981
Docket Number81-2034A.,Bankruptcy No. 81-20063
Citation10 BR 755
PartiesIn re WHITING POOLS, INC., Debtor. UNITED STATES of America, Plaintiff, v. WHITING POOLS, INC., Defendant.
CourtU.S. Bankruptcy Court — Western District of New York

Jonathan B. Forman, Civil Trial Section, Northern Region Tax Division, U.S. Dept. of Justice, Washington, D.C., for plaintiff.

Relin & Goldstein by Lloyd H. Relin, Rochester, N.Y., for defendant.

Harter, Secrest & Emery by Deborah Schwind, Rochester, N.Y., for Marine Midland Bank.


EDWARD D. HAYES, Bankruptcy Judge.

The United States of America has commenced an action under 11 U.S.C. § 362(d) of the new Bankruptcy Code seeking a determination that the automatic stay provisions of Bankruptcy Code 11 U.S.C. § 362(a) are not applicable to it with respect to certain property seized by the Internal Revenue Service from Whiting Pools, Inc. to satisfy unpaid employment taxes; or alternatively, seeking relief from the automatic stay provisions of 11 U.S.C. § 362 to permit the Internal Revenue Service to sell the seized property. A preliminary hearing was held within 30 days after the filing of the complaint and was continued to a final hearing. The final hearing has been held. Both parties have submitted memorandums of law and all testimony has been taken.

From the hearings, the facts appear to be as follows. Whiting Pools, Inc. filed a petition under Chapter 11 of the Bankruptcy Code on or about January 15, 1981. Whiting Pools, Inc., the debtor in this proceeding, is engaged in the business of selling, installing and servicing swimming pools. It also retails pool equipment and supplies from its place of business at 7244 Palmyra Road, Fairport, New York. On January 14, 1981, the United States acting through the Internal Revenue Service seized all of the debtor's property at its place of business. The seizure included nearly all of the debtor's tangible property. The United States proposes to sell this property at public auction or otherwise in accordance with sections 6331 et seq. of the Internal Revenue Code. It is seeking the permission of this Court to conduct such a sale. The property seized includes equipment, vehicles, inventory, office equipment and supplies. The United States claims to be owed approximately $92,000 in back employment taxes.

The issues presented to the Court are: First, can the Internal Revenue Service proceed with its sale of the seized property without permission of the Bankruptcy Court; second, if the Service is bound by the provisions of 11 U.S.C. § 362(a), should the stay be lifted pursuant to § 362(d); and third, if the stay is continued, can this Court order the Service to turn over the seized property to the debtor so that rehabilitation of the debtor can be effected. Each of these issues will be addressed in turn.

Whether the Service needs permission of this Court to proceed with its sale of the debtor's property depends on the applicability of the automatic stay provisions of 11 U.S.C. § 362. Section 362(a) provides in pertinent part as follows:

362(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title operates as a stay, applicable to all entities, of —
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title:
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; . . .

The automatic stay applies to the Service under either of these paragraphs. The seized property, although in the custody of the Service, is, nevertheless, property of the debtor. Title to the property never passed to the Service or to anyone else. Any doubt about the debtor's continued ownership of the property is soon dispelled upon the reading of § 6335 of the Internal Revenue Code of 1954 which provides for the sale of seized property. That section repeatedly refers to the taxpayer as the owner of the property. Therefore, paragraph 5 clearly applies in this case. Furthermore, even if the seizure had divested the debtor of title to the property, paragraph 6 would prevent the Service from unilaterally exercising its right to sell the property since such a sale would constitute an act to collect a claim against the debtor. See In re Avery Health Center, Inc., Civil Action No. 81-51E, BK 81-10130, 3 CBC 728, 8 B.R. 1016 (Bkrtcy. W.D.N.Y.1981).

Having decided that the automatic stay is applicable to the Service with respect to the seized property we must now consider whether the stay should be continued or lifted. Here, the relevant section of the Code is § 362(d) which provides as follows:

362(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay — (1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or
(2) with respect to a stay of an act against property, if —
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization.

It is readily apparent that the Service cannot succeed in lifting the stay under paragraph 2. The hearings required by 11 U.S.C. § 362(d) have been held and this Court finds with regard to those hearings that the property of the debtor is worth $162,876 as a going concern and that the only liens against that property are a tax lien of $92,000 and Marine Midland's security interest which is either $6,000 or $12,500 depending upon the outcome of litigation which involves parties not before this Court. Thus, the provisions of subparagraph A are not met since the debtor has substantial equity in the property.

Furthermore, the seized property is absolutely necessary to an effective reorganization of the debtor. The Service has seized virtually everything this debtor owns. If the stay is lifted and the sale occurs, the debtor will cease to exist. Therefore, even if the debtor had no equity in the seized property, the stay could not be lifted pursuant to paragraph 2 since the provision of subparagraph B cannot be satisfied.

Therefore, the Service must show cause, pursuant to paragraph 1, why the stay should be lifted. The sole cause advanced by the Service is that the United States is incurring rent of $2,500 per month while it waits to sell the property.

Taking into account the testimony adduced by the Service, their forced sale (the proceeds of which are subject to prior lien) will probably net a maximum of $30 to $35,000 and the more probable recovery will be in the neighborhood of $20,000. The extra expense incurred as a result of the stay of sale is substantial in light of the minimal recovery expected from the forced sale.

Significantly, the Service has not argued that it lacks adequate protection for the harm wrought by the imposition or continuation of the stay. Apparently, the reason for this is that a business without access to its property is in no position to offer such protection and it would be inconsistent for the Service to hold the property and demand protection at the same time.

It is abundantly clear to this Court that the United States' interest in the property can adequately be protected if the debtor's property is returned to it and its business is recommenced. This Court also feels that such a turnover is in the best interests of both parties and would accomplish the purpose of both the Bankruptcy and Internal Revenue Codes. The United States can realize more on its tax claim from the income of a revitalized business than from the proceeds of a forced sale. Nevertheless, the Service insists that it be permitted to sell the property at auction and further insists that this Court cannot order a turnover of pre-petition seized property. Since it makes little sense to continue the stay unless a turnover of property can accompany the stay, we now turn to the most critical issue of this case; i.e., the power of a Bankruptcy Court to order the turnover of property in the hands of a creditor incident to the enforcement of a lien.

To begin with, the question of whether property seized by the Service prior to the filing of a bankruptcy petition is property of the estate as defined by § 541 of the Code and thus subject to the turnover provisions of § 542 has already been addressed in this district. In the Matter of Avery Health Center, Inc., 3 CBC 728, 8 B.R. 1016 (Bkrtcy.W.D.N.Y.1981) Judge Elfin concluded that only those property interests remaining in the debtor at the time it filed its petition could be considered property of the estate as defined by § 541. Having found that the debtor was not entitled to use, lease, or otherwise possess the seized property at the time it filed its petition, Judge Elfin held that "the IRS may not be ordered to turn over the levied property under § 542 of the Bankruptcy Code." Id. at 732, 8 B.R. 1016.

Judge Elfin approached the problem by considering in turn § 542, § 363 and § 541. His attention was focused primarily on § 541 and he held close to the clear, plain and literal terms of that section. Simple logic, operating on the plain language of the Code and the information available to him, necessarily led him to the conclusion he reached.

This Court cannot argue with Judge Elfin's logic but neither can it accept an interpretation of the Code that strips a reorganization court of the power to order a turnover of pre-petition seized property necessary to the successful rehabilitation of Chapter 11 debtors. Such power was lodged in this Court under the Act and Congress could not have intended to limit that power when it enacted the Code.

Under the Act, the source of the Court's power to order the turnover of property...

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