Lapiana, Matter of
| Citation | 909 F.2d 221 |
| Decision Date | 31 July 1990 |
| Docket Number | No. 89-2736,89-2736 |
| Parties | -5970, 59 USLW 2166, 90-2 USTC P 50,436, 23 Collier Bankr.Cas.2d 766, 20 Bankr.Ct.Dec. 1391, Bankr. L. Rep. P 73,567 In the Matter of Vincent LAPIANA and Barbara Lapiana, Debtors. Appeal of Millard G. LEE. |
| Court | United States Courts of Appeals. United States Court of Appeals (7th Circuit) |
Daniel A. Zazove, Karen Walin, Towbin & Zazove, Chicago, Ill., for defendant-appellant.
Karen A. Smith, Dept. of Justice, Tax Div., Washington, D.C., Anton R. Valukas, U.S. Atty., William T. Clabault, Charles E. Ex, Asst. U.S. Atty., Office of the U.S. Atty., Chicago, Ill., Gary R. Allen, Debra J. Stefanik, Jonathan S. Cohen, Deborah Swann, Howard M. Soloman, U.S. Dept. of Justice, Tax Div., Washington, D.C., Victoria S. Crosley, I.R.S., Chicago, Ill., for I.R.S.
Allan J. DeMars, Spiegel & DeMars, Chicago, Ill., for defendants.
Joseph E. Cohen, Cohen & Cohen, Chicago, Ill., for debtors.
Before WOOD, Jr., CUDAHY, and POSNER, Circuit Judges.
The principal question raised by this appeal is whether United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), completely extinguishes the power of a bankruptcy judge to abate an award of post-petition interest to an oversecured creditor, in this case the United States. We answer "no" but uphold the district judge's ruling that the power was improperly exercised in this case.
The story begins in 1980, when the government filed notices of federal tax lien against two commercial properties owned by the Lapianas. The unpaid balance of the assessments underlying the lien was $70,000 (we round off all dollar figures to the nearest $1,000). A few months earlier Millard Lee, the appellant, had filed a lien against the same properties--a lien junior to the government's tax lien--to secure a large judgment that Lee had obtained against the Lapianas. In 1981 the Lapianas declared bankruptcy, and the bankruptcy judge authorized the sale of one of the properties secured by the federal tax lien and by Lee's judgment lien. The sale realized $74,000, after satisfaction of the mortgages on the property, to apply toward the payment of the liens. (Apply toward, not pay in full, because with interest on the original assessments continuing to accrue, the government's lien alone exceeded the net proceeds of the sale.) In September 1983 the judge ordered the trustee to pay the proceeds of the sale to the Internal Revenue Service in partial satisfaction of the government's lien. The trustee did not do so until May 1985, some twenty months later, and then all he paid was $60,000. He had embezzled the rest. Shortly afterward the Lapianas' other property was sold, yielding net proceeds of $72,000 to apply to the liens held by the government and by Lee. The government claimed all of these proceeds too. It did so because interest on the outstanding unpaid tax assessments since the filing of the petition for bankruptcy, when computed at the rate (approximately, the Treasury bill rate plus three percent) applicable to underpayment of federal tax, 26 U.S.C. Secs. 1274(d), 6621, and added to the outstanding unpaid assessments themselves, exceeded the net proceeds of the second sale, leaving nothing for Lee, the junior lienor.
In seeking the interest that had accrued on the unpaid tax assessments since the filing of the petition for bankruptcy, the government was relying on 11 U.S.C. Sec. 506(b), which provides that an oversecured creditor "shall be allowed ... interest on [his] claim." (An oversecured creditor is a creditor whose security interest is worth more than his claim.) There is no pertinent legislative history, United States v. Ron Pair Enterprises, Inc., supra, 109 S.Ct. at 1031 n. 6, but we suppose that the idea behind section 506(b), a provision new in the Bankruptcy Code of 1978, is that until the secured creditor's claim plus interest on it has eaten up the entire value of the security the payment of that interest does not infringe the reasonable expectations of any other creditor. After the value of the security is exhausted he is no longer an oversecured creditor and the section ceases to be applicable.
The bankruptcy judge rejected the government's argument and held that even if section 506(b) applies to involuntary liens such as a tax lien--an unsettled question at the time of his decision--the government had forfeited its rights under the statute by dragging its feet in collecting the proceeds of the first sale. The district judge reversed. 100 B.R. 998 (N.D.Ill.1989). Noting that Ron Pair had held section 506(b) applicable to involuntary liens, such as tax liens, she ruled that even if some equitable power to abate an award of post-petition interest on such liens survived, the bankruptcy judge had abused his discretion in invoking the power here. He had emphasized the government's lack of diligence but had failed to note that Lee had been no more diligent in assuring that the trustee complied with the order to pay the government the net proceeds of the first sale. Lee could if need be have asked the district court to hold the trustee in contempt if the latter disobeyed the order to pay; and while admittedly Lee may not have thought it necessary to press the trustee in this way, because In re Kerber Packing Co., 276 F.2d 245 (7th Cir.1960), had held that the government was not entitled to post-petition interest on its liens, that was a case under the old law, before section 506(b) was enacted. It was therefore a weak reed on which to lean in a case governed by that section.
In defending its victory in the district court, the government goes the district judge one better by arguing that never, in any circumstances, may a bankruptcy court deny or reduce an award of post-petition interest to the government, provided of course that the government is oversecured to the extent of the interest sought. This cannot be right. We put the following case to the lawyer who argued the case for the government. The Internal Revenue Service goes to the trustee and offers to compensate him if he will (1) delay paying proceeds in his possession earmarked for satisfying the IRS's tax liens on the bankrupt's property and (2) conceal the failure to pay from any junior lienors, who, if they got wind of the scheme, might ask the district court to hold the trustee in contempt for refusing to comply with an order to pay. The idea behind the scheme would be to enable the Treasury to earn a high interest rate, at the expense of the junior lienors and other creditors of the bankrupt, on what normally is a safe investment (an embezzling trustee is, we hope, a rara avis). Even in such a case, the government's lawyer argued, the bankruptcy judge would be helpless. We do not see why. The doctrine of estoppel, limited though it may be when it is the government that is being sought to be estopped--limited indeed to cases of affirmative misconduct, United States v. Monroe Service Co., 901 F.2d 610, 613 (7th Cir.1990), such as our hypothetical case--is as applicable to claims under section 506(b) of the Bankruptcy Code as to other government claims.
It is true of course that bankruptcy, despite its equity pedigree, is a procedure for enforcing pre-bankruptcy entitlements under specified terms and conditions rather than a flight of redistributive fancy or a grant of free-wheeling discretion such as the medieval chancellors enjoyed (equity itself is no longer a discretionary system in that sense). Boston & Maine Corp. v. Chicago Pacific Corp., 785 F.2d 562, 566 (7th Cir.1986); Levit v. Ingersoll Rand Financial Corp., 874 F.2d 1186, 1197-98 (7th Cir.1989); Marin v. England, 385 U.S. 99, 110, 87 S.Ct. 274, 280, 17 L.Ed.2d 197 (1966) (Harlan, J., dissenting). The government's tax claim...
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