Mark Anthony Const., Inc., In re

• Decision Date: 22 September 1989
• Docket Number: No. 87-4258,87-4258
• Citation: 886 F.2d 1101
• Parties: -5412, 58 USLW 2242, 89-2 USTC P 9550, 19 Bankr.Ct.Dec. 1391, Bankr. L. Rep. P 73,073 In re MARK ANTHONY CONSTRUCTION, INC., Debtor. UNITED STATES of America, Appellant, v. Ian LEDLIN, Trustee, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1101

886 F.2d 1101

64 A.F.T.R.2d 89-5412, 58 USLW 2242, 89-2

USTC P 9550,

19 Bankr.Ct.Dec. 1391, Bankr. L. Rep. P 73,073

In re MARK ANTHONY CONSTRUCTION, INC., Debtor.

UNITED STATES of America, Appellant, v. Ian LEDLIN, Trustee, Appellee.

No. 87-4258.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 7, 1989.

Decided Sept. 22, 1989.

William S. Rose, Jr., Asst. Atty. Gen., Gary R. Allen, Wynette J. Hewett, Linda E. Mosakowski, U.S. Dept. of Justice, Washington, D.C., for appellant.

Joseph D. Harkrader, Spokane, Washington, for appellee.

Appeal from the Bankruptcy Appellate Panel of the Ninth Circuit.

Before REINHARDT, KOZINSKI and TROTT, Circuit Judges.

REINHARDT, Circuit Judge:

This case presents a single, straightforward question of statutory construction. The question is, however, a difficult one. We must, in effect, seek to divine the substantive import, if any, of a statute's silence. In such a case reasonable arguments can often be made for either party's position. Here, our decision is one shaped as much by the application of fundamental legal principles as by consideration of the previous cases which have examined the question.

The question we answer is framed easily enough: is the interest which accrues on taxes due after the filing of a bankruptcy petition afforded first priority status as an administrative expense of the bankruptcy estate? It is explicit in the Bankruptcy Code ("Code") that the taxes which accrue after the filing of such a petition are treated as administrative expenses. Any fines or penalties relating to post-petition taxes are likewise afforded first priority status by the Code. Furthermore, before the Bankruptcy Code was enacted in 1978, the Supreme Court had explicitly held that post-petition interest was also properly deemed an administrative expense.

The dilemma we resolve here stems from two facts. First, the Bankruptcy Code, enacted after the Supreme Court decision just mentioned, is silent on the priority of post-petition interest. Second, a version of the Code revision, which Congress modified when drafting the final text, specifically afforded post-petition interest first priority status. The basic question, therefore, concerns the effect on the pre-revision rule of the earlier drafts and the final text of the Bankruptcy Code. A majority of the Bankruptcy Appellate Panel concluded that the statute's failure expressly to incorporate the rule laid down by the Supreme Court, as well as the process by which the section attained its final form affirmatively demonstrated the will of Congress and, accordingly, ruled that post-petition interest was no longer allowable as an administrative expense. Possibly with some cynicism, we are reluctant, given the inconclusive history we shall explore below, to adopt such an ingenuous view of the process by which Congress fashions complex legislation. Moreover, the Bankruptcy Appellate Panel's recitation of the legislative history is somewhat inaccurate. ¹ Because we conclude that Congress did not demonstrate an intent to abrogate the rule laid down by the Supreme Court, and because drawing a distinction between the priority afforded the interest accruing on post-petition taxes on the one hand, and the penalties or fines accruing on such taxes (not to mention the underlying taxes themselves) on the other, seems to run counter to the structure of the Bankruptcy Code--and to make little sense--we reverse, and hold that interest accruing on taxes due after the filing of a bankruptcy petition is to be treated as an administrative expense of the bankruptcy estate, and consequently afforded first priority status.

I

Almost eight years ago, Mark Anthony Construction, Inc. filed a Chapter 11 petition, seeking to reorganize its failing business under the protection of the bankruptcy laws. Attempts to maintain the company as a going concern failed and, in July 1983, the reorganization was converted into a Chapter 7 liquidating bankruptcy. During the period in which Mark Anthony had operated under Chapter 11, it incurred social security and withholding taxes in the amount of $9,708.95. At the time the liquidation began, $1,672.96 in interest had accrued on these taxes.

The government filed a proof of claim contending that the taxes and the accrued interest should be deemed administrative expenses of the estate, entitled to first priority under section 503(b) of the Bankruptcy Code, 11 U.S.C. Sec. 503(b). ² The trustee objected in part, claiming that the interest should not be treated as an administrative expense under section 503. In a brief, unpublished order, the bankruptcy court agreed and ruled that the post-petition interest was not a first priority expense of the estate's administration. On appeal, a majority of the Bankruptcy Appellate Panel ("BAP") affirmed. In re Mark Anthony Construction, Inc., 78 B.R. 260 (9th Cir. BAP 1987). Relying largely on the legislative history of the Bankruptcy Reform Act of 1978, Pub.L. 95-598, 92 Stat. 2549, the BAP noted that one version of the reform legislation had expressly included post-petition interest in section 503's list of administrative expenses, and that the relevant language was not included in the final version. Given this fact, the majority refused to hold that post-petition interest should be afforded the priority the government sought. 78 B.R. at 263. Judge Elliott dissented, believing that the rule laid down by the Supreme Court in Nicholas v. United States, 384 U.S. 678, 86 S.Ct. 1674, 16 L.Ed.2d 853 (1966) ("Nicholas "), under which post-petition interest was treated as an administrative expense, had not been "expressly abrogat[ed]" with the passage of the 1978 Act and therefore remained in force. 78 B.R. at 264. The government appealed, and we now reverse.

II

It is probably wise to begin with the common ground. Both parties agree that social security and employment withholding taxes incurred after the filing of the bankruptcy petition are entitled to first priority under the Code, as are fines and penalties incurred as a result of the failure timely to pay such taxes. Likewise, there is no dispute that, under the rules established by 11 U.S.C. Sec. 726, and the priorities mandated by 11 U.S.C. Sec. 507, the characterization of the post-petition interest at issue here as an "administrative expense" would give the interest first priority status in the ultimate distribution of the estate's assets. See In re Friendship College, Inc., 737 F.2d 430, 432 (4th Cir.1984) ("Friendship College "). Finally, all agree that, were we still operating under the regime of the old Bankruptcy Act of 1898, 30 Stat. 541 ("Act"), the rule of Nicholas would require that the $1672 in post-petition interest be given first priority.

Since the dispute between the parties essentially reduces to the question whether Nicholas has continuing vitality even after the adoption of the Bankruptcy Code, we preface our analysis of the statute with a brief discussion of the specifics of the case and the drafting of the Code. In Nicholas, the Supreme Court examined section 64(a) of the 1898 Act (then codified as 11 U.S.C. Sec. 104(a)), which listed those debts which should be given priority in the distribution of a bankrupt's assets. The Court sought to assess the equities of awarding interest on taxes which accrued during three distinct phases of reorganization and bankruptcy proceedings: the period before the Chapter 11 reorganization petition is filed; the period during the reorganization; and the period after a liquidating bankruptcy petition is filed. Nicholas, 384 U.S. at 685-690, 86 S.Ct. at 1680-1683. (The middle period is the one to which we refer as the "post-petition" period for purposes of this case.) In that portion of its opinion relevant here, the Court concluded that allowing the interest during the reorganization period neither unfairly burdened the trustee nor disadvantaged other creditors. ³ It further reasoned that, inasmuch as during reorganization the government was delayed in receiving its rightful tax revenue by the operation of the bankruptcy laws themselves, it would not be just to penalize the government creditor by not allowing interest on unpaid taxes. 384 U.S. at 689, 86 S.Ct. at 1682. It thus ruled that the government could claim, as a debt which had first priority, interest on taxes which were due but went unpaid during the pendency of Chapter 11 proceedings. Id.

For reasons that will shortly become apparent, in this case we need not engage in an exhaustive narration of the legislative history of section 503(b)(1) of the Code, although where necessary, we shall discuss particular aspects of that history in greater detail. For now, sufficient background for our analysis of post-Code treatment of the interest question is provided by three brief observations. First, the version of section 503 passed by the Senate explicitly stated that "taxes, including interest thereon," should be treated as administrative expenses. S. 2266, 95th Cong., 2d Sess. (1978) (emphasis added). Second, the House version of the section contained no reference to interest whatsoever. H.R. 8200, 95th Cong., 1st Sess., (1977). Third, the version adopted in conference, consistent with the House version, contains no mention of interest. See 124 Cong.Rec. H11094-95 (daily ed. Sept. 28, 1978) (statement of Rep. Edwards); 124 Cong.Rec. S17411 (daily ed. Oct. 6, 1978) (statement of Sen. DeConcini); n. 2, supra.

Since the Code became law, a number of courts have been called upon to determine the significance, if any, of these facts, and in roughly equal proportion, they have split in their response. More division appears when one examines the various modes of analysis brought to bear on the statute by the courts. Our decision, then, is one made against a backdrop of a substantial number of conflicting prior judgments and rationales; any course we take will necessarily require us to reject...