Matter of All-Way Services, Inc.

• Decision Date: 14 May 1987
• Docket Number: Bankruptcy No. 87-00367.
• Citation: 73 BR 556
• Parties: In the Matter of ALL-WAY SERVICES, INC., Debtor in Possession.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

73 B.R. 556 (1987)

In the Matter of ALL-WAY SERVICES, INC., Debtor in Possession.

Bankruptcy No. 87-00367.

United States Bankruptcy Court, E.D. Wisconsin.

May 14, 1987.

COPYRIGHT MATERIAL OMITTED

Jerome R. Kerkman, Milwaukee, Wis., for All-Way Services, Inc.

Maxine White, Milwaukee, Wis., for U.S. Dept. of Justice — Milwaukee.

James Klein, Washington, D.C., for I.R.S., Asst. Dist. Counsel.

Mary Bielefeld, Washington, D.C., for U.S. Dept. of Justice — Washington, D.C.

Andrew M. Barnes, Washington, D.C., for M & I Northern Bank.

DECISION^*

RUSSELL A. EISENBERG, Bankruptcy Judge.

FACTS

The Debtor in Possession, All-Way Services, Inc. ("All-Way") ("Debtor"), is a bus company engaged in the business of transporting school children in the Milwaukee area. On January 26, 1987, the Internal Revenue Service ("IRS"), without having filed a Notice of Lien, levied upon All-Way's bank accounts at M & I Northern Bank of Milwaukee, Wisconsin ("Bank"). Two days later, on January 28, 1987, All-Way filed a petition under Chapter 11 of the Bankruptcy Code. It also filed an adversary proceeding in which it sought to obtain the funds in the bank accounts.

The Court has been asked to decide which of the three, IRS, All-Way, or the Bank should be given the use of the funds on deposit in the Bank. Other issues include whether the IRS and the Bank are entitled to adequate protection for lost opportunity costs, and whether the IRS levy constituted a voidable preference. All-Way owed the IRS approximately $65,000. The amount requested by the IRS in its levy was $26,807.87. There was $20,820.14 in three accounts of All-Way in the Bank at the time of the levy: (1) a general account containing $20,192.16; (2) a payroll account containing $118.93; and (3) a corporate savings account containing $509.05. The funds in the general account were traceable to recent payments on account by the Milwaukee Public Schools. From time to time funds from the other accounts were deposited into the payroll account, which was used solely for payment of wages and employment taxes. The source of funds in the savings account is uncertain, but in all probability the source is proceeds of accounts.

At the time of the IRS levy, All-Way was indebted to the Bank on two separate loans in the total sum of $68,647.10, plus costs of collection and attorneys' fees. Most of All-Way's assets had been pledged to the Bank as security for the two loans. The loans were cross-collateralized, and the collateral covered future advances. The Bank had a security interest in accounts, instruments, chattel paper, inventory, documents relating to inventory, equipment, fixtures and general intangibles. The promissory notes signed by All-Way provided for a right of set-off on all funds on deposit with the Bank, as well as a security interest and lien on any demand account or savings account of All-Way at the Bank. All-Way gave the Bank a lien on all money on deposit in the Bank.

All-Way daily transports several thousand students to and from school. Its principal contract is with Milwaukee Public Schools, but it also has contracts with a number of private and parochial schools in the Milwaukee area. A wholly owned subsidiary, All Ride Bus Services, Inc. ("All Ride"), provides exclusive school bus service for Jefferson, Wisconsin, transporting approximately three thousand children daily. On occasion, All-Way and All Ride temporarily exchange school buses.

All-Way's employees were scheduled to be paid on January 30, 1987, the gross payroll for that date being $22,097.15. Immediately upon All-Way filing its Chapter 11 petition on January 28, 1987, a large number of its licensed school bus drivers gave notice that they would quit if they were not paid on time. This meant that unless All-Way had immediate access to cash, it was not going to be able to operate for more than a day, and thousands of school children would be left stranded in the middle of the winter. The only possible source of funds was the money in All-Way's bank accounts, which had been levied upon by the IRS.

At All-Way's request, an emergency hearing was held on January 29, 1987. The fact that the hearing was conducted during a snow storm emphasized the imperative need for school bus service.

The right to the bank accounts was sharply contested at this initial January 29, 1987, hearing. Nevertheless, all parties were concerned that the affected school children should not be without transportation to and from school the following morning. The Debtor was seeking an order permitting the use of cash collateral and requiring the IRS to turn over all of the funds subject to its levy. The Bank believed the Debtor's financial condition was precarious, and the Debtor's ability to operate its business for any substantial period of time without impairing the Bank's collateral was doubtful. From the limited information that was available on such short notice, it appeared that the Bank was fully secured. At the conclusion of the hearing, it was agreed that the money which was the subject of the IRS levy could be used by the Debtor to meet its January 30, 1987, payroll. In exchange for its rights, if any, to those funds, the IRS was given a replacement lien on new accounts generated by the Debtor. The Bank was also given a postpetition security interest in the Debtor's assets, and the Debtor was restrained from further encumbering any of its assets without prior court approval. This resolved the Debtor's immediate cash needs, but not the legal issues raised by the parties.

The Debtor was directed to deposit all money received in an account at the Bank, deposit payroll taxes in a segregated account when wages were paid, keep post-petition taxes current, maintain and keep current its insurance and maintain the school buses in a safe condition at all times. In addition, the Court directed the Debtor to furnish the IRS and the Bank with all financial information that was available to it, or reasonably possible to obtain, and the Bank was directed to furnish the IRS with copies of its security agreements, financing statements, promissory notes and related documents and instruments. Finally, a trial was scheduled for Monday, February 2, 1987.

At the trial on February 2, 1987, the following matters were presented to the Court:

1. An IRS claim to the proceeds of All-Way receivables to the extent of $20,820.14;

2. A motion by the IRS for adequate protection including lost opportunity costs;

3. A motion by the IRS to require the Bank to marshal its assets;

4. A motion by the Bank for adequate protection, including lost opportunity costs; and

5. A motion by the Bank to require the Debtor to file a disclosure statement and plan within 28 days.

At the conclusion of the trial, the Court made detailed written findings of fact which supplement this decision.

From the information presented to the Court at the hearings on January 29, and February 2, 1987, the following facts appeared. The Debtor used trust fund taxes for operating purposes. Shortly before the petition was filed, the principal of All-Way substantially increased insurance for himself and for members of his family, who were key employees. That principal resigned, took a vacation of undetermined length in Florida, and failed to advise the new principal, his son, of important financial matters. The former principal continued to receive a salary of $60,000 a year.

After the levy was served upon the Bank, the Bank drafted a cashier's check in the sum of all monies held in the Bank. The Bank held the cashier's check for ten days pursuant to standard operating procedure to enable All-Way to challenge the levy if it chose to do so. The cashier's check was not forwarded to the IRS before the petition was filed.

The Bank is fully secured. Against a loan balance in excess of $68,650, its collateral includes 29 school buses worth $35,550 on a forced sale basis, generally collectible accounts in the amount of $82,000, a paramount lien on all but $118.93 of the $20,820.14 in the All-Way bank accounts, inventory, documents relating to inventory, other equipment, fixtures and general intangibles of unknown value, a guaranty of the former principal, Charles B. Monfre, and a second real estate mortgage on Charles B. Monfre's residence with $57,500 of equity available to the Bank.

RIGHTS TO, AND INTERESTS IN, THE BANK ACCOUNTS

The IRS claims that the Debtor has no rights to, nor interest in, any of the bank accounts following its levy, and the funds in the Bank are not property of the estate. This Court disagrees. In United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), the day prior to the commencement of the bankruptcy case, the IRS seized Whiting's tangible personal property. The Supreme Court ordered the IRS to return the property to the debtor.

The IRS desires to distinguish Whiting Pools, Inc. from the present case. The property seized in Whiting Pools, Inc. was tangible personal property; the property seized in the present case is an intangible, the interest of the Debtor in its bank accounts. The IRS argues that it is necessary for the IRS to sell tangible personal property before realizing on the property; it is not necessary to sell an interest in bank accounts.

In this All-Way case, the IRS did not have possession of the funds, and the cashier's check remained in the possession of the Bank without objection of the IRS.¹ The IRS never credited the amount subject to the levy to the taxpayer's indebtedness to the Service. The IRS does have a lien on the funds on deposit. Its lien may be avoidable as a preference, and its lien is subsequent to the lien of the Bank on all funds other than the $118.93 in the payroll account, which the IRS, but not the Bank, may attach. At this point in time, however, the lien remains, and the IRS is entitled to adequate protection. The IRS also contends that following the levy, the Bank was a mere...