Matter of Aurora Cord and Cable Co., Inc., Bankruptcy No. 80 B 00373.
| Decision Date | 30 January 1980 |
| Docket Number | Bankruptcy No. 80 B 00373. |
| Citation | 2 BR 342 |
| Parties | In the Matter of AURORA CORD AND CABLE COMPANY, INC., Debtor-in-Possession. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Richard L. Horwitz, Gary G. Piccony of Reid, Ochsenschlager, Murphy & Hupp, Aurora, Ill., for Aurora Cord and Cable Co., debtor-plaintiff.
Thomas P. Sullivan, U.S. Atty., Chicago, Ill., M. Carr Ferguson, D. Patrick Mullarkey, T. Kazan Ray, Attys. U.S. Dept. of Justice, Tax Div., Washington, D.C., for I.R.S., defendant.
Yorkville, Illinois is a small rural community located about seventy-five miles southwest of Chicago. The debtor, Aurora Cord and Cable Company, is its largest employer and is engaged almost entirely in defense-related work for the United States. The debtor is current on its income and employee withholding taxes but has refused to pay and disputes liability for excise taxes assessed in the 1971-1976 period.
This dispute is now in issue in a case pending in the United States District Court for the Northern District of Illinois under the caption Aurora Cord and Cable Company v. United States of America, No. 79-C-5399. On January 9, 1980, while negotiations for settlement of this tax suit were being conducted, the Internal Revenue Service levied on the cash and accounts receivable of the debtor. The Anti-Injunction Act, 28 U.S.C. section 2283, prevented the District Court from maintaining the status quo beyond the ten-day period allowed in a temporary restraining order.
Therefore, on January 11, 1980, the debtor filed a petition under Chapter 11 of Title 11 U.S.C. in order to invoke the statutory stay of creditors and lienholders provided by the automatic stay provision of the Bankruptcy Reform Act of 1978, 11 U.S.C. section 362. The Internal Revenue Service does not contest that it is subject to the automatic stay, but contends that the bankruptcy court lacks the power to order a turnover to the debtor of the seized funds and accounts receivable.
In support of its position, the IRS relies on Phelps v. United States, 421 U.S. 330, 95 S.Ct. 1728, 44 L.Ed.2d 201 (1975). In Phelps, the IRS levied on assets of a debtor, which were in possession of an assignee for the benefit of creditors, prior to the debtor's filing a bankruptcy petition. On the application of the receiver in bankruptcy, subsequent to the filing of the petition, the bankruptcy judge ordered the assignee to turn over the assets to the estate.
The IRS appealed the order on the grounds that the bankruptcy court lacked jurisdiction to order a turnover of the funds. The receiver contended that the funds were in the possession of a nonadverse third party, the assignee for the benefit of creditors, and were therefore subject to the bankruptcy court's summary jurisdiction. The IRS maintained that its levy had given the IRS constructive possession of the funds, and therefore, the bankruptcy court lacked summary jurisdiction to order the funds turned over. The narrow issue before the Court was whether the levy was sufficient to bring the disputed funds within the constructive possession of the IRS for purposes of defeating the summary jurisdiction of the bankruptcy court.
The Court concluded that a pre-petition levy by the IRS gave it constructive possession of the funds, holding that property attached by IRS levy prior to filing a bankruptcy petition deprived the Bankruptcy Court of summary jurisdiction and that plenary jurisdiction to decide the tax-liability question was in the District Court. One of the purposes of the Bankruptcy Reform Act of 1978, and perhaps the principal reason for its enactment, was to eliminate the summary-plenary impediment to efficient administration of bankruptcy matters and to repeal the result in Phelps.
The IRS' present reliance on Phelps is misplaced. The instant case was filed under the Bankruptcy Reform Act of 1978, P.L. 95-598. Pursuant to that Act, the jurisdiction of the Bankruptcy Court has been radically expanded, and the distinction between summary and plenary jurisdiction has been abolished. 28 U.S.C. section 1471, Jurisdiction, as amended by the Bankruptcy Reform Act, provides, in pertinent part:
This revision grants the Bankruptcy Courts pervasive jurisdiction over all civil proceedings arising in or related to cases under the act, effectively eliminating the summary-plenary dichotomy in jurisdiction. The "forum shopping and jurisdictional litigation that have plagued the bankruptcy system, the unfairness to defendants from `jurisdiction by ambush', and the dissipation of assets and the expense associated with bifurcated jurisdiction will be eliminated by the jurisdiction proposed by this bill." H.Rept. 95-595 to accompany H.R. 8200, 95th Cong., 1st Sess. (1977) at 49; S.Rept. 95-989 to accompany S. 2266, 95th Cong., 2d Sess. (1978) at 18, 153-154, U.S.Code Cong. & Admin.News 1978, pp. 5787, 6010. See generally, The Bankruptcy Reform Act of 1978 —An Elevated Judiciary, 28 DePaul L.Rev. 1007 (1979).
The Reform Act grants to the Bankruptcy Court, as an adjunct of the District Court, pervasive jurisdiction over the debtor and all of its property, including property in dispute. 11 U.S.C. section 105, 28 U.S.C. section 1471(a), (c), section 1651 (All Writs Act). The Senate Report, commenting on the statute as eventually enacted, states:
Subsection (b) grants to the U.S. district courts original, but not exclusive, jurisdiction of all civil proceedings arising under title 11 or arising under or related to cases under title 11. This broad grant of jurisdiction will enable the bankruptcy courts, which are created as adjuncts of the district court for the purpose of exercising the jurisdiction, to dispose of controversies that arise in bankruptcy cases or under the bankruptcy code. Actions that formerly had to be tried in the State court or in the Federal district court, at great cost and delay to the estate, may now be tried in the bankruptcy court. The idea of possession and consent as bases for jurisdiction is eliminated. The adjunct bankruptcy courts will exercise in personam jurisdiction as well as in rem jurisdiction in order that they may handle everything that arises in a bankruptcy case.
S.Rept. 95-989 to accompany S. 2266, 95th Cong., 2d Sess. (1978) at 153, U.S.Code Cong. & Admin.News, p. 5939. Thus, insofar as Phelps was concerned with the parameters of the bankruptcy court's summary jurisdiction prior to the recent amendments to Title 28, it has been legislatively overruled.
In re Bush Gardens, 1979 Stand.Fed.Tax Rep. (CCH) par. 9736 (D.C.N.J.1979), decided under the new act, misreads Phelps. Phelps did not rule that the property, subject to the Internal Revenue Service levy, was forever barred from inclusion in the debtor's estate. It held only that the subject property was not within the summary jurisdiction of the Bankruptcy Court, and the receiver's rights in the property would have to be determined under a plenary suit in the district court. Phelps at 330 (Syllabus).
Indeed, the balancing test resorted to by the court in Bush Gardens, par. 9736 at 88,732, appears to be identical to the summary —plenary jurisdictional test expressly rejected by Congress in the Reform Act. Although recognizing that the debtor had interests in the seized funds, the court concluded that the IRS had a more substantial, adverse interest therein. Since, pursuant to Phelps, the IRS had constructive possession, the property was not, in the court's opinion, "property of the estate". If this reasoning were accepted, arguably any property which the debtor did not have possession of, and in which another entity appeared to have a substantial interest, might not be considered property of the estate.
Clearly this court has jurisdiction to resolve the adverse claims to the property in the present case. The IRS has levied on funds belonging to the debtor in order to secure payment for a disputed tax liability. Thus the dispute is one "related to" the debtor's Chapter 11 proceedings. Furthermore, section 505 of the new Bankruptcy Code explicitly grants this court authority to determine the legality of any tax imposed upon the debtor.1
Finally, the IRS contends that the debtor has no rights in the seized funds. This position is simply untenable. First, the debtor has, at a minimum, a right of redemption. Second, assuming the tax imposition to be valid, the debtor has a right to any amount in excess of the tax liability. Finally, and most importantly, the debtor will be entitled to all the funds if the tax assessment is determined to be invalid.
The turnover order in the instant case is particularly appropriate in light of the equitable power of this court (see, e.g. 11 U.S.C. § 105) and the spirit behind corporate reorganization. If the IRS is permitted to retain the debtor's assets, it is undisputed that the debtor will be forced into liquidation. The essence of Chapter 11, however, is to prevent the unnecessary dismemberment of viable corporations and to provide a maximum distribution to creditors who would be likely to receive nothing in the event of liquidation.
Allowing the property levied by Internal Revenue Service to be retained by them effectively decides that the debtor is barred from proposing a plan of reorganization and in satisfaction of creditors. It is clear from the legislative history of the Bankruptcy Reform Act that Congress was aware of situations where giving a secured or lien creditor an absolute right to its possessory interests might be seriously detrimental to the rehabilitation of the...
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