MATTER OF COMMUNITY HOSPITAL OF ROCKLAND CTY., Bankruptcy No. 79 B 20074
| Decision Date | 27 December 1979 |
| Docket Number | 79 ADV 2004.,Bankruptcy No. 79 B 20074 |
| Citation | 5 BR 7 |
| Parties | In the Matter of The COMMUNITY HOSPITAL OF ROCKLAND COUNTY, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Ballon, Stoll & Itzler, New York City, by Ronald Itzler and M. David Graubard, New York City, for debtor.
Robert B. Fiske, Jr., U.S. Atty., by Stuart M. Bernstein, Asst. U.S. Atty., New York City, for the Government.
DECISION ON COMPLAINT RE: DETERMINATION OF PREFERENCE PAYMENTS
The debtor, The Community Hospital of Rockland County, has filed a complaint in an adversary proceeding against the Government, and specifically, the Internal Revenue Service, to obtain a release of funds that were seized under the Government's prepetition levies. The debtor needs these funds in order to meet its payroll tomorrow. The Government opposes the debtor's action on grounds of lack of jurisdiction and sovereign immunity. The facts are not disputed.
On December 14, 1979, the debtor filed its petition for relief under Chapter 11 of the Bankruptcy Reform Act of 1978. The debtor is now operating as a debtor-in-possession in accordance with Code § 1107.
On and between November 14, 1979, and December 10, 1979, the Government, through the Internal Revenue Service, served notices of levy upon various third parties who were then indebted to the debtor. The aggregate debt owed to the debtor hospital by third persons, such as Blue Cross, Blue Shield, Rockland County Department of Social Services, New York City Department of Social Services, Citibank, Nanuet National Bank, Aetna Life and Casualty, Group Health, Inc. and New York State Department of Social Services, exceeds the sum of $100,000.00.
To date, the Internal Revenue Service has collected under its levies the sum of $38,502.89, which it has applied to the debtor's tax obligation with respect to the first quarter of the calendar year 1977. The taxes currently owed by the debtor exceed $703,000.00.
The debtor operates a hospital in Rockland County, New York. Its payroll for its employees must be met tomorrow, December 28, 1979. Accordingly, when the debtor filed its summons and complaint yesterday, December 26, 1979, it also presented an order which this court signed shortening the Government's time to answer to today, December 27, 1979, which date was also fixed for the trial. Because of the shortness of time involved, the debtor was only prepared to go forward with its first cause of action directed to Code § 724. The second cause of action asserts an alleged preference received by the Government. The third cause of action is directed to obligations arising after the levy.
The debtor's gross payroll for the two week period ending December 8, 1979, aggregated $92,144.99. Pursuant to an order of this court dated December 14, 1979, this payroll was paid on December 14, 1979.
The debtor now seeks an order directing the Government to release $92,144.99 to meet its payroll for tomorrow. The debtor argues that the funds in question are priority expenses. As such, the debtor urges under its first cause of action that the Government's tax lien must be subordinated to such priority expenses, in accordance with Code § 724(b).
Because of the gravity of the situation, including the potential closing of a hospital providing essential health services to the community in which it is located, the court afforded the parties an opportunity to attempt to resolve the financial dilemma, at least as to the payroll needed for tomorrow. After telephone communications with the Internal Revenue Service, the Government advised the court that it would not consent to a release of any levied funds for payroll purposes because of the debtor's financial history, the amount of taxes owed and the fact that the problem will reoccur each subsequent payroll period.
Since the parties have not been able to arrive at an understanding which would result in the release of funds from the Government's levy to meet tomorrow's payroll, it is therefore imperative that this court immediately resolve the questions posed by the pleadings and the factual presentation.
The debtor states in its complaint that its payroll consists of wages earned within ninety days of the filing of the petition and that no individual wage payment exceeds $2,000. Therefore, the complaint alleges that this payroll would afford a priority claim under Code § 507(a)(3), which provides as follows:
However, since this payroll covers wages due after the filing of the petition for relief, it constitutes an administrative expense within the meaning of Code § 503(b)(1)(A), which relates to:
"The actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case" . . .
As a § 503(b) administrative expense, the payroll expense qualifies as a first priority under Code § 507(a)(1), which refers to "administrative expenses allowed under Section 503(b)."
Advancing from the premise that its payroll is a priority expense under Code § 507, the debtor then reasons that the Government's tax lien is subordinated under Code § 724(b)(2) to such priority claim.
The pertinent language in Code § 724(b)(2) is as follows:
The debtor concludes that since the payroll expense is a priority to which the Government's tax claim must be subordinated, it follows that such priority expense funds are property of the estate within the meaning of Code § 541 and should be turned over to the debtor in accordance with Code § 542(a).* This syllogism, however, is not based upon a sturdy foundation.
The government opposes the debtor's conclusion that the levied funds are property of the estate to the extent of the payroll priority for wages and cites the recent decision in Bush Gardens, Inc. v. United States of America, No. 79-0001 (Bk.Ct.N.J. Nov. 21, 1979; Hill, B.J.), where the Bankruptcy Court held that a liquor license levied upon and seized by the Government for the collection of taxes pursuant to 26 U.S.C. § 6331, prior to the filing of a petition under the Bankruptcy Code, is not "property of the estate" within the meaning of Code § 541. The decision, however, is based upon the holding in Phelps v. United States, 421 U.S. 330, 95 S.Ct. 1728, 44 L.Ed.2d 201 (1975) and In re Pittsburgh Penguins Partners, 598 F.2d 1299 (3 Cir. 1979). These cases were decided prior to the effectiveness of § 541 of the current Bankruptcy Code. Under § 541, the Bankruptcy Court is no longer concerned with who has...
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