NLT Computer Services Corp. v. Capital Computer Systems, Inc.

• Decision Date: 04 March 1985
• Docket Number: Nos. 83-5156,83-5157,s. 83-5156
• Citation: 755 F.2d 1253
• Parties: -1013, 85-1 USTC P 9230, 12 Collier Bankr.Cas.2d 364, 12 Bankr.Ct.Dec. 1318, Bankr. L. Rep. P 70,309 NLT COMPUTER SERVICES CORPORATION, Plaintiff-Appellee, v. CAPITAL COMPUTER SYSTEMS, INC., et al., Defendants-Appellees, Gallo Sales Company, Inc. (83-5156); Richard Distributing Company (83-5157), Defendants-Appellants, United States of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1253

755 F.2d 1253

55 A.F.T.R.2d 85-1013, 85-1 USTC P 9230,

12 Collier Bankr.Cas.2d 364, 12 Bankr.Ct.Dec. 1318,

Bankr. L. Rep. P 70,309

NLT COMPUTER SERVICES CORPORATION, Plaintiff-Appellee, v. CAPITAL COMPUTER SYSTEMS, INC., et al., Defendants-Appellees Gallo Sales Company, Inc. (83-5156); Richard Distributing Company (83-5157), Defendants-Appellants United States of America, Defendant-Appellee.

Nos. 83-5156, 83-5157.

United States Court of Appeals Sixth Circuit.

Argued June 15, 1984.

Decided March 4, 1985.

Barrett B. Sutton, Jr. (argued), White & Reasor, David N. Shearon, Nashville, Tenn., for defendant-appellant in No. 83-5157.

Thomas B. Cresswell, Jr. (argued), Boult, Cummings, Conners & Berry, Nashville, Tenn., for defendant-appellant in No. 83-5156.

Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., Dept. of Justice, Michael L. Paup, Joan Oppenheimer, Bob Rice, Civ. Div., Tax Section, Internal Revenue, Washington, D.C., Joe B. Brown, U.S. Atty., Don L. Smith (argued), Nashville, Tenn., for defendant-appellee in both cases.

Before LIVELY, Chief Judge, ENGEL, Circuit Judge, and SWYGERT, Senior Circuit Judge. ^*

ENGEL, Circuit Judge.

The substantive issue in these appeals is whether the government's rights as a recorded tax lienholder continued to be covered by the provisions of the federal insolvency statute, 31 U.S.C. Sec. 3713, after involuntary bankruptcy proceedings were filed against the insolvent taxpayer, or whether after the bankruptcy filing, those rights were governed by the priorities established in the Bankruptcy Reform Act of 1978 ("Bankruptcy Code"). We hold that in such circumstances the priorities established in the Bankruptcy Code must prevail. We further hold that in any event, the unusual procedural posture of this case at the time of the lower court's decision requires a vacation and remand of that court's order.

I.

This litigation commenced in the district court when plaintiff NLT Computer Services Corporation ("NLT") filed an interpleader action naming as defendants the taxpayer Capital Computer Systems, Inc. ("Capital"), the United States, and several creditors of the taxpayer, including appellants Richard Distributing Company ("Richard") and Gallo Sales Company ("Gallo"). Because the facts are complicated and are contained in a stipulation filed in the district court, we summarize only briefly those facts necessary to our decision.

In 1981, NLT purchased certain computer software and licenses from Capital. When it commenced this interpleader action in the district court on June 21, 1982, NLT still owed Capital $150,000 on the purchase price, the balance of which was to be paid in two $75,000 installments on June 30 and December 31, 1982. NLT admitted that the payments were due as specified in its purchase contract and was otherwise willing to honor its obligations, but it faced the competing claims of several creditors of Capital, each claiming a prior right in the $150,000.

The United States claimed that the monies due were subject to a recorded government notice of tax levy to secure the payment of over $500,000 in withholding taxes which Capital had failed to pay over a five year period. Appellant Richard asserted its rights to the monies as a judgment creditor of Capital; Richard had obtained a valid judgment against Capital and had commenced garnishment proceedings against NLT in the Chancery Court of Davidson County, Tennessee to satisfy that judgment. Appellant Gallo claimed its rights as a secured creditor of Capital; Capital had conveyed a security interest in the monies to Gallo during a suit which Gallo had brought against Capital in a Tennessee state court for breach of contract damages. Gallo asserted that its secured interest was valid and that a proper financing statement had been recorded on January 18, 1982.

NLT paid each of the $75,000 sums into the district court's registry as they became due, and those funds were placed out at interest pending resolution of the several claims against them. NLT then withdrew from further active participation in the case.

After a certain amount of discovery had been taken and one trial date canceled, the district court on October 29, 1982 ordered hearing on the government's motion for summary judgment reset for 1:00 p.m., January 10, 1983. The court also ordered the parties to submit a stipulation of the facts and appropriate briefs before the hearing. When the parties appeared before the court on January 10, counsel for Richard and for one other creditor, Testa Distributing Company, Inc. (not herein a party), announced to the court that on that same morning they had filed an involuntary petition in bankruptcy against Capital. They then asserted, for the first time, that the court was stayed from further proceedings in the interpleader matter by virtue of the automatic stay provisions of 11 U.S.C. Sec. 362. They also contended that the filing of the petition had removed the instant case from the effect of the insolvency statute, 31 U.S.C. Sec. 3713, because that statute specifically provided that the priority established in it does not apply in a "case under Title 11," 31 U.S.C. Sec. 3713(a).

In an opinion filed on January 31, 1983, the district court held that it was not prohibited from proceeding upon the merits of the government's claim despite the automatic stay provisions of 11 U.S.C. Sec. 362, because it possessed the power to withdraw the order of reference of the involuntary proceedings to the bankruptcy court and then lift the automatic stay provisions which would otherwise apply. NLT Computer Services v. Capital Computer Systems, 31 B.R. 960 (M.D.Tenn.1983). The court withdrew the reference, lifted the stay, and proceeded to consider the merits of the government's motion. It determined that in this case, the government's rights under the general insolvency statute were unimpaired by the intervening involuntary bankruptcy proceedings against Capital because, in its view, the interpleader action was not a "case under Title 11" as that term was incorporated into section 3713(a). It, therefore, evaluated the competing rights of the several claimants to the fund under the provisions of section 3713 and decided that the government's claim was entitled to priority over the claims of the debtor and the other defendants. As the government's claim was admittedly greater in amount than the sum available in the interpleader action, the district court entered a judgment directing payment to the United States of all the funds on deposit with the court. Id.

II.

We first address the unusual procedural posture of this case. For accuracy, we quote at length from the opinion of the district court:

At the January 10, 1983 hearing, counsel for Testa and Richard announced that they had, that morning, filed an involuntary petition in bankruptcy against Capital. Two questions are thereby presented: first, whether this Court is stayed from proceeding in this matter by 11 U.S.C. Sec. 362 (the "automatic stay"); secondly, whether the filing removes this case from the effect of Section 3713(a) because of the last sentence of that statute.

The Court concludes that, for several reasons, the automatic stay does not prevent continuation of this action. First, it appears that the automatic stay is not applicable by the express terms of 11 U.S.C. Sec. 362. The several subsections of Section 362(a) stay acts and judicial proceedings "against" the debtor and/or property of the estate. This interpleader action is certainly not one "against" the debtor, especially where the debtor has specifically disclaimed any interest in the funds. In addition, the funds in question are not property of the estate because the debtor claims no interest in them and because Capital's right to payment, which gave rise to the funds, had been previously levied upon by the United States. See Cross Electric v. United States, 664 F.2d 1218 (4th Cir.1981). ³

An important consideration in this matter is this Circuit's adoption of a model rule to deal with bankruptcy matters in light of the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), which held the jurisdictional grant contained in the Bankruptcy Code unconstitutional. In essence, the rule provides that although the District Court has jurisdiction over bankruptcy cases, all bankruptcy cases are referred to the bankruptcy court for disposition, with certain limitations on the powers of the bankruptcy judges. One of these limitations is that a bankruptcy judge may not conduct a proceeding to enjoin a court. Rule (d)(1). Moreover, the rule gives this Court the power to withdraw the reference at any time upon its own motion. Therefore, this Court, at the hearing, withdrew the reference to bankruptcy court regarding the involuntary petition filed against the debtor; lifted the automatic stay (if it applies at all) as it pertains to this interpleader action; and remanded the bankruptcy case to the bankruptcy court for any further proceedings in that matter.

The second question is whether the filing of the bankruptcy petition removes this case from the effect of Section 3713(a), as contended by Testa and Richard. The last sentence of the statute provides: "the priority established under this section does not apply, however, in a case under title 11."

But this interpleader action is not one "under title 11." The complaint herein was filed on June 22, 1982, and is in no way related to the bankruptcy petition filed on January 10, 1983, under Title 11.

The Court is unaware of, and neither Testa nor Richard have cited, any statutory provision or other authority which would somehow convert the instant interpleader action into one "under Title 11" simply because an involuntary bankruptcy petition has been filed against a party to this proceeding. The Court therefore finds that the filing of the petition does not stay...