Pierce, Matter of, No. 90-1923

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Writing for the CourtBefore THORNBERRY, JONES, and WIENER; THORNBERRY
Citation935 F.2d 709
Decision Date16 July 1991
Docket NumberNo. 90-1923
Parties, 25 Collier Bankr.Cas.2d 69, 21 Bankr.Ct.Dec. 1465, Bankr. L. Rep. P 74,134 In the Matter of Richard A. PIERCE, Debtor. STATE OF TEXAS and the Texas State Employment Commission, Appellants, v. Richard A. PIERCE, Appellee.

Page 709

935 F.2d 709
60 USLW 2138, 25 Collier Bankr.Cas.2d 69,
21 Bankr.Ct.Dec. 1465,
Bankr. L. Rep. P 74,134
In the Matter of Richard A. PIERCE, Debtor.
STATE OF TEXAS and the Texas State Employment Commission, Appellants,
v.
Richard A. PIERCE, Appellee.
No. 90-1923.
United States Court of Appeals,
Fifth Circuit.
July 16, 1991.

Page 710

John Mark Stern, Mark Browning, Asst. Attys. Gen., Jim Mattox, Atty. Gen., Austin, Tex., for appellants.

Sean F. Creegan, Deputy Chief Counsel for Employment Sec., Dept. of Labor & Indus., Harrisburg, Pa., for amici curiae Com. of Pa., et al.

Joe Scott, Sr. Asst. Atty. Gen., Casper, Wyo., for amicus curiae Wyoming Dept. of Employment.

Gary Allen, Chief, Gary D. Gray, Kenneth W. Rosenberg, Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., for amicus curiae U.S.

W. Hollis Webb, Jr., Kevin L. Williams, Baker, Clifford, Krier & Webb, Lubbock, Tex., for appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before THORNBERRY, JONES, and WIENER, Circuit Judges.

THORNBERRY, Circuit Judge:

The bankruptcy court concluded that unemployment taxes which the debtor owed to the Texas Employment Commission (TEC) were not entitled to priority under section 507(a)(7)(D) of the Bankruptcy Code because the debtor paid the wages on which the taxes were based more than ninety days before filing for bankruptcy. The TEC appealed that decision to the district court, arguing that unemployment taxes are not dischargeable if the return was due within three years of the date when the employer filed for bankruptcy. The district court affirmed the bankruptcy court's decision, 115 B.R. 523, however, and the TEC now appeals to this court.

We conclude that the bankruptcy court's interpretation of the Code is palpably incorrect. Therefore, the order discharging the debtor's liability for unemployment taxes is REVERSED and judgment is RENDERED in favor of the TEC for $5,319.48, the amount of unemployment taxes owed.

Page 711

FACTS AND PROCEDURAL HISTORY

The facts are not disputed. See Stipulations of Fact, reprinted in Record on Appeal (R.), vol. 2. The debtor, Richard A. Pierce, operated a business known as Regal Building Systems. On September 13, 1988, he filed for relief under Chapter 7 of the Bankruptcy Code. When Pierce filed his petition for bankruptcy, he owed unemployment taxes of $5,319.48. See Tex.Rev.Civ.Stat.Ann. art. 5221b-5 (Vernon 1987 & Supp.1991). The taxes were assessed on wages that he had paid to his employees more than ninety days before he filed for bankruptcy and more than ninety days before he closed his business. The returns for these taxes were all due within three years of the date on which he filed for bankruptcy. Neither the state of Texas nor the TEC filed a proof of claim for the amount that Pierce owed, see 11 U.S.C.A. Secs. 501, 502(a), 727(c)(1) (West 1979 & Supp.1991).

Pierce was granted his Chapter 7 discharge on February 13, 1989. On February 16, he filed a complaint in the bankruptcy court against the state of Texas and the TEC seeking a determination that his liability for the unemployment taxes had been discharged. The TEC answered, claiming that the taxes which Pierce owed were exempt from discharge under sections 507(a)(7)(D) and 523(a)(1)(A) of the Bankruptcy Code because the returns for the taxes were due within three years of the date that Pierce petitioned for bankruptcy. See 11 U.S.C.A. Sec. 726(a)(1) (West 1979). In April 1990, Pierce moved for summary judgment. The bankruptcy court conceded that the legislative history of the Bankruptcy Reform Act of 1978 indicated that the unemployment taxes were not dischargeable but concluded that "the plain reading of the statute [did] not yield this result." See Pierce v. Texas, 115 B.R. 523, 526 (Bankr.N.D.Tex.1990). Consequently, the bankruptcy court granted Pierce's discharge. The district court summarily affirmed. See Order, reprinted in R., vol. 1, at 93.

The bankruptcy court's interpretation of the Bankruptcy Code significantly curtails the power of states and the federal government to collect employment taxes from bankrupt employers. The decision also affects the ability of the federal government to collect the employer's share of social security taxes. For this reason, Wyoming, Pennsylvania, and the federal government have filed briefs in support of the TEC.

DISCUSSION

Both the bankruptcy court and the district court concluded that unemployment taxes which become due more than ninety days prior to the filing of a bankruptcy petition or cessation of a debtor's business are not entitled to priority under section 507(a)(7)(D) of the Bankruptcy Code and, therefore, are not exempt from discharge under section 523(a)(1)(A). We review their interpretation of the Code de novo. See In re Kolstad, 928 F.2d 171, 173 (5th Cir.1991).

A debt that has "priority" is paid from the bankruptcy estate before the debts to general unsecured creditors are paid. See 3 L. King, Collier on Bankruptcy p 507.02, at 507-9 (15th ed. 1991). In section 507 of the Code, Congress listed all priorities in bankruptcy in the order in which they are to be paid. See id. p 507.02, at 507-11. Unemployment taxes, the focus of this case, have seventh priority, along with other "unsecured claims of governmental units." See 11 U.S.C.A. Sec. 507(a)(7) (West Supp.1991). But the claims of governmental units listed in section 507(a)(7) have an advantage over most other priorities: they are non-dischargeable even if the governmental entity did not file a proof of claim. See 11 U.S.C.A. Sec. 523(a)(1)(A) (West Supp.1991). 1

Pierce's argument is based on the relationship between two priorities: that given to claims for unpaid wages in section 507(a)(3)(A) and that given to employment

Page 712

taxes in section 507(a)(7)(D). Under section 507(a),
t]he following expenses and claims have priority in the following order

....

(3) Third, allowed unsecured claims for wages, salaries, or commissions, including vacation, severance, and sick leave pay--

(A) earned by an individual within 90 days before the date of the filing of the petition or the date of the cessation of the debtor's business, whichever occurs first; but only

(B) to the extent of $2,000 for each such individual.

....

(7) Seventh, allowed unsecured claims of governmental units, only to the extent that such claims are for--

....

(D) an employment tax on a wage, salary, or commission of a kind specified in paragraph (3) of this subsection earned from the debtor before the date of the filing of...

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12 practice notes
  • In re Al Copeland Enterprises, Inc., Bankruptcy No. 91-12575-FM.
    • United States
    • United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas
    • October 11, 1991
    ...This legislative intent has been recognized by courts of much higher authority than this one. See State of Texas v. Pierce (In re Pierce), 935 F.2d 709, 713 (5th Cir.1991); Selby v. Ford Motor Co., 590 F.2d 642, 646 n. 6, 648 (6th Cir.1979). Therefore, the answer to the issue of whether the......
  • In re Sacred Heart Hosp. of Norristown, Bankruptcy No. 94-13275DAS.
    • United States
    • United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
    • December 20, 1995
    ...Garfield Fire Clay Co., 46 F.Supp. 932, 933 (W.D.Pa.1942). Several cases decided under the Code hold to the same effect. See In re Pierce, 935 F.2d 709, 711 (5th Cir.1991); In re Continental Minerals Corp., 132 B.R. 757, 759 (Bankr. D.Nev.1991); and In re Skjonsby Truck Line, Inc., 39 B.R. ......
  • In re McConahey, Bankruptcy No. BK 89-50058. Adv. No. 95-5093.
    • United States
    • United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Southern District of Illinois
    • February 16, 1996
    ...due in the year preceding the debtor's bankruptcy filing, constitute priority employment taxes under § 507(a)(8)(D). See Matter of Pierce, 935 F.2d 709, 711-13 (5th Cir.1991); In re Continental Minerals Corp., 132 B.R. 757, 759 (Bankr.D.Nev.1991); In re Skjonsby Truck Line, Inc., 39 B.R. 97......
  • In re Lorber Industries of California, BAP No. CC-06-1374-BPaMk.
    • United States
    • Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit
    • July 16, 2007
    ...therein including In re Chateaugay Corp., 177 B.R. 176, 181 (S.D.N.Y.1995), aff'd, 89 F.3d 942 (2d Cir. 1996). See also Matter of Pierce, 935 F.2d 709, 711 (5th Cir.1991); In re William Akers, Jr., Co., 121 F.2d 846 (3d Cir.1941); In re Nail, 163 B.R. 105 (Bankr.E.D.Mich. 1994); In re Conti......
  • Request a trial to view additional results
12 cases
  • In re Al Copeland Enterprises, Inc., Bankruptcy No. 91-12575-FM.
    • United States
    • United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas
    • October 11, 1991
    ...This legislative intent has been recognized by courts of much higher authority than this one. See State of Texas v. Pierce (In re Pierce), 935 F.2d 709, 713 (5th Cir.1991); Selby v. Ford Motor Co., 590 F.2d 642, 646 n. 6, 648 (6th Cir.1979). Therefore, the answer to the issue of whether the......
  • In re Sacred Heart Hosp. of Norristown, Bankruptcy No. 94-13275DAS.
    • United States
    • United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
    • December 20, 1995
    ...Garfield Fire Clay Co., 46 F.Supp. 932, 933 (W.D.Pa.1942). Several cases decided under the Code hold to the same effect. See In re Pierce, 935 F.2d 709, 711 (5th Cir.1991); In re Continental Minerals Corp., 132 B.R. 757, 759 (Bankr. D.Nev.1991); and In re Skjonsby Truck Line, Inc., 39 B.R. ......
  • In re McConahey, Bankruptcy No. BK 89-50058. Adv. No. 95-5093.
    • United States
    • United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Southern District of Illinois
    • February 16, 1996
    ...due in the year preceding the debtor's bankruptcy filing, constitute priority employment taxes under § 507(a)(8)(D). See Matter of Pierce, 935 F.2d 709, 711-13 (5th Cir.1991); In re Continental Minerals Corp., 132 B.R. 757, 759 (Bankr.D.Nev.1991); In re Skjonsby Truck Line, Inc., 39 B.R. 97......
  • In re Lorber Industries of California, BAP No. CC-06-1374-BPaMk.
    • United States
    • Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit
    • July 16, 2007
    ...therein including In re Chateaugay Corp., 177 B.R. 176, 181 (S.D.N.Y.1995), aff'd, 89 F.3d 942 (2d Cir. 1996). See also Matter of Pierce, 935 F.2d 709, 711 (5th Cir.1991); In re William Akers, Jr., Co., 121 F.2d 846 (3d Cir.1941); In re Nail, 163 B.R. 105 (Bankr.E.D.Mich. 1994); In re Conti......
  • Request a trial to view additional results

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