Re: Paul D. Weinstein

• Decision Date: 10 September 2001
• Docket Number: No. 00-9012,00-9012
• Citation: 272 F.3d 39
• Parties: (1st Cir. 2001) IN RE: PAUL D. WEINSTEIN, Debtor. UNITED STATES, Appellant, v. JONATHAN YELLIN, Trustee, Appellee. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 39

272 F.3d 39 (1st Cir. 2001)

IN RE: PAUL D. WEINSTEIN, Debtor.

UNITED STATES, Appellant, v. JONATHAN YELLIN, Trustee, Appellee.

No. 00-9012

United States Court of Appeals For the First Circuit

Heard Sept. 10, 2001

Decided November 30, 2001

APPEAL FROM A JUDGMENT OF THE UNITED STATES BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT

Thomas J. Clark, Attorney, Tax Division, Department of Justice, with whom Claire Fallon, Acting Assistant Attorney General, and Michelle C. France and Donald B. Tobin, Attorneys, were on brief for appellant.

Craig J. Ziady with whom Riemer & Braunstein LLP was on brief for appellee.

Before Lynch and Lipez, Circuit Judges, and Doumar^*, Senior District Judge.

LYNCH, Circuit Judge.

The Internal Revenue Service appeals from the judgment of this circuit's Bankruptcy Appellate Panel, United States v. Yellin (In re Weinstein), 251 B.R. 174 (B.A.P. 1st Cir. 2000), affirming the judgment of the bankruptcy court, In re Weinstein, 237 B.R. 4 (Bankr. D. Mass. 1999), in favor of Jonathan D. Yellin, the trustee in this bankruptcy case. The parties contest the interpretation of 11 U.S.C. §§ 503, 507, and 726; the IRS argues that the Bankruptcy Code requires treatment of interest on postpetition taxes owed by the estate as a first-priority administrative expense, and Yellin responds that the interest should receive a mere fifth priority. The Panel and the bankruptcy court agreed with Yellin, and in so doing disagreed with all four circuit courts that have previously considered the issue. To answer the question presented, we must consider the text of the statute, the context of prior caselaw against which Congress wrote the Bankruptcy Code, the legislative history of that Code, and the policies and purposes of priority treatment for postpetition taxes. We conclude that the IRS offers the correct interpretation, and reverse.

I.

The legal question presented by this case does not turn on the case's facts, and a brief summary of those facts suffices to illustrate the circumstances under which that question arises. Paul D. Weinstein, the debtor in this case, filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code in 1992. Paul Grella, Weinstein's first trustee, sold assets from the estate, but did not file the required yearly income tax return. Grella later filed income tax returns for the years 1992 through 1995 in 1996. The IRS subsequently determined that the estate owed, in addition to taxes, a total of $9,195.43 in penalties and $5,529.67 in interest. Grella requested that this amount be reduced, and the IRS agreed to forgo the penalties and to reduce the estate's interest obligation.

On November 6, 1997, the IRS filed a request for payment of the remaining interest, which then amounted to $4,593.83. Grella offered to pay this amount at first priority under 11 U.S.C. § 726(a)(1). After Grella resigned as trustee, however, he was replaced by the current trustee, Jonathan D. Yellin. Yellin suggested paying the IRS at fifth priority under 11 U.S.C. § 726(a)(5) -- that is, not at all, because the estate's funds were insufficient to pay in full even the unsecured creditors who took second priority under § 726(a)(2). The IRS argued for first priority.

The bankruptcy court ruled in Yellin's favor, and the Panel affirmed. We discuss their arguments below, after placing the problem in context.

II.

Because Weinstein's is a Chapter 7 bankruptcy, his estate must pay its debts in the order prescribed by § 726. Section 726(a)(1) gives first priority to those types of claims listed in § 507, which in turn gives first priority to those listed in § 503(b).¹ Section 503(b) claims stem from the costs of administering the bankruptcy estate itself. Among these claims are most taxes "incurred by the estate," 11 U.S.C. § 503(b)(1)(B)(i), including fines or penalties related to those taxes, id. § 503(b)(1)(C). No one disputes that the language of § 503(b)(1)(B)(i) refers to postpetition taxes such as those Grella failed to pay. The parties disagree, however, whether that language includes interest on those taxes.

The IRS maintains that § 503(b)(1)(B)(i) does include interest, and relies for this proposition primarily on Nicholas v. United States, 384 U.S. 678 (1966). Nicholas preceded the current Bankruptcy Code, but the Supreme Court has given considerable weight to pre-Code caselaw in interpreting the current code. See Dewsnup v. Timm, 502 U.S. 410, 419 (1992) ("When Congress amends the bankruptcy laws, it does not write 'on a clean slate.'" (quoting Emil v. Hanley, 318 U.S. 515, 521 (1943))). The IRS contends that Nicholas stands for a rule of pre-Code practice and that, as the Court held was true in Dewsnup, nothing in the Code or the legislative history provides a sufficiently strong indication of congressional intent to change that rule.

Yellin, however, argues that this case is governed by § 726(a)(5), which provides that the estate shall pay at fifth priority "interest at the legal rate from the date of the filing of the petition" on claims paid under §§ 726(a)(1)-(4).² Because the tax claim at issue here is being paid under § 726(a)(1) -- due to the incorporation of § 507 into § 726(a)(1) and of § 503(b) into § 507 -- Yellin claims that § 726(a)(5) applies and provides a sufficiently clear directive from Congress that the courts may not consider Nicholas, much less legislative history or policy rationales. This position the bankruptcy court and Bankruptcy Appellate Panel took as well.

The position of the IRS has much support. Four circuits have considered the question whether § 503(b)(1)(B)(i) includes interest on postpetition taxes, and each has concluded that it does. See United States v. Flo-Lizer, Inc. (In re Flo-Lizer, Inc.), 916 F.2d 363 (6th Cir. 1990); United States v. Cranshaw (In re Allied Mechanical Serv., Inc.), 885 F.2d 837 (11th Cir. 1989); United States v. Ledlin (In re Mark Anthony Constr., Inc.), 886 F.2d 1101 (9th Cir. 1989); United States v. Friendship College, Inc. (In re Friendship College, Inc.), 737 F.2d 430 (4th Cir. 1984).³ The same is true of a leading treatise in bankruptcy. See 4 Collier on Bankruptcy ¶ 503.08, at 503-56 (L. King et al. eds., 15th rev. ed. 2001) ("[T]he courts generally and properly treat interest on postpetition taxes as an administrative expense."). These cases did not, however, arise entirely under Chapter 7. See Flo-Lizer, 916 F.2d at 364 (arising wholly under Chapter 11); Cranshaw, 885 F.2d at 837-38 (dealing with interest accrued during a Chapter 11 phase after conversion to Chapter 7); Ledlin, 886 F.2d at 1102 (same); Friendship College, 737 F.2d at 430-31 (same). Moreover, none addressed the relevance or irrelevance of § 726(a)(5) -- perhaps because of their less direct relationship to Chapter 7. Several bankruptcy courts of this circuit have dealt with the problem prior to this case, and have disagreed on the proper outcome. Compare In re Gould & Eberhardt Gear Mach. Corp., 80 B.R. 614 (D. Mass. 1987) (according first-priority status to interest on postpetition taxes), appeal dismissed, 852 F.2d 26 (1st Cir. 1988), and In re Goodrich, 215 B.R. 638, 642 (Bankr. D. Mass. 1997) (same), with In re Hospitality Assocs., 212 B.R. 188 (Bankr. D.N.H. 1997) (relegating such interest to fifth priority).⁴

III.

A question of the interpretation of the Bankruptcy Code, like any other question of statutory interpretation, is a question of law that we review de novo. Travelers Ins. Co. v. Cambridge Meridian Group, Inc. (In re Erin Food Servs., Inc.), 980 F.2d 792, 799 (1st Cir. 1992).

A.

We consider first the text of the statute. If sufficiently clear, that text assumes overriding importance. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 10 (2000); United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989) ("[W]here . . . the statute's language is plain, 'the sole function of the courts is to enforce it according to its terms.'" (quoting Caminetti v. United States, 242 U.S. 470, 485 (1917))). The bankruptcy court and the Panel felt that § 726(a)(5) was clear in precisely this way, because it refers expressly to postpetition interest and assigns that interest fifth priority. We disagree with their analysis.

Section 503(b)(1), examined in isolation, does not mention interest, either to include or to exclude it from the definition of a "tax." Similarly, § 507 does not mention interest. Accordingly, these provisions alone do not resolve the question whether interest on postpetition taxes should receive the same priority status as the taxes themselves. If these were the only relevant provisions, we could conclude easily that Congress had not spoken to the question and turn to auxiliary sources of statutory meaning. This approach was taken by the Ninth Circuit in Ledlin, the most thorough of the prior circuit court opinions addressing the priority treatment of interest on postpetition taxes. 886 F.2d at 1107 ("[W]e avoid the 'treacherous' course of inferring from Congress' silence any affirmative intentions." (quoting NLRB v. Plasterers' Local Union No. 79, 404 U.S. 116, 129 (1971))).

A fair review of the Panel's decision, however, requires us to discuss the different provisions within § 726. Section 726(a)(1) does not mention interest, but § 726(a)(5) does -- specifically, "interest at the legal rate from the date of the filing of the petition" -- and assigns it a fifth priority. Section 726(a)(5) could control the outcome of this case in one of two ways. First, it might be that although § 503(b)(1)(B)(i) includes interest as a general matter, § 726(a)(5) overrides § 503(b)(1)(B)(i) in the specific context of Chapter 7 and directs that interest on postpetition taxes, like all other interest, be paid at fifth priority rather than at first priority. This reading would apply the principle that in statutory interpretation courts give specific language precedence over general language. See, e.g., Varity...