U.S. v. Whiting Pools, Inc.

Decision Date09 March 1982
Docket NumberNo. 441,D,441
Citation674 F.2d 144,8 B.C.D. 1138
Parties82-1 USTC P 9269, 5 Collier Bankr.Cas.2d 1584, 8 Bankr.Ct.Dec. 1138 UNITED STATES of America, Plaintiff-Appellee, v. WHITING POOLS, INC., Defendant-Appellant. ocket 81-5046.
CourtU.S. Court of Appeals — Second Circuit

Michael L. Paup, Atty., Tax Div., Dept. of Justice, Washington, D. C. (John F. Murray, Acting Asst. Atty. Gen., Wynette J. Hewett and George L. Hastings, Jr., Attys., Tax Div., Dept. of Justice, Washington, D. C., Roger P. Williams, U. S. Atty., Buffalo, N. Y., of counsel), for plaintiff-appellee, the U. S.

Lloyd H. Relin, Relin & Goldstein, Rochester, N. Y., for defendant-appellant, Whiting Pools, Inc.

Before FRIENDLY, OAKES and PIERCE, Circuit Judges.

FRIENDLY, Circuit Judge:

The question on this appeal is whether a debtor in possession under Chapter 11 of the Bankruptcy Code of 1978 is entitled to an order, under §§ 542 or 543 of the Code, requiring the Internal Revenue Service (IRS) to turn over tangible assets of the debtor on which the IRS had levied pursuant to § 6331 et seq. of the Internal Revenue Code (IRC). This question has created much conflict among bankruptcy judges and district courts throughout the nation. 1 The only other court of appeals that has considered the issue has answered it in the negative, Cross Electric, Inc. v. United States, 664 F.2d 1218 (4 Cir. 1981). The issue is of importance to the successful reorganization of debtors, on the one hand, and to the interest of the United States in the quick collection of tax revenues, on the other. We find the issue more difficult than did the Court of Appeals for the Fourth Circuit and, conceding the question to be a close one, reach an opposite result.

Whiting Pools, Inc. (Whiting), the debtor, was in the business of selling, installing and servicing swimming pool equipment and supplies. On January 14, 1981, the IRS, acting pursuant to IRC § 6331, seized all of Whiting's tangible property, including equipment, vehicles, inventory, office equipment and supplies, at its place of business in the Western District of New York. The estimated worth of the seized property in the hands of Whiting as a going concern was $162,876. The lien of the IRS was for some $92,000, plus interest, in unpaid withholding and Federal Insurance Contributions Act taxes. Testimony taken before the bankruptcy judge indicated that sale of the property by the IRS would net a maximum of $30,000 to $35,000, with a more probable recovery in the neighborhood of $20,000.

On the day following the IRS levy Whiting filed a petition under Chapter 11 of the Bankruptcy Code and was continued as a debtor in possession, § 1101(1). A month later the United States initiated an adversary proceeding under § 362(d) of the Code in which it sought a determination that the automatic stay provisions of § 362 were inapplicable to it or, in the alternative, for relief from the stay to permit it to sell the property. It alleged that storing the property was costing $2,500 per month. Whiting's answer contained a counterclaim asking that the IRS be required to turn over the property pursuant to § 542 of the Bankruptcy Code.

Bankruptcy Judge Hayes, after holding hearings, delivered an opinion, 10 B.R. 755 (Bkrtcy.W.D.N.Y.1981), in which he concluded that the automatic stay provided in § 362 was applicable to the IRS-a conclusion which is not disputed here. Examining § 362(d), which directs the bankruptcy court to grant relief from such a stay under certain circumstances, 2 the judge found that such relief could not be granted under § 362(d)(2) since the debtor had an equity in the property and the property was "absolutely necessary to an effective reorganization of the debtor." Id. at 757. Turning back to § 362(d)(1), the judge concluded that while the best interests of the United States would be served by a reorganization, for which he thought there was a reasonable chance, and the Government could be adequately protected while the reorganization proceeding was pending, it made "little sense to continue the stay unless a turnover of property", id., could lawfully be directed. He thus reached what both parties concede to be the crucial issue, namely, whether it could be.

We set forth in the margin the sections of the Bankruptcy Code which must be construed in deciding that question. 3 Although Whiting had sought a turnover under § 542, the bankruptcy judge was precluded from granting relief under that section by the decision of District Judge Elfvin in the Western District of New York in In re Avery Health Center, Inc., 8 B.R. 1016 (D.C.W.D.N.Y.1981), with which he seemingly disagreed. Believing that the turnover powers formerly provided in proceedings under Chapter X of the Bankruptcy Act by the last sentence of § 257, 4 see Reconstruction Finance Corp. v. Kaplan, 185 F.2d 791, 795 (1 Cir. 1950), must have gone somewhere, he found them in § 543(b), reading the definition of "custodian" in § 101(10), more particularly the reference to an "agent", as including the IRS, 10 B.R. at 759. After noting the anomaly that § 543 seems to permit a turnover without providing for the protection that would be required by reading §§ 363(e) and 542 together, he directed the turnover on the conditions set forth in the margin. 5

The district court, 15 B.R. 270, reversed. It adhered to its previous decision in In re Avery Health Center, Inc., supra, concerning § 542, and rejected the bankruptcy judge's theory that the IRS was an "agent" under § 101(10)(C) and thus a "custodian" under § 543. It considered that "the concept of agency entails a fiduciary relationship arising out of an express or implied contract between the principal and the agent," and that the IRS, when making a levy under IRC § 6331, did not fill such a role. The court remanded the case to the bankruptcy court to determine whether the stay of the IRS's proposed sale should be lifted. Whiting appealed to this court, and the bankruptcy court declined to take action upon the remand pending our decision.

I. Section 543

The definition of "custodian" in § 101(10) finds an antecedent in § 2(a)(21) of the former Bankruptcy Act, which required, under certain circumstances, delivery of property by "receivers or trustees appointed in proceedings not under this Act, assignees for the benefit of creditors, and agents authorized to take possession of or to liquidate a person's property." The definition of custodian in § 101(10) appears in H.R. 8200, 95th Cong., 1st Sess., as reported by the House Committee on the Judiciary on September 8, 1977, H.R.Rep. No. 95-595, U.S.Code Cong. & Admin.News 1978, p. 5787, with a comment which we reproduce in the margin. 6 The same definition and comment can be found in S. 2266, 95th Cong.2d Sess. and in S.Rep.No. 95-989, p. 23, U.S.Code Cong. & Admin.News 1978, pp. 5787, 5809. These shed little light on the meaning of the phrase "or agent under applicable law, or under a contract" etc.

Since § 101(10)(A) and (B) include two of the categories described in § 2(a) (21) of the previous Act, § 101(10)(C) must have been intended to include and possibly broaden what had been covered by § 2(a)(21)'s phrase, "agents authorized to take possession of or to liquidate a person's property". Seemingly it embraces the case of an agent appointed or authorized by a debtor to take charge of property for the purpose of enforcing a lien of a particular creditor, but see, contra, In re Lewis, 12 B.R. 106, 108-09 (Bkrtcy.M.D.Ga.1981), which may not have been true under § 2(a)(21) of the previous Act. Compare 1 Collier on Bankruptcy P 2.78, at 390.23 n.35 (14th ed.) with In re Rosenberg, 128 F.2d 924 (7 Cir. 1942).

Here there is no doubt that the IRS is "authorized to take charge of property of the debtor for the purpose of enforcing a lien against ... property" of the debtor. However, the definition of "custodian" does not include anyone who is so authorized but only a person who acts as a trustee, receiver, or agent. Admittedly the IRS is not a trustee or receiver. No one would characterize it as the taxpayer's agent as a matter of ordinary English speech. The Restatement of Agency 2d, § 1 (1958) defines agency as "the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act." See also Restatement of Agency 2d, § 1, Comment, at pp. 8-9 (1958). Seizure of property by the IRS under IRC § 6331 is not pursuant to a consensual relationship but is imposed by law irrespective of and generally contrary to the taxpayer's desires. It is true that a person may be an agent under § 101(10)(C) when the relationship is created by law rather than by contract, but it would be a strained reading to interpret this as including the IRS, the archetypical "adverse claimant", see Phelps v. United States, 421 U.S. 330, 334, 95 S.Ct. 1728, 1731, 44 L.Ed.2d 201 (1975). 7 It is thus immaterial that the IRS has certain responsibilities, such as giving notice of seizure and sale and accounting for any surplus.

Beyond this, in determining the meaning of "custodian" as used in § 543, it is necessary to consider the other provisions of the Code. One of these is § 543(c), which requires the bankruptcy court to provide a custodian with "reasonable compensation for services rendered and costs and expenses incurred." We can think of no reason why Congress would have chosen to provide the IRS with reasonable compensation, as distinguished from reimbursement of expenses, see IRC § 6342(a)(1), for its efforts to dismember the debtor's estate in its own interest. Moreover, as Bankruptcy Judge Hayes noted below, 10 B.R. at 760, § 542's explicit reference to § 363, and thereby to the adequate protection requirements of § 361, suggests that § 542 is a "more appropriate section", 10 B.R. at 760, than § 543 for resolving turnover disputes...

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