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Parties Involved:
CF&I Fabricators of Utah, Inc.
Not Party
Reorganized Albuquerque Metals Company
Appellee
Reorganized CF&I Fabricators of Colorado, Inc.
Appellee
Reorganized CF&I Fabricators of Utah, Inc.
Appellee
Reorganized CF&I Steel Corporation
Appellee
Reorganized Colorado & Utah Land Company
Appellee
Reorganized Denver Metals Company
Appellee
Reorganized Kansas Metals Company
Appellee
Reorganized Pueblo Metals Company
Appellee
Reorganized Pueblo Railroad Service Company
Appellee
Reorganized The Colorado and Wyoming Railway Company
Appellee
United States of America
Appellant

Document Text:

.. 

PUBLISH 

FILED . United States Court of Appea;.'l 

Tenth Circuit 

UNITED STATES COURT OF APPEALS APR 2 7 1995 

TENTH CIRCUIT 

IN RE: CF&I FABRICATORS OF UTAH, INC., 

Debtor, 

UNITED STATES OF AMERICA, 

Appellant, 

v. 

REORGANIZED CF&I FABRICATORS OF UTAH, INC., 

REORGANIZED COLORADO & UTAH LAND COMPANY, 

REORGANIZED KANSAS METALS COMPANY, REORGANIZED 

ALBUQUERQUE METALS COMPANY, REORGANIZED PUEBLO 

METALS COMPANY, REORGANIZED PUEBLO RAILROAD 

SERVICE COMPANY, REORGANIZED DENVER METALS 

COMPANY, REORGANIZED CF&I FABRICATORS OF 

COLORADO, INC., REORGANIZED CF&I STEEL 

CORPORATION, REORGANIZED THE COLORADO AND 

WYOMING RAILWAY COMPANY, 

Appellees. 

PATR!CK FISHE!l 

Clerk 

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Nos. 94-4034 

94-4035 

94-4036 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF UTAH 

(D.C. No. 93-CV-68, 93-CV-317, 93-CV-424) 

Gary D. Gray, Attorney, Tax Division, Department of Justice, 

Washington, D.C. (Loretta c. Argrett, Assistant Attorney General, 

Kenneth W. Rosenberg, Attorney, and Scott M. Matheson, Jr., United 

States Attorney for the State of Utah, Of Counsel, with him on the 

briefs) for the Appellant. 

Steven J. McCardell, LeBoeuf, Lamb, Greene & MacRae, Salt Lake 

City, Utah (Stephen M. Tumblin and Kevin c. Marcoux, LeBoeuf, 

Lamb, Greene & MacRae, Salt Lake City, Utah, and Frank cummings, 

LeBoeuf, Lamb, Greene & MacRae, Washington, D.C., with him on the 

brief) for the Appellees. 

Appellate Case: 94-4035 Document: 01019282118 Date Filed: 04/27/1995 Page: 1 
Before TACHA and HOLLOWAY, Circuit Judges, and BURRAGE,* District 

Judge. 

TACHA, Circuit Judge. 

I. Background 

CF&I Fabricators of Utah, Inc. and various related entities 

(collectively, "CF&I") sponsored two qualified pension plans 

established for the benefit of their employees and retirees. 

Under the plans, CF&I was obligated to make annual plan funding 

contributions. On September 15, 1990, CF&I failed to make a 

required $12.4 million plan funding payment for the year ending 

December 31, 1989. Two months later, CF&I petitioned for 

reorganization under Chapter 11 of the Bankruptcy Code. The 

larger of the two pension plans was subsequently terminated by the 

Pension Benefit Guaranty Corporation ("PBGC"), a wholly-owned 

government corporation that guarantees payment of certain pension 

benefits. See 29 U.S.C. §§ 1321-1322b.1 

The Internal Revenue Service ("IRS") filed several proofs of 

claim in the bankruptcy court. The claim that is the subject of 

this appeal arises under Internal Revenue Code ("IRC") section 

* The Honorable Michael Burrage, District Judge, United States 

District Court for the Eastern District of Oklahoma, sitting by 

designation. 

1 Most of the funds from which the PBGC pays pension benefits 

come from insurance premiums paid by sponsors of qualified pension 

plans. See 29 U.S.C. § 1305. The PBGC filed proofs of claims 

against the debtors in the bankruptcy court. The bankruptcy court 

ruled that these claims are unsecured and are not entitled to 

priority or administrative status. That ruling is not at issue in 

this appeal. 

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Appellate Case: 94-4035 Document: 01019282118 Date Filed: 04/27/1995 Page: 2 
4971(a), under which the IRS imposes a ten percent tax on the 

"accumulated funding deficiency" of specified pension plans. 26 

U.S.C. § 4971(a). CF&I's failure to make the required pension 

plan contribution on September 15, 1990, triggered the immediate 

imposition of the tax. See id. The parties do not dispute CF&I's 

underlying section 4971 liability. At issue is what, if any, 

priority the claim should be accorded. 

In its proof of claim, the IRS asserted that CF&I's section 

4971(a) liability was entitled to priority as an excise tax under 

Bankruptcy Code section 507(a) (7) (now codified at 11 U.S.C. § 

507(a) (8)) .2 The bankruptcy court disagreed with the IRS's 

position and held that CF&I's section 4971(a) liability was not an 

excise tax. Instead, the court characterized the claim as a 

penalty that did not compensate for pecuniary loss and was 

therefore not entitled to priority status. In re CF&I 

Fabricators, 148 B.R. 332, 337-40 (Bankr. D. Utah 1992). In a 

subsequent order, the bankruptcy court subordinated the IRC 

section 4971(a) claim to all other general unsecured claims 

pursuant to the Bankruptcy Code's equitable subordination 

provision, 11 U.S.C. § 510(c) (1). The district court affirmed the 

bankruptcy court's orders, and the government appealed to this 

court. We have jurisdiction pursuant to 28 U.S.C. §§ 158(d) and 

1291. 

2 Congress amended section 507 on October 22, 1994. Former 

subsection 507(a) (7) is currently located at subsection 507(a) (8). 

Other than the change in priority of governmental claims, the text 

of the subsection is unchanged. In this opinion we will refer to 

the provision as it was codified at the time the IRS asserted its 

claim. 

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Appellate Case: 94-4035 Document: 01019282118 Date Filed: 04/27/1995 Page: 3 
In its appeal, the IRS argues that the bankruptcy and 

district courts erred (1) by concluding that the exaction imposed 

by IRC section 4971(a) was not entitled to priority under section 

507(a) (7), and (2) by subordinating the IRS's claim to all other 

unsecured creditors under the doctrine of equitable subordination. 

In addition, the government suggests that we reconsider, in an en 

bane hearing, our decision in United States v. Dumler (In re 

Cassidy), 983 F.2d 161 (lOth Cir. 1992). 

II. Discussion 

We review determinations of law by the bankruptcy court de 

novo. Davidovich v. Welton (In re Davidovich), 901 F.2d 1533, 

1536 (lOth Cir. 1990). Our review of the district court's order 

affirming the bankruptcy court is de novo as well. Burden v. 

United States (In re Burden), 917 F.2d 115, 116 (3d Cir. 1990). 

A. Priority Under Section 507(a) (7) 

The IRS contends that CF&I's section 4971(a) liability is a 

governmental claim entitled to priority under subsection 

507(a) (7) (E) or, in the alternative, subsection 507(a) (7) (G). 

Section 507(a) (7) (E) accords priority to "an excise tax on . a 

transaction occurring before the date of the filing of the 

petition for which a return . . . is last due . . . after three 

years before the date of the filing of the petition." 11 U.S.C. § 

507(a) (7) (E) (i). The same priority is accorded to "a penalty 

related to a claim of a kind specified in this paragraph and in 

compensation for actual pecuniary loss." Id. § 507(a) (7) (G). The 

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Appellate Case: 94-4035 Document: 01019282118 Date Filed: 04/27/1995 Page: 4 
tax at issue here, IRC section 4971(a), is included in SubtitleD 

of the IRC, entitled "Miscellaneous Excise Tax." The IRS argues 

that, because the tax is labeled an "excise tax" under the IRC, it 

must be considered an excise tax under the Bankruptcy Code as 

well. 

On December 7, 1992, after the bankruptcy court issued its 

first order in this case, we decided Cassidy, 983 F.2d 161. In 

Cassidy, we held that "Congress' labeling of [an] exaction as a 

tax is not determinative of its status for priority in 

bankruptcy." Id. at 163. The tax at issue in Cassidy was the ten 

percent additional tax imposed by 26 U.S.C. § 72(t) on early 

distributions from qualified retirement plans. Section 72 is in 

subtitle A, chapter 1, subchapter B, part II of the IRC, which is 

titled "Items Specifically Included in Gross Income." Thus, the 

government argued, it should be given priority under section 

50 7 (a) ( 7) (A) as "a tax on or measured by income. " We disagreed 

with the government and held that the label given a tax in the IRC 

was not determinative of its status for priority under section 

507(a) (7). Cassidy further held that, to determine whether an 

exaction is a tax or penalty for priority in bankruptcy purposes, 

we apply the four-part test from In re Lorber Indus., 675 F.2d 

1062 (9th Cir. 1982). Cassidy, 983 F.2d at 163. 

In the present case, the government vigorously argues that 

Cassidy was wrongly decided, again contending that a court should 

defer to Congress's designation of an exaction rather than look 

beyond the statutory label to the nature of the exaction. Cassidy 

binds this panel, however, because it is the law of this circuit. 

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Appellate Case: 94-4035 Document: 01019282118 Date Filed: 04/27/1995 Page: 5 
See In re Smith, 10 F.3d 723, 724 (lOth Cir. 1993) (per curiam) 

("We are bound by the precedent of prior panels absent en bane 

reconsideration or a superseding contrary decision by the Supreme 

Court."), cert. denied, 115 S. Ct. 53 (1994). We therefore 

conclude that the bankruptcy court correctly refused to treat the 

IRC's label as determinative for priority in bankruptcy purposes. 

Instead, the bankruptcy court looked beyond the IRC's label 

and analyzed the nature of the exaction using the Lorber test. 

The court concluded that CF&I's section 4971(a) liability was not 

entitled to priority. We agree with the bankruptcy court's 

analysis and therefore affirm the order of the district court for 

substantially the reasons given by the bankruptcy court. See In 

re CF&I Fabricators, 148 B.R. 332. 

B. Equitable Subordination 

The government's first argument against equitable 

subordination of its claim is that a bankruptcy court may not 

subordinate a claim under section SlO(c) (1) if that claim is 

entitled to priority under section 507. Because we have 

determined that the IRS's claim here is a nonpecuniary loss 

penalty not entitled to section 507 priority, we need not discuss 

the merits of this argument. 

The government next contends that the phrase "under 

principles of equitable subordination" in section SlO(c) prohibits 

the bankruptcy court from subordinating a claim without a finding 

of misconduct on the part of the subordinated claimant. In this 

case, the bankruptcy court expressly found that "there [had] been 

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Appellate Case: 94-4035 Document: 01019282118 Date Filed: 04/27/1995 Page: 6 
no inequitable conduct on the part of the Internal Revenue 

Service." 

The Bankruptcy Code neither defines the doctrine of equitable 

subordination, see United States v. Noland, No. 93-4311, 1995 WL 

82886, at *4 (6th Cir. Mar. 2, 1995), nor specifies the 

circumstances under which it should be imposed, see United States 

Abatement Corp. v. Mobil Exploration & Producing U.S., Inc. (In re 

United States Abatement Corp.), 39 F.3d 556, 561 (5th Cir. 1994). 

Consequently, courts applying section 510(c) (1) have looked to 

common law principles for guidance. See, e.g., id. 

In general, equitable subordination is imposed only when a 

creditor has committed some kind of wrongful conduct. In re 

Virtual Network Servs. Corp., 902 F.2d 1246, 1248 (7th Cir. 1990); 

Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 700 

(5th Cir. 1977). Nevertheless, the four circuit courts that have 

considered the matter have concluded that a court may subordinate 

a nonpecuniary loss tax penalty claim without a showing of 

misconduct on the part of the government. See Noland, 1995 WL 

82886, at *8-9; Burden, 917 F.2d at 118-19; Schultz Broadway Inn 

v. United States, 912 F.2d 230, 234 (8th Cir. 1990); In re Virtual 

Network, 902 F.2d at 1249-50.3 

3 In addition, a number of district and bankruptcy courts have 

subordinated nonpecuniary loss tax penalties under section 

510(c) (1). See, e.g., In re Juvenile Shoe Corp. of Am., 166 B.R. 

404, 410 (Bankr. E.D. Mo. 1994); Walker v. Ferguson (In re Import 

& Mini Car Parts, Ltd.), 136 B.R. 178, 182 (Bankr. N.D. Ind. 

1991); Retail Marketing Corp. v. United States (In re Mako, Inc.), 

135 B.R. 902, 904 (E.D. Okla. 1991); Seidle v. United States (In 

re Airlift Int'l. Inc.), 120 B.R. 597, 601-02 (S.D. Fla. 1990); In 

re Merwede, 84 B.R. 11, 14 (Bankr. D. Conn. 1988). 

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Appellate Case: 94-4035 Document: 01019282118 Date Filed: 04/27/1995 Page: 7 
The question was addressed first by the Seventh Circuit in 

Virtual Network. After a thorough analysis of the legislative 

history of section 510(c} (1}, the court decided that Congress 

intended courts to continue developing the principles of equitable 

subordination. Virtual Network, 902 F.2d at 1249-50. The court 

further found that "[section] 510(c} (1} authorizes courts to 

equitably subordinate claims to other claims on a case-by-case 

basis without requiring in every instance inequitable conduct on 

the part of the creditor claiming parity among other unsecured 

general creditors." Id. at 1250. 

In subsequent cases addressing this issue, other courts have 

employed substantially the same analysis as the Virtual Network 

court. See Noland, 1995 WL 82886, at *3-8; Burden, 917 F.2d at 

116-20; Schultz Broadway Inn, 912 F.2d at 231-34. We find the 

reasoning of Virtual Network persuasive and hold that section 

510(c} (1} does not require a finding of claimant misconduct to 

subordinate nonpecuniary loss tax penalty claims. 

The bankruptcy court considered the equities in this case and 

determined that subordination of the IRS's section 4971 claim to 

all other unsecured claims was appropriate. After noting that the 

facts in the case were undisputed, the bankruptcy court observed 

that general unsecured creditors of CF&I will receive only a small 

percentage of their claims. One of CF&I's unsecured creditors is 

the PBGC, which will be paying the pension benefits due under 

CF&I's terminated pension plan. Declining to subordinate the 

IRS's penalty claim would harm innocent creditors rather than 

punish the debtor for failing to fund the pension plan. Thus, the 

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Appellate Case: 94-4035 Document: 01019282118 Date Filed: 04/27/1995 Page: 8 
• 

bankruptcy court reasoned, allowing the IRS's penalty claim would 

not advance the purposes of either IRC section 4971 or the 

Bankruptcy Code. We conclude that the bankruptcy court correctly 

addressed the equities in this case and therefore affirm the 

orders subordinating the IRS's section 4971 claims. 

III. Conclusion 

For the reasons stated in this opinion, the judgment of the 

district court is AFFIRMED. In addition, the government's 

suggestion for hearing en bane to reconsider our decision in In re 

Cassidy, 983 F.2d 161, has been brought to the attention of all 

the active judges of the court. As no poll has been requested on 

the suggestion, it is hereby DENIED. 

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Appellate Case: 94-4035 Document: 01019282118 Date Filed: 04/27/1995 Page: 9