Opinion ID: 567680
Heading Depth: 2
Heading Rank: 2

Heading: Priority of IRS' Tax Claim in Second Chapter 11 Petition

Text: 10 To resolve the central question at issue here, we cautiously venture into hitherto uncharted terrain. For, as we observed in Jartran, Congress never anticipated the possibility of serial Chapter 11 filings: [T]he [Bankruptcy] Code, legislative history and commentators to date simply do not consider the possibility of a situation in which a completely new liquidating Chapter 11 case could be used to deal with problems that arise in the course of consummation of a prior Chapter 11 plan. Jartran, 886 F.2d at 869 n. 12. Instead, conversion to Chapter 7 or liquidation within the existing Chapter 11 case comprised the entire universe of options that were ordinarily contemplated when a Chapter 11 reorganization failed. See id. at 866. Because Congress did not contemplate serial Chapter 11 filings, it never directly addressed the question we confront here--whether the priority given a claim for trust fund taxes survives a serial Chapter 11 petition. Serial Chapter 11 filings pose novel and unprecedented problems. We must, therefore, construe the relevant statutes with care, striving to further rather than frustrate the underlying congressional objectives. 11 The priority and discharge provisions of the Bankruptcy Code interact in the following manner. 11 U.S.C. § 507 enumerates the priorities that are attached to various types of debts. It accords seventh priority to trust fund taxes, taxes required to be collected or withheld and for which the debtor is liable in whatever capacity. 3 Unlike other sorts of tax claims, which are given priority under § 507(a)(7) for only a limited time, trust fund tax claims are, moreover, granted priority under § 507(a)(7)(C) regardless of their age. See Rosenow v. State of Illinois Dept. of Revenue, 715 F.2d 277, 279 (7th Cir.1983) (trust fund taxes must be given priority without any limitation upon the time when they became due). 11 U.S.C. § 1141 elaborates upon the effect of confirmation of a reorganization plan. It specifies that, except as provided in the plan itself or by statute, confirmation of a plan of reorganization frees the debtor of all debts but those provided for in the plan. 4 11 U.S.C. § 523, however, sets forth one exception to this general rule: it provides that confirmation of a reorganization plan does not discharge individual debtors from certain debts for which corporations and partnerships are discharged under section 1141. 5 12 Emphasizing section 523's exception to the discharge of individual debtors, the Committee urges us to conclude that a plan of reorganization discharges corporate debtors from all debts that arose prior to confirmation. The Committee maintains that, under section 1141, a confirmed plan of reorganization replaces all pre-existing debts and their priorities with whatever contractual obligations are embodied in the plan. 13 Yet such a drastic impairment of the scheme of priorities established in section 507 is not compelled by either the plain language of these statutes or the legislative history. For, as the IRS points out, section 523 may also be construed as prohibiting discharge of individual debtors only for hidden liabilities--debts not included in the plan of reorganization because no proof of claim was ever filed. This interpretation maintains the delicate balance between priority and discharge that is erected by all three statutes. It is also entirely consistent with the legislative history. 14 In enacting the Bankruptcy Code, Congress acknowledged the existence of a three-way tension among the general creditors' interest in recouping their investment, the debtor's interest in a fresh start unburdened by massive past taxes and the tax collector's interest in raising revenue. See S.Rep. No. 95-989, 95th Cong., 2d Sess. 14 (1978), reprinted in U.S.Code Cong. & Admin.News 5787, 5800. The Bankruptcy Code strikes a balance, accommodating these competing interests by guaranteeing priority to certain tax claims properly included in the plan of reorganization while simultaneously setting limits upon how far back in time the IRS can reach and how quickly it must act before a tax obligation loses its priority or is discharged. The legislative history also indicates that Congress sought to encourage successful reorganization by allowing debtors to present their creditors with a fixed list of liabilities: 15 It is necessary for a corporation or partnership undergoing reorganization to be able to present its creditors with a fixed list of liabilities upon which the creditors or third parties can make intelligible decisions. Retaining an exception for discharge with respect to nondischargeable taxes would leave an undesirable uncertainty surrounding reorganization that is unacceptable. 16 124 Cong.Rec. H11089 (daily ed. Sept. 28, 1978) (statement of Congressman Donald Edwards), reprinted in 1978 U.S.Code Cong. & Admin.News 6436, 6478. Section 1141 fulfills this function by discharging a corporation's hidden liabilities and thereby ensuring that creditors may rely upon the plan of reorganization as representing a fixed list of liabilities. 17 The Committee contends, however, that only its interpretation of this network of statutes avoids the undesirable uncertainty that would hamper reorganization and dissuade creditors from taking the risk of dealing with a reorganized debtor. But hidden liabilities not included in the confirmed plan of reorganization are exactly the sort of claims that, if not discharged by a confirmed plan of reorganization, would promote uncertainty. Preserving intact the section 507 priorities of all tax debts that are specifically included in a confirmed plan of reorganization does not, on the other hand, create undesirable uncertainty. 18 Turning finally to our decision in Jartran, the Committee asserts that WFE II, the second Chapter 11 proceeding, is a new and distinct undertaking with new and distinct obligations. The Committee maintains that, under Jartran, the provisions of a confirmed plan discharge the debtor's underlying obligations and create a wholly new contract to fulfill the plan. By this reasoning, all debts incorporated in the reorganization plan lose their old priority status and are instead transformed into mere contractual obligations. But the Committee relies upon the broad language of the bankruptcy court's decision in Jartran to the exclusion of its narrow holding. Although the bankruptcy court expansively stated that [t]he provisions of a confirmed plan bind all parties whose rights are affected by the plan.... When, as here, substantial operations under a confirmed plan are followed by a second case, the entity's unpaid liabilities under the first case plan become general unsecured claims in the second case, In re Jartran, Inc., 76 B.R. 123, 125 (N.D.Ill.1987), it held only that administrative claims arising from expenses incurred solely to preserve the first estate were not entitled to administrative priority in a second bankruptcy proceeding. As the Committee concedes, administrative claims are intimately tied to a single bankruptcy estate in a manner that is completely different from the trust fund tax claims at issue here. Absent a clear signal from Congress, therefore, we are reluctant to adopt the Committee's broad reading of Jartran and extend its holding so far beyond its unique facts. 19 Contrary to the suggestions of the Committee, moreover, nothing in our opinion holds that all claims included in a confirmed plan of reorganization will retain their priorities forever. For claims accorded limited priority under section 507 may still lose their priority once they have become stale. Pre-bankruptcy income taxes, for example, are allotted seventh priority only if the return to which they relate was due within three years before the petition for relief is filed. If three years have elapsed by the time the second Chapter 11 proceeding is filed, such a claim would lose its section 507 priority. Our reading of the statute neither extends nor extinguishes the priority accorded claims under section 507. We merely strive to interpret these statutes so as to ensure that the delicate balance of the priority and discharge scheme established by the Code is not skewed by the unanticipated development of serial Chapter 11 filings.