Opinion ID: 5666
Heading Depth: 2
Heading Rank: 2

Heading: The Interest Awarded Under Texas Law

Text: The bankruptcy court, pursuant to section 111.060 of the Texas Code, awarded interest at a rate of ten percent per annum beginning 60 days from the date the taxes were due until the time they were paid.8 Under Texas law, once a consumer pays his sales taxes, liability for the payment of that tax to the State shifts to the person who receives or collects it from the consumer. Specifically, as is provided under section 111.016 of the Texas Tax Code, [a]ny person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state or the full amount collected plus any accrued penalties and interest on the amount collected. TEX.TAX CODE ANN. § 111.016 (Vernon 1992). Person is defined under the Texas Government Code to include a corporation, organization, government or governmental subdivision or agency, business trust, estate, trust, partnership, association, and any other legal entity. TEX.GOV.CODE ANN. § 311.005 (Vernon 1988). Federal policy, as embodied in sections 959(b) and 960 of Title 28, mandates that trustees manage estates in compliance with state law. Specifically, section 960 provides that: Any officers and agents conducting any business under authority of a United States court shall 8 We note that the first five percent of this award of interest constitutes interest actually earned. We have already concluded that the State is entitled to this interest. See supra Part II.A. be subject to all Federal, State and local taxes applicable to such business to the same extent as if it were conducted by an individual or corporation. 28 U.S.C. § 960; see In re Hatfield Const. Co., 494 F.2d 1179, 1181 (5th Cir.1974) (property in the hands of a trustee is not exempt from state and local taxes absent a clear expression from Congress). And section 959(b) provides that: a trust ee ... appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof. 28 U.S.C. § 959(b) (West Supp.1992); see Midlantic Nat. Bank v. New Jersey Dept. of Environmental Protection, 474 U.S. 494, 505, 106 S.Ct. 755, 761, 88 L.Ed.2d 859 (1986) ( [Section 959(b) ] supports our conclusion that Congress did not intend for the Bankruptcy Code to pre-empt all state laws that otherwise constrain the exercise of a trustee's powers.). The interest imposed under section 111.060 of the Texas Code was incurred by Copeland's estate as a result of the services rendered by Copeland in administering the estate and, mo re specifically, Copeland's failure to pay the State its sales taxes on the respective dates they were due in compliance with Texas law. Accordingly, we must consider whether this statutory award of interest constitutes an administrative expense pursuant to section 503 of the Bankruptcy Code. See Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968) (damages resulting from the negligence of one acting within the scope of his authority as receiver of an estate constitute an administrative expense of that estate); In re Execuair Corp., 125 B.R. 600, 604 (Bankr.C.D.Cal.1991) (treating attorney's fees award against estate because of post-petition actions of trustee as an administrative claim). An administrative expense allowed under 11 U.S.C. § 503(b) is the highest priority claim to be paid in a bankruptcy case. See 11 U.S.C. § 507(a)(1). Pursuant to section 503(b)(1)(A), administrative claims are defined to include the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case....9 11 U.S.C. § 503(b)(1)(A). However, administrative expenses entitled to first 9 We note that this case involves a statutory award of post-petition interest based upon the post-petition actions of a trustee, rather than a fine, penalty, or reduction in credit relating to a priority status are not necessarily confined to those enumerated at 11 U.S.C. § 503(b). In re FloLizer, Inc., 107 B.R. 143, 145 (Bankr.S.D.Ohio 1989), aff'd, 916 F.2d 363 (6th Cir.1990). Applying sect ion 503 to the case before us, we find that the State's claim for post-petition interest pursuant to TEX.TAX CODE ANN. §§ 111.016, 111.060 is controlled by the Supreme Court's opinion in Reading, 391 U.S. at 471, 88 S.Ct. at 1759, and its progeny.10 In Reading, a debtor filed a petition under Chapter XI of the Bankruptcy Act,11 and a receiver was appointed to conduct the debtor's business. Six weeks after the bankruptcy was filed, the debtor's only significant asset—an eight-story industrial structure—was destroyed by fire, which spread to the adjoining property. When the owners of the abutting property filed administrative claims against the estate, the receiver was elected trustee, and he moved to expunge these claims on the ground that they did not constitute administrative expenses and the estate was without assets to satisfy them. The Supreme Court disagreed, holding that damages resulting from the negligence of a receiver acting within the scope of his authority as receiver give rise to actual and necessary costs' of a Chapter XI arrangement. tax. The latter are expressly addressed by 11 U.S.C. § 503(b)(1)(C). 10 Copeland argues that this issue is controlled by In re Goldblatt, 61 B.R. at 459. We note that the case before us is distinguishable from Goldblatt on several points. First, Goldblatt involved interest accrued on funds constituting an administrative expense pursuant to an agreement entered into by the parties. The interest at issue in the case before us is a statutory award of interest imposed under Texas law because of the post-petition actions of an entity acting as trustee, and the question before us is whether that award of interest itself constitutes an administrative expense. Second, Goldblatt and the case before us are distinguished by differences in the governing state trust law. The decision in Goldblatt is based upon Illinois trust law, which limits interest to the rate actually earned. Under Texas trust law, a beneficiary such as the State is entitled to the maximum legal rate of interest on trust funds. See Langford v. Shamburger, 392 F.2d 939, 945 (5th Cir.1968) (In Texas cases, the trustee who has used trust funds for his own benefit is uniformly charged with the highest legal rate.). Moreover, as discussed in the text above, Texas law expressly imposes interest at a rate of 10 percent per annum on any person who collects sales taxes for the State and holds those revenues for more than 60 days from the date they are due. See TEX.TAX CODE ANN. §§ 111.016, 111.060. 11 The pre-Code basis for the prioritization of administrative expense claims is summarized in In re Execuair: [s]ection 503(b)(1)(A) is derived from § 64 of the Bankruptcy Act of 1898, as amended in 1962, which states that there was a priority for debts which were ... the costs and expenses of administration, including the actual and necessary costs and expenses of preserving the estate, subsequent to filing the petition.... 125 B.R. at 602. 391 U.S. at 485, 88 S.Ct. at 1767. The Court's opinion in Reading survived Congress's revisions to the Bankruptcy Code. As stated in Execuair, After the Reading decision, the Bankruptcy Code was completely revised and Congress made no substantial changes in the definition of administrative claim. Had they chosen to do so, Congress could have defined administrative expense so as to overrule the Reading case.... In fact, it appears that they broadened the concept of administrative expense claim by using the word including to demonstrate that the sub-parts of § 503(b)(1) are examples and not limitations of what can be determined to be an administrative claim. 125 B.R. at 602-03. Moreover, Reading has been expanded by lower courts. For example, in Yorke v. N.L.R.B., 709 F.2d 1138, 1143 (7th Cir.1983), cert. denied, 465 U.S. 1023, 104 S.Ct. 1276, 79 L.Ed.2d 680 (1984), the Seventh Circuit relied upon Reading in holding that those injured during the trustee's administration of an estate are entitled to an administrative priority regardless of whether their injury was caused by a tort or other wrongdoing. Similarly, the First Circuit has applied Reading to hold that damages to plaintiffs in the form of a civil compensatory fine and attorney's fees resulting from a debtor's violation of an injunction constitute an administrative claim. In re Charlesbank Laundry, Inc., 755 F.2d 200, 202 (1st Cir.1985).12 And several courts have applied Reading to hold that awards of attorney's fees and costs resulting from frivolous litigation pursued by trustees constitute administrative expenses. See In re Met-L-Wood Corp., 115 B.R. 133, 136 (N.D.Ill.1990) (citing cases). For example, in In re E.A. Nord Co., Inc., 78 B.R. 289, 292 (Bankr.W.D.Wash.1987), the court held that attorney's fees and costs resulting from a debtor's pursuit of a legally frivolous post-petition arbitration constituted an administrative expense.13 12 Specifically, the First Circuit held: We see no reason why the claim of plaintiffs in this case does not fall within both the letter and the spirit of Reading. The same fairness principle favors plaintiffs here, whose premises, lives or businesses were adversely affected by Charlesbank's continuing conduct in violation of the temporary injunction.... If fairness dictates that a tort claim based on negligence should be paid ahead of pre-reorganization claims, then, a fortiori, an intentional act which violates the law and damages others should be so treated. 755 F.2d at 202. 13 As stated by the Nord Co. court: Similarly, in Execuair, 125 B.R. at 604, the court held that attorney's fees awarded against an estate because of the trustee's post-petition efforts to fight contempt proceedings constituted an administrative claim. With Reading and its progeny in hand, we now consider the case before us. Copeland, possibly because of an excess of caution or possibly because of a belief that section 502(b)(2) of the Bankruptcy Code would enable its estate to hold the State's $1,817,151.38 in sales tax revenues without incurring any interest obligation to the State, elected not to carry out promptly its statutory obligations under Texas law. This post-petition decision on the part of Copeland resulted in monetary harm to the State resulting from the State being deprived of the use of its $1,817,151.38. It also resulted in Copeland's estate incurring a statutory award of interest in favor of the State pursuant to TEX.TAX CODE ANN. §§ 111.016, 111.060 (Vernon 1992). Accordingly, we conclude that, under the circumstances present here, an award of interest to the State pursuant to section 111.060 of the Texas Tax Code constitutes an administrative expense under 11 U.S.C. § 503(b), and, as such, it is entitled to be paid as the bankruptcy court ordered. See 11 U.S.C. § 507(a)(1); Reading, 391 U.S. at 471, 88 S.Ct. at 1759.