Court Opinion

ID: 9465447
Source: CourtListenerOpinion
Date Created: 2023-08-05 00:46:44.095369+00
Date Added: 2024-06-11T17:39:11.176156
License: Public Domain

MESKILL, Circuit Judge,
concurring:
I concur in the result reached by the majority but wish to record separately my views on the issue of granting priority to New York State’s tax claims.
As explained by Judge Oakes, this case involves the peculiar circumstance of a Chapter X reorganization being converted into a Chapter X liquidation. This Court implicitly approved of this conversion in Matter of Stirling Homex Corp., 579 F.2d 206, 209 n.4 (2d Cir. 1978), and I concur fully in today’s express approval of that decision. See also United States v. Key, 397 U.S. 322, 323, 90 S.Ct. 1049, 25 L.Ed.2d 340 (1970).
It is clear that § 64 of the Bankruptcy Act, 11 U.S.C. § 104, granting a fourth priority to taxes “legally due and owing by the bankrupt ... to any State,” does not govern in Chapter X proceedings unless the bankruptcy court so orders. 11 U.S.C. § 502. Until that time, an unsecured tax claim of a state is to be treated like any other unsecured claim by any other ordinary creditor. Compare 11 U.S.C. § 599 (requiring that priority be given to federal taxes). This, of course, is not to say that a priority may not be granted to state tax claims and, in my judgment, Judge Burke should have granted such a priority here.
The task of a bankruptcy judge in Chapter X proceedings is to devise a plan of reorganization that is “fair and equitable” as well as “feasible.” 11 U.S.C. §§ 621(2), 574. In doing this, and “[f]or the purposes of the plan and its acceptance, the judge shall fix the division of creditors and stockholders into classes according to the nature of their respective claims and stock.” 11 U.S.C. § 597; Bankruptcy Rule 10-302(a). The statute defines “creditor” as “the holder of any claim,” 11 U.S.C. § 506(4), and it defines “claims” to “include all claims of whatever character against a debtor or its property, except stock, whether or not such claims are provable under section 103 of this title and whether secured or unsecured, liquidated or unliquidated, fixed or contingent.” 11 U.S.C. § 506(1). Quite understandably, this definition of “claims” embraces tax claims made by a state government, see 6 Collier on Bankruptcy U 9.07, at 1556, so the State is a “creditor” for purposes of reorganization.
With regard to the ranking of creditors, Collier makes the following relevant observations:
Unsecured creditors . . . may be divided into classes where the legal character or effect of their claim is such as to accord them a status different from other unsecured creditors generally — as, for example, . . . tax claims or the like.
6 Collier on Bankruptcy 19.10, at 1602 (emphasis added; footnote omitted).
Within the total group of unsecured creditors . . . there may be certain ones whose claims are of such a nature as to give them some right of priority or preference over other claimants. These creditors, then, must be separately classified and accorded the priority to which they are entitled.
Id. $ 9.13[1], at 1620-21 (footnote omitted). See also id. H9.13[3], at 1630-31; In re Sixty-Seven Wall Street Restaurant Corp., 23 F.Supp. 672 (S.D.N.Y.1938). Here, I think Judge Burke’s decision not to grant the priority to these New York State tax claims was inequitable.
*160The equities favor the State, here, not the Trastee. The State determined that Stirling Homex owed sales and use taxes on January 21, 1970, long before there was even a hint of reorganization, let alone liquidation. Homex contested these claims administratively until the early part of 1972, when hearings before the State Tax Commission were adjourned. In ordinary and orderly fashion, the State filed a proof of claim with the Trustee in October of 1972. The State was then ordered by the District Court to halt any further Tax Commission proceedings until the reorganization matter was cleared up or until the court ordered otherwise. On July 15,1976, Judge Burke made his decision regarding the set-off and expressly rejected rumors of the pending Homex liquidation as being “without any asserted valid basis.” When Bankruptcy Judge Hayes made his decision on May 3, 1977, he was not aware of the Trustee’s April 28th motion for an order declaring Homex insolvent; neither was he aware of the Trustee’s conclusion in the § 167 report that “Stirling Homex is hopelessly insolvent.” The State was also unaware of these matters. When Judge Burke declared Homex insolvent on June 13,1977, no notice of that decision was given to the State. When the State discovered Judge Burke’s ruling, it promptly moved to reopen and to reargue the matter but its motion was denied. In other words, the State seems to have been kept in the dark regarding the impending liquidation of Homex’s assets. Had it been informed of all of the developments, the State would have been able to participate in the reorganization proceedings more fully and, in my judgment, would have been granted the priority it is now accorded. Given this combination of circumstances, it was error for Judge Burke to decline to grant a priority to the State’s tax claims.1

. It appears that Congress attempted to avoid the problems created in this case when it designed the Bankruptcy Reform Act. See H.R. 8200, 95th Cong., as passed by the United States Senate and United States House of Representatives and cleared for the President. Chapter 11 (reorganization) provides for “conversion” to Chapter 7 (liquidation) by either the debtor or the court. § 1112. In such circumstances, the question of the priority to be granted to unsecured tax claims would be governed by § 507.