Opinion
Case No. A01-00223-DMD Chapter 13
November 19, 2001
ORDER GRANTING DEBTOR'S MOTION FOR CORRECTION AND FOR RECONSIDERATION
The debtor's motion for correction and reconsideration duly came before the court for hearing on October 9, 2001. John E. Simmons appeared for the Kenai Peninsula Borough. Terry Draeger appeared for the debtor. After reviewing the parties' memoranda and hearing the arguments of counsel, IT IS ORDERED:
The debtor's motion for correction and reconsideration is granted. Claim No. 8 of the Kenai Peninsula Borough is allowed as a secured claim in the sum of $10,374.49; as an unsecured priority claim in the sum of $20,696.71; and as a general unsecured claim in the sum of $20,026.86. Claim No. 7 is disallowed in full because it is included in the unsecured portion of Claim No. 8. This is a final order, subject to appeal.
Discussion
This order represents this court's third and, hopefully, final venture into the world of withholding tax claims asserted by the Kenai Peninsula Borough ("KPB"). The KPB seeks priority status as to certain ancillary costs and expenses it has included in its tax claim.
The parties agree that the KPB's prejudgment sales tax of $17,159.66, together with prepetition interest which has accrued on those taxes, in the sum of $17,872.85, is entitled to priority status under 11 U.S.C. § 507(a)(8)(C). The parties disagree as to whether the KPB's ancillary costs of $6,518.49, plus $8,510.74 in interest accruing on those costs, are entitled to priority treatment.
The KPB has cited a number of cases in support of its position on ancillary costs. Chief among them is a Ninth Circuit BAP decision, Florida v. Ticor Title Insurance Co. The debtor, Florida, forged a release of a federal tax lien upon the sale of certain real property he owned. Ticor Title Insurance Company sued Florida in state court and obtained a judgment that included attorney's fees, costs and an award for sanctions. The BAP found that the ancillary costs "partook" the character of the primary debt and excepted them from discharge as damages arising from willful and malicious conduct. The KPB contends the same principle should be applied here. I disagree.
164 B.R. 636 (B.A.P. 9th Cir. 1994).
Id. at 639.
The KPB's reliance on Florida is misplaced for a number of reasons. First, Florida is an exception to discharge case under 11 U.S.C. § 523(a)(6), rather than a priority case under 11 U.S.C. § 507. Second, in the Florida case, the BAP miscited a case on which it heavily relied, Klingman v. Levinson, as being a Ninth Circuit case. Klingman is a Seventh Circuit case and not binding precedent for this court. Third, in Florida, the BAP recognized that not all ancillary obligations would assume the character of the primary debt, noting "that the relationship of ancillary to primary obligations can become so attenuated that it would be unreasonable to characterize them as integral to the original [debt]." Finally, BAP decisions are persuasive, but not necessarily binding, authority in the Ninth Circuit. I conclude that Florida does not support the KPB's position on priority claims.
831 F.2d 1292 (7th Cir. 1987). Klingman is miscited in Florida at 164 B.R. 639.
Florida, 164 B.R. at 639.
Bank of Maui v. Estate Analysis, Inc., 904 F.2d 470 (9th Cir. 1990); In re Sisson, 7 A.B.R. 37, 40-41 (D.Alaska 2000).
The KPB's reliance on In re Tucknall and Polishuk v. Polishuk, (In re Polishuk) is also misplaced. Tucknall was an objection to claim proceeding on an unsecured claim. It didn't involve a determination of priority status or exception from discharge under the Code. The issue addressed by the court in Tucknall was simply whether a judgment creditor was entitled to postjudgment interest on attorney's fees and costs as a matter of Connecticut law. Connecticut law has no application here. The fact that the court found for the creditor is meaningless. Polishuk was an exception to discharge case for alimony or maintenance under 11 U.S.C. § 523(a)(5). In that case, the court found that the debtor's obligations to save and hold harmless his ex-wife from credit card debt and to pay attorney's fees were in the nature of support and nondischargeable. The court noted that while, ordinarily, exceptions to discharge were narrowly construed to give effect to the fresh start purpose of bankruptcy, the policy underlying § 523(a)(5) favored the payment of support obligations over the debtor's interest in a fresh start. In the instant case, the debtor's ancillary obligations to the KPB, comprised of audit and collection costs, attorney's fees incurred by the KPB and interest on these ancillary obligations, are not support obligations. The KPB's ancillary costs do not fall within any provision of the Code which would prefer their payment over the debtor's fresh start.
94 B.R. 277 (Bankr.D.Conn. 1989).
243 B.R. 408 (Bankr.N.D.Okla. 1999).
Polishuk, 243 B.R. at 411-412.
The remaining cases cited by the KPB also do not support its position. In the Mark Anthony case, the issue addressed was whether interest accruing on taxes due after the filing of a bankruptcy petition would be given administrative expense priority under 11 U.S.C. § 503(b). Mark Anthony is distinguishable because the KPB's tax claim arose prepetition. Further, the provisions of § 503(b) specifically exclude taxes "of a kind specified in § 507(a)(8)." Finally, the KPB's prepetition interest on its taxes have been allowed as part of the priority portion of its claim. Only the ancillary costs, and interest on those costs, have not. The other case cited by the KPB, In re Shank, determined whether a Washington state sales tax was an excise or trust fund tax. This case is of no help to the KPB because the court didn't discuss interest or ancillary costs in its decision.
United States v. Ledlin (In re Mark Anthony Constr., Inc.), 886 F.2d 1101 (9th Cir. 1989).
Shank v. Wash. St. Dept. of Revenue, Excise Tax Div. (In re Shank), 792 F.2d 829 (9th Cir. 1986).
"[T]he priority provisions of the Code should be closely construed in order to promote equality of distribution among a debtor's creditors." 11 U.S.C. § 507(a)(8) provides that certain unsecured claims of governmental units are entitled to priority, but "only to the extent that such claims are for" the types of debts specified in that subsection of the Code. Section 507(a)(8)(C) grants priority to claims for "a tax required to be collected or withheld and for which the debtor is liable in whatever capacity." Where a statute's language is plain, it should be enforced according to its terms. Section 507(a)(8)(C) restricts priority status only to taxes which must be collected or withheld. Nothing in the statute confers priority status upon attorneys fees, collection costs or interest on the costs and fees involved in the collection of a tax.
Raiman v. Calif. St. Bd. of Equalization (In re Raiman), 172 B.R. 933, 938 (B.A.P. 9th Cir. 1994); see also Standard Oil Co. v. Kurtz, 330 F.2d 178, 180 (8th Cir. 1964); In re Kent Plastics Corp., 183 B.R. 841, 844-845 (Bankr.S.D.Ind. 1995); In re AER-Aerotron, Inc., 182 B.R. 725, 727 (Bankr.E.D.N.C. 1995); Employers Ins. of Wausau v. Ramette (In re HLM Corp.), 183 B.R. 852, 854 (D.Minn. 1994); In re North Atlantic Gulf S.S. Co., Inc., 192 F. Supp. 107, 108 (D.C.N.Y. 1961).
11 U.S.C. § 507(a)(8) [emphasis added].
United States v. Ron Pair Enter., Inc., 489 U.S. 235, 241 (1989).
The KPB's liberal reading of § 507(a)(8)(C) is beyond the plain meaning of the statute and violates the Code's policy of equality of distribution. Unlike the support obligations addressed in Polishuk, there is no policy in the Code which favors the payment of the KPB's ancillary costs over the debtor's fresh start. Further, the relationship of the KPB's ancillary costs to the sales tax is so attenuated that these costs should not "partake" the same character as the priority taxes. Only that portion of the KPB's claim which is attributable to a tax, as defined in § 507(a)(8)(C), is entitled to priority status. The balance of the KPB's claim, for ancillary costs and interest on those costs, will be disallowed as a priority claim and allowed as a general unsecured claim.
BY THE COURT