United States Ex Rel. Bell v. Rhodey (In Re R & W Enterprises)

ORDER ON MOTION FOR REHEARING

An order was entered in this adversary proceeding on September 12, 1994 in which the Court granted summary judgment for the Trustee as against Escambia County and the Internal Revenue Service, and in reconsideration of the claims allowed and disallowed by. the Court in its Order of Distribution entered on April 9, 1991 this Court ordered the Internal Revenue Service to re*649turn to the Trustee $8,137.59 of the funds paid to it by the Trustee, which amount was the amount of the claim filed by the County. This amount included the principal amount for 1987 personal property taxes due the County plus interest. The Court ordered the Trustee, once he had received the repayment from the IRS, to pay $8,137.59 to the County.

On September 22, 1994 the County filed a Motion and Memorandum in Support of Motion of Escambia County Tax Collector for Rehearing and Request for Hearing.1 In its motion for rehearing the County requests the Court to reconsider its memorandum opinion and order of September 12, 1994 and to find that:

1. The County is entitled to interest on its claim in addition to that calculated in its proof of claim;2
2. The Trustee acted in a negligent manner; 3 and that,
3. The County did not receive notice of the Trustee’s Proposed Distribution of the assets of this ease or the United States Trustee’s approval of that proposal, and did not receive notice of or a copy of the Court’s April 9,1991 Order Directing Disbursement of Funds.4

The above matters must be addressed in relation to the Court’s April 9, 1991 Order Directing Disbursement of Funds. There are significant differences in the answers to these questions when the questions are considered in relation to interest to be paid for the period before that Court order and for interest to be paid for the period following the order.

I. PRE-DISTRIBUTION INTEREST

A. Item 1

As to Item 1, the County argues that it is entitled to interest on its claim under 11 U.S.C. § 506 as interpreted by the Supreme Court of the United States in United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) because it is an oversecured creditor. This Court agrees. The facts, law and equities existing in this case dictate that these parties be placed in the positions they should have held if the Trustee’s distribution of assets had been correct. That was this Court’s intent. In conformity with this Court’s Memorandum Opinion on Motion for Summary Judgment entered on September 12, 1994 and in consideration of the County’s request for additional interest, this Court finds that the County is entitled to interest on its claim.

1. Applicable Rate of Interest

While all the parties do not agree that the County is entitled to interest on its claim, they do agree that if interest is allowed, that it should be calculated according to a statutory rate rather than a market rate.5 The County argues for the rate pro*650vided for in 197.172(3) Fla.Stat. The IRS argues for the rate provided for in 26 U.S.C. § 6621(a)(1). The Trustee argues for the rate provided for in 28 U.S.C. § 1961. While some of these rates are determined with a market rate variable, they are essentially statutory.

Section 1961 in Title 28 applies to interest on a “money judgment in a civil case recovered in a district court.” 28 U.S.C. § 1961(a). While the Trustee correctly argues that some courts have applied section 1961 to bankruptcy cases, it appears from the cases cited by the Trustee that where section 1961 has been applied to bankruptcy eases, the circumstances involved either money judgments, something that does not exist in this case, or were Chapter 11 cases or were both. The cases cited by the Trustee are similar to United States v. Southern States Motor Inns, Inc., 709 F.2d 647 (11th Cir.1983), which is not applicable.

From the limited Chapter 7 cases discussing interest on distributions, this Court surmises that the correct interest rate to apply in these situations is the statutory rate of the statute associated with the party making the claim for interest. For example, if the IRS were the claimant, 26 U.S.C. 6621(a)(1) would apply. If the County were the claimant, the Florida statute would apply. There is precedent for this hypothesis. In United States v. Robinson, 929 F.2d 1 (1st Cir.1991), an involuntary petition was filed against the debtor in 1970. In addition to a wage claimant, there were two governmental claimants. The circuit court held that the interest due on the IRS claim should be calculated under 26 U.S.C. § 6621 and that of the Commonwealth of Massachusetts under state law.6 The pertinent part of the bankruptcy court’s order of final distribution stated:

[T]he I.R.S. and Commonwealth through its Department of Revenue and Division of Employment Security (the “Commonwealth”) are entitled to be paid next. The I.R.S. is entitled to postpetition interest on its priority claim, at the rate specified in 26 U.S.C. § 6621 (the rate provided by law for federal tax claims) on a pro rata basis with the Commonwealth, for the period May 22, 1970 (the petition filing date) to date of payment. The Commonwealth is entitled to postpetition interest at the rate set forth in MASS.ANN.LAWS ch. 62e, § 32 (Law Co-op.1978 & Supp.1989) (the rate applicable to overdue taxes) on its priority claims on a pro rata basis with the I.R.S. from May 22, 1970 until paid.

United States v. Robinson at 2 (emphasis added).

The pertinent part of the circuit court’s conclusion reads:

The I.R.S. shall be paid post-petition interest pursuant to 26 U.S.C. § 6621 on its total tax claims, lien and non-lien. Such payment shall be made on a pro-rata basis with the post-petition interest due the Commonwealth under Mass.Gen.L.Ann. ch. 62 § 32 on its tax claims.

*651Id. at 6 (emphasis added).7 Because most cases addressing the rate of interest question are Chapter 11 eases involving “current value” questions, those cases are not helpful. There is little question however that a statutory rate should be applied. As to which one, this Court finds that the statute that should apply in this case to determine the County’s pre-distribution interest on its personal property tax claim is § 197.172(3) Fla. Stat., and the applicable rate is the 18% rate provided for in that statute.8

2. Calculation

If the County had received its principal and interest on the date of distribution, the County would have been entitled to interest at the state statutory rate of 18%. If the Trustee’s distribution had been correct, principal and interest would have equaled $11,-996.23. That amount includes principal of $7,787.17 and interest for the 36 months from April 1, 1988 through March 31, 1991 and nine days of April 1991 at a rate of $116.81 per month, which rate is calculated on the principal of $7,787.17 at 18% simple interest per year.

Also in conformity with this Court’s opinion of September 12, 1994, as the IRS was paid an amount in excess of the amount it should have received if the Trustee’s distribution had been correct, this Court finds that the IRS should return $11,995.87 to the Trustee for distribution to the County.9

B. Item 2

As to Item 2, this Court found that it was not necessary to determine whether the Trustee acted in a negligent manner in order to decide the issues in this matter. As to the issue of the amount of the County’s claim for pre-distribution interest, this Court will not reconsider the issue of the Trustee’s negligence. The County, by the order entered this day, has received all that it would have received if a proper distribution had been made.

C. Item 3

As to Item 3, this Court found that it was not necessary to determine whether the County received notice of the Trustee’s Proposed Distribution of the assets of this case or of the United States Trustee’s approval of that proposal, or received notice of or a copy of the Court’s April 9, 1991 Order of Distribution in order to decide the issues in this matter. As to the issue of the amount of the County’s claim for pre-distribution interest, this Court will not reconsider the issue of notice. The County, by the order entered *652this day, has received all that it would have received if a proper distribution had been made.

II. POST-DISTRIBUTION INTEREST

In the September 12, 1994 memorandum this Court noted, “The County should receive no interest here because 22 months passed between the admitted time the County discovered the inaccurate distribution in June 1991 and the time it filed its complaint in April 1993, as compared to the two months that passed between the date of the Order for Distribution, April 9,1991, and the June 1991 discovery of the inaccurate distribution.” As to the question of this post-petition interest, there are genuine issues as to material facts which are not ripe for summary judgment. Because the County claims interest for a time beyond the time of the Trustee’s distribution of the assets in this case, the factual matters raised in the County’s motion for rehearing must be explored.10

A. Items 1, 2 and 3

As to Items 1, 2 and 3, the County maintains that the failure of the Trustee to pay its claim was due to the negligence of the Trustee and the failure of the Court and the Trustee to comply with notice and hearing procedures of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure. The County did not present evidence on these issues but as stated in its motion for rehearing it is prepared to do so. If these matters are to be resolved in this case the parties must consider the factual basis of the Court’s Order of Distribution, the general, as well as case specific, practices and procedures of the Clerk of Court, and the policies and procedures of the United States Trustee and how and whether those practices were followed in this case and to what extent they impact the issues before this Court.11

B. Summary Judgment

None of the above issues, factual or legal, relate to either the claim of the County or the claim of the IRS as to what those parties should have received through a distribution of assets in this case. They do however relate to the Court’s actions, the United States Trustee’s actions and the Trustee’s actions as those actions affect the County’s claim to interest after the date of distribution and are consequently not ripe for summary judgment.

It is therefore ORDERED, ADJUDGED AND DECREED, that:

1. This Court’s Order of September 12, 1994 is VACATED to the extent that it is in conflict with this order.
2. Summary judgment for the Trustee, as against the County and the IRS, is *653GRANTED to the extent of the County’s claim to its 1987 taxes and pre-distribution interest thereon.
3. The County’s claim of $8,137.59 is reconsidered and allowed in the amount of $11,996.23.
4. The IRS’ claim of $156,854.51 is allowed but the Trustee’s distribution to the IRS of $78,705.83 should be reduced by $11,996.23.
5. The IRS shall return $11,996.23 to the Trustee within 45 days of the date of this order.
6. Upon receiving the funds from the IRS, the Trustee shall distribute the $11,996.23 to the County forthwith.
7. Should any party desire an evidentiary hearing on the issue of the County’s claim to post-distribution interest, the requesting party must make the request for an evidentiary hearing in writing and file it with the Clerk of Court within 10 days from the date of this Order. If no request is made, the Court will consider all matters concluded and this adversary proceeding will be closed. If a request is made, the Clerk of Court is directed to schedule appropriate hearings at the convenience of the parties and the Court.

. The request for hearing portion of the motion was granted with the holding of a telephone conference on October 6, 1994 at which Mr. Philip A. Bates, attorney for the County, Ms. Carol Koehler Ide, attorney for the IRS and Mr. Coiy E. Peterson, attorney for the Trustee, appeared. The proceeding was duly recorded by the Clerk of Court for the Northern District of Alabama. The parties were given opportunities to submit written arguments.

. In its proof of claim filed July 25, 1988, the County requested $8,137.59, an amount including interest. In its prayer for relief in its complaint against the Trustee, the County requested "judgment ... for damages, pre-judgment interest, and the costs of this action.”

. The County argues that the Trustee failed to preserve and protect properly of the estate which was subject to the County’s lien.

. The County argues that the Court and the Trustee failed to give notice of, schedule hearings on or distribute copies of pertinent documents.

. The calculation of interest rates in Chapter 11 cases, unlike Chapter 7 cases, requires the application of a market rate of interest, at least for the calculation of present value in section 1129(a)(9)(C). See, United States v. Southern States Motor Inns, Inc., 709 F.2d 647 (11th Cir.1983). In that case the circuit court said, "Consequently, we hold that the interest rate to be used in computing present value of a claim pursuant to § 1129(a)(9)(C) should be the current market rate without any deduction for ‘rehabilitation aspects' of the plan.” Id. at 652-53 (footnote omitted). The court rejected the application of 26 U.S.C. § 6621 as the sole source for interest rate calculation. See also, In re General Development Corp., 135 B.R. 1008 (Bankr.S.D.Fla.1991). Relying on Southern States the bankruptcy court in General Development held that the *650appropriate interest rate for the calculation of interest on claims in a Chapter 11 case for purposes of § 1129(b)(2)(A)(i)(II) was the market rate. Interestingly in that case the parties objecting to the debtor’s plan were Florida county tax collectors seeking the statutory 18% rate payable on delinquent property taxes. Even more interesting however is that the debtor stipulated that the interest rate applicable to the taxes for the period from the filing date of the case to the effective date of the plan (the pre-confirmation period) should be the statutory rate. This period is attuned to the calculation of interest on a claim for a pre-distribution period in a Chapter 7 case, unlike the post-confirmation period of primary concern in Southern States and General Development.

. The court characterized this case as a "no asset” case. This Court is unable to determine with absolute certainty that this case would, if filed today, be considered a Chapter 7 case and thus stand for the proposition that it is cited for, however even if it could be characterized as a Chapter 11 matter, the calculation of interest was one made for the immediate payment of claims, rather than one for purposes of paying claims pursuant to a confirmed plan. After the trustee was awarded $750,000.00 from a pending lawsuit, the "asset” characteristic of the case changed. Because this case was over 20 years old, the Court retroactively applied the Bankruptcy Act of 1898, rather than Ron Pair, to determine whether the IRS, an oversecured creditor, should receive post-petition interest, but applied current statutes to decide what rate of interest would apply.

. See also, In re LaPiana, 100 B.R. 998 (N.D.Ill.1989), aff'd 909 F.2d 221 (7th Cir.1990) (in a Chapter 11 proceeding converted to a Chapter 7 case, the IRS is entitled to post-petition interest on its oversecured tax claim calculated at a rate fixed by 26 U.S.C. § 6621); Matter of Isley, 104 B.R. 673 (Bankr.D.N.J.1989) (the trustee should apply the statutory rate of interest allowed by N.J.S.A. 54:4-67 when calculating interest due New Jersey municipalities on tax liens).

. One court has held that the real estate portions (subsections (1) and (2)) of § 197.172 Fla.Stat. are in the nature of penalties and therefore may not be used as an interest rate for calculating interest on tax liabilities. In re Roger Properties, Inc., 172 B.R. 351 (Bankr.M.D.Fla.1994). As that case explains, some courts have held that where an interest rate is maintained in order to penalize a taxpayer, rather than for the purpose of calculating interest to the government, the rate may not be used. While the Roger Court found that the 18% interest rate was too high, as the County astutely writes after analyzing the history of section 197.172, "Whether the rate appears to be high or low depends on a fluctuating market rate.” Response to Defendants' Supplemental Memorandum at 16. In comparison to Roger, the instant case is dramatically different. Roger involved real property taxes. If one uses current real estate mortgage rates as a guide, 18% may seem excessive. The instant case involves personal property taxes however. Subsection (3) of section 197.172, not subsections (1) and (2) is applicable. While there was no evidence presented on the question, common sense, and the credit card in this judge’s pocket, demonstrates that 18% interest on personal loans is not, although some may wish differently, a legally unreasonable rate and consequently a penalty. The real estate portions of section 197.172 may be a penalty. That issue is not before this Court. But for purposes of calculating pre-distribution interest due the County on a claim for personal property ad valorem taxes, this Court finds that section 197.172(3) Fla.Stat. is not a penalty.

.In its Response by the United States of America to Briefs on Rehearing the IRS disagrees with the Court’s conclusions of law and the applicable interest rate the Court has applied, but concurs in the general holding that the IRS should return a portion of the funds it received from the Trustee’s distribution.

. This Court does not need to look beyond court records to recognize that there are genuine issues as to material facts which must be addressed before a determination is made on post-distribution interest. The County claims that copies of the Court's April 9, 1991 Order were not sent to creditors. The Court’s docket entry for that order reads, "ORDR DIRCTING DISBRSMNT of Funds cc: Dbtr, Attys of Recrd, IRS (EOD 4/9/91) rh". What copies, if any, were sent and to whom are questions of fact that are of course material to this Court's analysis.

These questions and others were raised at the earlier hearing, but because the legal issues to be decided, as this Court framed them, were not dependant on facts in dispute, the Court’s authority to decide those issue in the context of a motion for summary judgment was not destroyed. The Court may not however decide the question of post-distribution interest on the motion for summary judgment because that question is directly dependent on facts in dispute. These post-distribution interest issues did not impact the County's claim to its 1987 taxes or to any pre-distribution interest it was entitled to, and consequently the determination of those issues was not necessary to decide the issue of pre-distribution interest.

. If facts are presented to decide the issues presented by the County, this Court may need to consider: (1) what immunity is afforded the Trustee because of his relationship to the Court and his reliance on the policies and procedures of the United States Trustee and his reliance, as well as the Court's reliance, on the audit of this case by the United States Trustee; (2) what standard is appropriate to judge the Trustee's actions where those actions appear to be in agreement with the policies and procedures of the United States Trustee and which actions were in agreement with an audit of the proposed distribution by the United States Trustee; and (3) whether the County is estopped from claiming interest beyond the date of distribution because it was aware of the incorrect distribution in June 1991 but did not address the Court with this error before the Court ordered the closing of this case in July 1991.