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#2212 signed 4-16-96 motion to amend claim and for reconsideration denied

10-10-96 (appended)






CASE NO. 92-40079-11







ADV. NO. 92-7100


This proceeding is before the Court for decision following a bench trial. Chequers Investment Associates II (Chequers) brought this complaint to determine the amount it owes Reno County, Kansas, for real property taxes for 1990, 1991, and 1992. Chequers appears by counsel Samuel M. Stricklin and Richard G. Grant of Sheinfeld, Maley & Kay of Dallas, Texas, and Jan Hamilton of Hamilton, Peterson & Keeshan of Topeka, Kansas. The Board of Commissioners of Reno County (the County) appears by counsel Joseph L. McCarville III of Hutchinson, Kansas, and James P. Davidson of Salina, Kansas. The Court has heard the evidence and reviewed the relevant materials, and is now ready to issue this opinion.

The issues presented are: (1) whether the County should have included the goodwill or going-concern value of the debtor's hotel as part of the assessed value of the debtor's real property for purposes of the County's ad valorem taxes; (2) if not, what amount should be deducted from the County's assessments; and (3) whether the 1992 real property taxes were discharged because the County failed to file a claim for them.

For the reasons discussed below, the Court concludes that it was improper for the County to include the goodwill or going-concern value of the debtor's hotel in assessing the debtor's real property. However, the evidence presented is insufficient to enable the Court to determine the amount which should be deducted from the 1990 and 1991 assessments; the parties will be given the opportunity to present additional evidence to help the Court make this determination. Pursuant to the confirmed plan and the applicable statutes, the County's claim for 1992 real property taxes was discharged because it filed neither an application for an administrative expense nor a proof of claim for those taxes within the time allowed for doing so.


Sunwest Hotel Corporation (Sunwest), the owner of a hotel in Hutchinson, Kansas, filed a chapter 11 bankruptcy petition in January 1992. The County received notice of the bankruptcy, and, within a few weeks, filed a proof of claim for 1988 through 1991 real estate taxes. It has never amended this proof of claim. Chequers was a creditor of the debtor and proposed a plan of reorganization under which it (or its nominee) would become the owner of Sunwest's hotel. Paragraph 4.1 of the plan fixed a deadline for filing applications for administrative expenses. The County received all pertinent notices concerning the disclosure statement and plan. Chequers's plan was confirmed in October 1993. The deadline under paragraph 4.1 of the plan has passed, and the County has made no request to be paid any real estate taxes as an administrative expense of the bankruptcy case.

Six months after filing for bankruptcy, Sunwest commenced this proceeding, asking the Court, pursuant to 11 U.S.C.A. §505, to determine its liability to the County for real estate taxes for 1989, 1990, and 1991. It claimed the valuations for those years were illegal. It also asked the Court to determine a maximum valuation for the property for the 1992 and thereafter. Later, the parties agreed the debtor was barred from attacking the 1989 taxes. After its plan was confirmed, Chequers continued to prosecute this proceeding in Sunwest's name. Following a dispute, the Court ruled it would consider only the 1990, 1991, and 1992 taxes. Both Chequers and the County have submitted appraisals that conclude the income approach is the method to use to value the hotel. The appraisers agreed Sunwest's hotel had a goodwill or going-concern value that contributed to the income it produced. Chequers's appraiser then tried to determine the value of that goodwill and deduct it from the value shown by the income approach to reach the taxable value of the real property and improvements that comprise the hotel. The County's appraiser, on the other hand, did not attempt to make such a deduction because he did not believe that was done in Kansas in determining the value of a hotel for purposes of real property taxes.

Paragraphs 1.3 and 1.5 of Chequers's plan provided that a tax claim could be an allowed claim only to the extent a timely proof of claim was filed for it or it was listed on Sunwest's bankruptcy schedules as undisputed, liquidated, and noncontingent, and any post-confirmation objection Chequers made to it was resolved by the Court. Paragraph 8.8 provided that Chequers could rely on the proofs of claim on file, and no proof of claim could be filed, amended, modified or supplemented after the confirmation date. Paragraph 8.10 of Chequers's plan provided that the confirmation order would contain an injunction against any effort to collect any debt from Sunwest or the property conveyed to Chequers (or its nominee) except pursuant to the terms of the plan.


Goodwill or Going-Concern Value

The County does not dispute the fact Sunwest's hotel had some goodwill or going-concern value in 1990 and 1991. While there may well be a factual dispute about the contribution of the goodwill value to the gross income generated by the hotel, whether the goodwill is assessable as real property for ad valorem tax purposes is a legal issue.

The County suggests that Chequers is trying to exempt the hotel's goodwill from taxation even though no statute exempts it. It notes that K.S.A. 79-101 declares: "All property in this state, real and personal, not expressly exempt therefrom, shall be subject to taxation in the manner prescribed by this act." However, in In re Tax Protest of Strayer, 239 Kan. 136, 142, (1986), it appears the Kansas Supreme Court ruled that statute covers only tangible personal property. The court also noted that some types of intangible property were not covered by the limited intangibles tax imposed pursuant to K.S.A. 1985 Supp. 12-1,101, and held that a certain type of computer program was intangible property not subject to the personal property tax for tangible property. Id. at 142-43. Thus, the court has indicated that at least some intangible property is not taxable in Kansas, even though there appears to be no statutory exemption for it.

The Court does not believe Chequers is seeking a tax exemption anyway. Instead, Chequers is arguing simply that goodwill is personal property, not real property, and is taxable as personal property. This argument requires the Court to construe K.S.A. 79-102, which provides in pertinent part:

That the terms "real property," "real estate," and "land," when used in this act, except as otherwise specifically provided, shall include not only the land itself, but all buildings, fixtures, improvements, mines, minerals, quarries, mineral springs, and wells, rights and privileges appertaining thereto.

The term "personal property" shall include every tangible thing which is the subject of ownership, not forming part or parcel of real property; also the capital stock, undivided profits and all other assets of every company, incorporated or unincorporated, and every share or interest in such stock, profit, or assets, by whatever name the same may be designated, provided the same is not included in other personal property subject to taxation or listed as the property of individuals.

For present purposes, it is important to note that, as would be expected, "real property" is not defined to include a business located on the property. The County argues, at least in effect, that the hotel's goodwill is a part of the real property, apparently on the theory it is an "improvement." The County cites In re Tax Protest of Spangles, Inc., 17 Kan.App.2d 335 (1992), but that case says nothing about the status of goodwill as a part of real property. A hypothetical situation demonstrates the fallacy of the County's contention. If an identical facility had been built nearby and all those parts of Sunwest's operations that could be moved had been moved there, the goodwill would have moved over to the other facility with Sunwest without harming the tangible hotel facilities at the old site. The Court does not suppose the County would argue that real estate on which is located a business that derives all its income from the services it provides rather than from the real estate--say a law firm, for example--should be valued based on the net operating income of the business. Yet that is precisely what the County is arguing here. The only difference is that a hotel does derive some, perhaps even most, of its income from the real estate, so it is more difficult to separate the income attributable to the real estate from the income attributable to the services provided. Nevertheless, the concept is the same: some of the value of the business, as measured by the income approach, is created not by the real estate but by the hotel's reputation and the services it provides. That portion of the business's value is commonly referred to as goodwill or going-concern value. The County's approach turns the real property tax into a kind of income tax.

The County may instead be arguing that goodwill is one of the "rights and privileges appertaining" to the real property under the definition in K.S.A. 79-102. "Appertaining" means "[c]onnected with in use or occupancy," and "appertain" means "[t]o belong to; to have relation to; to be appurtenant to." Black's Law Dictionary 90 (5th ed. 1979). The Court believes that the definition of "real property" includes only the land, tangible things attached to but more or less severable from the land, and intangible things that cannot be severed from the land. Cf. Strayer, 239 Kan. at 142 (indicating K.S.A. 79-102 is limited to tangible personal property). Again, since the goodwill could be moved to another location, the Court does not believe it "appertains" to the land.

The County suggests the Court cannot adopt Chequers's view that the hotel's goodwill value must be deducted from the income appraisal method to arrive at the taxable value of Sunwest's real property because no other hotel in Kansas is appraised this way for tax purposes. This argument in essence says that since all hotels in the state are taxed improperly, none is taxed improperly. The fact, if it is one, that no other hotel owner has complained of an improper assessment should not penalize the one who has, and if the one succeeds in reducing its assessed valuation, it has legitimately obtained its advantage over those who have not complained.

In Strayer, the Kansas Supreme Court recognized the existence of intangible personal property and stated that goodwill falls in that category. 239 Kan. at 142. So far as the Court is aware, the only Kansas tax referred to as being a tax on intangibles applies only to "gross earnings derived from money, notes or other evidence of debt"; before 1982, it was found in K.S.A. 1980 Supp. 79-3109, see Von Ruden v. Miller, 231 Kan. 1, 3 (1982), and it is now found in K.S.A. 12-1,101. Consequently, although no statute expressly exempts goodwill from Kansas property taxes, the Court concludes Kansas does not currently impose any tax on a business's goodwill value. See Strayer, 239 Kan. at 142-43 (intangible computer program not subject to personal property tax).

The parties have not cited, nor has the Court found, any Kansas decision which prohibited deducting goodwill value from an appraisal based on the income approach, or which expressly declared that goodwill value is properly included in the value of real estate for ad valorem tax purposes. In an appeal of the valuation of the Woodlands horse and dog racing facility in Wyandotte County, Kansas, the Kansas Board of Tax Appeals did recognize that "business" or "going-concern" value exists and might be deducted from a valuation in appropriate circumstances, but rejected the argument it should be deducted from an appraisal based on the cost of improvements to real estate. In re Appeal of Sunflower Racing, Inc., for the year 1990 and 1991, Docket No. 90-15882-EQ, (Kan. Bd. Tax Appeals, Order of September 18, 1991), aff'd on other grounds sub nom. Sunflower Racing v. Board of Wyandotte County Comm'rs, 256 Kan. 426 (1994) (issue of going-concern value not raised before Supreme Court). The Kansas Supreme Court has stated, "Unlike the income tax, the property tax is based on the value of the property itself, not on the income or economic condition of the property's owner." State ex rel. Stephan v. Martin, 227 Kan. 456, 466 (1980) (emphasis omitted). In addition, the profitable or unprofitable nature of a business is not a factor in valuing the property itself. Id. at 466-67. The Court is convinced that if they ever face the question, the Kansas state courts will conclude that an appraisal of real estate for ad valorem tax purposes which is based on the income derived not only from a business's real estate but also from services the business provides must allow a deduction for the contribution to the income of the business's goodwill.

Having reached this conclusion, the Court must now decide the value of the real property. Unfortunately, for the following reasons, the Court cannot determine the value of the improvements based on the materials presented to date, and can only determine the value of the land. As indicated, although it contains some useful information, the Court must reject the ultimate values offered by the County's appraiser, Mr. Taggert, because he made no effort to deduct the portion of the hotel's income which is attributable to the business's goodwill.

On the other hand, Chequers's appraiser, Mr. Dannis, made some mistakes as well. In calculating Sunwest's net operating income, at page 56 of his appraisal, he deducted annual franchise fees paid to be a member of a national hotel franchise, but based the amount on stated industry averages rather than the actual fees Sunwest paid, which appear to be shown on page 41 of Mr. Taggert's appraisal. While a prospective buyer might wish to take industry standards into account, the Court believes the actual cost to Sunwest is the appropriate amount to use for present purposes. The Court is also unable to accept the full amount which Mr. Dannis deducted for goodwill. He made several deductions from Sunwest's gross income for 1990 and 1991 which the Court believes in theory could be appropriate measures of the contribution of goodwill to the hotel's revenue, but he used inflated or unexplained figures for his calculations. Overstating these deductions results in a lower net operating income figure to be capitalized under the income approach to appraising the real estate, and thus a lower value than the real estate actually has. For example, at page 65 of his appraisal, Mr. Dannis determined a deduction of $385,000 should be made for certain pre-opening expenses, including a franchise sign-up fee, based on an estimate of $1,750 per room for these costs. He listed five sources he consulted before estimating these expenses, but did not otherwise explain how he arrived at his estimate. Three of the sources are Sunwest's franchisor Holiday Inn, Chequers's franchisor Ramada Inn, and the current management company for the hotel. These sources project pre-opening expenses of at least $450 per room less than the figure Mr. Dannis used. The fourth source projected $1,600 per room, while the fifth source projected expenses higher than the figure he chose. The Court concludes the per-room figure Mr. Dannis used is not adequately justified, and likely caused the contribution of goodwill to the hotel's income to be overstated. Also at page 65, Mr. Dannis projected post-opening costs of $495,000, or $2,250 per room. The Court is uncertain of the basis of an average he stated and of the assumptions he made to arrive at this figure. Again, an overstatement here will increase the portion of the hotel's income attributed to its goodwill and lower the appraised value of the real estate. Finally, the Court notes that in an article Chequers submitted in support of its claim that the value of the real estate under the income approach should not include the income attributable to the hotel's goodwill, the authors use the pre-opening costs, franchise sign-up fees, and post-opening business losses as a measure of that goodwill value, but amortize them over a period of years so that only a portion is deducted annually. See Matonis and DeRango, "The Determination of Hotel Value Components for Ad Valorem Tax Assessment," The Appraisal Journal, Vol. LXI, No.3 (July 1993) (item 13 in the appendix to Chequers's trial brief). Mr. Dannis, by contrast, appears to have deducted these items in full each year, again overstating the goodwill value.

Land value

After reviewing the evidence of the value of the land on which the hotel sits, the Court concludes that on this point, the appraisals do not suffer the deficiencies found in their valuations of the improvements. The Court accepts the County's original view, joined by Mr. Dannis, that the land value remained the same in 1990 and 1991. Based on the matching comparable sales reported in the appraisals of Mr. Taggert and Mr. Dannis, the Court concludes the land had a value of $1.24 per square foot, or a total value of $702,187, for 1990 and 1991.

1992 Real Estate Taxes

While it admits it possessed a claim against the bankruptcy estate for 1992 real property taxes, the County contends that those taxes survived confirmation because, pursuant to K.S.A. 79-1804, they are secured by a lien against the property. This position is incorrect. Under that statute, no lien could attach for these taxes before November 1, 1992. Consequently, when Sunwest filed for bankruptcy in January 1992, the taxes for that year were not yet secured by a lien on the real property. They were merely a claim that had not matured and was not due or owing. Before 1994, 11 U.S.C.A. §362 prohibited such tax liens from attaching postpetition. In re Parr Meadows Racing Ass'n (Lincoln Savings Bank v. Suffolk County Treasurer), 880 F.2d 1540, 1544-46 (2nd Cir. 1989); Baer v. Board of County Comm'rs (In re Prairie Mining), ___ B.R. ___, 1995 WL 831579 (Bankr.D.Kan. 1995). While §401 of the Bankruptcy Reform Act of 1994 added subsection (18) to §362(b) to overrule Parr Meadows and similar cases and allow statutory liens for taxes coming due postpetition to be created and perfected, that provision does not apply to cases, like this one, filed before the effective date of the Act. See Pub. L. No. 103-394, §401 and §702(b) (Oct. 22, 1994), reprinted in 1994 U.S.C.C.A.N. (108 Stat.) 4106, 4141, 4150. In the Prairie Mining case, this Court recently concluded that a real estate tax claim like the County had here was a priority claim under §507(a)(8). 1995 WL 831579, Order Denying Reconsideration, slip op. at 5-9. However, the County failed to file a claim for the 1992 taxes, and so is now barred from collecting them because the debt was discharged pursuant to §1141 and paragraphs 1.3, 1.5, 4.1, 8.8, and 8.10 of Chequers's confirmed plan. Board of County Comm'rs v. Coleman Amer. Properties (In re American Properties), 30 B.R. 239, 246-47 (Bankr.D.Kan. 1983).


The Court has been able to resolve the questions concerning: (1) the propriety of making a deduction for goodwill from the net operating income of a hotel in order to value the real property and improvements for ad valorem tax purposes; (2) the value of the land; and (3) the discharge of the County's 1992 taxes. However, rather than determine the goodwill deduction based on the evidence so far presented, the Court hereby directs the parties to prepare to present additional evidence about an appropriate amount to deduct. If they believe it to be necessary, they may, within the next thirty days, engage in additional discovery for that purpose. At the end of that time, they should inform the Court when they will be ready to present their additional evidence, and how long a hearing they will need to do so.


Dated at Topeka, Kansas, this _____ day of April, 1996.






IN RE: )











v. ) ADV. NO. 92-7100








Now before the Court are two motions filed by the Board of County Commissioners of Reno County (the County), one to amend its proof of claim in the main case and one for reconsideration of the judgment entered in the above-captioned adversary proceeding. The motions seek largely the same relief. The County appears by counsel James P. Davidson of Salina, Kansas, and Gary H. Hanson of Stumbo, Hanson & Hendricks of Topeka, Kansas. Chequers Investment Associates II (Chequers) appears by counsel Samuel M. Stricklin and Richard G. Grant of Sheinfeld, Maley & Kay of Dallas, Texas, and Jan Hamilton of Hamilton, Peterson & Keeshan of Topeka, Kansas. The Court has reviewed the relevant pleadings and is now ready to rule.

The County mainly complains about the Court's conclusion the County's claim for 1992 real property taxes was barred because the County had never filed a proof of the claim. The County suggests that Chequers was always aware of the 1992 tax claim and that certain documents constituted an informal proof of claim. However, the first document referred to was filed seven months after the reorganization plan was confirmed. Chequers's proposed plan of reorganization clearly provided that Chequers could rely on the filed proofs of claims and the debtor's schedules, and that no proof of claim could be filed or amended after the plan was confirmed. Since the 1992 taxes would have been due in December 1992 and June 1993, the County knew the amount it had determined must be paid for that year before the plan was confirmed on October 27, 1993. Nevertheless, although it objected to Chequers's plan on other grounds, it did not complain about the requirement for filing all proofs of claim before confirmation, and failed to file any claim for the 1992 taxes before that time. The Court remains convinced the County's 1992 tax claim was discharged by the confirmation of Chequers's plan.

The County also asks the Court to reconsider its ultimate acceptance of Chequers's expert witness's calculation of the value of the goodwill of the debtor's hotel business. In a preliminary ruling, the Court had indicated it had problems with several parts of that calculation. However, when the trial was reconvened for the parties to present additional evidence of the goodwill's value, the expert explained his approach to the Court's satisfaction. The Court remains convinced Kansas law requires the hotel's goodwill value to be separated from the value of the real property because ad valorem real property taxes are imposed on the value of the real property, not on that value plus the value of the intangible goodwill of the business being operated on the property. The County's appraisal method improperly included both values. The Court determined and deducted the goodwill value based on the most convincing evidence presented to it.

For these reasons, the County's motion to amend its claim and its motion for reconsideration of the judgment entered in the adversary proceeding are hereby denied.


Dated at Topeka, Kansas, this _____ day of October, 1996.




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