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#2188 signed 12-19-95



In Re:




NO. 89-40642-11


These matters are before the Court on the debtor's objections to certain tax claims asserted by several Kansas counties. The debtor had objected to the claims of many more counties in Kansas, Texas, and Arkansas, but has settled with them. The debtor has recently filed a motion for summary judgment which essentially repeats legal arguments previously presented to the Court and opposed by many of the counties. The debtor appears by counsel Mark A. Shaiken and Cindi S. Woolery. Reno County appears by counsel Joseph L. McCarville III. Finney, Ford, Grant, and Serward Counties appear by counsel William H. Zimmerman, Jr. Harvey County has also apparently not settled with the debtor and previously appeared by counsel Craig D. Cox, then but apparently no longer the County Counselor; Harvey County has not filed a response to the debtor's new motion.


The relevant facts are undisputed. When it filed for bankruptcy in May 1989, the debtor was operating about 150 retail stores, a number of which were located in Kansas. At that time, Kansas statutes (which have since been repealed) made the debtor responsible for paying to each county an ad valorem tax based on the average value of the inventory it held in that county during its federal tax year which ended before January 1. Each county where the debtor had a store would calculate the tax by multiplying this average value by the county's mill levy. The tax was assessed on January 1 but was not payable until December 20; the debtor could pay the full amount then or pay one-half then and the other half by June 20 of the following year. Except in situations not applicable here, this tax did not automatically give rise to a lien or other charge against any of the debtor's property. Instead, but for the bankruptcy stay, after the debtor failed to pay the tax when due, the county would have issued a tax warrant to the sheriff who would have tried to levy against any of the debtor's personal property, not just its inventory. K.S.A. 79-2101 (Ensley 1989). If the levy failed to collect the tax, the county would have filed certain documents with the district court of the county and the tax would have become a judgment against the debtor, enforceable like any other judgment. Id.

As relevant here, the counties assessed the inventory tax on January 1, 1988, and January 1, 1989. The debtor paid the first half of its 1988 taxes by December 20, 1988. It then filed this chapter 11 bankruptcy proceeding before the second half of its 1988 taxes became due and before any of its 1989 taxes became due. The debtor contends the Bankruptcy Code made these taxes unenforceable against its bankruptcy estate, and it has not paid them.

During the relevant tax years, the debtor sold all its inventory an average of 2.8 times per year. That is, its inventory "turned over" 2.8 times per year.


With certain exceptions not applicable here, §502(b) provides that the Court shall determine the amount of a claim and allow it in that amount "except to the extent that-- . . . (3) if such claim is for a tax assessed against property of the estate, such claim exceeds the value of the interest of the estate in such property." The debtor contends the taxes assessed against the average value of its inventory constitute claims which must be disallowed pursuant to this provision. Since it sold its inventory 2.8 times per year, it argues, the property subject to the taxes was sold before it filed for bankruptcy and so did not come into its bankruptcy estate upon filing. Alternatively, the debtor continues, if it in fact retained specific pieces of inventory which had been taxed or if inventory must be treated as an aggregate mass so that the taxes could be said to have been assessed against the inventory the debtor did have when it filed for bankruptcy, then the taxes must be disallowed because the inventory was fully encumbered by the liens of the debtor's secured creditors and the debtor's estate's interest in that inventory had no value. While these arguments have some superficial appeal, the Court believes they are ultimately flawed.

The Supreme Court has provided some guidance for construing the Bankruptcy Code which seems relevant here. In rejecting an undersecured creditor's assertion that "adequate protection" under §362(d)(1) included the right to be paid postpetition interest while the automatic stay remained in effect, the Court concluded the pre-Code practice had denied such interest and said, among other things, "Such a major change in the existing rules would not likely have been made without specific provision in the text of the statute [citation omitted]; it is most improbable that it would have been made without even any mention in the legislative history." United Savings v. Timbers of Inwood Forest, 484 U.S. 365, 380 (1988). On the other hand, in holding that §506(b) entitled nonconsensual as well as consensual oversecured creditors to postpetition interest, the Court noted that the 1978 Bankruptcy Code was intended to modernize bankruptcy law and made significant changes in its substance and procedure, and said, "In such a substantial overhaul of the system, it is not appropriate or realistic to expect Congress to have explained with particularity each step it took. Rather, as long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute." United States v. Ron Pair Enterprises, 489 U.S. 235, 240-41 (1989). The plain meaning is conclusive except when "'the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'" Id. at 242 (quoting Griffin v. Oceanic Contractors, 458 U.S. 564, 571 (1982). In addition, "[i]t is not the law that a statute can have no effects which are not explicitly mentioned in its legislative history." Pittston Coal Group v. Sebben, 488 U.S. 105, 115 (1988).

The Tenth Circuit has similarly described how this Court is to construe federal statutes like the Bankruptcy Code:

In statutory interpretation we look to the plain language of the statute and give effect to its meaning. United States v. Ron Pair Enter., Inc., 489 U.S. 235, 241 (1989); Johns v. Stewart, 57 F.3d 1544, 1555-56 (10th Cir. 1995). "'Absent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive.'" Kaiser Aluminum & Chem. Corp. v. Bonjorno, 494 U.S. 827, 835 (1990) (quoting Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980)). If the statute is clear, that is the end of our inquiry. United States v. Morgan, 922 F.2d 1495, 1496 (10th Cir.), cert. denied 501 U.S. 1207 (1991).

Schusterman v. United States, 63 F.3d 986, 989 (10th Cir.1995).

Given these directions, the Court sees two basic problems with the debtor's theories. First, §502(b)(3) states that it applies to taxes "assessed against property of the estate." Since, as the debtor argues, it did not have the inventory that created the amount of the taxes when it filed for bankruptcy, one could say the taxes were not assessed against property of the debtor's bankruptcy estate. Without stay relief, however, taxes cannot be assessed against property of the estate, so to give the provision a more reasonable scope, the Court believes it would be appropriate to construe §502(b)(3) as if it read, "assessed against property that became property of the estate." Even under this construction, though, these taxes are not included because none of the inventory on which the taxes were based ever became property of the estate. While the provision can reasonably stretch this far, the words Congress used would be twisted beyond recognition if applied to cover taxes assessed against property which never becomes property of the estate.

Second, the Kansas inventory taxes cannot accurately be said to have been assessed "against" the debtor's inventory. For most retailers, most of the specific items of inventory that contributed to the average value which had to be reported on January 1 of any year would already have been sold by that date, and any remaining items would likely have been sold by the time the taxes were due on December 20 that year and on June 20 the following year. That is, most of the property by which the taxes were measured was ordinarily gone even before the taxes were assessed, and almost certainly gone by the time the taxes were due. Under normal circumstances, for nonpayment of the taxes, the counties were given no lien or other right to attach any of the inventory that contributed to the average value or to recover any of it from the debtor's retail customers. Instead, following nonpayment, each county would have had to issue a tax warrant to the sheriff who would then levy on any of the debtor's personal property that could be found in the county. If the tax could not be collected that way, the county would have had to file documents with the district court of the county to give the tax the effect of a judgment against the debtor. Thus, the Kansas inventory taxes were assessed against the debtor based on the value of the inventory carried by the debtor in the preceding federal tax year, and not imposed against its actual inventory on hand. As the tax was assessed against the debtor and not against the property, it is not covered by §502(b)(3).

The debtor relies on a number of cases to support its position. Probably the strongest support comes from In re Schulz, 4 Bankr. Ct. Dec. (LRP Pub.) 458 (Bankr.N.D.Iowa 1978). The Schulz court held the predecessor to §502(b)(3) applied to a tax on inventory and prevented it from being a priority claim. Id. at 459-62. That provision, §64a(4) of the 1898 Bankruptcy Act, concerned the priority of tax claims, and read in pertinent part: "[P]rovided further, That no order shall be made for the payment of a tax assessed against any property of the bankrupt in excess of the value of the interest of the bankrupt estate therein as determined by the court." The legislative history of §502(b)(3) says: "Paragraph (4)(1) requires disallowance of a property tax claim to the extent that the tax due exceeds the value of the property. This too follows current law to the extent the property tax is ad valorem." H.R.Rep.No. 595, 95th Cong., 1st sess. 353 (1977); S.Rep.No. 989, 95th Cong., 2d sess. 63 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5849, 6309. However, as explained in Schulz, the courts were divided on the meaning and effect of §64a(4), at least when an inventory tax was involved. 4 B.C.D. at 460-62; see also Bristow, Some Problems Arising Out of Tax Claims in Bankruptcy, 14 J. of Nat'l Ass'n of Referees in Bankruptcy 90-91 (1940) (pointing out a number of questions that were left unanswered by §64a(4)). Furthermore, despite the statement in the legislative history, §502(b)(3) changed the language of §64a(4) from "a tax assessed against any property of the bankrupt" to "a tax assessed against property of the estate." Equivalent language under the new Code would have been "a tax assessed against property of the debtor." While such broader wording might have been more consistent with the legislative history, the narrower phrase actually used is hardly "demonstrably at odds with the intentions of its drafters." U.S. v. Ron Pair, 489 U.S. at 242. Perhaps Congress thought taxing authorities who could would enforce their taxes against the taxed property which the debtor had ceased prepetition to own or possess, and would not assert claims against the debtor's bankruptcy estate.

A leading bankruptcy treatise explains that §64a(4) of the 1898 Bankruptcy Act arose as:

Congress' response to a situation which often saw estates almost entirely depleted by taxes to the detriment of unsecured creditors in spite of the fact that such property was often thereafter abandoned to mortgagees or the taxing authorities. This was so because such taxes were construed, under many state statutes, to be taxes legally due and owing by the bankrupt personally although they may have been liens on the real estate as well.

The injustice of such payments was apparent since the payment of taxes from the bankruptcy estate would have the effect of clearing away tax claims which otherwise would have remained charges on the real estate in the hands of the mortgagees or the tax sale purchasers.

3 Collier on Bankruptcy, ¶502.02[4] at 502-42 to -43 (15th ed. 1994). This discussion attributes an understandable purpose to §502(b)(3), namely to require taxes which can follow property out of the debtor's hands to be collected from the property, or the party that winds up with it, rather than from the bankruptcy estate. However, Congress clearly did not intend to disallow all taxes that would deplete estates to the detriment of unsecured creditors. In fact, far from being disallowed, many, if not most, taxes are given priority over the unsecured claims. §507(a)(8). Taxes on or measured by income or gross receipts, for example, are equally capable of depleting an estate to the detriment of unsecured creditors even though the taxed income or gross receipts rarely come into the estate. The personal property taxes the debtor now asks the Court to disallow are collectible, if at all, only from the debtor and not from any party now owning the inventory that generated the average value which the Kansas counties taxed. The Court is convinced the Kansas inventory tax was a not terribly accurate way to measure and tax the relative size of a business, rather than a direct tax on the ownership of property. The latter is the kind of tax covered by §502(b)(3) and discussed in the Collier treatise.

Two other cases the debtor cites did apply §502(b)(3) to disallow taxes on inventory, but neither carefully considered the statutory language. Jackson County, Missouri, v. Stern-Slegman-Prins Co., Case No. 86-00227-CV-W-1, Memorandum and Orders (W.D.Mo. Aug. 29, 1986) (unpublished), involved taxes assessed against the debtor based on the value of inventory and equipment it had during the taxable years but no longer had when it filed for bankruptcy. The court said §502(b)(3) "disallows such tax claims to the extent that they exceed the value of the interest of the estate in the property upon which the taxes were based." Slip op. at 2. While §64a(4) of the Bankruptcy Act applied to taxes assessed on property of the bankrupt, §502(b)(3) clearly applies only to taxes "assessed against property of the estate." Thus, the court apparently overlooked the clear language Congress inserted into the provision. In In re DaMar Machine, 30 B.R. 256, 257-58 (Bankr.D.Me. 1983), the court applied §502(b)(3) to disallow taxes that had been assessed on equipment and inventory that had been repossessed before the bankruptcy was filed. So far as the opinion discloses, this property never became property of the estate. Without discussing the fact the statute says it applies only to taxes assessed against property of the estate, the court declared the taxes had to be disallowed because the estate had no interest in the property on which the taxes had been assessed. The opinion does not indicate whether the taxes were assessed against equipment and inventory the debtor actually possessed on a particular date or whether the taxes might have been recoverable from the new owner of the property.

The other cases Duckwall relies on all appear to deal with taxes that followed the taxed property into the hands of its eventual owner. In In re Skinner Lumber Co., 35 B.R. 31 (Bankr.D.S.C. 1983), in the course of disallowing under §502(b)(3) a claim for taxes on real and personal property which the trustee had abandoned, the court indicated that a creditor secured by the property might have to pay the tax if the estate did not, and that after the property was abandoned, it remained subject to a lien in favor of the taxing authority. In In re Spruill, 78 B.R. 766, 768-69 (Bankr.E.D.N.C. 1987), two creditors obtained stay relief, bought the real property at foreclosure sales, paid pre- and postpetition taxes on the property, and then filed claims for those taxes against the bankruptcy estate. The court disallowed the claims for the prepetition taxes under §502(b)(3) because the value of the estate's interest in the property was zero, as shown by the fact the creditors had deficiency claims after the foreclosure sales. Id. at 679-70. In Griffith v. Plainview Independent School Dist. (In re Transco Corp.), 11 B.R. 310 (Bankr.N.D.Tex. 1981), which involved taxes assessed and secured by liens against rolling stock that became property of the estate, the court disallowed, under §502(b)(3), a subrogee's claim for the taxes. In Sumitomo Trust & Banking Co. v. Holly's, Inc. (In re Holly's, Inc.), 140 B.R. 643, 694-97 (Bankr.W.D.Mich. 1992), in the course of determining whether an undersecured creditor was entitled to stay relief in a chapter 11 case, the court noted that Michigan law imposed liens for unpaid real and personal property taxes which would take priority over the creditor's security interests, so that the creditor's position would be harmed if postpetition property taxes were not paid and the property were abandoned by the bankruptcy estate.

For these reasons, the Court concludes the debtor's objections to the counties' claims for the Kansas inventory tax must be overruled. The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. Since the record is not completely clear about which counties have previously settled their dispute with the debtor, the nonsettling counties should submit one or more proposed judgments allowing their claims based on this ruling. The Court will then enter the judgment or judgments as required by FRBP 9021 and FRCP 58.

Dated at Topeka, Kansas, this ____ day of December, 1995.




1. The paragraph 4 referred to in the 1978 legislative history has been redesignated so that it is now paragraph 3. Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L.No. 98-353, §445(b)(4), 1984 U.S.C.C.A.N. (98 Stat.) 333, 373. Some of the cases discussed below were decided before this change, but were applying the provision now found in paragraph 3.


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