#2160 signed 8-21-95
Published. Judgment entered later (appended).
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
PRAIRIE MINING, INC.,
ROBERT L. BAER, TRUSTEE,
BOARD OF COUNTY COMMISSIONERS OF JOHNSON COUNTY, KANSAS,
ADV. NO. 94-7094
MEMORANDUM OF DECISION
This proceeding is before the Court for resolution of the trustee's attack on various aspects of real
and personal property tax claims asserted by the Board of County Commissioners of Johnson
County, Kansas (Johnson County). The trustee appears as his own counsel in this proceeding.
Johnson County is represented by Assistant County Counselor Roger L. Tarbutton. The Court
has reviewed the relevant pleadings and is now ready to rule on what it perceives to be the major
issues between the parties.
The pertinent facts are not in dispute. The debtor owned real and personal property located in
Johnson County which it had pledged to the Equitable Life Assurance Society (Equitable). After
the debtor defaulted on its obligations, Equitable filed suit and obtained a judgment foreclosing its
mortgage and security interest. On July 6, 1993, before any sale based on that judgment
occurred, the debtor filed a chapter 11 petition. At that time, the real property taxes for 1989
through 1992 and the personal property taxes for 1991 and 1992 which it owed Johnson County
were unpaid and overdue. The case was converted to chapter 7 on March 24, 1994, and
Equitable was granted stay relief to sell the real property. Real property taxes for 1993 and 1994
and and personal property taxes for 1993, 1994, and, if any are owed, 1995 also remain unpaid.
All of the property which could be subject to tax liens in favor of Johnson County has been sold
free and clear, with the liens, if any, to attach to the sale proceeds. Money to pay the real estate
taxes is in escrow, and the trustee has set aside enough money to pay the personal property taxes.
DISCUSSION AND CONCLUSIONS
At this time, the Court is prepared to rule on the following questions: (1) whether Equitable's
foreclosure judgment and Johnson County's possible tax liens prevented any of the debtor's
property from becoming property of the bankruptcy estate; (2) whether property subject to any
Johnson County liens which the trustee cannot avoid should be distributed pursuant to §724(b),
which invades property securing tax liens to the extent necessary to pay claims having priority
under §507(a)(1) through (7); (3) whether 11 U.S.C.A. §545(1)(A) empowers the trustee to
avoid any personal property tax lien Johnson County might have; and (4) whether portions of
Johnson County's claim qualify as administrative claims under §503 or priority claims under §507.
The Court will first discuss what property became property of the estate, then discuss the other
issues relating to the real property, and finally, the other issues relating to the personal property.
1. Property of the Bankruptcy Estate
Johnson County contends that the debtor's real and personal property which had been subject to the County's taxes (and so, the proceeds of that property) were not property of the bankruptcy estate. The Court cannot agree. Although a foreclosure judgment had been entered before the debtor filed for bankruptcy, no sheriff's sale of the real property had been held. Consequently, the debtor retained both legal and equitable title on the date it filed its petition, and the real property became property of its estate pursuant to 11 U.S.C.A. §541. See United States v. Whiting Pools, Inc., 462 U.S. 198 (1983); In re Thompson, 894 F.2d 1227 (10th Cir. 1990); In re Application of SBA for Ad Valorem Tax Exemption, 14 Kan.App 2d. 879 (1990). The real property remained property of the estate until it was sold after stay relief was granted, and the sale proceeds that were placed in escrow remain property of the estate until the trustee's dispute with Johnson County is resolved.
No shad the debtor voluntarily turned the property over before it filed its chapter 11 petition.
Even more clearly than the real property, the personal property became property of the estate
under §541 on the date the case was filed. After the case was converted to chapter 7, the trustee
sold the personal property free and clear with any liens attaching to the proceeds. The personal
property remained property of the estate until the trustee sold it, and then it was replaced by the
sale proceeds. Johnson County cites no law in support of its contrary position regarding the
2. Real Property Tax Claims
Under Kansas law, real estate is appraised as of January 1, K.S.A. 1994 Supp. 79-503a,(1) taxes on it become due on November 1, K.S.A. 79-1804, and the taxes are payable on December 20 or one-half on December 20 and one-half on the following June 20, K.S.A. 1994 Supp. 79-2004.(2) A lien for the taxes attaches automatically on November 1 and continues in effect until the taxes plus any penalties and interest which may have accrued are paid. K.S.A. 79-1804.
The real estate taxes for 1989 through 1992 were due and payable before the debtor filed for bankruptcy, and were secured by nonavoidable liens on the debtor's real property. Section 724(b) of the Bankruptcy Code provides in pertinent part that property subject to such a tax lien is to be distributed: (1) first to any holder of a nonavoidable lien that is senior to the tax lien; (2) second to any holders of claims specified in §507(a)(1) through (7) to the extent of the allowed amount of the tax claim that is secured by the lien; (3) third to the holder of the tax lien to the extent that the allowed amount of its claim that is secured by the lien exceeds any amount distributed to claims under clause (2); (4) fourth to the holder of an allowed claim secured by a lien that is junior to the tax lien; (5) fifth to the holder of the tax lien to the extent its secured claim was not paid under clause (3); and (6) sixth to the bankruptcy estate. There are no liens senior to Johnson County's liens, so assuming there are administrative expense claims against the debtor's estate which arise from activities other than disputes about the tax liens on the real property, see Oakland County Treasurer v. Allard (In re Kerton Industries), 151 B.R. 101, 102-03 (E.D.Mich. 1991) (§724(b) may not be applied where the only priority claims that would be paid are the expenses of the sale of the property subject to the tax lien); see also 3 Norton Bankruptcy Law & Practice 2d, §71:3 at 71-6 to -7 (1994) (approving reasoning of Kerton Industries case), §724(b) will require the trustee to distribute the proceeds subject to the 1989 through 1992 tax liens first to §507(a)(1) through (7) claimants before distributing the remainder to Johnson County.
The debtor's real property was to be appraised for 1993 taxes by March 1, K.S.A. 1994 Supp. 79-1460,(3) before the debtor's bankruptcy filing, but the taxes were not due or secured by a lien by then, K.S.A. 79-1804. The automatic stay prevented any lien for these taxes from attaching postpetition. §362(a)(4); In re Parr Meadows Racing Ass'n (Lincoln Savings Bank v. Suffolk County Treasurer), 880 F.2d 1540, 1544-46 (2nd Cir. 1989). Instead, they became a priority claim pursuant to §507(a)(8)(B). The debtor's 1994 taxes were not assessed prior to bankruptcy, and so do not become priority claims under §507(a)(8)(B). Instead, they are administrative expenses under §503(b)(1)(B).
Johnson County argues that it has a perpetual interest in all the real estate in the county so that its
tax liens relate back to a time prior to the debtor's bankruptcy filing, even for taxes that are not
assessed or due until later. It relies on Maryland National Bank v. Mayor of Baltimore (In re
Maryland Glass Corp.), 723 F.2d 1138 (4th Cir. 1983), which expresses the minority view on
this point. This Court agrees instead with the majority view as expressed in Parr Meadows, 880
F.2d at 1546-49 and Makaroff v. City of Lockport, 916 F.2d 890, 893-94 (3rd Cir. 1990). The
county does not have an "interest" in all real property within its realm of the sort which may be
perfected postpetition under §546(b),(4) nor does Kansas law provide for any reference back of the
county's real property tax liens when they are created on November 1. While §401 of the
Bankruptcy Reform Act of 1994 added subsection (18) to §362(b) to help ad valorem taxing
authorities by overruling the majority line of cases and allowing statutory liens for taxes coming
due postpetition to be created and perfected, that provision does not apply to cases 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 cases filed after October 22,
1994, Johnson County may obtain a lien under this amendment, but not in cases like this one that
were filed before then.
3. Personal Property Tax Claims
Kansas law regarding the taxation of personal property is much the same as that for real property. "All tangible personal property subject to taxation shall be listed and assessed as of the first day of January each year in the name of the owner thereof." K.S.A. 79-301. "On or before March 15 of each year . . . every . . . corporation required by this act to list property shall make and personally sign a statement listing all tangible personal property which by this act such person is required to list . . . as the . . . agent . . . and deliver the same to the county appraiser." K.S.A. 1994 Supp. 79-306.(5) The county appraiser is to notify the taxpayer by May 1 of any change in the classification or valuation of its personal property. K.S.A. 1994 Supp. 79-1460.(6) Though taxes are due on November 1st of each year, K.S.A. 79-1804, they are payable in full on or before December 20th or payable one-half on or before December 20 and one-half on or before June 20 of the following year, K.S.A. 1994 Supp. 79-2004a.(7) "If any owner of personal property surrenders or transfers such property to another after the date such property is assessed and before the tax thereon is paid, whether by voluntary repossession or any other voluntary act in reduction or satisfaction of indebtedness, then the taxes on the personal property of such taxpayer shall fall due immediately, and a lien shall attach to the property so surrendered or transferred, and shall become due and payable immediately." K.S.A. 79-2020.
A federal district judge in the District of Kansas has held that the filing of a voluntary bankruptcy petition triggers K.S.A. 79-2020, so that a lien for unpaid taxes attaches to the personal property that becomes property of the estate. In re Knights Athletic Goods (Board of County Comm'rs v. Knights Athletic Goods), 98 B.R. 553, 554-55 (D.Kan. 1989) (Kelly, J.) ("Knights I"). However, in a later proceeding in the same bankruptcy case, another district judge held that the lien thus created is a statutory lien which can be avoided pursuant to 11 U.S.C.A. §545(1)(a). In re Knights Athletic Goods (Sorenson v. Board of County Comm'rs), 128 B.R. 679, 683-84 (D.Kan 1991) (Crow, J.) ("Knights II"). Under these rulings, Prairie Mining's personal property taxes for the years 1993 and before became due and payable when the company filed its chapter 11 petition, and became secured by an avoidable lien on that date.
Johnson County contends that an unpublished ruling by still another district judge in some way changes the result of Knights II by allowing the lien created by the debtor's transfer of its property to the bankruptcy estate to relate back to January 1 for perfection purposes. Butler County v. Bank of the West, No.92-1515-MLB, Memorandum and Order (Oct. 8, 1993) (Belot, J.). The Court cannot agree. First, that ruling concerned escaped taxes under K.S.A. 79-1475 and the question was whether a lien imposed by 79-2020 could follow the personal property into the hands of a party who bought it at a bankruptcy sale. Bankruptcy Code §545 and Knights I and II were apparently not considered, presumably because the bankruptcy estate was not involved in the appeal. Second, this Court does not agree that the words "as of" in K.S.A. 79-301 mean that the lien created upon transfer relates back to a time before the transfer; all they mean is that the extent of the taxpayer's taxable property and its value are fixed and measured "as of" January 1. Any lien under K.S.A. 79-2020 originates when a transfer occurs, and the transfer involved in this case occurred when the debtor filed for bankruptcy. Pursuant to Bankruptcy Code §545, such a lien is avoidable. Under Kansas law, in the absence of a transfer, Johnson County does not obtain any lien on the taxpayer's personal property, but instead must collect its taxes through a warrant directing the sheriff to levy on personal property. K.S.A. 1994 Supp. 79-2017.(8)
During the bankruptcy proceeding, the debtor was obliged to list and assess, as of January 1,
1994, its personal property that was subject to taxation. Although Johnson County was
prohibited by 11 U.S.C.A. §362(a)(4) from any act to create, perfect, or enforce any lien against
property of the estate, the 1994 taxes on the estate's personal property became administrative
expense claims pursuant to 11 U.S.C.A. §503(b)(1)(B)(i). Johnson County contends a lien for
these taxes was created through the operation of any of several state statutes when the trustee
sold the property. See K.S.A. 79-2109, -2110, and -2111. The Court disagrees; §362(a)(4)
prohibits the imposition of such liens against property of the estate. In fact, the county is better
off with an administrative expense claim than a lien. If a lien arose, the trustee could distribute the
proceeds of the property under §724(b), paying claims having priority under §507(a)(1) through
(7) before paying to the county the balance, if any, of the amount secured by its lien. The 1994
personal property taxes arose while the debtor was in chapter 11 and are therefore an
administrative claim of the chapter 11 portion of the case. Any claim for 1995 personal property
taxes arose after the case was converted, and so constitutes an administrative claim of the chapter
7 portion of the case.
For these reasons, the Court concludes the real and personal property in dispute all became
property of the debtor's bankruptcy estate. Johnson County's liens for real property taxes for
1989 through 1992 are not avoidable but, so long as there are administrative expense claims other
than those incurred in disputes about the tax liens on that property, the proceeds subject to the
liens are to be distributed as provided by §724(b). The 1993 real property taxes are a priority
claim under §507(a)(8), and the 1994 real property taxes are administrative expense claims under
§503(b)(1)(B)(i). A lien for the personal property taxes for 1993 and before attached to the
property when the debtor filed for bankruptcy, but the trustee may avoid the lien under
§545(1)(A). Any personal property taxes owed for 1994 are an administrative claim of the
chapter 11 portion of the case, and any owed for 1995 are an administrative claim of the chapter 7
The Court is uncertain whether these conclusions will enable the parties to resolve any remaining
disputes they may have. Consequently, a status conference is hereby scheduled for Thursday,
September 14, 1995, at 11:00 a.m. The parties are directed to be prepaieve have not been
resolved by this order.
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. A judgment based on this ruling will not be entered on a separate document as required by FRBP 9021 and FRCP 58 until any remaining disputes the parties may have are resolved.
Dated at Topeka, Kansas, this 21st day of August, 1995.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: )
PRAIRIE MINING, INC., ) NO. 93-41090-7
) CHAPTER 7
ROBERT L. BAER, TRUSTEE, )
v. ) ADV. NO. 94-7094
BOARD OF COUNTY COMMISSIONERS )
OF JOHNSON COUNTY, KANSAS, )
JUDGMENT ON DECISION
This proceeding was before the Court for resolution of the trustee's attack on various aspects of real and personal property tax claims asserted by the Board of County Commissioners of Johnson County, Kansas (Johnson County). The trustee appeared as his own counsel. Johnson County was represented by Assistant County Counselor Roger L. Tarbutton. The Court reviewed the relevant pleadings and on August 21, 1995, issued its Memorandum of Decision which resolved the parties' disputes.
For the reasons stated in the Memorandum of Decision, judgment is hereby entered as follows. The real and personal property in dispute all became property of the debtor's bankruptcy estate. Johnson County's liens for real property taxes for 1989 through 1992 are not avoidable but, since there are administrative expense claims other than those incurred in disputes about the tax liens on that property, the proceeds subject to the liens are to be distributed as provided by 11 U.S.C.A. §724(b). The 1993 real property taxes are a priority claim under §507(a)(8), and the 1994 real property taxes are an administrative expense claim under §503(b)(1)(B)(i). A lien for the personal property taxes for 1993 and before attached to the property when the debtor filed for bankruptcy, but the trustee may avoid the lien under §545(1)(A). Any personal property taxes owed for 1994 are an administrative claim of the chapter 11 portion of the case, and any owed for 1995 are an administrative claim of the chapter 7 portion.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this 12th day of February, 1996.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
1. 2. 3. 4. 5. 6. 7. 8.
1.The 1990 amendment to this statute made no changes affecting this decision.
2.The 1989, 1992, and 1994 amendments to this statute made no changes affecting this decision.
3.The 1994 amendment to this statute made no changes affecting this decision.
4.Section 204 of the Bankruptcy Reform Act of 1994 amended §546, but applies only to cases filed after the effective date of the Act, October 22, 1994, so the Court has not considered what impact, if any, it might have had on this case. See Pub. L. No. 103-394, §204(b) and §702 (Oct. 22, 1994), reprinted in 1994 U.S.C.C.A.N. (108 Stat.) 4106, 4122, 4150.
5.This material is quoted from the statute as amended in 1992. None of the changes made by the 1992 amendment affect this decision.
6.Although this statute was amended in 1990, 1991, 1992 and 1994, none of the amendments made changes affecting this decision.
7.The 1992 amendment to this statute made no changes affecting this decision.
8.This statute applies only to Sedgwick, Johnson, Wyandotte, and Shawnee counties. The procedure for other counties to collect personal property taxes is largely the same but with different time limits. See K.S.A. 1994 Supp. 79-2101.