508 B.R. 891
Bankr. D. Del.2014Background
- Debtors' plan funds withheld employee wages for pre-petition wages, remitted to IRS, but IRS allocated funds to Employer Liability instead of Trust Fund Liability.
- Debtors sought to apply withheld amounts to Trust Fund Liability or to enforce Plan injunctions; IRS claimed Employer Liability and potential responsible person liability.
- IRS did not file a proof of claim for Employer Liability by Bar Date; Plan injunctions issued to prevent collection of pre-petition claims.
- Courts recognized Trust Fund vs. Employer Liability taxes; Trust Fund taxes are withheld for employee benefit and are generally pre-petition unless post-petition accrual creates administrative claims.
- Debtors argue designation of Withheld Amounts to Trust Fund Liability is necessary for Plan integrity; IRS argues designation is constrained by EFTPS rules and Energy Resources framework.
- Court must determine (a) whether Employer Liability is pre-petition and not barred, (b) whether IRS needed to file a claim, and (c) whether designation of Withheld Amounts to Trust Fund Liability is warranted based on evidence in record.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Employer Liability is a pre-petition claim and not barred. | Debtors: Employer Liability pre-petition; IRS claim barred by Bar Date and Plan injunction. | IRS: Tax accrual after wages paid makes liability post-petition; administrative claim possible. | Employer Liability is a pre-petition claim; not barred by Bar Date or Plan injunction. |
| Whether IRS needed to file a proof of claim for Employer Liability. | IRS not required to file claim before wages paid; pre-petition wages trigger IRS right to payment. | Bar Date/claims process require filing for pre-petition liabilities; post-petition accrual possible. | IRS not required to file a proof of claim for Employer Liability; no bar. |
| Can Court designate the Withheld Amounts to Trust Fund Liability rather than Employer Liability? | Designation is necessary to preserve Plan integrity and avoid personal liability; EFTPS constraints support designation. | Designation depends on Energy Resources framework and record of necessity; EFTPS/Deposits complicate designation. | Court cannot designate without additional evidence; designation denied without prejudice. |
| Is Energy Resources and related caselaw applicable to the Chapter 11 liquidation context here? | Debtors rely on Energy Resources to justify designation if necessary for plan success. | Energy Resources split; applicability in liquidations uncertain; Deer Park persuasive. | Court acknowledges split authority but cannot decide designation on record; denial without prejudice. |
| What is the overall conclusion regarding the Debtors' motion? | Debtors seek enforcement of injunctions and designation. | IRS rights to Employer Liability and potential claims remain intact; designation uncertain. | Motion granted in part as to (i) and (ii) with prejudice; denied in part as to (iii) without prejudice. |
Key Cases Cited
- U.S. v. Redmond, 36 B.R. 932 (D. Kan. 1984) (tax accrual controls timing of incurrence; prepetition claim)
- In re Hillsborough Holdings Corp., 156 B.R. 320 (Bankr. M.D. Fla. 1993) (accrual timing for prepetition taxes; not administrative expense)
- United States v. Energy Resources, Inc., 495 U.S. 545 (1990) (bankruptcy court power to designate tax payments to trust fund liabilities)
- In re Deer Park, Inc., 136 B.R. 815 (9th Cir. BAP 1992) (case-by-case designations; liquidation context)
- In re Kaplan, 104 F.3d 589 (3d Cir. 1997) (designation rights under regulatory framework)
- In re Thorne, No. 09-04515-8-SWH, 2011 WL 1118487 (Bankr. E.D.N.C. 2011) (voluntary vs involuntary payments designation; Energy Resources framework)
- United States v. Pepperman, ? (Third Circuit) (1993) (designation rights in general context)
- In re Deer Park, Inc., 136 B.R. 815 (9th Cir. BAP 1992) (see above)