In Re Gould & Eberhardt Gear MacHinery Corp.
MEMORANDUM
This matter is before the Court on appeal from a decision by the United States Bankruptcy Court,
The facts are undisputed. On August 30, 1982, Gould & Eberhardt Gear Machinery Corporation (the “Debtor”) filed for relief under Chapter 11 of the Bankruptcy Code. During the course of the proceeding, the Debtor failed to pay on a current basis various taxes owed to appellants, the United States and the Commonwealth of Massachusetts. These obligations accrued after the date the petition for reorganization was filed. As a result of the Debtor’s failure to pay these debts as they became due, the Debtor incurred penalties and interest.
In October, 1986, the Debtor filеd a Plan of Reorganization. The Plan proposed to pay the United States and the Commonwealth the total amount of their tax claims without interest and penalties, over a period of two years, with one-third of each claim to be paid immediately on confirmation. Both tax authorities objected to the Plan on the grounds that their claims, including accrued penalties and interest constituted administrative expenses of the reorganization which are entitled to priority status under Section 507(a)(1) of the Bankruptcy Code and thus, to payment in full prior to confirmation of the Debtor’s Plan.
See
The courts are divided over the issue of whether interest accruing on post-petition taxes is allowable as an administrative expense pursuant to Section 503(b) of the Bankruptcy Code.
See, e.g., In re Stack & Steel Supply Co.,
Prior to the enactment of Section 503(b)(1), the Supreme Court had decided
Nicholas v. United States,
The discussion in Nicholas which approves the accrual of interest on debts incurred during the course of a Chapter XI arrangement provided the backdrop for the enactment of Section 503(b)(1). Section 503(b)(1) does not explicitly mention interest on post-filing taxes. However, the legislative history of that section indicates that a Senate version of the statute did contain a provision expressly including intеrest as an administrative expense. See S.Rep. No. 989, 95th Cong., 2d Sess. 66 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787. This provision was not present in the House bill, the version that was later enacted. See H.R. 8200, 95th Cong., 1st Sess. § 503(b)(1) (1977). As the Bankruptcy Court noted, the legislative record is silent as to why the provision relating to interest was dropped. Discussion on the floor of Congress merely indicates that the House version of § 503(b)(1) was adopted as altered by the Senate bill. See 124 CONG.REC. H 11094-95 (daily ed. ■ Sept. 28, 1978) (Statement of Rep. Edwards); 124 CONG.REC. § 17411 (daily ed. Oct. 6, 1978) (statement of Sen. DeConcini).
From this legislative history, the Bankruptcy Court inferred that Congress deliberately intended to exclude interest on post-petition taxes from the scope of § 503(b). Althоugh this conclusion is not implausible, I am unwilling to infer that the legislative history conveys a definitive intent to deprive the tax authorities from any claim to interest when a debtor fails to pay the obligations arising from its continued operation of its business in a timely fashion. It is equally plausible that Congress felt the inclusion of a specific provision respecting interest was unnecessary in light of the Supreme Court’s holding in
Nicholas.
In the same vein, Congress might also have intended the term “tax” to encompass any interest accruing on a tax obligation.
See In re Associated Air Services, Inc.,
In addition to the inadequacy of evidence supporting a Congressional intent to exclude post-petition interest, a decision to allow the interеst claims is supported by the policies enunciated in cases concerning post-petition interest.
See, e.g., Sexton v. Dreyfus,
In the present case, the record indicates that the delay in payment giving rise to the claims for interest asserted by thе appellants was not the result of the time-consuming procedures of administering the reorganization or by virtue of any court order deferring payment. To the contrary, the record indicates that early on thе Debt- or was ordered by the Bankruptcy Court to pay all of its post-petition indebtedness, including the tax claims at issue here, or the case would be converted automatically into a Chapter 7 liquidation. Sevеral times, the Debtor gained an extension for the time within which payment must be made by promising that its obligations would be paid as soon as it could obtain a much needed influx of new capital.
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On this record, I perceivе none of the legal delays that have caused other courts to find it inequitable to grant claims for post-petition interest.
See In re Boston & Maine Corp.,
A decision allowing appellants’ claims for interest as administrative expenses is also consistent with the policies underlying the Bankruptcy Code’s treatment of administrative expenses as debts entitled to first priority which must be paid in full before a Plan for Reorganization may be confirmed. Although the fundamental goal of Chapter 11 is the ultimate rehabilitation of a debtor, the treatment of administrative expenses as debts entitled to first priority status suggests an overriding policy that a debt- or’s efforts to reorganize shall be financed by the debtor, not the debtor’s post-petition creditors. As stated by the court in
In re Thompson,
... to hold otherwise would be, in effect, to grant the debtors an interest free loan at the expense of the government. In Re Boston & Maine Corp., supra,719 F.2d at 502 (Campbell, C.J. concurring in part and dissenting in part). If the debtors choose to finance their reorganization effort with funds that would otherwise be used to pay taxes, then interest on the taxes may fairly be considered as an аctual and necessary cost of preserving the estate allowable as an administrative expense under section 503(b)(1)(A).
The Bankruptcy Court decided that the equities of this case favored the denial of аppellants’ claims for interest as administrative expenses of the reorganization. This decision was premised on the fact that the assets of the Debtor are insufficient to pay the interest claims; consequently, a decision favorable to the appellants would prevent confirmation of the Debtor’s Plan for Reorganization. Implicit in the Bankruptcy Court’s reasoning, however, is the proposition that if the assеts were indeed sufficient to cover the interest claims, the claims would be entitled to treatment as administrative expenses.
I do not believe that the status of appellants’ claims as administrative expenses should turn on the value of the assets owned by the Debtor and their sufficiency with respect to claims against the estate. The Bankruptcy Court, while a court of equity, does not have the power to replacе statutory provisions. Once it is decided that an expense constitutes an administrative expense within the scope of section 503(b), the Bankruptcy Court is without power to relieve the Debtor of its obligation to рay these expenses prior to
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confirmation.
See In re Air Associates, Inc.,
Order accordingly.
Notes
. Chapter XI arrangements are one of the predecessors of the Bankruptcy Code's Chapter 11 reorganizations. See H.R.Rep. 595, 95th Cong., 1st Sess., 5 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5963.
. Nothing in the record indicates that the appellants waived their claims to interest by agreeing to give the Debtor more time to obtain money with which to pay its tax debts.