The principal question raised by this appeal is whether
United States v. Ron Pair Enterprises, Inc.,
The story begins in 1980, when the government filed notices of federal tax lien against two commercial properties owned by the Lapianas. The unpaid balance of the assessments underlying the lien was $70,000 (we round off all dollar figures to the nearest $1,000). A few months earlier Millard Lee, the appellant, had filed a lien against the same properties — a lien junior to the government’s tax lien — to secure a large judgment that Lee had obtained against the Lapianas. In 1981 the Lapia-nas declared bankruptcy, and the bankruptcy judge authorized the sale of one of the properties secured by the federal tax lien and by Lee’s judgment lien. The sale realized $74,000, after satisfaction of the mortgages on the property, to apply toward the payment of the liens. (Apply toward, not pay in full, because with interest on the original assessments continuing to accrue, the government’s lien alone exceeded the net proceeds of the sale.) In September 1983 the judge ordered the trustee to pay the proceeds of the sale to the Internal Revenue Service in partial satisfaction of the government’s lien. The trustee did not do so until May 1985, some twenty months later, and then all he paid was $60,000. He had embezzled the rest. Shortly afterward the Lapianas’ other property was sold, yielding net proceeds of $72,000 to apply to the liens held by the government and by Lee. The government claimed all of these proceeds too. It did so because interest on the outstanding unpaid tax assessments since the filing of the petition for bankruptcy, when computed at the rate (approximately, the Treasury bill rate plus three percent) applicable to underpayment of federal tax, 26 U.S.C. §§ 1274(d), 6621, and added to the outstanding unpaid assessments themselves, exceeded the net proceeds of the second sale, leaving nothing for Lee, the junior lienor.
In seeking the interest that had accrued on the unpaid tax assessments since the filing of the petition for bankruptcy, the government was relying on 11 U.S.C. § 506(b), which provides that an overse-cured creditor “shall be allowed ... interest on [his] claim.” (An oversecured creditor is a creditor whose security interest is
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worth more than his claim.) There is no pertinent legislative history,
United States v. Ron Pair Enterprises, Inc., supra,
The bankruptcy judge rejected the government’s argument and held that even if section 506(b) applies to involuntary liens such as a tax lien — an unsettled question at the time of his decision — the government had forfeited its rights under the statute by dragging its feet in collecting the proceeds of the first sale. The district judge reversed.
In defending its victory in the district court, the government goes the district judge one better by arguing that never, in any circumstances, may a bankruptcy court deny or reduce an award of post-petition interest to the government, provided of course that the government is overse-cured to the extent of the interest sought. This cannot be right. We put the following case to the lawyer who argued the case for the government. The Internal Revenue Service goes to the trustee and offers to compensate him if he will (1) delay paying proceeds in his possession earmarked for satisfying the IRS’s tax liens on the bankrupt’s property and (2) conceal the failure to pay from any junior lienors, who, if they got wind of the scheme, might ask the district court to hold the trustee in contempt for refusing to comply with an order to pay. The idea behind the scheme would be to enable the Treasury to earn a high interest rate, at the expense of the junior lienors and other creditors of the bankrupt, on what normally is a safe investment (an embezzling trustee is, we hope, a
rara avis).
Even in such a case, the government’s lawyer argued, the bankruptcy judge would be helpless. We do not see why. The doctrine of estoppel, limited though it may be when it is the government that is being sought to be estopped— limited indeed to cases of affirmative misconduct,
United States v. Monroe Service Co.,
It is true of course that bankruptcy, despite its equity pedigree, is a procedure for enforcing pre-bankruptcy entitlements under specified terms and conditions rather than a flight of redistributive fancy or a grant of free-wheeling discretion such as the medieval chancellors enjoyed (equity itself is no longer a discretionary system in that sense).
Boston & Maine Corp. v. Chicago Pacific Corp.,
But this is not to say that section 506(b) is an invitation to a free-for-all equity-balancing act. That would be a swing to the opposite extreme. We deprecate flaccid invocations of “equity” in bankruptcy proceedings. Creditors have rights, among them the right of oversecured creditors to post-petition interest, and bankruptcy judges are not empowered to dissolve rights in the name of equity. Flexible interpretation designed to allow the judicial interpolation of traditional defenses in a statute silent on defenses is one thing; standardless decision-making in the name of equity is another.
Ron Pair
makes clear that section 506(b) provides more than merely “guidance in the exercise of [the bankruptcy court’s] equitable powers.”
An equity free-for-all and enforcement of the statute according to its terms subject only to well-recognized defenses such as estoppel and statute of limitations are not the only alternatives. Another possibility would be to create a new equitable defense: lack of due diligence by senior lienors. Equitable defenses need not be limited to equitable claims,
Jones v. Trans-ohio Savings Ass’n,
That is one objection to creating a new equitable defense for this case; another is that it would complicate the law needlessly by requiring a searching and often inconclusive inquiry into the relative fault of debtor and creditor. This case is a good illustration of the problematics of such a defense. If the government dragged its feet, so, as the district judge remarked, did Lee, for he made no effort to keep track of whether the trustee had complied with the bankruptcy court’s order to pay the government the proceeds of the first sale. He tells us he could not have monitored the trustee’s compliance, but does not explain why not. A better point is that he may have had little incentive to do so. Since the Supreme Court had not yet decided
Ron Pair,
it was uncertain whether the govern
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ment was entitled to post-petition interest. The government was claiming it, though, and with some judicial support, illustrated by
In re Busman,
A further point complicates analysis of the equities in this case. The government’s foot dragging began sometime after September 1983, for it was not until then that the bankruptcy judge ordered the trustee to pay the government the proceeds of the first sale. By then, however, the unpaid tax assessments plus post-petition interest to which Ron Pair clearly entitles the government approximated $94,000, no part of which can be abated on the ground of the government’s foot dragging. Lee is not content to seek the difference between that amount and the proceeds of the two sales. He seeks the entire proceeds of the second sale. That is overreaching, and rather undermines his equitable claim. He does, it is true, propose in the alternative that the government should at least be denied the full, compound interest to which the statutes applicable to underpayments of federal income tax would otherwise entitle it. The government showed a greater want of care than Lee, and perhaps if this were a pure case of equity balancing that would be enough to give him the partial victory that his fall-back position seeks. But defenses must be crafted with reference to the generality of cases, not the idiosyncratic ones. After Ron Pair, junior lienors know they must monitor their seniors’ compliance with payment orders, and since they can protect themselves in this way we see no urgent need to complicate the law by creating a new defense of uncertain boundaries and dubious compatibility with the rules on estopping the government.
The Internal Revenue Service would be well advised, however, to institute a procedure for notifying junior lienors of the status of the Service’s liens; we were told at argument, without contradiction, that no such procedure exists. The existence of such a procedure would at small cost lighten the burden that we conclude rests on the junior lienor to protect himself from the consequences of section 506(b) and would head off lawsuits such as this. Nevertheless there was no error in the district judge’s order reversing the bankruptcy judge and that order is therefore
Affirmed.