Matter of West Texas Marketing Corp.

intеrpretation Singh particular selected these victims to be our of U.S.S.G. 2D1.1. We however, agree, vul- target of his crime because of that that the district court failed Therefore, nerability. enough apply we remand to the dis- to adduce evidence to U.S.S.G. and, fact-finding resentencing trict court for additional if 3A1.1 and remand for on that necessary, resentencing on the issue of part, issue. We therefore affirm in reverse Pelkey, § 3A1.1. United States v. 29 F.3d part, resentencing. and remand for Cf. (1st Cir.1994) (remanding for resen- PART, AFFIRMED IN IN REVERSED tencing 5K2.3 under U.S.S.G. when district PART, AND REMANDED FOR RESEN- support court’s conclusions did not its factual TENCING. harm); Rusher, departure psychological (remanding 966 F.2d 883-85 resentenc-

ing explain when the district did its upwardly departing

reasons for from the rec- history category pursu- criminal

ommended 4A1.3).

ant to U.S.S.G.

B. Finally, Singh argues Dr. that we should In the Matter of WEST TEXAS long-standing precedent reverse and hold CORPORATION, MARKETING sentences under 2D1.1 U.S.S.G. Debtor. should be calculated based on the active weight of the controlled substances rather KELLOGG, Trustee, Walter C. West gross weight than the of the substance and Marketing Corporation, Texas Although Singh strenuously its carrier. Dr. Appellant, v. otherwise, attempts persuade us we are by unequivocal precedent. bound circuit (Internal America, UNITED STATES of Daly, United States v. 883 F.2d 315-18 Service), denied, (4th Appellee. Revenue Cir.1989), cert. 496 U.S. 2622, 110 (1990), S.Ct. L.Ed.2d 643 we decid- No. 94-10089. plain ed that both the text of the Guidelines plain language Appeals, United States Court of underlying congressional Fifth sentencing act instructed Circuit. apply gross weight theory

courts to May Then, sentencing. United States Mei tinger, 901 F.2d Cir.), cert. de

nied, S.Ct. (1990), theory

L.Ed.2d applied we

defendants, Singh, Dr. like convicted of ille

gally distributing pharmaceutical controlled precedents soundly

substances. These were

decided, Singh’s and we will not Dr. consider

invitation to reexamine them.

IV. reasons, foregoing

For the we affirm Dr. conviction,

Singh’s the district court’s failure instruction, give jury entrapment Singh’s Dr. its denial of motion for a new reject Singh’s challenge

trial. We also Dr. victims from other victims this crime. These court must evaluate individual basis. fact-specific determinations that the district Shepard, Fresno, CA, James I. for amicus

curiae. Oppenheimer,Atty., Gary Allen, Joan I. R. Chief, Appellate Sec., Mosakowski, Linda E. Gary Gray, Attys., Div., Dept. D. Tax Justice, Washington, DC, appellee. SMITH, BARKSDALE, Before Judges, FITZWATER,1 Circuit District Judge. BARKSDALE, RHESA HAWKINS Judge: Circuit Chapter liquidation At issue in this holding whether the district court erred in Marketing the estate of West Texas Corporation (WTMC), debtor, (1) could not, purposes, for federal income tax accrue post-petition and deduct puted interest on undis- general claims; and resolved unsecured penalty, was liable for a tax even though the Internal Revenue Service as- period sessed it outside the allowed Code. We AF- FIRM.

I. stipulated facts, This case was tried on developed fully which are more in In re West Mktg. Corp., (Bankr. Texas N.D.Tex.1993), 155 B.R. 399 and are restated here necessary. voluntary WTMC filed a bankruptcy petition Chapter 11 of the Bankruptcy Code; but, the Chapter liquidation converted the case to a in 1983. 1991,Kellogg, estate, as trustee for the filed amended tax returns for 1988and previ on the basis that the estate ‍‌​​​​​‌​​​​‌‌​‌​​‌‌‌​‌‌‌​‌​​‌‌‌‌​​​‌​‌‌​​​​‌‌​​‌‍failed ously post-petition to deduct interest on un disputed and resolved unsecured 1989; and, (2) claims for 1988 and could operating carryforwards Stacy Obenhaus, Flagg, deduct net loss R. Brett B. Garere based, part, post-petition Wynne, Dallas, TX, appellant. interest for

& sittingby designation. Judge Texas, 1. District oftheNorthernDistrictof through such claims for 1982 1987.2 On that “[w]hat claims creditors are valid and return, Kellogg sought subsisting obligations against WTMC’s 1991 also bankrupt petition filed, deduct at the time interest for such unse- which, expense question cured claims. The total interest is a in the absence of overrul- million, law, approximately ing with a total by re- federal is to be determined refer- $12.6 161, claim approximately fund million. ence to state law.” Id. at 67 S.Ct. at 239 $1.1 added). Thus, (emphasis validity The IRS any disallowed the refunds. may prior interest that have accrued to the addition, prior attempt In to the to deduct filing petition of the generally by is resolved interest, IRS had assessed But, filed, petition state law. once the penalty approximately $23,000 against 163, law federal controls. Id. at 67 at S.Ct. 1989, WTMC for because it'failed make (“[w]hen 240 and under what circumstances , payments. Eventually, estimated tax federal courts will allow interest on claims penalty against IRS set off this a refund due against being debtors’ estates administered WTMC for 1988. by long by them has been decided federal of, alia, As a result inter both actions law”). IRS, Kellogg adversary pro- filed this ceeding. relief; court denied 446(a) 461(a) Sections In of the the district court affirmed. provide ternal Revenue Code taxable computed, taken, income is and deductions

II. accounting under the method that the tax payer normally uses for his books. I.R.C. A. 461(a).3 446(a), §§ WTMC maintained its that, goes saying It generally, pur- without books, and calculated its federal income 163, corporation may suant to I.R.C. liability, utilizing the accrual method. Under paid deduct all interest or accrued within the method, determining standard for year taxable Kellogg indebtedness. main- expense when an has been incurred fed liability tains that post- WTMC’s vel non for purposes eral income tax has been “all petition question is a of state law: issue, During years events” test. at that, because the unsecured claims constitute required test that two elements be met be liability filed, a fixed petition when the was fore accrual expense of an would be allowed: statutory the Texas rate of 6% establishes first, all the events must have occurred that present and liability unconditional for inter- and, establish liability; the fact of the sec claims; est on those and that federal law ond, the amount liability must be priority determines of how assets of capable being determined with reasonable the estate are to be distributed in satisfaction accuracy.4 Only the first element is at issue. against the claims it. “[Although expenses may be deductible

In Vanston they Bondholders Protective befоre payable, have become due and Green, 156, 237, Comm. v. 329 liability U.S. 67 S.Ct. firmly must first be established.... (1946), 91 L.Ed. 162 recognized the Court taxpayer may liability [A] not deduct a that is accounting period 2. WTMC’s Treasury Regulation runs from October 4.The in force from 1982 to September example, year 1 to 30. For provided taxable expense 1991 that "an is deductible for 1, 1987, represents 1988 September October year the taxable in which all the events have 30, 1988. occurred which determine the fact of the and the amount thereof can be determined with 446(a) provides: I.R.C. "Taxable income accuracy”. Treas.Reg. § reasonable 1.461- computed shall be under the method of account- 1(a)(2) (1991). 1992, Regulation ing taxpayer on the regularly basis of which the provide expenses modified to for the deduction of computes keeping his income in his books”. year "in the taxable which all the events have 461(a) provides: occurred that liability, I.R.C. establish the fact "The amount of deduction the amount or credit allowed this subtitle shall can be determined year proper accuracy, perfor- taken for the taxable which is the reasonable and economic year taxable accounting respect under the method liability”. mance has occurred with computing (a)(2)(i) used in (1992). taxable Treas.Reg. § income”. 1.461-1 Code sets 502 of v. General States United contingent....” post- that claims for 239, 243, 107 S.Ct. forth a Corp., 481 U.S. Dynamics (1987); against accord are not allowed petition 1736, 1732, 95 L.Ed.2d Inc., 502(b)(2).6 Properties, Hughes One v. estate. 11 U.S.C. United 600-01, 106 provision is that principles underlying S.Ct. (1986). describing this non- stops accruing at the date of the L.Ed.2d “interest H.R.Rep. Supreme Court requirement, contingent petition.” filing of the No. liability be “fixed reprinted in required (1977), also that has Cong., 1st Sess. 353 95th Hughes, 476 U.S. S.R.Rep. absolute”, at 5963, 6309; No. 1978 U.S.C.C.A.N. Helvering, Brown (quoting (1978), S.Ct. reprinted Cong., 2d 95th Sess. 356, 360, 78 L.Ed. In re 5787, 5849; see 1978 U.S.C.C.A.N. “unconditional”, id. (quoting (1934)), Inc., Mktg., Brints Cotton 737 F.2d Co., Tex. Lumber v. North Lucas (5th Cir.1984) (“post-petition accumula- 74 L.Ed. law) (allowable on by state of interest tion (1930)). bankrupt’s estate are against a sus- claims non of vel ability is not pended”). The issue interest on post-petition pay to WTMC however, for several provides, The Code Martin, Fahs v. claims. unsecured rule. Section exceptions to this Cir.1955) (interest for which an F.2d 387 726(a) priorities when establishes hierarchial un presently and taxpayer is basis accrual Chapter 7 estate in a distributing a debtor’s unlikely to liable, is conditionally priorities is within the liquidation. Included insolvency, is still by reason of his paid post-petition on payment of deductible).5 Rather, determine we must any assets remain against the estate claims if liability post-petition for WTMC’s whether claims, prioritized for distributions after unconditional, absolute, or fixed, is fines, claims, penalties, unsecured contingency. See Mer- subject any to not damages. U.S.C. nonpecuniary 12A.139 Tax Fed Inoome of Law teNS 726(a)(5). occupying only distribution (“[w]hile (1993) held interest is cases have hierarchy is the on the re- position lower a improbability is when there deductible the debtor.7 remaining assets to any turn in none was it is well note payment Phinney, Corp. v. Investment Guardian (substantial contingen uncertainty any there (5th Cir.1958), taxpayer a itself’). 253 F.2d 326 Lability cy) of the first, (1) issue, payment claims of the kind in years total one of the For all but 5. in, in, specified the order specified and in against WTMC undisputed claims and resolved claims) ]; (prioritized Thus, [ title extremely 507 of this section was WTMC'sassets. exceeded unlikely second, (2) any payment of allowed unse- in pay such be able to WTMC would claim, a however, than a claim of kind noted, cured other is not dis- this fact As claims. (3), (4) (1), specified paragraph or in positive us. of the issue before ...; subsection third, (3) any payment of allowed unse- provides, Bankruptcy Code 502 of the Section 6. tardily proof is filed of which cured claim part: pertinent title, 501(a) than of this other under section interest, (a) proof of which is A claim or 2(C) paragraph specified in kind claim of the title, deemed of this section 501 filed under subsection; of this allowed, objects. party ... in interest unless claim, fourth, (4) any payment of allowed (b) objection to a claim such an ... if fine, unsecured, any whether secured or court, made, hearing, notice and a after forfeiture, exempla- multiple, penalty, or for or claim ... of such determine the amount shall arising damages, before the ry, punitive or amount, in such claim and shall allow such appoint- relief or of the order for earlier except the extent that— fine, trustee, extent that such to the of a ment forfeiture, damages com- penalty, or (2)such interest. unmatured claim is for pecuniary loss suffered pensation for actual U.S.C. claim; the holder fifth, legal (5) payment interest at the provides Bankruptcy Code 726 of the petition, filing of the date of the rate from the that: (1), (2), paragraph paid any undеr claim subsection; (4) (3), or of this (a) be distribut- property estate shall ... of the sixth, (6) debtor. ed— sought to deduct interest on a second mort- seeks to deduct interest on un- gage, though claims, payments principal disputed even no the amount of such easily interest would be due until can be determined. When taken in mortgage. Additionally, according first aggregate, and based principles mortgage, payments the terms of the second that, accounting, accrual we conclude un- on it pro- could be made from the net tests, der the all events WTMC’s any mortgaged property. ceeds of sale of the post-petition interest has not been estab- Thus, potential payments existed that no recognized lished. Our court in Guardian mortgage on the second would ever be made. that, Investment “if proceeds from the mortgaged property sale of the [were] Although Guardian Investment addressed pay sufficient mortgage, off the first princiрal whether due on the second taxpayer [would] not [be] obli- mortgage contingent, it still gation pay any or principal framework contingent to consider the nature mortgage”. if, Similarly, second Id. at 331. purposes.8 for income tax in the distribution of WTMC’s assets in ac- finding contingent, the indebtedness to be 726(a)(l)-(4), cordance with all assets are the Guardian Investment court examined depleted, then the estate will not in- have aspects obligation: five is there a any obligation curred interest on maturity; fixed or determinable date of unsecured claims. This is not due to the fact only upon the owed happening the impossible, that (3) became condition; be- of a happening is the of that (4) necessary cause the condition uncertain; to create condition is that condition to liability post-petition for and, juturo; interest failed to occur in is there a fixed or occur. liability? determinable Id. at 331. Consid- ering aggregate factors, of these our Accordingly, Kellogg may not now deduct court held liability on the second post-petition undisputed interest on and re-

mortgage fixed, definite, was not “a existing solved, general against unsecured claims obligation”. Id. estate.9 Implicit § in the under B. post-petition interest on unsecured necessary claims is the The other issue is condition whether the violat- that suffi IRS liability cient assets ed tax following discharge provision remain distributions of 11 726(a)(1)-(4). 505(b) § § These U.S.C. when it distributions assessed the estimat- could not occur during years penalty ed tax taxable for 1989 and used it as a setoff issue, and against there is no fixed or determinable a refund due for 1988.10 Section 505(b) occur; date when these distributions will allows request trustees to a determi- condition is in Kellogg any Because unpaid nation of tax from the futuro. rely upon 8. provide We Guardian Investment to Section 7422 of the Internal Revenue Code analysis provides contingent structure for our proсeeding that ‘‘[n]o na- suit or shall be interest, post-petition any ture of WTMC's recovery any for maintained in court for the not to internal revenue tax command of itself the ... until a result we reach claim for refund on 502(b) 726(a). not, duly or Secretary, §§ the therefore, credit has been basis of filed with the and We need according provisions regard, of law in that concern ourselves with factual distinc- regulations Secretary and the between established pres- tions Guardian Investment and the 7422(a). pursuance § thereof". I.R.C. ent Fur- case. thermore, Bankruptcy 505(a)(2)(B) § pro- Code course, 9. Of if assets remain may after distributions vides that a not determine pursuant 726(a)(1)-(4), refund, § are made any right then liabil estate to a tax before ity for interest will be the earlier of— established. (i) days properly after the trustee re- matter, contends, preliminary 10. As a the IRS quests governmental such refund from the unit that, erroneously, because the United States did claimed; from which such refund is or sovereign immunity, not waive (ii) the district court governmental a determination such jurisdiction lacked to consider whether WTMC request. unit of such was entitled a penalty. refund for the 505(a)(2)(B). It § 11 U.S.C. that, statutory maintains prece- as a condition argu- Between submission of briefs and oral suit, ment, dent taxpayer however, to a refund Congress must file a Bankrupt- enacted the it, alia, claim for the cy refund. Reform Act of 1994 inter

H99 seeking to assess the IRS unit, does not involve and governmental appropriate taxes; rather, any liability for the the trustee entity notifies collect that, unless has been it was extinguished return because days that has been penalty within trustee, examination, “the for against the refund due a selected used as setoff are debtor, the debtor any maintains, successor to and Thus, this claim is the IRS 1988. tax” liability for such any discharged from 505(a).13 refund, §by governed a instead or contains fraudulent unless return noted, timely return ‍‌​​​​​‌​​​​‌‌​‌​​‌‌‌​‌‌‌​‌​​‌‌‌‌​​​‌​‌‌​​​​‌‌​​‌‍for Kellogg filed As 11 U.S.C. misrepresentation. material prompt determination requested added).11 505(b) Kellogg made (emphasis § 505(b). later, A month 505(b) pursuant IRS did request, but §a had day Kellogg limit. the return notified within the 60 IRS penalty assess the therefore, determine, whether a refund as filed and issued accepted must been We 505(b) subsequent assessment But, after the bars the three months over check. estate.12 against the penalty filed, collection of notified Kel- the IRS return was and, subsequently, used penalty

logg of the for 1988. refund due against the 1. as a setoff due, the not had that refund If had WTMC Kellogg’s reliance IRS contends collect the have been able to would not issue IRS misplaced because charged responsibility for col- unit claim mental retrospectively, a expressly, and abrogated tax. Unless lection or determination respect 505. immunity with sovereign fraudulent, or contains a materi- 103-394, 113, such return 108 Stat. No. Pub.L. trustee, debtor, misrepresentation, pertinent part: al provides in the Act Sectiоn 113 discharged debtor successor to the United States 106 of title any liability tax— for such from to read follows: is amended shown on such upon payment of the tax immunity sovereign "§ Waiver return, if— "(a) Notwithstanding of sover- assertion notify (A) governmental not unit does such abrogat- sovereign immunity immunity, is eign trustee, request, days after such the within extent set governmental to the a unit ed as to for exami- has been selected such that return respect follow- to the section with in forth this nation; or ing: (B) not com- governmental unit does such "(1) title. of this ... 505 ... Section!] notify the trust- plete such examination any "(2) may and determine hear Court The due, days after such any within ee of tax application respect arising to the with issue the time as request such additional or within governmental units. to such sections cause, court, permits; for by payment tax determined upon of the And, pursuant to 4117-18. 108 Stat. court, hearing, after and a notice the' after Act, 702(b)(2)(B) amendment § of the this by governmental unit of such сompletion such pending applicable cases: to all made examination; or by 113 and sections made The amendments by tax determined respect com- apply to cases with 117 shall governmental unit to be due. such 11 of the United under title menced 505(b). § 11 U.S.C. before, on, the the date of and after Code of this Act. enactment underlying merits of Kellogg challenges the 12. 4106, 4150. 108 Stat. previously Kellogg penalty. time the argument, Although, at oral his rebuttal reply to the a brief was in this raised issue Act, neither Kellogg the recent noted counsel for (It pretrial the was not court. authority citing supplemental as letter side filed a order.) not raised appears the issue was that It 28(j). We note that by Fed.R.App.P. permitted any in, by, court. the district or considered obviously cognizant Rule 28(j), Government event, waived. we it consider a different issue letter on that it a filed 28© say, supplemental briefs case. Needless this 505(a)(1) Bankruptcy pro- Code Sectiоn filed. been should have vides legality may or the amount determine pro- 505(b) Bankruptcy Code 11.Section tax, tax, relating penalty to a any any fine or vides: tax, previ- or not any whether or addition assessed, paid, and or not ously whether any may request a determination A trustee adjudicat- before and contested or any in- whether tax liability for unpaid estate tribunal by judicial administrative or ed the case during the administration curred submitting jurisdiction. competent tax and a such a tax return for 505(a)(1). govem- 11 U.S.C. to the request a determination for penalty 505(c) Only Furthermore, as it did. because IRS uses term “es- found position WTMC in the fortuitous tate” as distinct from the terms “debtor” and being prior 505(c) entitled to a refund for the tax “successor the debtor”. Section year that, Claiming to offset. able after the court makes a deter- these events mandate that is not Kellogg mination of tax govern- under “the 505(b) charged entitled raise mental responsibility timeliness issue unit for places form may over substance. collection of such tax assess such tax estate, debtor, against the or a successor debtor_” Thus, to the the clear distinc- tion between “estate” and “successor to 505(b), Congress

Under the failure the debtor” of the IRS demonstrates that did discharge to act in a timely discharges poten liability manner intend of tax of, alia, liability apply tial tax inter to the estate. debtor the trustee. At issue is whether this failure plain language, addition to the Code’s discharges well, the estate as under the sec prior situation faced trustees to the “any tion’s nomenclature of successor enactment of the Code illumines debtor”. This is an issue of impression first purpose by § to be served 505. Prior to any circuit court. Of the two lower trustees lacked a mechanism for issue, courts to directly have considered obtaining prompt determination of tax both have held that enjoy the estate doеs not Therefore, of the estate. a trustee discharge given “any successor to the wishing to have the case closed was confront- Fondiller, debtor”. In re 125 B.R. 805 ed with leaving the choice of open the estate (N.D.Cal.1991); Rode, In re 119 B.R. 697 until the IRS’s opportunity to review the (Bankr.E.D.Mo.1990); but see In re Flaher expired, estate’s proceed or to have the ty, (Bankr.D.N.H.1994) 169 B.R. 270 n. potential ease and face personal closed dictum, (declaring, in “[ajlthough liability for additional taxes IRS (b) wording actual of subsection of the stat might subsequently determine were due. trustee, debtor, any ute ‘the succes 505(b) provided the solution to this sor to the discharged debtor are from (MB) dilemma. 1A Collier on Bankr. tax,’ for such ... this language effec ¶ 12.04[3]. tively discharges tax, the estate of the 505(b)] Although [§ was envisioned as a well”). permit mechanism to a determination of tax at the of the conclusion admin- goes saying It interpreta- without that our estate, i.e., istration of single an rеquest a tion a begins of statute language. with its prompt for a of all determination the rele- Bankruptcy The Code defines a debtor as a periods, vant nothing there is its “person or municipality concerning a prevent language to requests successive as commenced”, case under this title has been period completed each tax is and a return 101(13); “person” U.S.C. and a includes apart filed from to “individual, an partnership, corporation”. and taxes on shown such returns. 101(41). Thus, 11 U.S.C. a “debtor” must individual, be an partnership corporation, or Id. and it follows that “successor to the III. individual,

debtor” must be an also partner- ship corporation. or It becomes more obvi- reasons, For foregoing judgment is ous that the estate cannot be a “successor” AFFIRMED. when we consider what an is An “estate”. “estate” is created at the commencement of SMITH, E. Judge, JERRY Circuit case, bankruptcy of, “comprised” and is dissenting: alia, intеr legal equitable “all and interests of the property debtor in as of the com- Ever this circuit since decided Fahs v. mencement of 541(a), Martin, the case”. 11 Cir.1955), U.S.C. 224 F.2d 387 the set- (a)(1). tled rule has been that an basis accrual tax- on interest postpetition liability for of deduct, under the may immediately payer claims”). only half is This view unsecured as expense such Revenue Internal notwithstanding right. owed, legally interest 393. No at Id. payment. of improbability de- bankruptcy is not of law The federal backed debt a between is made distinction to among parties debts create to signed the United of credit and faith full dis- be should existing debts how determine has who by a creditor owed one and Frank- fairly. Justice creditors tributed but has bankruptcy of brink at the tottered as explains in Vanston concurrence furter’s today majority The chasm. into fallen much: of ease in the rule from our retreat would bankruptcy administration of business The during the law by state imposed should debts existing how is to determine inter- (“pendency pendency so bankrupt’s estate out be satisfied misinter- majority est”). IAs believe creditors. fairly the various with as to deal a Code, extinguishes prets par- between of a debt The existence federal and creates right property state relation alleged creditor-debtor ties between distinction one, confuses precedes bankruptcy and independent I re- payment, contingent improbable bankruptcy court ain Parties it. dissent. spectfully established, already duties rights and their arise subsequently they as except insofar A. bankruptcy adminis- during the course source examining the begin Obli- I its conduct. part of or tration pay in- The at issue. bank- out be satisfied gations and ac- on contracts owed all, tort arise, for debts at out terest if thus rupt’s estate contract. law a creation relationship created counts or other contract par- private amоng law Generally, contract the law And applicable law. law. is state system in our federalist transactions ties consequences legal fixes here, Texas of contract law the state Under States. the several the law owed for debts law, background at 67 S.Ct. Vanston, at at six is that and contracts accounts id. at concurring); see also J., (Frankfurter, days after thirty imposed will be percent (‘What of credi- claims 67 S.Ct. agree other- parties due, unless debt was obligations subsisting are valid tors art. 5069-1.03 wise. Tex.Rev.Civ.Stat.Ann. petition the time bankrupt at against doubt majority does (West The 1987). which, in the question ais is filed obligations its right and property that such law, tois overruling federal absence bankruptcy. imposition prior to existed law.”) state by reference determined that, post- however, believes majority, Grogan v. J.) opinion); (majority (Black, Vanston 654, 657, controls. law federal petition, Garner, 498 U.S. Green, 329 v. Comm. (“The validity Protective of a (1991) Bondholders 755 L.Ed.2d 112 240, 237, 162 91 L.Ed. 163, 156, 67 S.Ct. by rules U.S. is determined claim creditor’s circumstances (“When what (1946) and law.”). state claims interest will allow courts federal Nothing in the stressing. bears point This being administered estates against debtors’ failure damages for awards Bankruptcy Code by federal decided long been has by them negligent injury from goods deliver it what specify law.”). majority not does The create Nor does vehicle. aof operation however, Presumably, by “controls.” means unpaid from to collect right defines law federal majority means debt. posi- valid, as that debts are sense in the control does Bankruptcy law bank- and government by the here taken tion such enforce may ultimately courts United Kellogg v. below. ruptcy court and constitutional carrying out their rights in Corp.), 155 Mktg. (In Texas re West Frankfurt- As Justice statutory obligations. (positing (Bankr.N.D.Tex.1993) 399, 402 B.R. continued: er “sources law are federal state both 1202 Of may course a State Now, affix to a transac- question we must when, answer is tion an obligation which the courts of other in the bankruptcy proceedings, state States or the federal courts need not en- right law is extinguished. force because overriding considerations Turning to Code, the Bankruptcy I note policy. so, in And the proper adjust- 502(a), that section 11 502(a), U.S.C. pro- ment rights of creditors and the vides, in pertinent part, that a claim is al- desire to debtor, rehabilitate Congress lowed party unless a objects. under its bankruptcy power may authorize Upon objection, 502(b) provides, section its courts to refuse to existing allow debts part, relevant court, that “the after notice to be proven. and a hearing, shall determine the amount of Vanston, 169, 329 U.S. 67 S.Ct. at 243. such a claim ... and shall allow such claim Thus, a state-law debt may enter the controls in such amount except to the extent that— of the valid, Code as but ulti- (2) ... such a claim is for unmatured inter- mately may not be enforced if the bankrupt- est.” This section ais сodification of pre- court, cy through its congressionally granted Code rule that courts need recognize equitable powers, determines otherwise. See accrual of during the pendency of

Fahs, (“[W]e 224 F.2d at 395 interpret [Van- bankruptcy.2 isolation, When read in ] ston as establishing equitable pow- plain language 502(b)(2) of § appears to ex- duty er and of bankruptcy courts subor- tinguish a right creditor’s to earn interest claim.”).1 dinate such a and a debtor’s obligation it. B. duty A court’s in interpreting the Bank- ‍‌​​​​​‌​​​​‌‌​‌​​‌‌‌​‌‌‌​‌​​‌‌‌‌​​​‌​‌‌​​​​‌‌​​‌‍I have stressed the distinction ruptcy between however, is to read the statute state property law and federal bankruptcy holistically. Sav. United v. Ass’n Timbers of detail, law some as that distinction is Assocs., Ltd., Inwood Forest 365, 484 U.S. critical in understanding how 371, federal bank- 626, 630, 108 S.Ct. 98 L.Ed.2d 740 ruptcy law “controls” here. Kellogg’s (1988). state majority As the recognizes, Con- law to pay interest on its gress overdue has codified exception pre-dates debts imposition of bankruptcy. 726(a) rule.3 Sеction of the Bankruptcy Fahs, 1. In we explained further position, our ing origins of American rule derived from En- glish bankruptcy system); see also Thomas v. stating: majority opinion may [in ] Vanston Co., rec- 95, 116-17, Western Car 149 U.S. 13 S.Ct. onciled with [the unquestion- concurrence's] 824, 833, (1893) 37 L.Ed. rule); (recognizing 663 ably principles only correct regarded, if it is as American Mfg. Iron & Steel Co. v. Seaboard Air it, regard we not declaring Ry., 261, Line 266-67, U.S. 34 S.Ct. (regardless validity law) void, under state 504-05, (1914) 58 L.Ed. (recognizing merely as subordinating it. exceptions); City New Saper, York v. 224 F.2d at Litton, 395 n. 5. See Pepper also & n. 69 S.Ct. 556 & n. 295, 310-12, 308 U.S. 238, 247-48, 60 S.Ct. (1949) (same). L.Ed. 710 L.Ed. (holding equitable power has to disallow or subordinate fact, judgment); state 3.In (In the Code Langston Addison v. excep- at least re three Inc.), Prints Mktg., 726(a)(5) Cotton tions. Section 737 F.2d 1341- discussed text. (5th Cir.1984) ("[W]hile state ordinarily law allows interest to a secured credi- determines what claims oí creditors are tor to the valid extent property the secured greater subsisting obligations, bankruptcy court is than amount of the claim. Seе United States (if entitled authorized the federal Enters., Inc., v. Ron Pair statute) to determine how and what claims are 1026, 1032-33, 103 L.Ed.2d 290 bankruptcy allowable for purposes, in order to (interpreting 506(b)). § specifical- Section 1124 accomplish statutory the purpose of advancing a ly permits reinstatement of according a debt to ratable distribution of among assets the credi original its contractual terms if brings the debtor tors.”); generally see 3 Daniel R. Cowan’s Cowans, payments current the principal of and interest Bankruptct 12.7, at 39-40 Law and Practice during accrued bankruptcy. See United Sav. (1994) (examining interrelationship of state law Ass’n v. Assocs., Timbers Inwood Forest Ltd. of "allowability" claims and Bankruptcy under the (In re Assocs., Timbers Ltd.), Inwood Forest 808 of Code). 363, (5th Cir.1987) F.2d (en banc) 380 (Jones, J., 2. See 339, Dreyfus, Sexton v. 256, 257-58, 219 U.S. dissenting), aff'd, 365, 31 371, 484 U.S. 108 S.Ct. S.Ct. (1911) (examin- 55 626, L.Ed. 244 630, (1988). 98 L.Ed.2d 740

1203 required is to bankruptcy court buttons, the of order distribution the controls only lower interest.5 the creditors pay to the court cases, mandatеs 7 chapter remaining assets to the returns distribution the 726(a)(6). debtor. the distribut- shall be estate property ed— bankruptcy, the throughout Accordingly, legal the at of interest (5) fifth, payment credi- pay its obligation to the retains debtor filing of the the of the date rate from remain assets sufficient When tors interest. para- paid under any claim on petition, for provide distribution, must the upon this subsec- (3), of (1), (2), graph credi- doubt the No of interest. payment the ... tion. And, while as much. on insist tors would 502(b)(2), §in rule, codified like that This obli- unlikely, may be payment actual long from pedigree impressive an obligation, claims an Such is not. gation See, 2 e.g., Wil- decisions. pre-Code of but, line pur- for extinguished, therefore, not is Blaokstone, *488 Commentaries liam ig- is proceedings, poses is, interest that all rule the usual (“[T]hough court determines the time until nored cease from shall interest carrying debts on can meet assets debtor’s whether commission, yet, issuing the of time 727, discharge, see Only obligation.6 payment after surplus left aof case pay extin- law the state is revive, be debt, shall interest every guished. represen- his bankrupt or chargeable 502(b)(2) is a because occurs result This when sufficient tatives.”).4 is that Its effect law.7 convenience, not substantive matter distri- prior after in the estate remain assets 163, terminol- 240. The exact at 67 S.Ct. at supports the U.S. Thus, precedent pre-Code while 4. not overcome important, does ogy, running while stops when argument interest Code, however. Sexton, filed, requirements of the at 219 U.S. bankruptcy petition is helow, an Code where the 257, not abso- discussed 344, practice was As this at 31 S.Ct. rule, right to the recog- three, Two, exceptions exception were if not lute. 246, Pair, exist. 109 S.Ct. at continues 489 Ron See nized. were: If well-recognized rules The two at 1033. solvent, creditors bankrupt proved alleged bankruptcy has commentary on leading 7.The any sur- before post-bankruptcy interest received recognized much: bankrupt; if securi- plus was returned accrual to confuse tax taken not [C]are must or divi- produced interest bankrupt ties context. title in a 11 concepts and were bankruptcy, such amounts during dends pre- 502(b)(2) Bankruptcy Code Saper, 336 interest. post-bankruptcy supplied to in a objecting to claims grounds scribes the 7, 7. Of more at n. at 556 S.Ct. n. 69 atU.S. itself, change the not By it does case. title 11 precedent, was pre-Code origin, under doubtful of ah holder rights of Pair, legal Ron claims. exception for oversecured gen- way, the Put another against the debtor. 246, at 1033. 109 S.Ct. at 489 U.S. is no that there 11 cases in title eral rule a rule of is postpetition interest accrual 726(a)(5) states Because to credi- governing distributions convenience rate,” state law Texas legal set "at should be law that rule substantive not a is tors. It interest. amount the existence determines ato interest-bearing indebtedness converts P. Fortgang Lawrence & J. generally Chaim nonenforceable, non-interest-bearing indebted- Wrong Some Bankruptcy Code: King, The 1978 Vending Mach. re Continental 1148, ness. Even Decisions, 1151-52 56 N.Y.U.L.Rev. Policy 9,121, ¶ (CCH) at Cas. Corp., U.S.Tax [77-1 "legal means rate” (1981) (discussing whether (E.D.N.Y.1976)], which 86,093, 1976 WL 913 contracts). As no set statutory or rate rate against position opposite cited here, is often problem contracts set rate interest, state un tax accrual presented. equivocally: straight aor petition, whether A 502(b)(2) general applying Courts suspends or ... reorganization, corporate its effect: describe terms various have used though even accrual postpones the United Nicholas "suspended," Interest interest-bearing its lost has 1674, the "claim States, & n. 384 U.S. quality.” (1966), to- ceases L.Ed.2d & n. 86,097-98 (citing 6A Colliers at Bank Id. Pair, at S.Ct. run, at Ron 9.08, ¶ at ruptcy ed.)). at S.Ct. Saper, 336 U.S. stops, Bankruptcy 344, G. Colliers 1A Eliot Sexton, al., on 31 at U.S. Freier et 219 computed," "not ed., King ed. (Lawrence 15th 22.05, ¶ P. Vanston, 22-40 at allowed, 329 257, is not at S.Ct. 1204 premised That section is upon the subjеct idea of on the pendency of interest virtue

making bankruptcy proceedings sections.”).8 easier and of these administer, fairer to not replacing prop- state Moreover, precedent our Supreme erty law with federal. Supreme Court Court caselaw conclude § that does explained pre-Code justification the not void the property interests, state but rule thus: only ignores it until distribution as a matter Accrual simple of Fahs, interest policy. on of unsecured we stated that claims in bankruptcy prohibited was in or- [t]he Vanston case seems to tous establish der that the administrative inconvenience only rule for the distribution of a bank- of continuous reeomputation of interest rupt’s assets. It did not hold that such a causing recomputation of claims void, could be claim that the claimant Moreover, avoided. different creditors should participate in the distribution of whose claims bore diverse interest rates or assets until all claims superior in con- paid by were the court on dif- science and fairness paid. were ferent dates would suffer gain neither nor 224 F.2d at 394. We have followed this loss solely by caused delay. reasoning in applying the current Bankrupt Vanston, cy Code. United 164, 329 Sav. U.S. at Ass’n v. 67 Timbers S.Ct. at (In Assocs., Inwood Forest Nothing in the text Ltd. re legislative Tim the history of bers Assocs., Ltd., Inwood of this Forest section of Code, the Bankruptcy 793 F.2d which of 1380, 1386 (5th Cir.1986) (“Put admits to n. ‍‌​​​​​‌​​​​‌‌​‌​​‌‌‌​‌‌‌​‌​​‌‌‌‌​​​‌​‌‌​​​​‌‌​​‌‍5 codifying much pre-Code different ly, suspended petition practice, the suggests that Congress the adopted right contract interest; any rule for accrue extinguish other did not See John C. purpose. reinstated, right.”), McCoid, II, Pendency 808 F.2d Interest in Bankrupt- Cir.), 363 (en banc), cy, aff'd, (1994) 1068, 107 68 1, 481 2459, Am.Bankr.L.J. 9 (“Though S.Ct. (1987). Congress 95 L.Ed.2d 868 time, said more this there is noth- ing legislative history that Likewise, indicates Supreme Court has contin- any intention to effect change in the law ued to adhere Vanston.9 sum, 1988) [hereinafter see Colliers be "non-dischargeablе”). Bankruptcy]; interest on A search 3 ¶ also supra, Bankruptcy, Colliers Congressional of 502.02[2] on Record reveals no discus- (discussing general principles sion or even language suggesting pre- that the applied interest). to unmatured Code rules should be discarded legis- or Vanston latively overturned. Cong.Rec. See 124 Indeed, (1978); legislative 32,383 history Cong.Rec. (1978); in the Cong. Senate and 34,143 reports (1978); House Rec. (1978). accompanying 28,257 Bankruptcy Cong.Rec. Act 1978, 2549, Finally, suggested No. Pub.L. 92 Stat. bill shows contained in report Bankruptcy that current Commission Bankruptcy Code enacted much States, Laws of pre-Code United provided regarding rules pendency much inter- 989, legislative impetus Act, S.Rep. est. See pro- No. the 1978 Cong., 95th 2d Sess. explicit vided provision (1978), reprinted 62-63 for the in 1978 U.S.C.C.A.N. McCoid, 5787, interest. supra, (citing at Report 8-9 (stating 502(b)(2) 5848-49 that contains the Commission on principles law,” "two Laws of including current rule 4-405(a)(8), United 137, H.R.Doc. No. disallowed); unmatured interest H.Rep. Sess., Cong. II, 93d 1st 595, (1973)). Part at 110 Cоng., Sess., No. (1977), 95th 1st 352-53 reprinted 5963, in 1978 U.S.C.C.A.N. I have legislative examined history to show (same); 989, S.Rep. No. Cong., 95th 2d Sess. 97 majority’s that the reliance the Senate and (1978), reprinted 5787, in 1978 U.S.C.C.A.N. reports House discussing 502(b)(2) is incom- (stating 726(a)(4) provides puni- plete. That section must be read in context with penalties subrogated tive claims, to all other the other sections of the legislative their "except accruing case”; during the history, pre-Code practice and the that the Code 726(a)(5) adopted. remain); where 595, assets H.Rep. No. 95th Cong., (1977), 1st Sess. 383 reprinted in 1978 States, 9. See 678, Nicholas v. United 384 U.S. 5963, (same); U.S.C.C.A.N. Report see also 1674, 1682-83, 86 S.Ct. 16 L.Ed.2d 853 Finance, Committee of S.Rep. No. 95- (quoting passage approval); Vanston Cong., (1978), 95th 2d 22-23 reprint- Sess. States, Burning v. United 362 n. app. in 3 ed supra, Bankruptcy, Colliers at Tab 84 S.Ct. 909 n. 11 L.Ed.2d 772 (recognizing VI petition post- (same); "subordination rule” for Iron, American 233 U.S. at and recommending that tax liens (explaining pre-Code applies, contingent na- the to consider rule, a framework does 502(b)(2), as a non-substantive pur- obligation income for interest, an mere- ture of right to the state void not does, but that Guardian Perhaps poses.” distribution. eventual ly limits its the situa- distinguishable from easily ease is explicit- say so majority does not the While obligation to here, the as in Guardian tion a substantive as section it treats ly, contin- debt, mortgage, was a second pay the non- majority, the the According to rule. agreement itself. the terms gent by pen- pay to obligation contingent, state-law is not contin- right Here, property state the upon “contingent” becomes dency interest Moreover, does Guardian by its terms. gent The petition. the filing of the A Bankruptcy Code. the mention not even is con- payment that not mean majority does the to mention even fails ease that remain must funds sufficient tingent, as assistance of little can be Bankruptcy Code Rather, rea- paid. be to debt for the order Code, substantial- current the interpreting of distribution ultimate soning the that simply application Its in 1978. ly codified being assets upon there contingent anachronism. majori- it, the pay to in the estate remaining necessary to condition “the ty holds that and out far so afield than wander Rather in- liability for the the create Bank- the current time, turn I to would of added). (Emphasis to occur.” failed interplay terest be- interpret the ruptcy Code Jr., MERTENS, Law 2 Jaoob Mertens also 726(a)(5) a 502(b)(2) settling §§ tween 12A.138, op Tax Income Federal the fixed of distribution scheme the (“The exist when ceases to 502(b)(2), di- which Section interest. pay to passes into corporation property of interest, co- pendency ignore courts rects hands.”). receiver’s in order ease convenience rule of a difies process. state- of out the the administration effect, majority snuffs 726(a)(5) obli- reimposes the debtor’s preserves pay law of fair- as matter only upon debt pay this gation of distribution it at end majori- The creditors. remain. assets ness to that contingency conceptual two difficult ty presents thus Bankruptcy interpretation of This First, the address. it does problems language of the with consistent Code of the source explain what majority does his- caselaw, legislative statute, pre-Code distribution. interest would commentary on leading view of tory, the 726(a)(5) is majority believe Does all, prece- our and, of not least bankruptcy, property federal for a independent source sum, the obli- retains Kellogg dent.10 right is Second, source if the right? re- The interest. pay pendency gation law, risk is the how property Texas state improbabili- is whether maining question 726(a)(5) differ- under distribution ultimate from deduct- Kellogg prevents ty of any debt distribution risk from the ent interest. ing the bankruptcy? diffi- to these majority’s non-answer C. case, to one resort is to questions cult Fahs, application to an Finally, I return F.2d Phinney, 253 v. Corp. Inv. Guardian attempted to bankruptcy trustee in which “provides Cir.1958), claims recognized the con- Court has the Tax 10. Even interest- lost their had the claims “not because Mail validity See Southeastern of Fahs. tinuing [receivership], [be- during hut bearing quality (CCH) Commissioner, 63 T.C.M. Inc. Trans. 2893, necessary and enforced it] is cause (1992). Appar- 2905-06, WL 86031 distribution, of receiv- in case fact that due policy. IRS earlier ently, it is also consistent generally insufficient erships assets See, C.B. 1970-2 e.g., Rev.Rul. full.''); Bankruptcy, Collier debts obligations of (holding accrued that interest (noting 502.2[2], ¶ at 34-34.1 supra, reorganization undergoing corporation debtor unma- 502(b)(2)'s claims for "disallowance Act). as to the “The doubt accruing date after the or claims tured interest contingency of anot interest is payment of policy and one of petition is filing accrual of postpones the a kind substan- a statement than rather convenience Id. contingency is resolved.” until law”). tive 1206

deduct interest owed on mortgage justification indеntures The for the Fahs rule is sim- during ple. accrued the pendency every As subject of bank- debt is to the risk of ruptcy. non-payment, government The objected, requiring part, absolute cer- tainty repayment as a prerequisite on the ground that to ac- interest “not cruing and deducting interest would make accruable and deductible for pur- income tax I.R.C. nullity. 163 a No rely one could poses in view of the fact that is there little or upon the accrual method. The Fahs court no likelihood that it will ever be paid.” 224 accordingly focused instead the obli- We, however, F.2d at 393. held that “inter- gation pay. To be able to deduct a debt est on an legal obligation unconditional is the accrual method and the “all deductible for purposes income tax by an test, events” there must be a fixed and accrual taxpayer, basis notwithstanding the unconditional obligation pay.13 According- improbability of being paid....” its Id. at ly, validity obligation is mеasured fixed, at the time it is not at the future date paid. should be Contrary holding to the here, court Fahs remains the law of this Here, there is dispute no the unse circuit.11 Even the Tax Court recog- has cured are obligations debts valid to which nized continuing validity of Fahs. See Texas state law attaches obligation Southeastern Transp. Mail Inc. v. Commis they interest after thirty days over sioner, (CCH) 2893, T.C.M. 63 1992 due. imposition While the of bankruptcy is (1992).12 WL 86031 majority The opinion probative uncertainty concerning the accepts much. as payment of interest, the pendency there is no See, e.g., Tampa & Coast R.R. v. Commis Commissioner, also Zimmerman Steel v. Gulf Co. 45 sioner, 263, (5th Cir.1972); 469 F.2d 264 (1941) Law B.T.A. (outlining general 1041 approach), yers' States, Title Guar. Fund v. United rav’d, 508 F.2d (8th Cir.1942). 130 F.2d 1011 Third The 1, (5th Cir.1975) ("The 6 law also is that a hare Circuit apparently acquiesced has in the Tax possibility non-payment delay approach. Court's See Pearlman v. Commission- principal's because of the financial condition er, 560, (3d Cir.1946) 153 F.2d 563 (affirming either."); does not defeat accrual W.S. Badcock reported 34, Tax Court decision at 4 T.C. 1944 Commissioner, Corp. 1226, v. (5th 491 F.2d 1228 (1944) (that WL applies 197 interpre- Tax Court's Cir.1974) (recognizing rule that risk of collection ). tation of Zimmerman does not defeat fixed pur for accrual Circuit, poses). Eighth Circuit, The government The the Eleventh correctly does note that Claims, however, Court we have of Federal exception created an to the follow the rule in Fahs. Inc, adopted rule we possibility Where Keebey’s there no pay Fahs. eventual v. ment, Paschal, fixed, (8th F.2d Cir.1951); no 188 115-16 therefore an interest improper. Commissioner, Steel deduction is Zimmerman Co. v. Tampa 130 & F.2d R.R., (8th Cir.1942); Coast example, F.2d at we Sartin v. United Gulf States, recognized (1984) principle (citing Cl.Ct. Fahs but held Fahs rule give that it way approval); had to Prichard, extreme City circumstances Bonner v. cf. Tampa, case before it. parent Cir.1981) (en 661 F.2d banc) subsidiary corporation had (holding created a tax precedent shelter that Fifth prior Circuit where payments rent parent from the split binding circuit Circuit). Eleventh subsidiary were offset unpaid accrued but leading The following case not originates Fahs payments parent. on debts to the from a district in the Second Circuit. See court found that apply, Fahs did not as the debt In re Vending Continental Corp., Mach. 77-1 paid would never be on account of the beneficial (CCH) ¶9121, U.S.Tax Cas. 1976 WL 913 relationship corporations. between the (E.D.N.Y.1976). Court, tunes, 163, 461; 12. Even the Tax appears §§ 13.See I.R.C. apply Treas.Reg. 1.461- approach to, 1(a)(2); abo, than, e.g., similar but more see restrictive Hughes United States v. Commissioner, Inc., Fahs. See Cohen Properties, 593, 600, v. 21 T.C. 2092, 2096, 1954 WL (holding (1986) ("[T]o that deduc 90 L.Ed.2d satisfy proper, except tions are test, where "categori all-events must be final and cally" paid); Commissioner, will not be amount, Jorden v. definite absolute, must be fixed and 914, 925, 11 T.C. (same); 1948 WL 96 see unconditional.”). and must be al., Aberle, еt Raymond V. or concession government, by the allegation Plaintiffs-Appellants, never debt will Kellogg, that the paid, be could long the debt As paid. hold I would remains. bankrupt proper, the deduction CO., AMERICAN OIL ARABIAN Fahs.14 refusing to follow erred ‍‌​​​​​‌​​​​‌‌​‌​​‌‌‌​‌‌‌​‌​​‌‌‌‌​​​‌​‌‌​​​​‌‌​​‌‍cy court Defendant-Appellee. dissent. respectfully I Accordingly, Plaintiffs, al., OLSON, et

Robert al., Aberle, Raymond et V. Plaintiffs-Appellants, v. CO., AMERICAN OIL ARABIAN al., MOONEY, et R.

Robert Defendant-Appellee. Plaintiffs-Appellants, v. Plaintiffs, RICHARDS, al., et R. John CO., ARAMCO SERVICES Defendants, al., et Aberle, al., Raymond et V. Plaintiffs-Appellants, Co., Oil Arabian American Defendant-Appellee. v. McMILLAN, Elliott

James CO., OIL AMERICAN ARABIAN Plaintiffs, al., et Defendant-Appellee. al., Aberle, et Raymond V. Plaintiffs, al., OZOLIN, et Plaintiffs-Appellants, V. William v. al., Olson, et O. Kenneth CO., ARAMCO SERVICES Plaintiffs-Appellants, Defendants, al., et v. Co., Oil Arabian American Defendant-Appellee. CO., OIL AMERICAN ARABIAN Defendant-Appellee. Plaintiffs, al., KAUS, et F. Thomas No. 94-20040. al., Aberle, et Raymond V. Plaintiffs-Appellants, Appeals, Court United Fifth Circuit. CO., ARAMCO SERVICES 20, 1995. June Defendants, al., et Co., Oil Arabian American

Defendant-Appellee. Plaintiffs, BRUNST, al., et G.

Arthur issue, it. I do address 11 U.S.C. moot result would 14. As

Case Details

Case Name: Matter of West Texas Marketing Corp.

Court Name: Court of Appeals for the Fifth Circuit

Date Published: Jun 1, 1995

Citation: 54 F.3d 1194

Docket Number: 94-10089

Court Abbreviation: 5th Cir.