Memorandum of Decision Re: Interest on Tax Liens

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re McNAMARA & PEEPE CORP.,                                       No. 1-84-00550      Debtor. ________________________/ WILLIAM B. GROVER, Trustee,      Plaintiff,    v.                                                                                      A. P. No. 1-86-0113 SIMPSON TIMBER CO., et al.,      Defendants. ___________________________/
Memorandum of Decision
     The trustee in this Chapter 7 case has entered into an agreement to sell the estate's real and personal property. Because extensive environmental cleanup is necessary before the sale can be consummated, the trustee has leased the property to the purchaser and is using the rents to pay the cleanup expenses. The sole issues remaining to be resolved in this adversary proceeding are whether the prepetition tax liens of the County of Humboldt are entitled to postpetition interest and whether they may include penalties.      The penalties issue is easy to resolve. Section 724(a) of the Bankruptcy Code provides that tax liens for penalties are avoidable unless the penalty is in lieu of interest. Section 551 of the Code preserves such avoided liens for the benefit of the estate. Therefore the lien for penalties exists, but the trustee may avoid it and thereby recover the penalties for the estate. It should be noted that avoidance does not affect the priority of the lien; junior lienholders do not move up in priority when a senior lien is avoided.      The postpetition interest issue is more difficult to resolve. Although there is authority to the contrary and no binding authority in this circuit, the majority rule is that under the Bankruptcy Code postpetition interest is not allowed on prepetition tax liens. In re Newbury Cafe, Inc. (1st Cir.1988) 841 F.2d 20; In re Ron Pair Ent., Inc. (6th Cir.1987) 828 F.2d 367; but Cf. In re Best Repair Co., Inc. (4th Cir.1986) 789 F.2d 1080.      The County of Humboldt argues that an exception to the rule exists where the collateral produces income, citing In re Mark Antony Construction, Inc. (9th BAP 1987) 78 B.R. 260, and Matter of Walsh Const., Inc. (9th Cir.1982) 669 F.2d 1325. While these cases are easily distinguishable (the former dealt with postpetition taxes and the latter was decided under the old Act), the Court must decide whether there is in fact an uncodified equitable right to interest on a prepetion tax lien if the collateral produces income.      The court in Newbury Cafe recognized that under pre-Code caselaw interest was allowed where the debtor was solvent, the creditor was oversecured, or the collateral produced income. 841 F.2d at 21-22. However, the court went on to note that these exceptions have been codified in sections 726(a)(5), 506(b), and 552(b) of the Code, respecively. Since Congress has dealt with the issue, it is the responsibility of this court to apply the law as Congress drafted it rather than as the courts formulated the rule before codification.      It is clear that section 552(b), like section 506(b), is limited in application to consensual liens. The Court therefore finds that the County of Humboldt is not entitled to postpetition interest on its prepetition tax liens notwithstanding any income produced from the collateral.      Because the Court finds that no postpetition interest is allowable at all on the prepetition tax liens, it need not deal with how much interest would be allowed. However, the Court feels compelled to point out that since the trustee is using most or all of the income to clean up the property, there would be little or no net income left over to pay interest even if the Court were to allow it. Under no circumstances would the County be entitled to full postpetition interest merely because some small income was derived from the property. The amount of interest allowed would be limited to the net amount of income, after expenses.      It is the Court's understanding that all other issues, including those associated with postpetition taxes and priorities, have been resolved by the parties. The parties shall advise the Court immediately if any issue in the adversary proceeding remains unresolved.      This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052. Counsel for Bank of America shall submit an appropriate form of judgment, which counsel for the trustee and the County of Humboldt shall approve as to form.
Dated: September 8, 1988                                                                          _____________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy