FOR THE NORTHERN DISTRICT OF CALIFORNIA
McNAMARA & PEEPE CORP., No. 1-84-00550
WILLIAM B. GROVER, Trustee,
v. A. P. No. 1-86-0113
SIMPSON TIMBER CO., et al.,
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.
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 _____________________