CASE NO. BK02-81632-TJM.United States Bankruptcy Court, D. Nebraska.
June 25, 2009
ORDER
TIMOTHY MAHONEY, Chief Judge
Hearing was held in Omaha, Nebraska, on June 2, 2009, regarding Filing # 889, Motion to Require Trustee and Debtor-in-Possession to Provide a Report to the Court Showing Payments to Employees, the Deductions for Taxes Required to be Withheld or Paid for and on Behalf of Employees and the Place Where the Amounts Were Paid or Deposited Under Rule 2015(a)(3) and 11 U.S.C.S. § 1106(a)(3), filed by Contractors, Laborers, Teamsters and Engineers Health and Welfare Plan and Operating Engineers Local No. 571, and Filing #896, Objection, filed by the Chapter 7 trustee. M. H. Weinberg appeared for the movant, T. Randall Wright and Stacey L. Hines appeared for James Killips, Trustee, and the debtor, and Jerry Jensen appeared for the U.S. Trustee.
Creditors, the Contractors, Laborers, Teamsters and Engineers Health and Welfare and Pension Plans and Operating Engineers Local No. 571, have filed a motion to require the trustee of the Chapter 7 debtor, M S Grading, Inc., to provide a report to the court showing payments to employees, the deduction for taxes required to be withheld and the entities that were paid the tax money, rather than the Internal Revenue Service. During the pendency of the Chapter 11 case, prior to the appointment of the trustee, the Debtor paid wages to its employees and showed on the wage statements that taxes were withheld, but the taxes were never deposited into the special tax account set up by agreement of the Internal Revenue Service, the debtor, and First National Bank of Omaha.
First National Bank of Omaha had a security interest in all of the assets of the debtor, including hard assets, accounts receivable, contract rights and general intangibles. By virtue of the agreement with the Internal Revenue Service and the debtor, First National Bank of Omaha waived its security interest in any funds placed in a special tax account by the debtor. The debtor had been permitted to use cash collateral of the First National Bank of Omaha and the agreement was entered into and the security interest waived to make certain that any monies deposited by the debtor into the special tax account would get to the taxing authorities and not be set off by the bank.
As a result of the debtor’s failure to put the money into the special tax account, the IRS was not paid and now has a claim for well over $900,000.00. Similarly, the debtor failed to make contractually required payments to the movants’ health and welfare plan, leaving the movants with a claim of approximately $117,000.00 plus, arguably, statutory interest and penalties. The trustee does not have sufficient funds in the estate account to pay the IRS claim, which presumably has priority, and the claim of the movants.
It is apparently the plan of the movants, if the court orders the trustee to file such a report, to then ask the court for permission to use the statutory authority of the trustee to sue those entities that received payment from the debtor with money that should have gone to the Internal Revenue
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Service. Although unstated, it appears that the theory of the lawsuit is that the recipients converted property of the debtor that should have gone to the IRS. Upon successfully suing the recipient entities, the funds obtained would be paid to the IRS, thereby reducing its claim and increasing the likelihood that the claim of the movants would be paid.
Since it is clear that the funds did not go into the tax account, the security interest of the First National Bank of Omaha was not waived as to any funds in control of the debtor. The debtor was authorized to use cash collateral to maintain its operations. Although it was supposed to pay the withheld funds into the special tax account, it is obvious that it used those funds for other purposes resulting in a breach of the agreement with the IRS. Some of the money which should have gone to the Internal Revenue Service may have gone to the First National Bank of Omaha as adequate protection payments and to other post-petition ordinary course of business creditors. Once the bank decided to terminate the debtor’s right to use cash collateral, the balance of funds remaining in the debtor’s operating account were turned over to the First National Bank of Omaha by the trustee pursuant to the bank’s security interest in the funds.
The security interest of the First National Bank of Omaha has been determined to be valid with regard to all of the assets, both by this bankruptcy court and by the appellate courts. There is no legal or equitable basis for permitting a suit against the bank or other recipients of payments from the debtor in the ordinary course of business. Therefore, there is no basis for ordering the trustee to expend time and money to research who received the funds and file a report.
IT IS ORDERED that Filing #889, Motion to Require Trustee and Debtor-in-Possession to Provide a Report to the Court Showing Payments to Employees, the Deductions for Taxes Required to be Withheld or Paid for and on Behalf of Employees and the Place Where the Amounts Were Paid or Deposited Under Rule 2015(a)(3) and 11 U.S.C.S. § 1106(a)(3), is denied.
Notice given by the Court to:
*M. H. Weinberg
T. Randall Wright
Stacey L. Hines
Jerry Jensen
Movant (*) is responsible for giving notice to other parties if required by rule or statute.