Case No. 04-80098-DHW.United States Bankruptcy Court, M.D. Alabama.
January 13, 2006
MEMORANDUM OPINION
DWIGHT WILLIAMS, JR., Bankruptcy Judge
On November 10, 2005, Jeffrey Lamar Davis filed a motion (Doc. # 318) to amend this court’s July 7, 2005 order (Doc. # 273) approving the sale of real estate by the debtor pursuant to 11 U.S.C. § 363. Davis seeks to amend the order to provide for payment of tax claims of the State of Alabama from the sale proceeds.[1] The motion is opposed by Wachovia Bank (Doc. # 320), Bank of Wedowee (Doc. # 322), and the debtor (Doc. # 323).[2]
A final hearing on the motion was held on January 9, 2006. Present at the hearing were Jeffrey Lamar Davis through his counsel, Dan W. Taliaferro; Wachovia Bank through its counsel, Jay R. Bender; the Internal Revenue Service through its counsel, Patricia A. Conover; Bank of Wedowee through its counsel, Christie L. Dowling; and the debtor through its counsel, Charles M. Ingrum, Sr.
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Jurisdiction
The court derives jurisdiction in this matter from 28 U.S.C. § 1334 and from the United States District Court for this district’s general order referring all title 11 matters to this court. Further, because the issue here concerns a claim against the bankruptcy estate, it is a core proceeding under 28 U.S.C. § 157(b)(2)(B), thereby extending the court’s jurisdiction to the entry of a final order or judgment.
Factual and Procedural Background
Before converting to chapter 7 on September 22, 2005, 3-D Cash Carry, Inc. (hereinafter 3-D or debtor) was a chapter 11 debtor-in-possession. On June 6, 2005, while in chapter 11, the debtor filed a motion to sell two parcels of Roanoke, Alabama realty. The debtor proposed to sell the property free and clear of all liens and encumbrances “with all liens and encumbrances to be transferred and attached to the proceeds of the sale.” The motion stated that the proposed sales price of the property “exceeds the amount of all liens and encumbrances against the property.”[3]
On June 8, 2005, the court entered an order setting a June 20, 2005, hearing date on the debtor’s motion to sell. The order setting hearing required the debtor to serve a copy of the order and motion upon parties in interest as required by Fed.R.Bankr.Proc. 2002. Although there is no evidence that the order setting hearing was served as required, the motion was apparently served on all creditors, and no objections were filed to the proposed sale.
On July 7, 2005, an order entered granting the debtor’s motion and
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approving the sale.[4] The order provides, inter alia, that “[p]ursuant to Section 363(f) of the Bankruptcy Code, existing liens, claims, interests and encumbrances and other interests on the Property shall attach to the Proceeds of the sale in accordance with the Bankruptcy Code and other applicable laws.”
It is undisputed that Wachovia Bank and the Bank of Wedowee held consensual liens on the realty sold by the debtor. Randolph County, Alabama also had a lien on the realty arising from unpaid ad valorem taxes. Both the banks and the County were paid from the sale proceeds.[5]
The debtor owes the State of Alabama Department of Revenue $7,833.72 for unpaid employment taxes. Before the debtor filed for bankruptcy relief, the State of Alabama recorded liens to secure the payment of these taxes. Hence, the State of Alabama had liens on the realty sold by the debtor, but those liens were not satisfied from the sale proceeds.[6]
The movant, Jeffrey Lamar Davis, is the principal shareholder of the debtor. He, too, is a responsible party for the collection and remittance of the debtor’s employment trust fund tax obligations to the State of Alabama. The State of Alabama is pursuing Davis, personally, for the payment of these unpaid employment taxes.
Conclusions of Law
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11 U.S.C. § 363(f) permits the sale of estate property free and clear of liens only in limited circumstances. Generally, unless a lien creditor consents to the sale, estate property may be sold free and clear of liens only if the sale price exceeds the total of the lien creditors’ claims.
In keeping with the requirements of § 363(f), the debtor’s motion to sell free and clear of liens indicated not only that the sale proceeds were sufficient to pay the claims of all lien creditors in full but that these liens would attach to the sale proceeds. The order granting the motion to sell echoed those same provisions.[7] Therefore, the State of Alabama’s record liens for employment taxes attached to the sale proceeds.
The liens on the property attached to the sale proceeds in the order of their priority under applicable nonbankruptcy law. The lien of Randolph County, Alabama enjoyed first priority in that its lien was the result of unpaid ad valorem taxes. Ala. Code § 40-1-3 (1975); BPH, Inc. v. Cochrane, 628 So. 2d 911
(Ala.Civ.App. 1993). Next by way of priority would be the consensual liens of Wachovia Bank and the Bank of Wedowee because both predate the lien of the State of Alabama. The senior lien creditors cannot be surcharged to pay the claim of a junior lien creditor.
The only portion of the sale proceeds that has not previously been disbursed to creditors with senior liens are those that were paid to the debtor’s attorney.[8] The $7,833.72 lien of the State of Alabama enjoys priority in those proceeds over the unsecured claim of debtor’s counsel.
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Conclusion
Although Davis’s motion seeks to amend the court’s order approving the sale, for the foregoing reasons the court concludes that the order need not be amended but instead, enforced.
A separate order consistent with this memorandum opinion will enter denying the motion to amend but requiring that debtor’s counsel satisfy the State of Alabama’s liens from the sale proceeds in his possession.
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