GEORGE BRODY, Bankruptcy Judge.
This case presents the question of the power of the bankruptcy court to compel the turnover of property seized by a creditor prior to the filing of a Chapter 11 proceeding under the Bankruptcy Reform Act of 1978.
Troy Industrial Catering Service, a Michigan corporation (hereinafter referred to as the "debtor"), is involved in the industrial catering business. On May 24, 1979, the Department of Treasury of the State of Michigan issued a jeopardy assessment pursuant to MCLA § 205.64 against the debtor for unpaid sales taxes and, pursuant to this assessment, seized all catering trucks, food inventory and books and records of the debtor.
The debtor then filed a complaint in Oakland County Circuit Court requesting that the court order the State to return the seized property. A temporary restraining order was issued enjoining the State from selling the property, but the court on July 27, 1979, dissolved the temporary restraining order and dismissed the debtor's complaint. However, the court stayed the sale of the seized property to permit the debtor to appeal the dismissal. An appeal was taken and is still pending.
On December 3, 1979, the debtor filed a petition under Chapter 11 of the Bankruptcy Reform Act of 1978 (Public Law 95-598) (hereinafter referred to as the "Bankruptcy Code").
The debtor and the State have agreed that the issues presented by the complaint filed by the State are to be held in abeyance pending the court's determination of the turnover issue.
Section 542, in pertinent part, provides that an entity
An entity under the Bankruptcy Code "includes any person, estate, trust, governmental unit." 11 U.S.C. § 101(14). "Governmental unit" includes the United States or any state. 11 U.S.C. § 101(21). Thus, if the property seized is property of the estate that the debtor may use, sell, or lease under § 363 of the Bankruptcy Code, and if it is property of more than inconsequential value or benefit to the estate, the State may be required to return the property.
The initial question to be determined is whether the property seized by the State is property of the debtor. Under the Bankruptcy Code, an estate is created upon the commencement of the case. 11 U.S.C. § 541(a). The estate created consists of "all legal or equitable interests of the debtor in property as of the commencement of the
The trucks, food inventory and books and records, prior to the seizure, were admittedly property of the debtor. It becomes necessary, therefore, to determine whether, despite the seizure, the debtor retains the requisite interest in the property to compel turnover pursuant to Section 542.
The State contends that the pre-bankruptcy seizure divested the debtor of all interest in the property and, therefore, the court may not compel its return by the State. This contention has no merit.
Although this controversy involves a seizure of property by the Department of Treasury of the State of Michigan to enforce the collection of a state sales tax, it is pertinent to consider the effect of a seizure under the Internal Revenue Code.
26 U.S.C. § 6331(a) and (b) of the Internal Revenue Code authorizes the Secretary of Treasury to collect a delinquent tax by levy upon, and seizure of all property and rights to property (except exempt property) belonging to the taxpayer. The Secretary is required to inform "the owner of the property (or, in the case of personal property, the possessor thereof)" of ". . . the sum demanded and . . . in the case of personal property, an account of the property seized . . .." 26 U.S.C. § 6335(a).
The Secretary is also required to give notice to the owner regarding any proposed sale of the property. 26 U.S.C. § 6335(b). A person whose property has been levied upon has the right to pay the amount due prior to sale and upon such payment, the Secretary is required to return the property to him. 26 U.S.C. § 6337. Before the sale, the Secretary is required to set a minimum price for the sale and, if this amount is not obtained, to declare the property purchased at such price for the United States. 26 U.S.C. § 6335(e)(1). The sale transfers "to the purchaser all right, title and interest of the party delinquent in and to the property sold." 26 U.S.C. § 6339.
Seizure by the Secretary of Treasury is merely a step in the collection process. Seizure "does not in and of itself operate to transfer title to the government." In re Brewster-Raymond, 344 F.2d 903, 910 (6th Cir. 1965). This is made crystal clear by the court in Bennett v. Hunter, 9 Wall. 326, 76 U.S. 326, 19 L.Ed. 672 (1870), wherein the Court stated:
Nor is the result any different when a seizure is made by the State of Michigan. To enforce collection of delinquent sales taxes, the Michigan General Sales Tax Act, like the Internal Revenue Code, authorizes
The State, in opposing the turnover request by the debtor, relies on Bush Gardens, Inc. v. United States of America, 5 B.C.D. 1023 (D.N.J., 1979). Admittedly, Bush supports the position asserted by the State. Bush, however, is not persuasive. It misreads both the cases it relies upon and the Bankruptcy Code in reaching the conclusion that it did.
In Bush, the Internal Revenue Service levied upon and seized the debtor's liquor license, pursuant to 26 U.S.C. § 6331, to enforce the collection of federal withholding and social security taxes. Prior to the sale of the license by the Internal Revenue Service, the debtor filed a Chapter 11 proceeding under the Bankruptcy Act, and filed a complaint to compel the Internal Revenue Service to return the liquor license to the debtor. The court dismissed the complaint in reliance upon Phelps v. United States, 421 U.S. 330, 95 S.Ct. 1728, 44 L.Ed.2d 201 (1975), and the fact that the United States had a "significantly greater interest" in the liquor license than the debtor. This conclusion is spelled out by the Court as follows:
Phelps involved the troublesome question of the bankruptcy court's summary jurisdiction. In Phelps, a receiver in a liquidating bankruptcy filed an application with the bankruptcy court for an order requiring the turnover of property held by an assignee for the benefit of creditors upon which the Internal Revenue Service had filed a notice of tax lien. The referee in bankruptcy entered the requested order. The Court of Appeals reversed, holding that:
The Supreme Court, in affirming the Court of Appeals, held that:
The Supreme Court in Phelps merely held that the court did not have jurisdiction to decide the property question and that to obtain the relief requested, "the receiver's recourse is limited to a plenary suit under § 23 of the Bankruptcy Act, 11 U.S.C. § 46. See Taubel-Scott-Kitzmiller Co. v. Fox [264 U.S. 426, 44 S.Ct. 396, 68 L.Ed. 770 (1924)], supra." 421 U.S. 336, 95 S.Ct. 1732. The Court, in Phelps, did not determine the respective interests of the parties in the property seized by the Internal Revenue Service.
The bankruptcy court, therefore, under the Bankruptcy Code has jurisdiction to determine the property question which the Supreme Court did not decide in Phelps.
The second ground for dismissal is puzzling. The court concedes that the debtor continues to have certain "legal or equitable interests" in the property, but concludes that the United States is under no obligation to return the property unless the tax liability is met because the United States, by virtue of the seizure, acquired a "significantly greater interest" than the debtor in the liquor license. The court does not reveal the criteria used to determine the extent of the government's interest but, more importantly, does not indicate how the concept of a "significantly greater interest" is imported into the Bankruptcy Code. There is nothing to suggest that the Bankruptcy Code adopts any such test as a condition for the application of Section 541 or Section 542. Admittedly, the State acquired an interest in the property by virtue of the seizure. However, the question is not whether the government acquired an interest in the property, or the extent of the interest, but whether the debtor continues to have an interest in the property, and whether it is property which the debtor may use, sell, or lease and which has more than "inconsequential value or benefit" to the debtor to justify the court directing that the property be returned to the debtor.
Since the court in Bush concedes that the debtor continued to have "legal or equitable interests" in the liquor license, Section 541 is obviously satisfied, and the only appropriate
Since Troy Industrial Catering Service, after seizure, retained its ownership interest in the property and since the property has substantial value to the debtor, as the debtor cannot operate the business without the property, it is subject to turnover pursuant to Section 542.
The only question that remains is whether the power to compel turnover should be exercised. A debtor may use, sell, or lease property of the estate in the ordinary course of business unless the court orders otherwise. § 363(c)(1). However, upon request of an entity that has an interest in property which the debtor proposes to use, sell, or lease, the court must prohibit or condition the proposed use, sale, or lease "as is necessary to provide adequate protection" for such entity. § 363(e). The term "adequate protection" is defined in Section 361. Since the debtor proposes to use the property now held by the State of Michigan, the turnover should not be compelled unless the debtor adequately protects the State within the meaning of Section 361.
The court has scheduled a status conference to determine the manner and the time within which the remaining issues are to be resolved.
Title II amends Title 28 of the United States Code (the Judicial Code) and the Federal Rules of Evidence.
Title III contains conforming amendments to other federal statutes that deal with bankruptcy matters.
Title IV is the transition title. Although the Bankruptcy Code was enacted November 6, 1978, and became effective on October 1, 1979, many of its provisions do not become effective until April 1, 1984. Title IV of the Act is designed to provide an orderly transition to the Bankruptcy Code.