1. INTRODUCTION- The trustee has sold various properties subject to priority tax liens for amounts which exceed those tax liens and any other unavoidable liens. So, there is a balance which some taxing authorities have argued should be returned to them to the extent payment of their liens was postponed under 11 USC § 724(b)(2).

      Section 724(b) postpones payment of a tax lien on a property. It puts the trustee in the shoes of the tax lienor, and allows the trustee to pay the amount of the tax lien instead to certain preferred priority creditors.⁽¹⁾

      Some municipal tax lienors argue that the amount of the sale price left over after paying these preferred priority creditors and other unavoidable liens should go to the tax lienor to satisfy the amount of their liens. The trustee argues that this balance should continue to be applied to the priority claims instead of being returned to the unpaid tax lienor.

      The municipalities are correct. Section 724(b)(5) indicates that the tax lienor is to be reimbursed for the amount of its postponed tax lien if there is enough money available after paying the preferred priority creditors and senior and junior liens.

      Though this was not a final order, the trustee filed a motion for reconsideration⁽³⁾ which I have not considered ripe until the present time when the trustee is contemplating distribution.

      11 USC § 724(b) provides a method of compensating certain priority claimants by using the funds that normally would have gone to a tax lienor on property which the trustee has sold, and applying it to those priority claims, but only to the extent of the tax lien.

      The scheme does not effect the rights of senior or junior lien holders whose liens are unavoidable.⁽⁴⁾ It is a zero sum game as far as they are concerned.

The distribution scheme under § 724(b) is:

• first, to pay senior liens which are not tax liens and which are not voidable;⁽⁵⁾

• second, to pay claims allowable under § 507(a)(1)-(7) to the extent of the tax liens;⁽⁶⁾

•         6 ABR 329  third, if the priority expenses in the second category do not eat up all of the tax lien, the balance of that tax lien is then paid;⁽⁷⁾

• fourth, junior unavoidable liens are then paid;⁽⁸⁾

• fifth, to the extent the tax lienor did not recover the amount of its otherwise allowable tax lien under the third category, the tax lienor gets reimbursed;⁽⁹⁾ and,

• sixth, any balance left over after that goes to the estate.⁽¹⁰⁾

      In this case, because of the enormous administrative and priority expenses,⁽¹¹⁾ we can eliminate consideration of the third category.⁽¹²⁾The question is, after reserving an amount equal to the tax lien, and providing for the payoff of any non-avoidable senior and junior non-tax liens, does the tax lienor then get reimbursed, or does the money go to the estate, presumably to be applied first to the preferred category, which is identified under § 724(b)(2)?

      The answer seems obvious merely by reading the statute - the tax lienor should be next in line to recover the amount of its postponed tax lien. The trustee, however, argues that the tax lienor should not prime the remaining unpaid preferred priority creditors. To reach this conclusion the trustee cites cases⁽¹³⁾

decided under § 67(c)(3) of the Bankruptcy Act, the predecessor of § 724(b). Section 67(c), however, does not contain the detailed distribution scheme of § 724(b). Nor do any of these cases address the precise factual issue that concerns this Memoran-         6 ABR 330  dum, a balance due after paying all non-tax liens and the preferred priority claims.

      I have found two cases⁽¹⁴⁾ under the 1978 Bankruptcy Code which support my original conclusion⁽¹⁵⁾ that the tax lienor gets paid under § 724(b)(5) if it has not been paid earlier, before the unsecured preferred priority creditors can be paid. In In re Atlas Commercial Floors, Inc.,⁽¹⁶⁾ the bankruptcy judge said that since § 724(b) expressly limits the amount distributable to the preferred § 507(a) claimants to the amount of the allowed tax claim:

. . . it is clear that administrative and priority claimants are able to prime a tax lienholder under § 724(b)(2) only to the extent of the tax lien; if, as in this case, the sum of administrative and priority claims exceeds the amount of the tax lien, the excess amount is relegated to § 724(b)(6) status and paid in accordance with § 726. To hold otherwise would render meaningless the limiting language in § 724(b)(2).

      I do not agree with the last sentence of this quote. Limiting the distribution at the § 724(b)(2) level does have a separate meaning or purpose - to keep junior lien holders in their proper place without effecting their collateral position. What the opinion might have discussed at this point, but did not, is the use of § 724(b)(3) and § 724(b)(5) to establish the tax lienor's priority in distribution to claims of administrative and priority creditors. It is the application of these sections that result in the administrative and priority creditors being limited to the amount of the tax lien as the court in Atlas concluded.

      Neither Atlas, nor any other cases that I can locate analyze § 724(b)(5) in this context. A search of Westlaw for any bankruptcy cases with a head note citing § 724(b)(5), turns up none.

        6 ABR 331  In the interim order which the trustee seeks to reconsider, I cited In re Dowco Petroleum, Inc. as follows:⁽¹⁷⁾

. . . to the extent the tax lien is displaced, it becomes a special category of unsecured claim which is payable prior to a distribution to general unsecured claims. Section 724(b)(6); In re: Darnell, 834 F.2d 1263, 1268 (6th Cir.1987) (under section 724, property is not distributed to the estate (§ 724(b)(6)) until all liens, both tax and nontax, are satisfied); In re: Atlas Commercial Floors, Inc., 125 B.R. 185, 187 (Bankr. E.D.Mich. 1991); In re: Packard, supra at 156 [In re Packard Properties, Ltd., 112 BR 154, 156 (Bankr ND Tex 1990)]. [italics added]

      The trustee argues that the court in Dowco talked about subordination of only "general unsecured claims" to the tax lien, and by negative implication must have held that the preferred priority claims should be paid ahead of those tax claims.⁽¹⁸⁾ There is nothing to suggest that Dowco meant to adopt such a negative implication, contrary to the clear wording of § 724(b)(5). The reference to "general unsecured claims" in the quote seems rather to have been a loose (and, technically incorrect) reference to the final stage of § 724(b), subsection (6) in which the proceeds still remaining are distributed to "the estate." "The estate" would usually begin paying claims, starting with the priority claims, not "general unsecured claims."⁽¹⁹⁾

      The statutory language is clear, however, that the tax lienor is only postponed in recovering the amount of the tax lien in the distribution scheme under § 724(b), to an amount equal to the tax lien. If there is any money left over after paying the § 724(b)(2) claimants and unavoidable non-tax lien claimants, the tax lienor should recover up to the balance of the lien. The analysis is:

•         6 ABR 332  if the preferred priority claims are smaller than the tax lien, the lax lienor will be able to recover the unpaid balance of the tax lien before the next unavoidable junior lien at the § 724(b)(3) level;

• this leaves a junior lienor unaffected to recover at the § 724(b)(4) level the precise amount it is due in the precise order it would have without regard to § 724(b);

• if there is money left over after paying the senior and junior non-tax liens and the claimants under § 724(b)(2), the tax lienor recovers under § 724(b)(5) (to the extent that it did not previously recover any of its tax lien under § 724(b)(3)); and,

• only when the tax lienor is whole, does the excess go to "the estate" under § 724(b)(6) (which presumably includes the self-same § 507(a)(1)-(7) claims which the trustee attempts to elevate over the tax lien claims).

Had Congress intended to pay the preferred priority claimants instead of the tax lienors, § 724(b)(5) would have provided words to the effect that the distribution would go "to the holder of any claim of the kind specified in § 507(a)(1)-(7) to the extent they were not paid under § 724(b)(2)." Instead, Congress made it clear that, under § 724(b)(5), a tax lienor is entitled to catch up if the funds are available.

      The trustee argues, without authority, that if a tax lienor does not recover at the § 724(b)(3) level (which would be the case where the amount of the tax lien exceeds the amount of the preferred creditors' claims), it should not be able to go to the § 724(b)(5) level. No cogent reason for reaching this conclusion is offered, and the court will not accept it.

      Therefore, the trustee's motion to reconsider will be denied.

      This is without prejudice to any other § 724(b) issues which have not been addressed. For example, there is authority, in the nature of a marshaling argument, that if the estate has         6 ABR 333  unencumbered funds to pay the § 507(a)(1)-(7) claims from sources other than § 724(b)(2) funds, these other sources should be tapped first, thus freeing the tax lienor of the onus of § 724(b)(2).⁽²⁰⁾

    6 ABR 327  1. 11 USC § 507(a)(1)-(7).

    6 ABR 328  2. Interim Order Regarding 11 USC § 724(b) [North Slope Borough and Municipality of Anchorage Real Property Tax Liens], Docket Entry 2705, filed December 13, 1996.

    6 ABR 328  3. Trustee's Motion for Reconsideration of Judge's Order Regarding § 724(b) Claims, Docket Entry 2728, filed December 23, 1996.

    6 ABR 328  4. United States v Darnell (In re Darnell), 834 F2d 1263, 1267 (6^th Cir 1987); * Collier on Bankruptcy, ¶ 724.03[3][d] (15^th ed rev 1999).

    6 ABR 328  5. 11 USC § 724(b)(1).

    6 ABR 328  6. 11 USC § 724(b)(2).

    6 ABR 329  7. 11 USC § 724(b)(3).

    6 ABR 329  8. 11 USC § 724(b)(4).

    6 ABR 329  9. 11 USC § 724(b)(5).

    6 ABR 329  10. 11 USC § 724(b)(6).

    6 ABR 329  11. 11 USC § 507(a)(1)-(7).

    6 ABR 329  12. 11 USC § 724(b)(3).

    6 ABR 329  13. In the Matter of Quaker City Uniform Co., 258 F2d 155 (3^rd Cir 1956); California State Department of Employment v United States, 210 F2d 242 (9^th Cir 1954); In re American Zyloptic Co., 181 FSupp 77 (EDNY 1960); In re Empire Granite Co., Inc., 42 FSupp 450 (D Ga 1942).

    6 ABR 330  14. In re Atlas Commercial Floors, Inc., 125 BR 185, 187 (Bankr ED Mich 1991); In re Dowco Petroleum, Inc., 137 BR 207, 210 (Bankr ED Tex 1992).

    6 ABR 330  15. See, Interim Order Regarding 11 USC § 724(b) [North Slope Borough and Municipality of Anchorage Real Property Tax Liens], Docket Entry 2705, filed December 13, 1996.

    6 ABR 330  16. In re Atlas Commercial Floors, Inc., 125 BR at 187.

    6 ABR 331  17. In re Dowco Petroleum, Inc., 137 BR at 210.

    6 ABR 331  18. Trustee's Motion for Reconsideration of Judge's Order Regarding § 724(b) Claims, at 5-6 Docket Entry 2728, filed December 23, 1996.

    6 ABR 331  19. 11 USC § 726.

    6 ABR 333  20. In re Dowco Petroleum, Inc., 137 BR at 210.