1. FACTUAL SUMMARY AND RULING- The Municipality of Anchorage (MOA) and the debtor-in-possession (DIP) in MarkAir's chapter 11 case entered into an agreement settling a dispute about various MOA taxes. The MOA agreed to a reduced amount of taxes which would be a paramount lien on the property giving rise to the lien. The agreement provided it would not be avoidable for any reason in a subsequent chapter 7 proceeding.

      6 ABR 513   After the case converted to chapter 7, the trustee filed a motion¹ under 11 USC § 724(b), ² claiming that the MOA tax lien under the agreement is subordinated to the trustee's rights to pay certain priority claims identified in the statute. The trustee wants to pay not only the amount of the tax lien attributable to each parcel, but all the priority claims which exist, before paying the MOA.

The MOA argues that: (a) the agreement with the DIP bars the trustee; and, if it does not, (b) the trustee is limited to the amount of the tax lien on each parcel. In addition, the MOA wants the subordinated portion to be paid ahead of junior lien holders if there is sufficient excess to get to the level of junior lien holders, contrary to the statute.³

I find that: (a) the agreement between the DIP and the MOA was not sufficiently detailed to bar the trustee's § 724(b) claims, and (b) even if was, the trustee should prevail for policy reasons in being able to assert his § 724(b) rights. The trustee is, however, limited to subordinating only the amount equal to the tax lien on each parcel. The MOA cannot, however, prime junior lienholders should the proceeds from property subject to the tax liens be sufficient to reach the level of junior lien creditors, ⁴ because it is clear their rights are not affected by the operation of § 724(b).

2.1. The Stipulation Does Not Per Se Refer to § 724(b) Subordination- During the chapter 11 phase of this case, the DIP and the MOA entered into a stipulation to settle       6 ABR 514   some disputes centered around the interpretation of the law regarding property taxation as it related to the MOA's municipal tax claims,⁵ The MOA agreed to reduce its tax claim from about $950,000 to $625,000, half to be paid immediately and the other half from certain identified property when sold. The MOA was to have a "prior and paramount lien" to secure the $312,500 which remained unpaid. ⁶

The Stipulation also provided:

E.    Notwithstanding any other provision of this Stipulated Order, to the extent that any taxes attributable to property that is not subject to a valid, nonavoidable security interest of AeroUSA, Inc., for the benefit of the GPA Entities (as defined in the cash collateral orders previously entered in this case), are paid from the proceeds of property that is subject to such a security interest in favor of the GPA Entities, the resulting loss to the GPA Entities from such diminution of their collateral shall be secured by any and all replacement liens and superpriority claims granted in favor of the GPA Entities as adequate protection under cash collateral orders previously or hereafter entered in this case.

F.    Any payments made pursuant to this Stipulation, now or hereafter, shall be deemed final and non-avoidable (i.e., not subject to any type of attack, including an attack as preferential transfers under 11 USC § 547). This Stipulation shall not be altered or modified by any provisions in the plan of reorganization proposed or confirmed by the debtor or any other party in interest or any subse­quent modification to said plan, and shall be binding upon any trustee appointed in the Chapter 11 proceeding or in any subsequent Chapter 7 proceeding.

Although there is merit to both parties' arguments, the trustee's argument is more persuasive. He is not attempting to effect the priority or finality of the amount the MOA is entitled to under the settlement, but invoking a provision only available in chapter 7 to usurp that amount for the estate, and subordinate the MOA's recovery pursuant to § 724(b). Thus, based on the literal reading of the Stipulation, the trustee is not enjoined from priming the MOA by use of § 724(b).

     2.2. Even If the Stipulation Was Intended to Encompass § 724(b), It Is Better Policy That It Did Not Trump § 724(b) Subordination- Even if the Stipulation can be interpreted that the parties intended to protect the MOA's recovery against the subordination provisions of § 724(b), bankruptcy policy favors protecting the trustee's § 724(b) rights. At least, that is how I predict that a higher court in the 9^th Circuit would decide the issue, as there are no cases in this circuit directly on point.

In an analogous situation, however, the 9^th Circuit BAP, in Sun Runner, ⁷ held that a claim which was granted a superpriority status by statute to "every other claim [administrative claim]" when an adequate protection order in a chapter 11 case failed, ⁸ was nonetheless subordinated to the chapter 7 expenses incurred after conversion by virtue of       6 ABR 516   another statute subordinating chapter 11 administrative expenses. ⁹ Although Sun Runner appears to have been a court ordered adequate protection situation, the holding would also seem to apply to an order based on a stipulation like in the present case. The policy arguments pro and con raised by the parties in that case are strikingly similar to the arguments raised by the MOA and trustee in the present proceding.

Those policy arguments have been discussed in bankruptcy court cases from other circuits which are directly on point. The issue in these cases is whether an agreement in a chapter 11 case that a tax lien creditor will maintain priority, even after conversion, primes the plain wording of § 724(b), which provides for subordination under certain conditions.

In Buzzworm,¹⁰ a Colorado bankruptcy court held that a chapter 11 DIP can enter a court approved agreement with a tax lien creditor regarding the use of its cash collateral which will prime a later chapter 7 trustee's rights to enforce subordination under § 724(b). ¹¹ The court said that this should only be allowed where creditors had adequate, timely notice to have objected to the motion which it held did not exist in that case.¹²

Disagreeing with a bankruptcy judge from the same district, ¹³ the court stated that the policy reasons for allowing § 724(b) to be primed, provided notice was adequate, were:
      6 ABR 517  

this Court finds that there are significant policy considerations weighing in favor of enforcing such agreements, in addition to those cited above. They include: (1) encouraging a debtor and secured creditors to negotiate and, if possible, settle disputes, particularly cash collateral and adequate protection disputes, amicably, quickly, inexpensively, and effectively, at the onset of a reorganization case, (2) enhancing the prospects for a successful reorganization, at least for a promising debtor acting in good faith, and (3) inducing secured creditors to cooperate with, and accommodate, a struggling debtor-in-possession, in exchange for adequate protection--for the indubitable equivalent--of its secured position. [footnote omitted] ¹⁴

Reaching the contrary conclusion was the bankruptcy court in Illinois in Bino.¹⁵ Disagreeing with Buzzworm, the court in Bino held that a cash collateral agreement between a tax lienor and a chapter 11 DIP, which stated that the tax lienor's superpriority position would prevail over the subordination provisions of § 724(b) in the event of a conversion, could not be enforced against the chapter 7 trustee.

The policy considerations which the Bino court found most persuasive was the doctrine of giving the plain meaning to a statute, finding "[t]here is no provision in the Code making the application of § 724(b) discretionary for the judiciary or for the parties involved". ¹⁶ Also, the court found that § 724(b) could not be waived because the rights only came into being upon distribution of the collateral secured by the tax liens. ^l7

The issue is close, but I believe, based on the analogous holding in Sun Runner, the 9^th Circuit would adopt the reasoning of Bino. I conclude that the Stipulation between the MOA and the chapter 11 MarkAir DIP, even it were intended to be broad enough to       6 ABR 518   encompass § 724(b), does not override the plain words of the statute, and § 724(b) can be invoked by the chapter 7 trustee.

     2.3. Section 724(b) Subordination Is Limited Only to the Amount of Taxes Related to the Property- The trustee argues that, because of the large administrative expenses in this case - one of the priority claims which can result in subordination of a tax lien under § 724(b)(2) - the tax lien creditor loses its catchup rights under §§ 724(b)(3),(5). The court has previously ruled against the trustee on that argument.¹⁸

     2.4. Junior Lien Holders Are Not Effected by § 724(b)- The MOA argues that, if the court rules in favor of the trustee that he retains § 724(b) rights, the MOA should, in equity, be entitled to come in ahead of any junior lien creditors who are in line under § 724(b)(4). All the authorities indicate that, with respect to junior and senior non-tax creditors, it's a zero sum game - they are not effected by § 724(b).¹⁹

     3. CONCLUSION- I will enter an order based on my ruling. If the parties are unable to liquidate the amount and priority of the MOA's claims based on this ruling, I will conduct further hearings dealing with the specifics.

DATED: September 28, 2000
HERBERT A. ROSS
U.S. Bankruptcy Judge

N O T E S:

1    Trustee's Motion for Recovery of § 724(b) Claims and for Accounting on Net Proceeds Due to ClT, Docket Entry 2346, filed August 2, 1996.

2    Copy attached as Appendix.

3    11 USC § 724(b)(4).

4    Id.

5    See, footnote 1, at Exhibit 1, Stipulated Order Approving Settlement and Compromise Between MarkAir, The MOA, North Slope Borough, Nome, Dillingham, and Unalaska, which was originally docketed at Docket Entry 1179 on October 18, 1995 (referred to in this Memorandum as the "Stipulation."

6    Stipulation, at ¶ C.

7    Citibank, N.A. v Transamerica Commercial Finance Corp. (In re Sun Runner Marine, Inc.), 134 BR 4 (9^th Cir BAP 1991).

8    11 USC § 507(b).

9    11 USC § 726(b).

l0    In re Buzzworm, Inc., 178 BR 503 (Bankr D Colo 1994).

1l    Id, at 509-12.

12    Id, at 512-14.

13    In re Life Imaging Corp., 131 BR 174 (Bankr D Colo 1991).

14    In re Buzzworm, Inc., at 512.

15    In re Bino's, Inc., 182 BR 784 (Bankr ND Ill 1995).

16    Id, at 787-89.

l7    Id, at 789.

18    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; Memorandum Denying Trustee's Motion for Reconsideration Regarding the Court's Interpretation of 11 USC § 724(b)(5), Docket Entry 5850, filed February 7, 2000; and, Order Denying Trustee's Motion for Reconsideration Regarding the Court's Interpretation of 11 USC § 724(b)(5), Docket Entry 5849, filed February 7, 2000, reported at 6 ABR 327.

19    United States v Darnell (In re Darnell), 834 F2d 1263, 1267 (6th Cir 1987); Collier on Bankruptcy, ¶ 724.03[3][d] (15th ed rev 1999). See, Memorandum Denying Trustee's Motion for Reconsideration Regarding the Court's Interpretation of 11 USC § 724(b)(5), at page 3, Docket Entry 5850, filed February 7, 2000, reported at 6 ABR 327.

11 USC § 724. Treatment of certain liens

(a) ...

(b) Property in which the estate has an interest and that is subject to a lien that is not avoidable under this title and that secures an allowed claim for a tax, or proceeds of such property, shall be distributed -

(1) first, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is senior to such tax lien;

(2) second, to any holder of a claim of a kind specified in section 507(a)(1), 507(a)(2), 507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6), or 507(a)(7) of this title, to the extent of the amount of such allowed tax claim that is secured by such tax lien;

(3) third, to the holder of such tax lien, to any extent that such holder's allowed tax claim that is secured by such tax lien exceeds any amount distributed under paragraph (2) of this subsection;

(4) fourth, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is junior to such tax lien;

(5) fifth, to the holder of such tax lien, to the extent that such holder's allowed claim secured by such tax lien is not paid under paragraph (3) of this subsection; and

(6) sixth, to the estate.

(c) ...

(d) ...