UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

In re MARKAIR, INC., an Alaska corporation,                               Debtor(s)	Case No. A95-00236-HAR In Chapter 11
METROPOLITAN AIRPORTS COMMISSION, a Minnesota corporation,                               Plaintiff(s) CITY and COUNTY of DENVER,                               Intervenor,               v. MARKAIR, INC., an Alaska corporation,                               Defendant(s)	ADV PROC NO A95-00236-001-HAR (BANCAP No. 95-3057) MEMORANDUM DECISION DENYING MOTION FOR SUMMARY JUDGMENT FILED BY THE PUBLIC AGENCIES [ Four Consolidated Adversary  Proceedings]
THE DALLAS/FORT WORTH INTERNATIONAL AIRPORT BOARD,                               Plaintiff(s)           v. MARKAIR, INC., an Alaska corporation,                               Defendant(s)	ADV PROC NO A95-00236-002-HAR (BANCAP No. 95-3061)
5 ABR 278      THE PORT OF SEATTLE, a municipal corporation,                Plaintiff(s)           v. MARKAIR, INC., an Alaska corporation,                               Defendant(s)	ADV PROC NO A95-00236-003-HAR (BANCAP No. 95-3097)
CITY OF CHICAGO,                               Plaintiff(s)           v. MARKAIR, INC., an Alaska corporation,                               Defendant(s)	ADV PROC NO A95-00236-005-HAR (BANCAP No. 95-3114)

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Table of Contents	Page
1.INTRODUCTION	279
2. BACKGROUND	279
2.1. Passenger Facility Charges Legislation	279
2.2. MarkAir's PFC History	281
3. ANALYSIS	283
3.1. the Chapter 7 Trustee Does Not Have The Same Obligations As The Debtor Or          Debtor-In-Possession To Pay The PFCs	283
3.2. Begier v. IRS Does Not Automatically Establish A Trust In The Property Currently Held          By The Chapter 7 Trustee	284
3.2.1. The Parties' Contentions	284
3.2.2. The Supreme Court's Holding Regarding Begier	286
3.3. The Equitable Remedies Sought by the Plaintiffs' Conflict With Fundamental Bankruptcy          Policy	288
3.4. Accounting	288
4. CONCLUSION	289

The Public Agencies ask that the court interpret Begier v I.R.S., 496 US 53, 110 SCt 2258, 110 LEd 46 (1990), to establish that some of the $8 million currently held by the trustee is subject to the $1.27 million pre-petition PFC funds which debtor did not remit to the Public Agencies. Alternatively, they asked that they receive the funds through imposition of equitable remedies.

I have concluded that Begier does not mean that the Public Agencies' trust fund rights are automatically traced to the $8 million held by the trustee. I have further concluded that the Public Agencies are not entitled to equitable relief.

2. BACKGROUND-

• In the late 1980's, the nation's airport system needed funding to facilitate increased capacity, safety, security, noise reduction, and competitiveness in air transportation.



• In 1990, Congress enacted the Aviation Safety and Capacity Expansion Act, which allowed public agencies controlling airports to charge enplaning passengers a facility charge. 11 USC § 40117.
  
  5 ABR 280     
• § 40117 allows qualifying public authorities to participate in the benefits of the section. It allows the collection from enplaning passengers of a fee of $1, $2, or $3, to be collected by the air carrier. The funds are to be used for statutory purposes of facilitating improvement of air transportation. The right to collect the fees is restricted to approved projects.
  
  
• To implement the Act, Congress directed the DOT to enact regulations. The DOT engaged airports and air carries in the rule-making process. One of the concerns raised was that funds might be lost because of bankruptcy. 56 Fed Reg 24,254, 24,269 (1991). Some airport authorities wanted to deny the airlines access to the funds and wanted the funds to be kept in separate escrow accounts. The airlines thought that such an accounting system would be unnecessarily burdensome.
  
  
• There was a consensus of the involved parties in the rule-making that whatever system was devised, the funds would not belong to the air carrier which was collecting them along with collection for the ticket fare.
  
  
• "Accordingly, the Department adopted a final rule that sought to balance the burden and cost concerns of the airlines with the bankruptcy treatment and accountability concerns of the airports. The final rule permitted a commingling of PFCs with the carriers' other sources of revenue, subject however to various requirements, including separate accounting of PFC revenue by carriers, disclosure of PFC amounts as trust funds in financial statements, and additional reporting, record keeping, and auditing requirements. 14 C.F.R. §§ 158.49, 158.65, and 158.69. See also 56 Fed. Reg. 24,254, 24,268-69 (1991). Most important, however, was the requirement for trust fund treatment of the PFC revenues. Here, the Department adopted the language submitted by the three trade associations in their joint comments:

  PFC revenue is to be regarded as trust funds held by the collecting carriers as agents, for the beneficial interest of the public agencies imposing PFC's. All PFC revenue collected and held by the carriers are property in which the carriers hold only a possessory interest and not an equitable interest.

  14 C.F.R. § 158.49(b) (emphasis added). [ footnote omitted]
  
  In the recently enacted Federal Aviation Administration Authorization Act of 1996, Congress specifically reiterated the trust fund status of PFCs:

  Passenger facility revenues that are held by an air carrier or an agent of the carrier after collection of a passenger facility fee constitute a trust fund that is held by the air carrier or agent for the beneficial 5 ABR 281      interest of the eligible agency imposing the fee. Such carrier or agent holds neither legal nor equitable interest in the passenger facility revenues except for any handling fee or retention of interest collected on unremitted proceeds as may be allowed by the Secretary.

  Federal Aviation Reauthorization Act of 1996, Pub. L. No. 104-264, § 1202, 110 Stat. 3213.

  As the legislative history to the 1996 Act demonstrates:
  
  [t]his provision clarifies Congress' intent in authorizing the Passenger Facility Charge program in 1990 that PFCs collected by airlines and their agents are held in trust for the local agencies imposing those fees. FAA's current regulations implementing the PFC statute accurately reflect the trust fund nature of the airlines' collection and remittance of PFC funds from their passengers. In certain recent and current airline bankruptcy cases, courts have appeared erroneously not to accept the trust fund nature of the collection process; PFC proceeds should not be treated as other funds of the bankrupt carrier.

  H.R. Rep. No. 104-848 (1996)." [ DOT Reply Brief at 5-6] .

  • " In order to ensure that PFC proceeds, even if temporarily commingled, did not lose their identity, the Department prescribed detailed accounting, handling and auditing requirements. 56 Fed. Reg. 24254-75 (1991).
    
    Each airline is required to file a quarterly report with the airport for which it is collecting funds, to account for funds collected and remitted. 14 C.F.R.. § 158.65. In addition, each airline must establish and maintain for each airport for which it is collecting PFCs, an accounting record of PFCs collected and remitted. 14 C.F.R. § 158.69(a)." [ DOT brief at Pages 6-7]
    
    
  • The DOT has enforcement tools for parties who violate the PFC statute or regulations. 49 USC § 41712, 46301(a).

       2.2. MarkAir's PFC History- MarkAir, Inc. filed a chapter 11 bankruptcy on April 14, 1995. It had been a debtor in a previous bankruptcy, In re MarkAir, Inc., A92-00476-HAR, which had a confirmed plan in mid-1994.

  Between June 1, 1994, and April 14, 1995, the following PFC charges were 5 ABR 282      imposed by the Public Agencies at their respective airports:

  Minneapolis/St. Paul	$ 158,982.40
  Denver	$ 539,496.00
  Dallas/Ft. Worth	$ 236,844.12
  Seattle	$ 128,953.04
  Chicago	$ 205,801.60
  TOTAL	$1,270,077.16

  Some public authorities have not joined in this lawsuit and the amount of the pre-petition PFC fees (excluding the pre-petition portion of April 1995) is approximately $1,990,562.21 [ Affidavit of Matthew E. Roy, at ¶ 3, and Exhibit B to Affidavit (Docket Entry 50)] .

  Very early in the chapter 11 proceeding, the Metropolitan Airport Commission (Minneapolis/St. Paul) contended that the debtor had improperly used its trust funds and demanded payment. To minimize any possible loss, I required the debtor to provide for weekly reporting and payment of ongoing PFC charges. There was no way, at that time, to reasonably liquidate the amounts due to the PFC claimants, many of whom had not even raised the issue. In the Trustee's Response To Plaintiffs' Motion For Summary Judgment (Docket Entry 63), the trustee has attached an affidavit of Russell E. Minkemann, a CPA retained by the chapter 7 trustee. Exhibit 1 to Minkemann's affidavit is his analysis of the daily cash balances of MarkAir from December 31, 1994, through November 8, 1995 (with some omissions).

  The case was converted to chapter 7 on November 7, 1995. On November 8, 1995, the cash balance determined by Mr. Minkemann was $86,542.85.

  MarkAir was shut down by the FAA for alleged noncompliance with regulations, but permitted to start up later. This hiatus was a crippling financial blow. It had to quit operations on October 24, 1995. On that date, Mr. Minkemann's analysis shows the cash balance at $240,804.78.

  Apparently, the Public Agencies learned for the first time during this adversary 5 ABR 283      proceeding that there may have been as much as $966,870.87 on hand on the April 14, 1995, petition date. See, Page 2 of Exhibit 1 to Minkemann Affidavit.

       3. ANALYSIS-

       3.1. The Chapter 7 Trustee Does Not Have The Same Obligations As The Debtor Or Debtor-In-Possession To Pay The PFCs- The Public Agencies argue that the chapter 7 trustee must pay their trust claims now or face the accrual of civil penalties against the chapter 7 estate. To avoid these penalties, they argue, their claims must be paid immediately. Their argument is not well taken.

  The statutes giving rise to civil penalties apply to air carriers in active business. 49 USC § 41712 provides the Secretary of the DOT with the power to order an air carrier to stop a practice or method which the Secretary finds to be an unfair or deceptive practice or an unfair method of competition, after notice and a hearing. 49 USC § 46301(a)(1)(A) provides civil penalties for violating § 41712. When an air carrier fails to eliminate an unfair method of competition, penalties may accrue.

  There can be no civil penalties assessed here, however, because there is no actual business being transacted by the trustee and no air carrier is in existence. The trustee has never and will never actively operate as an air carrier in chapter 7.

  No citation has been issued by the DOT nor is one appropriate because there are currently no unfair business practices or unfair methods of competition to stop. MarkAir ceased being an air carrier long ago. The trustee is simply liquidating assets in accordance with his statutory responsibilities. There is no reason or statutory basis for the accrual of civil penalties under such circumstances.

  The DOT argues that the "trustee stands in the shoes of the debtor" and is not "immune from compliance with federal statutes and regulations." A chapter 7 trustee does not always share the shoes of a chapter 11 debtor, however. A chapter 7 5 ABR 284      trustee's role is fundamentally different from the role of a debtor-in-possession actively operating an air carrier. A chapter 7 trustee liquidates. A chapter 11 trustee or debtor-in-possession operates and attempts to rehabilitate a debtor.

  The Department of Transportation statutes and regulations regarding accrual of civil penalties simply have no application to a liquidating trustee not actively engaged in the air carrier business. The trustee is complying with federal bankruptcy statutes by fulfilling his role as liquidator. If the trustee sought to reopen MarkAir as a functioning carrier and actively engage in business, he would have to comply with all federal statutes and regulations just like any other carrier.

  The Public Agencies contend that the DOT is free to assess civil penalties against the estate without seeking relief from stay. They are wrong. The "police power" exception to the stay found in 11 USC § 362(b)(4) has no application to the issues presented at this time. There has been no power delegated to the DOT for assertion of police or regulatory power against a chapter 7 trustee not acting as an air carrier.

  Even if civil penalties could be assessed against the chapter 7 trustee without relief from stay, the penalties could not be recovered from property of the estate. 3 Collier on Bankruptcy, ¶ 362.05 [ 5] [ b] (15th Ed. Revised 1996); Hillis Motors, Inc. v Hawaii Auto Dealers' Ass'n., 997 F 2d 581, 591 (9th Cir 1993).

       3.2. Begier v. IRS Does Not Automatically Establish A Trust In The Property Currently Held By The Chapter 7 Trustee-

       3.2.1. The Parties' Contentions- The Public Agencies are requesting that a trust be recognized in the funds the trustee currently holds and, apparently, that the court immediately order the payment of $1.27 million to the Public Agencies for the pre-petition PFCs established, and an appropriate amount to be determined for the post-petition 5 ABR 285      PFC charges.

  They rely principally on the holding of Begier that a voluntary payment by a chapter 7 debtor pre-petition, but during the preference period of 11 USC § 547(a), was not from property of the estate, but rather from trust fund property. Thus, the property was not recoverable as a preference. 11 USC § 541(d) and Begier, 110 S Ct at 2267.

  Begier involved employment, FICA, and excise tax, some of which was commingled in the general account of the debtor. The trustee in Begier argued that the IRS had to establish by common law trust theory that the funds it received were traceable to the trust funds held by the debtor. The court reviewed the legislative history and the floor statement of Representative Don Edwards, which indicated that "reasonable assumptions" could be made in the case of trust fund taxes, and that payment of a trust fund tax obligation pre-petition could reasonably be presumed to have been made from trust funds, even without adopting common law rules of tracing. The Public Agencies argue that the funds now held can likewise be reasonably presumed to be derived from trust funds. They cite, in addition, Taylor v. Adams (In re Nash Concrete Form), 159 BR 611, 615 (D Mass 1993). The Public Agencies argue that "the debtor's collection of PFC revenues pursuant to PFC regulations created a trust in an abstract dollar amount, not in a specific property." They cite 14 CFR § 158.49(b), previously quoted at page 4. They analogize this to the income trust fund taxes collected pursuant to 26 USC § 7501.

  The trustee argues that the regulation does not create an identifiable trust in commingled funds. It emphasizes that 14 CFR § 158.49(b) expressly states that the PFC revenue, itself, is to be held as a trust fund, not an abstract amount as mentioned in the IRS regulations.

  5 ABR 286           3.2.2. The Supreme Court's Holding Regarding Begier- The Supreme Court held in Begier v IRS, that a voluntary payment of a trust fund obligation from unsegregated funds of a debtor, was not a preference. It analyzed the 1978 Bankruptcy Reform Act, using the floor statements of Representative Don Edwards as instructive legislative history. It found that the common law rules of tracing had little utility in determining trust fund problems under 26 USC § 7501. Section 7501 trusts were very different from common law trust situations. The amount of trust fund taxes collected and withheld were to be placed in a special fund pursuant to § 7501. Thus, the trust is created in an abstract "amount" and not a particular asset. Begier, 110 SCt at 2265.

  The court noted the adoption of 11 USC § 541(d) which provides that property in which legal title is in the name of a debtor, but not equitable title, becomes property of the estate only to the extent of debtor's bare legal title. The Supreme Court quoted Rep. Edwards' floor statement in Begier at 2265-66. A more complete quote is found in City of Farrell v. Sharon Steel Corp., 41 F3d 101 (3rd Cir 1994), as follows:

  Where it is not possible for the Internal Revenue Service to demonstrate that the amounts of taxes withheld are still in the possession of the debtor at the commencement of the case, present law generally includes amounts of withheld taxes as property of the estate . . .. Nonetheless, a serious problem exists where 'trust fund' taxes withheld from others are held to be property of the estate where the withheld amounts are commingled with other assets of the debtor. The Courts should permit the use of reasonable assumptions under which the Internal Revenue Service, and other taxing authorities, can demonstrate that amounts of withheld taxes are still in the possession of the debtor at the commencement of the case. For example, where the debtor had commingled that amount of withheld taxes in his general checking account, it might be reasonable to assume that any remaining amounts in that account on the commencement of the case are withheld taxes.

  The Supreme Court found that, even though the reference was whether a post- 5 ABR 287      petition payment of trust fund taxes involved property of the estate, the same analysis could be made with respect to pre-petition payments. In short, the Supreme Court said that this was a "reasonable assumption" to show some connection between § 7501 trust fund taxes and the assets being used to pay the trust fund obligation. Begier, 110 SCt at 2666, citing United States v. Whiting Pools, Inc., 462 US 198, 205 n. 10, 103 SCt 2309, 2314 n. 10, 76 L Ed 515 (1983) ("IRS cannot exclude funds from estate if it cannot trace them to § 7501 trust fund property.") The Supreme Court accepted as sufficient guidance for such a nexus the following further statement from Representative Edwards:

  "A payment of withholding taxes constitutes a payment of money held in trust under Internal Revenue Code § 7501(a), and thus will not be a preference because the beneficiary of the trust, the taxing authority, is in a separate class with respect to those taxes, if they have been properly held for payment, as they will have been if the debtor is able to make the payments." H.R.Rep. No. 95-595, supra, at 373, U.S. Code Cong. & Admin. News 1978, p. 6329.

  Begier, 110 SCt at 2267.

  Here the trustee only inherited about $86,000 on the date of the conversion, November 7, 1995. Largely through asset sales, the trustee now holds $8 million or more. The Public Agencies and the DOT have not demonstrated any "reasonable assumption" connecting their PFC claims and the money currently held by the trustee. The situation is very different from Begier, where the funds were identified by the debtor pre-petition and paid. The Public Agencies have been unable to establish a sufficient nexus between their claims and the funds now held by the trustee. Courts interpreting Begier have required such a nexus. Farrell v. Sharon Steel Corp., 41 F3d 92 (3rd Cir 1994); In re Ruggeri Electrical Contracting, Inc., 214 BR 481, 486-88 (ED Mich 1996); In re Plummer, 174 BR 284, 286 (Bankr CD Cal 1992); Matter of Wellington Foods, Inc., 165 BR 719 (Bankr SD Ga 1994). The Public Agencies and 5 ABR 288      the DOT are not entitled to summary judgment under Begier.

       3.3. The Equitable Remedies Sought by the Plaintiffs Conflict With Fundamental Bankruptcy Policy- The Public Agencies seek imposition of a constructive trust against the $8 million held by the chapter 7 trustee. There is no basis for doing so here. Imposition of equitable remedies in favor of specific creditors flies in the face of the bankruptcy policy of ratable distribution. The Ninth Circuit has consistently refused to allow the imposition of constructive trusts or equitable liens under similar circumstances. In re North American Coin & Currency, Ltd., 767 F2d 1573 (9th Cir 1985), cert denied sub nom, Torres v. Eastlick, 475 US 1083, 106 SCt 1462, 89 LEd 719 (1986); In re Lewis W. Shurtleff, Inc.,778 F2d 1416 (9th Cir 1985); In re Tleel, 876 F2d 769 (9th Cir 1989).

  Nor is there any basis for equitable subordination of all claims to those of the Public Agencies. Equitable subordination as proposed by the Public Agencies is contrary to the bankruptcy policy of ratable distribution and no payment was made by the Public Agencies directly to creditors. The requirements of Han v. United States, 944 F2d 526, 529 (9th Cir 1991) are not met. The Public Agencies are not entitled to equitable relief.

       3.4. Accounting- The Public Agencies have demanded an accounting of "all trust funds alleged to have been dissipated by the debtor or the trustee" based on DOT requirements. As previously noted, the chapter 7 trustee has no duty to comply with the accounting requirements imposed by the DOT on active air carriers. The trustee has filed interim reports in the main case that disclose all receipts and expenditures of the estate. Any reports prepared by the estate's accountant or other experts are subject to full disclosure and discovery. The Public Agencies' request for an accounting is unnecessary, and will be denied.

  5 ABR 289           4. CONCLUSION- The Public Agencies have not established a reasonable nexus between the PFC charges and the chapter 7 estate. The chapter 7 trustee of a defunct air carrier is not subject to the imposition of civil penalties by the DOT. The Public Agencies are not entitled to equitable remedies. Their motion for summary judgment will be denied.

  DATED: April 13, 1998.

  HERBERT A. ROSS
  Bankruptcy Judge