On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil Action No. 86-3772
Hutchinson, Scirica and Rosenn, Circuit Judges
In this appeal we must determine whether the Commonwealth of Pennsylvania violated the automatic stay in a Chapter 11 bankruptcy proceeding, 11 U.S.C. § 362 (1982), by conducting a sales tax audit and issuing a notice of audit assessment to the debtor, H & H Beverage Distributors, Inc. ("H & H"). The district court affirmed the bankruptcy court and concluded that both the audit and the notice violated the automatic stay's prohibition against "any act to create perfect, or enforce" a lien, see §§ 362(a)(4), (a)(5), because the acts constituted "the statutory prerequisites to the creation of a lien under the Pennsylvania Tax Code. . . ." H & H Beverage Distrib., Inc. v. Department of Revenue of Pennsylvania, 79 Bankr. 205, 207 (E.D. Pa. 1987).
Our review is plenary, In re Remington Rand Corp., 836 F.2d 825, 828 (3d Cir. 1988), and for reasons that follow, we will reverse. We hold that the Commonwealth was entitled to audit H & H to ascertain the extent of any claim it may have. Moreover, although issuance of a notice of audit assessment was a step toward the creation of a lien, it was expressly permitted under § 362(b)(9), which provides that issuance by a governmental unit of a notice of tax deficiency is not subject to the automatic stay.
H & H filed a voluntary petition on January 20, 1984, under Chapter 11 of the Bankruptcy Reform Act of 1978 ("the Code"), 11 U.S.C. § 1101, and was granted debtor-in-possession status. The Commonwealth received notice of the Chapter 11 filing and in August, 1984, undertook a sales tax audit for the period from January 1, 1981 to July 30, 1984. Upon completing the audit on August 27, 1984, the Commonwealth sent H & H a "notice of audit assessment," which read:
A certificate of lien will be filed with the prothonotary of your county, unless this assessment is paid or a notice of intent to appeal is filed with the board of appeals within thirty (30) days of the assessment mailing date . . .
J.A. at 5. The notice stated that H & H owed $162,981.16 in unpaid sales tax.
H & H initiated the administrative appeal process in an effort to obtain a redetermination of the audit findings. Its state appeal is pending in the Pennsylvania Commonwealth Court. In addition, H & H filed a complaint on January 16, 1986 in the United States Bankruptcy Court, seeking to set aside the sales tax assessment, or in the alternative to have the bankruptcy court determine H & H's tax liability.
The bankruptcy court ruled that the audit and the assessment of tax liability against H & H violated the automatic stay under § 362(a). Moreover, the court concluded, because the violations were made with knowledge of the bankruptcy petition, H & H was entitled to attorneys' fees and costs. Accordingly, the bankruptcy court declared the assessment null and void and held that any lien arising from the assessment must be stricken. The district court affirmed, reasoning that the audit, assessment, and notice were prerequisites to the creation of a lien, and under Pennsylvania law, a "lien ...