Before: BECKER, MANSMANN and GREENBERG, Circuit Judges.
Appeal from the United States District Court for the District of New Jersey
In this appeal, we are presented with two decisions of the district court dated May 18, 1995, and February 20, 1996, which reversed the orders of the bankruptcy court on two related bankruptcy cases. We are asked to decide whether the district court erred in determining that the bankruptcy court was not authorized to compel the Internal Revenue Service to reallocate tax payments first to trust fund taxes. We find that neither 11 U.S.C. Section(s) 105 nor the Supreme Court's decision in United States v. Energy Resources Co., Inc., 495 U.S. 545 (1990), authorized the bankruptcy court to order the Internal Revenue Service to reallocate tax payments under the particular facts here. Accordingly, we will affirm the decisions of the district court.
We feel compelled to set forth the facts in detail because these bankruptcy cases are so heavily fact-intensive.
This consolidated appeal arises from two separate but related Chapter 11 bankruptcy petitions filed by Michael and Morris Kaplan and Kaplan Building Systems, Inc. ("KBS"). KBS is a Pennsylvania corporation formed for the sole purpose of acquiring and operating a modular home manufacturing business. Two brothers, Michael and Morris Kaplan, organized KBS and, at all relevant times, were its sole owners. During 1990, KBS made only one payment of employment taxes in the approximate amount of $200,000. That payment was not accompanied by a quarterly return. For the four quarters of 1990, KBS failed to file timely returns and to pay to the United States approximately $2 million in federal employment taxes. Of this amount, $1,564,468 were "trust fund" taxes. *fn1
On February 11, 1991, Michael and Morris Kaplan filed two separate Chapter 11 petitions with the United States Bankruptcy Court for the District of New Jersey, which were later consolidated. KBS did not file for bankruptcy at that time. Although the Kaplans owned or were partners in approximately 89 entities including KBS, they wanted to avoid preparing petitions and paying filing fees with respect to each of the entities. The Kaplans thus sought an injunction under 11 U.S.C. 105 to enjoin specific creditors from instituting civil actions against the "non-filing" Kaplan businesses. Although a number of KBS's other creditors were named in the injunctions, the IRS was not one of the defendant-creditors named in the orders, nor did the IRS participate in the matter. *fn2 Invoking its powers under section 105, the bankruptcy court enjoined all of the named defendant-creditors from proceeding to litigate claims against the non-filing Kaplan entities. The injunction dissolved ninety days after the effective date of the Kaplans' plan of reorganization.In March of 1991, KBS filed its employment tax returns for the four quarters of 1990 and the corresponding taxes were assessed against KBS. In lieu of instituting formal collection proceedings against KBS, the revenue officer determined that KBS could make installment payments to satisfy the debts, provided the Kaplans executed Forms 2751--Proposed Assessment of 100 Percent Penalty--and consented to the assessment and collection of a responsible person's penalty in connection with KBS's unpaid trust fund taxes for 1990. The Kaplans executed the necessary forms, thereby agreeing that the responsible person penalty could be assessed against them on or before December 31, 1995.
KBS and the IRS entered into two installment agreements. The first installment agreement provided that KBS would pay the IRS $30,000 per month from October, 1991 through December, 1991; $35,000 per month from January, 1992, through March, 1992; $40,000 per month from April through June, 1992; and $50,000 from July, 1992, until December, 1994, when the balance would be paid in full. Although the installment agreement contained several conditions, it did not address the allocation of payments. By the end of 1993, KBS defaulted on the first installment agreement.
A second installment agreement was drawn up in May, 1994, which required KBS to make monthly payments of $60,000 from July of 1994 to March of 1995, and $100,000 from April of 1995 until the debt was paid in full. The installment agreement form, which had been revised in January, 1993, provided as one of the conditions that "[a]ll payments will be applied in the best interest of the United States." On May 27, 1994, the general counsel for the Kaplan companies wrote to the revenue officer advising him that before executing the installment agreement, KBS deleted the language on the form providing that payments will be applied in the best interest of the United States. The revenue officer informed KBS's counsel that the agreement could not be accepted by the IRS with the deletion of this condition. KBS reversed the deletion, but reserved its right to further contest this allocation. The IRS executed the second installment agreement on July 6, 1994 and KBS made payments through at least September of 1994. The Kaplans claim they have personally funded KBS's tax liability payments in an amount in excess of $1 million.
On January 29, 1993, the bankruptcy court confirmed the Kaplans' first amended plan of reorganization. The confirmed plan dealt with some debts against the non-filing Kaplan entities. With respect to tax claims against KBS, the plan provided:
Notwithstanding anything in this Plan to the contrary, Tax Claims against Kaplan Building Systems, Inc. shall be paid in accordance with and pursuant to installment agreements with Internal Revenue Service. *fn3
On July 29, 1994, the Kaplans filed a motion in their individual bankruptcy cases to compel the IRS to reallocate the tax payments made by KBS (but funded by the Kaplans) to trust fund obligations. *fn4 Without such reallocation, the Kaplans remain liable for 100% of KBs's unpaid trust fund taxes. The bankruptcy court held a hearing at which the Kaplans argued that because reallocating the payments to KBS's trust fund liabilities would "enhance the probability the Kaplans will fully consummate their confirmed Plan which requires payments to be made to creditors over time," the bankruptcy court has the authority to and should compel the IRS to change the allocation of KBS's payments that had been funded by the Kaplans, based on the Supreme Court's holding in United States v. Energy Resources Co., Inc., 495 U.S. 545 (1990). The government opposed the motion, asserting that Energy Resources was inapposite here because the corporation was not a debtor in the Kaplans' bankruptcy proceedings and whatever the effect on KBS, the allocation of tax payments would not affect the reorganization of the Kaplans, who were the only debtors in the case. The bankruptcy court concluded that this case was completely analogous to Energy Resources, even though the structure here was not a textbook structure. Because it found that the reallocation of KBS's taxes was necessary for the Kaplans' reorganization, the bankruptcy court entered an order directing the IRS to reallocate the prior payments to trust fund taxes.
The IRS appealed the bankruptcy court's order to the district court. On May 18, 1995, the district court issued an order reversing the decision of the bankruptcy court, finding that because KBS was not a debtor in bankruptcy, the bankruptcy court was not authorized to order the IRS to reallocate payments made by KBS. The district court noted that unlike Energy Resources, the bankruptcy court here lacked jurisdiction over KBS and, therefore, was without the power to order reallocation of the tax payments under 11 U.S.C. Section(s) 1123, 1129 and 105, as those sections were not applicable. The district court further held that the bankruptcy court could order retroactive allocation of tax payments. *fn5 In dicta, the district court commented that KBS could file its own Chapter 11 petition, thereby subjecting itself to the bankruptcy court's jurisdiction. The Kaplans filed a timely appeal to this court, which was stayed on September 12, 1995, pending the district court's ruling on the same issue in the KBS bankruptcy case.
On June 2, 1995, KBS filed its own bankruptcy petition under Chapter 11 of the Bankruptcy Code. On that same date, KBS filed several motions with the bankruptcy court, one of which asked the court to compel the IRS to reallocate the tax payments funded by the Kaplans on behalf of KBS to trust fund taxes. KBS argued that reallocation of the tax payments was necessary for its successful reorganization, in that it would induce the Kaplans to provide KBS with new emergency funding necessary for the continued operation of KBS. The IRS opposed the motion on the basis that the bankruptcy court lacked authority to reallocate, arguing that all of the payments at issue had been made pre-petition and that the debtor had failed to designate the manner in which they were to be applied. The IRS applied the payments in accordance with IRS written policy, which requires that payments received be applied in a manner consistent with the best interests of the government, unless otherwise designated.
Having determined that it had jurisdiction over KBS, the bankruptcy court considered whether it had the authority to compel the IRS to reallocate the tax payments under Energy Resources. Concluding that the reallocation was necessary to KBS's successful reorganization, the bankruptcy court entered an order, with retroactive ...