United States v. Whiting Pools, Inc.
462 U.S. 198 (1983)

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U.S. Supreme Court

United States v. Whiting Pools, Inc., 462 U.S. 198 (1983)

United States v. Whiting Pools, Inc.

No. 82-215

Argued April 19, 1983

Decided June 8, 1983

462 U.S. 198

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT

Syllabus

Section 542(a) of the Bankruptcy Reform Act of 1978 (Act) requires an entity, other than a custodian, in possession of property of the debtor that the trustee in bankruptcy can use, sell, or lease under § 363 to deliver that property to the trustee. Section 543(b)(1) requires a custodian in possession or control of any property of the debtor to deliver the property to the trustee. Promptly after the Internal Revenue Service (IRS) seized respondent swimming pool firm's tangible personal property to satisfy a tax lien, respondent filed a petition for reorganization under the Act. The Bankruptcy Court, pursuant to § 543(b)(1), ordered the IRS to turn the property over to respondent on the condition that respondent provide the IRS with specified protection for its interests. The District Court reversed, holding that a turnover order against the IRS was not authorized by either § 542(a) or § 543(b)(1). The Court of Appeals in turn reversed the District Court, holding that a turnover order could issue against the IRS under § 542(a).

Held:

1. The reorganization estate includes property of the debtor that has been seized by a creditor prior to the filing of a petition for reorganization. Pp. 462 U. S. 202-209.

(a) Both the congressional goal of encouraging reorganization of troubled enterprises and Congress' choice of protecting secured creditors by imposing limits or conditions on the trustee's power to sell, use, or lease property subject to a secured interest, rather than by excluding such property from the reorganization estate, indicate that Congress intended a broad range of property, including property in which a creditor has a secured interest, to be included in the estate. Pp. 462 U. S. 203-204.

(b) The statutory language reflects this view of the scope of the estate. Section 541(a)(1) of the Act, which provides that the estate shall include "all legal or equitable interests of the debtor in property as of the commencement of the case," is intended to include any property made available to the estate by other provisions of the Act, such as § 542(a). In effect, § 542(a) grants to the estate a possessory interest in certain property of the debtor that was not held by the debtor at the commencement of reorganization proceedings. Pp. 462 U. S. 204-207.

(c) This interpretation of § 542(a) is supported by its legislative history, and is consistent with judicial precedent predating the Act.

Page 462 U. S. 199

Any other interpretation would deprive the reorganization estate of the assets and property essential to its rehabilitation effort, and thereby would frustrate the congressional purpose behind the reorganization provisions. Pp. 462 U. S. 207-208.

2. Section 542(a) authorizes the Bankruptcy Court to order the IRS to turn over the seized property in question. Pp. 462 U. S. 209-211.

(a) The IRS is bound by § 542(a) to the same extent as any secured creditor. Nothing in the Act or its legislative history indicates that Congress intended a special exception for tax collectors. 462 U. S. 209.

(b) While § 542(a) would not apply if a tax levy or seizure transferred to the IRS ownership of the property seized, the Internal Revenue Code does not transfer ownership of such property until the property is sold to a bona fide purchaser at a tax sale. Pp. 462 U. S. 209-211.

674 F.2d 144, affirmed.

BLACKMUN, J., delivered the opinion for a unanimous Court.

JUSTICE BLACKMUN delivered the opinion of the Court.

Promptly after the Internal Revenue Service (IRS or Service) seized respondent's property to satisfy a tax lien, respondent filed a petition for reorganization under the Bankruptcy Reform Act of 1978, hereinafter referred to as the "Bankruptcy Code." The issue before us is whether § 542(a) of that Code authorized the Bankruptcy Court to subject the IRS to a turnover order with respect to the seized property.

I

A

Respondent Whiting Pools, Inc., a corporation, sells, installs, and services swimming pools and related equipment and supplies. As of January, 1981, Whiting owed approximately $92,000 in Federal Insurance Contribution Act taxes and federal taxes withheld from its employees, but had failed

Page 462 U. S. 200

to respond to assessments and demands for payment by the IRS. As a consequence, a tax lien in that amount attached to all of Whiting's property. [Footnote 1]

On January 14, 1981, the Service seized Whiting's tangible personal property -- equipment, vehicles, inventory, and office supplies -- pursuant to the levy and distraint provision of the Internal Revenue Code of 1954. [Footnote 2] According to uncontroverted findings, the estimated liquidation value of the property seized was, at most, $35,000, but its estimated going-concern value in Whiting's hands was $162,876. The very next day, January 15, Whiting filed a petition for reorganization, under the Bankruptcy Code's Chapter 11, 11 U.S.C. § 1101 et seq. (1976 ed., Supp. V), in the United States Bankruptcy Court for the Western District of New York. Whiting was continued as debtor-in-possession. [Footnote 3]

The United States, intending to proceed with a tax sale of

Page 462 U. S. 201

the property, [Footnote 4] moved in the Bankruptcy Court for a declaration that the automatic stay provision of the Bankruptcy Code, § 362(a), is inapplicable to the IRS or, in the alternative, for relief from the stay. Whiting counterclaimed for an order requiring the Service to turn the seized property over to the bankruptcy estate pursuant to § 542(a) of the Bankruptcy Code. [Footnote 5] Whiting intended to use the property in its reorganized business.

B

The Bankruptcy Court determined that the IRS was bound by the automatic stay provision. In re Whiting Pools, Inc., 10 B.R. 755 (1981). Because it found that the seized property was essential to Whiting's reorganization effort, it refused to lift the stay. Acting under § 543(b)(1) of the Bankruptcy Code, [Footnote 6] rather than under § 542(a), the court directed the IRS to turn the property over to Whiting on the condition that Whiting provide the Service with specified protection for its interests. 10 B.R. at 760-761. [Footnote 7]

Page 462 U. S. 202

The United States District Court reversed, holding that a turnover order against the Service was not authorized by either § 542(a) or § 543(b)(1). 15 B.R. 270 (1981). The United States Court of Appeals for the Second Circuit, in turn, reversed the District Court. 674 F.2d 144 (1982). It held that a turnover order could issue against the Service under § 542(a), and it remanded the case for reconsideration of the adequacy of the Bankruptcy Court's protection conditions. The Court of Appeals acknowledged that its ruling was contrary to that reached by the United States Court of Appeals for the Fourth Circuit in Cross Electric Co. v. United States, 664 F.2d 1218 (1981), and noted confusion on the issue among bankruptcy and district courts. 674 F.2d at 145, and n. 1. We granted certiorari to resolve this conflict in an important area of the law under the new Bankruptcy Code. 459 U.S. 1033 (1982).

II

By virtue of its tax lien, the Service holds a secured interest in Whiting's property. We first examine whether § 542(a) of the Bankruptcy Code generally authorizes the turnover of a debtor's property seized by a secured creditor prior to the commencement of reorganization proceedings. Section 542(a) requires an entity in possession of "property that the trustee may use, sell, or lease under section 363" to

Page 462 U. S. 203

deliver that property to the trustee. Subsections (b) and (c) off § 363 authorize the trustee to use, sell, or lease any "property of the estate," subject to certain conditions for the protection of creditors with an interest in the property. Section 541(a)(1) defines the "estate" as

"comprised of all the following property, wherever located: . . . all legal or equitable interests of the debtor in property as of the commencement of the case."

Although these statutes could be read to limit the estate to those "interests of the debtor in property" at the time of the filing of the petition, we view them as a definition of what is included in the estate, rather than as a limitation.

A

In proceedings under the reorganization provisions of the Bankruptcy Code, a troubled enterprise may be restructured to enable it to operate successfully in the future. Until the business can be reorganized pursuant to a plan under 11 U.S.C. §§ 1121-1129 (1976 ed., Supp. V), the trustee or debtor-in-possession is authorized to manage the property of the estate and to continue the operation of the business. See § 1108. By permitting reorganization, Congress anticipated that the business would continue to provide jobs, to satisfy creditors' claims, and to produce a return for its owners. H.R.Rep. No. 95-595, p. 220 (1977). Congress presumed that the assets of the debtor would be more valuable if used in a rehabilitated business than if "sold for scrap." Ibid. The reorganization effort would have small chance of success, however, if property essential to running the business were excluded from the estate. See 6 J. Moore & L. King, Collier on Bankruptcy

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