Receiver's Obligation to Pay IRS Tax Claims Ahead of All Other Creditors: Abundance of Caution Required
The appointment of a Receiver generally occurs as a state law remedy when a business is insolvent and is unable to pay its debts when they become due. Generally, a creditor (or creditors) of an insolvent business may file a civil action requesting that the Court appoint a receiver to take control of the business’s assets, including its bank accounts, inventory, cash, accounts receivable and other property, in order to pay creditors. Upon appointment by the Court, the Receiver assumes control of the business, winds down its affairs, liquidates its assets, and ultimately closes the business. The Receiver collects the funds received from the liquidation of the business’s assets and disburses the proceeds to pay the claims of its creditors.
The priority of payment of the creditors is generally established by statute. In Maryland, for example, the priority of payment of creditors is set by Maryland Code Ann. Commercial Law Article § 15-102(b)(1)-(7) and provides that the claims are to be paid according to the following priority: (b)(1), administrative costs and expenses (i.e., receiver’s fees and related professional fees, including attorney’s fees); (b)(2), wages earned within three months of the commencement of the insolvency proceeding; (b)(3), lien claims of tax authorities and judicial liens; (b)(4), unsecured claims of $900 for deposits by individuals for purchase or rental of receivership property; (b)(5), rent for real property accruing not more than three months prior to the commencement of the insolvency proceeding; (b)(6), charges for goods transported by a common carrier; (b)(7) unsecured tax claims; and (b)(8), claims of unsecured creditors.
Apart from the priority scheme established under Maryland state law, however, federal law imposes its own schedule of priority of payment regarding tax claims to be paid by a receiver. Specifically, 31 U.S.C § 3713 provides that when a business is insolvent and not in bankruptcy, the tax claim of the United States must be paid first. 31 U.S.C § 3713(a) states as follows:
(1)A claim of the United States Government shall be paid first when
(A) A person indebted to the Government is insolvent and—
(i)The debtor without enough property to pay all debts makes a voluntary assignment of property;
(ii)Property of the debtor, if absent, is attached; or
(iii)An act of bankruptcy is committed; or
(B)the estate of a deceased debtor, in the custody of the executor administrator, is not enough to pay all debts of the debtor.
Pursuant to 31 U.S.C § 3713(a)(1)(iii), an act of bankruptcy has been determined to include “permitting a receiver or trustee to be appointed over all property.” As a result, claims paid by a Receiver in a receivership action are subject to and governed by the federal priority statue. A Receiver must, therefore, carefully review and determine the existence of any federal tax debt due and owing by the entity in receivership. The failure of the Receiver to provide the requisite payment to the federal government before paying any other claims imposes personal liability on the Receiver. Specifically, 31 U.S.C § 3713(b), states as follows:
(b) A representative of a person or estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the government is liable to the extent of the payment for unpaid claims of the government.
Based upon this provision, 31 U.S.C § 3713(b) imposes a significant sanction on a receiver who fails to pay or a federal tax debt or pays a tax claim only after paying other creditors. As a result, a Receiver must proceed carefully in reviewing and assuring that all federal tax claims are paid in full prior the payment of any non-tax claims.
The failure of the Receiver to provide such priority tax payments may result in the Receiver becoming personally liable for payment of the taxes incurred by the entity in receivership. Receivers should proceed with an abundance of caution in distributing funds from the receivership accordingly.
For additional information regarding the District of Columbia homestead exemption, or bankruptcy generally, contact Chris Hamlin or any other member of the firm’s Bankruptcy Group; Steve Goldberg, Janet Nesse, Craig Palik, Justin Fasano or Doan Phan.
Disclaimer: The opinions raised in this blog are solely those of the author. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation.