UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re: Collins & Aikman Corporation, et al.

, Debtors. ____________________________________/ Chapter 11 Case No. 05-55927 Hon. Steven W. Rhodes Jointly Administered

REPLY TO DEBTORS OBJECTION TO CITY OF PORT HURONS MOTION FOR ALLOWANCE OF ADMINISTRATIVE CLAIM In response to the City of Port Hurons (the City) Motion for Allowance of Administrative Claim (the Motion), the Debtors make two objections: (i) the taxes that constitute the Citys claim are not entitled to administrative expense priority, and (ii) this Court should not decide this Motion because the Debtors have already filed an adversary proceeding to avoid the Citys liens. Each of these objections are without merit and should overruled. I. The Taxes Are Administrative Expenses. Section 503(b)(1)(B) of the United States Bankruptcy Code1 (the Bankruptcy Code) allows as administrative expenses any tax incurred by the estate, whether secured or unsecured, . . . except a tax of a kind specified in section 507(a)(8) of this title. The Sixth Circuit has set forth the following analysis for determining whether or not a tax is an administrative expense: In determining whether a claim is a valid administrative expense, a court must decide (1) whether the taxes were incurred by the estate and (2) whether the taxes are of a kind specified in 507(a)(8). In re Federated Dept Stores, Inc., 270 F.3d 994, 1000 (6th Cir. 2001).
1

11 U.S.C. 101 et seq.

{00145499}

0W[;')8

0555927070924000000000007

',

In this case, as in Federated, the taxes at issue were both (i) incurred by the estate and (ii) are not of a kind specified in 507(a)(8). A. The Taxes Were Incurred By The Estate.

State law determines when a tax is incurred. Id. at 1000. A tax is incurred when it accrues and becomes a fixed liability. Id. at 1001. Further, a tax obligation accrues when the event triggering liability occurs. Id. Thus, the inquiry is to determine when the event occurs that causes the tax to become a fixed liability under state law. The Debtors state simply that under Michigan law the taxes are considered incurred on December 31 of the immediately preceding year. Debtors Objection at 45. However, the statutes cited by the Debtors state only that this is the date on which the taxes are assessed under state law. MCL 211.40, 211.2, 211.13. The Debtors

themselves admit that the date the taxes are assessed is immaterial. Debtors Objection at 4, citing In re Northeastern Ohio Gen. Hosp. Assn., 126 B.R. 513, 515. Instead, as clearly stated by the Sixth Circuit, the focus must be on when the tax becomes a fixed in personam liability. Federated at 1001-03. In Federated, the Sixth Circuit construed New York tax statutes very similar to the Michigan tax statutes at issue in this case. The District Court ruled that the taxes were incurred on the tax status date, the date when the taxability and valuation of the property is determined. The Sixth Circuit reversed stating that taxes are not incurred until the date that personal liability for the taxes attaches. The tax status date only determines in rem, not in personam liability. Personal liability, under New York law, does not attach until the levy date. Thus, if the property were sold after the tax status date, but before the tax levy date, the purchaser, and not the seller, would be personally liable for the taxes. Therefore, the tax was

{00145499}

incurred by the property owner on the levy date, the date that the city obtained an in personam claim against the property owner. Because the levy date occurred post-

petition, the taxes were post-petition taxes incurred by the debtors estate. Id. at 1002-03. Michigan law also provides that only in rem liability attaches on the tax date. As in New York, in personam liability does not attach until the levy date, the date on which the taxes become due and payable. MCL 211.2(3) and (4). Just as the Sixth Circuit noted in Federated, if the property were sold after the tax date but before the levy date, the purchaser, not the seller, would be liable for the taxes. Id. Thus, the taxes do not become fixed liabilities on the tax date or on the date the taxes are assessed according to state law. Instead, the taxes are incurred (become a fixed liability) on the levy date, the date the taxes become due and owing. In this case, the levy date was July 1, 2005, after the Debtors bankruptcy petitions were filed. Therefore, the taxes were incurred post-petition by the Debtors estates. B. The Taxes Are Not 507(a)(8) Taxes.

The second prong to determine whether taxes are entitled to administrative expense priority is to determine whether or not they are 507(a)(8) taxes. Section

507(a)(8) of the Bankruptcy Code covers taxes assessed before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition.2

11 U.S.C. 507(a)(8)(B). Effective after the filing of the Debtors bankruptcy cases, 507(a)(8) has been revised to change the word assessed to incurred, presumably to make the two prongs of the analysis consistent with one another. See Federated, at 1000 (citing the possibility that a tax could be incurred prepetition but assessed post-petition, and thus qualify for neither administrative expense status or priority status), quoting from 2 William L. Norton, Bankruptcy Law and Practice 2d 42:39 (2d ed. 2001). The Sixth Circuit reached the same result by determining that assessed has the same meaning as incurred under these sections of the Bankruptcy Code.

{00145499}

Federal law, not state law, determines what constitutes an assessment under 507(a)(8). Federated, at 1004. A tax is assessed when liability is fixed and the entity is made liable for the tax. Id. at 1005. In Federated, the Sixth Circuit found that the tax was not assessed until the debtor became personally liable for the taxes. Because New York law did not impose personal liability for the taxes until after the petition date, the taxes were assessed after the petition date for purposes of 507(a)(8). Federated, at 1005-06. Therefore, the Sixth Circuit held that the taxes were post-petition administrative expenses. As discussed above, Michigan law, like New York law, does not impose personal liability for taxes until the taxes are levied, i.e., until they become due and owing. In this case, the taxes were not levied until July 1, 2005. Thus, under the analysis set forth in Federated, the taxes were assessed post-petition and are not 507(a)(8) taxes. Therefore, the taxes are entitled to administrative expense status. II. The Relief Requested By The City Is Not A Remedy Available Through The Debtors Lien Avoidance Adversary Proceeding. The Debtors have filed an adversary proceeding against the City seeking to (i) avoid certain liens and (ii) reduce the Citys claim (the Avoidance Action). However, the Debtors complaint in the Avoidance Action does not seek any determination as to the priority of the Citys claim and the City did not file a counter-claim seeking such a determination.3 In fact, the City has admitted that the liens are subject to avoidance. See Complaint and Answer, attached as Exhibits A and B, respectively.

The City, in its answer, does state that the claim is an administrative claim. However, an answer is not a proper request for affirmative relief, nor an application for an administrative expense as required by 503.

{00145499}

The City cannot obtain a determination that its claims are entitled to administrative expense status through the adversary. Thus, seeking this relief through the Motion is necessary and appropriate. The only issue that has any overlap between the Avoidance Action and the Motion is the proper amount of the Citys claim. The City claims $322,619.01 is

currently due and owing (Motion, 7), and the Debtors believe this amount should be $305,863.48 (Complaint, 20). If the City and the Debtors are unable to resolve this $17,000 difference, the dispute can easily be determined through a simple evidentiary hearing. Therefore, the City respectfully requests that this Honorable Court grant the Motion and enter an Order (i) allowing the City an administrative claim in the amount of the 2005 taxes and (ii) requiring that the Debtors immediately pay the 2005 taxes.

Respectfully submitted,

SCHAFER AND WEINER, PLLC

FLETCHER FEALKO SHOUDY & MOELLER, P.C.

By: / s / Ryan D. Heilman DANIEL V. SMITH (P56047) RYAN D. HEILMAN (P63952) Co-Counsel for City of Port Huron 40950 Woodward Ave., Ste. 100 Bloomfield Hills, MI 48304 (248) 540-3340 rheilman@schaferandweiner.com

And

By: GARY A. FLETCHER T. ALLEN FRANCIS Counsel for City of Port Huron 522 Michigan Street Port Huron, Michigan 48060-3811 (810) 987-8444 afrancis@fletcherclark.com

Dated: August 14, 2007

{00145499}