By Charles Moster 
Well, Benjamin Franklin always said it best and with a unique fervor, “There is nothing certain in life except death and taxes.”  However, in the topsey turvey “Alice through the Looking Glass” world of Chapter 11 bankruptcy only one thing was certain.  At least for a while.

In my last year as a litigation and bankruptcy attorney for the U.S. Department of Commerce, I had too much time on my hands.  It’s not that I personified the erroneous notion of the lazy government worker, most of my cases had concluded or ground to a halt.  Back in 89′ I was charged with cleaning up the mess generated from the Feds first “TARP” program.  Congress in its infinite wisdom decided to guarantee close to $1Billion in loans to the steel industry which went bad (sound familiar?). 

Unfortunately most of the collateral which secured these massive loans was inadequate or illusory.  I felt somewhat like Don Quixote chasing down rusted collateral throughout the steel belt.  After awhile, one steel mill looks a whole lot like another.  That’s when I decided to get creative and test old Ben Franklin’s universal law.

See, the pivotal mother lode of all bankruptcy protections is known as the “automatic stay”, absent which our bankruptcy system could not operate.  At the very moment in time a Chapter 11 bankruptcy petition is filed at the courthouse an invisible force field surrounds the debtor and all of its assets.  Any lawsuit or claim in any court brought anywhere against the debtor is magically suspended in time and space. 

These legal actions literally die instantly on the vine and must be re-filed in bankruptcy court where different rules apply altogether (subject of a later blog).  So, for example, if you slipped on the proverbial banana peel at the entrance of Disneyland and had your lawyer lay claim to Mickey Mouse himself (itself?), that lawsuit would be instantly snuffed out.

In what was my last big case for the government before making the migration to private practice, I decided to test the power and extent of this automatic stay force field.  My client was The United States of America, and it held a multimillion dollar claim after a huge loan to a steel company was not paid off in full. 

I went to my handy form file and decided to foreclose on the steel facility in Lockport, New York (famous for proximity to Niagara Falls) to payoff this debt to the government.  For the first time in my experience, the collateral slightly exceeded the amount of the debt.  That is, until I was told by the City of Lockport, New York, that unpaid school and other taxes approximating a good chunk of our claim constituted a “priming lien” on the collateral.  This meant that regardless of our first mortgage on the collateral, the first proceeds of the sale would go to the Lockport School system. 

Not that I had an aversion to little kids getting the textbooks they needed, but this didn’t seem fair to me. After all, the Feds lent the money and were given first place status to recover the proceeds of any sale.  I brought that to the attention of my Assistant General Counsel at the Commerce Department who seemed perplexed by my concern.  “Why taxes always come first.  You know, Benjamin Franklin himself said something about the certainty of death and taxes.”  My supervisor shook his head and mumbled, “Charlie, you have too much time on your hands.”

Maybe so, but the inevitability of taxes seemed most unfair to me.  If the automatic stay was as all powerful as they said, then how could taxes somehow sneak in after the filing of the Chapter 11 bankruptcy?  I took a closer look at the law in Lockport, New York, and learned that the so-called “priming lien” arose automatically once the state legislature approved the tax rolls for the state.  OK, that made sense. 

But wait a minute, didn’t those legislators have to do something affirmatively to approve the tax?  How about the act of voting “yay” or “nay” on the proposed tax?  Certainly that had to happen. 

In less than a NY Minute, a most potent and mischievous argument occurred to me.  If the great banana slip and fall case against Mickey could be stopped or stayed if Walt filed for Chapter 11, why would the State of New York be any different?

And so I fashioned a legal argument that once a business files for bankruptcy nothing can pierce its force field, not even the taxing authorities.  The force field of the automatic stay would prohibit any claim from penetrating the assets of the debtor, even a tax approved by a state legislature.  And that was the argument I made.

My supervisor at the time, and even the U.S. Department of Justice, found the argument to be interesting but dead in the water.  Collectively they mumbled something about Ben Franklin.

Not so the Bankruptcy Court for New York, the United States District Court, and the second highest court in the land – the Second Circuit Court of Appeals.  The logic was unpleasant but flawless, the taxes owed to the state of New York were declared invalid. 

The majority cited a Latin phrase that the Empire State tax claim was “void ab initio” (void at inception).  The minority referred to ole Ben himself, “We always thought that the only thing certain is death and taxes. After this decision, the only thing we have to look forward to is death.”

I was quite taken with myself as a young lawyer having taken down Goliath with a statutory slingshot!  And that’s when I got a heavy dose of humility.

See, this new court ruling allowed my client Uncle Sam to get paid, but not so the City of Lockport and its schools.  Then another lawyer with too much time on her hands got a hold of my new case and made the same argument to invalidate the environmental claim of the Environmental Protection Agency which would have forced a big polluter to clean up its act. 

And so this product of my imagination made its way across the country wreaking havoc.  Thankfully, an act of Congress (literally) came to the rescue of large and small cities everywhere when the Bankruptcy Code was amended.  The “automatic stay” force field was rewritten to allow taxes to find a way through! 

I learned a big lesson in the unpredictability of the legal process.  After all, Ben Franklin himself could not have been clearer about the certainty of death and taxes. 

That’s when a brand new idea popped into my head.  Yep, time to load up the ole statutory slingshot again.  Keep an eye out in 09′ for my next challenge to our tax system.  This time I figured out a way to save those textbooks and my clients, too.   After that, I’m setting my sights on death itself!

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