11 U.S.C. § 725 — Disposition of certain property

Page 202 TITLE 11—BANKRUPTCY § 725 sets are to be distributed from the debtor’s estate to pay higher priority claims before the tax claims are paid, even though the tax claims are properly secured. Under present law and the Senate amendment only tax liens on personal property, but not on real property, are subordinated to the payment of claims having a pri- ority above the priority for tax claims. SENATE REPORT NO. 95–989 Subsection (a) of section 724 permits the trustee to avoid a lien that secures a fine, penalty, forfeiture, or multiple, punitive, or exemplary damages claim to the extent that the claim is not compensation for actual pecuniary loss. The subsection follows the policy found in section 57j of the Bankruptcy Act [section 93(j) of former title 11] of protecting unsecured creditors from the debtor’s wrongdoing, but expands the protection af- forded. The lien is made voidable rather than void in chapter 7, in order to permit the lien to be revived if the case is converted to chapter 11 under which penalty liens are not voidable. To make the lien void would be to permit the filing of a chapter 7, the voiding of the lien, and the conversion to a chapter 11, simply to avoid a penalty lien, which should be valid in a reorga- nization case. Subsection (b) governs tax liens. This provision re- tains the rule of present bankruptcy law (§ 67(C)(3) of the Bankruptcy Act [section 107(c)(3) of former title 11]) that a tax lien on personal property, if not avoid- able by the trustee, is subordinated in payment to un- secured claims having a higher priority than unsecured tax claims. Those other claims may be satisfied from the amount that would otherwise have been applied to the tax lien, and any excess of the amount of the lien is then applied to the tax. Any personal property (or sale proceeds) remaining is to be used to satisfy claims secured by liens which are junior to the tax lien. Any proceeds remaining are next applied to pay any unpaid balance of the tax lien. Subsection (d) specifies that any statutory lien whose priority is determined in the same manner as a tax lien is to be treated as a tax lien under this section, even if the lien does not secure a claim for taxes. An example is the ERISA [29 U.S.C. 1001 et seq.] lien. HOUSE REPORT NO. 95–595 Subsection (b) governs tax liens. It is derived from section 67c(3) of the Bankruptcy Act [section 107(c)(3) of former title 11], without substantial modification in re- sult. It subordinates tax liens to administrative ex- pense and wage claims, and solves certain circuity of liens problems that arise in connection with the subor- dination. The order of distribution of property subject to a tax lien is as follows: First, to holders of liens sen- ior to the tax lien; second, to administrative expenses, wage claims, and consumer creditors that are granted priority, but only to the extent of the amount of the al- lowed tax claim secured by the lien. In other words, the priority claimants step into the shoes of the tax col- lector. Third, to the tax claimant, to the extent that priority claimants did not use up his entire claim. Fourth, to junior lien holders. Fifth, to the tax col- lector to the extent that he was not paid under para- graph (3). Finally, any remaining property goes to the estate. The result of these provisions are to leave sen- ior and junior lienors and holders of unsecured claims undisturbed. If there are any liens that are equal in status to the tax lien, they share pari passu with the tax lien under the distribution provisions of this sub- section. Editorial Notes REFERENCES IN TEXT Section 6323 of the Internal Revenue Code of 1986, re- ferred to in subsec. (d), is classified to section 6323 of Title 26, Internal Revenue Code. AMENDMENTS 2010—Subsec. (b)(2). Pub. L. 111–327 substituted ‘‘507(a)(1)(C) or 507(a)(2)’’ for ‘‘507(a)(1)’’, ‘‘this chapter’’ for ‘‘chapter 7 of this title’’, and ‘‘507(a)(1)(A), 507(a)(1)(B),’’ for ‘‘507(a)(2),’’ and inserted ‘‘under each such section’’ after ‘‘such expenses’’. 2005—Subsec. (b). Pub. L. 109–8, § 701(a)(1), inserted ‘‘(other than to the extent that there is a properly per- fected unavoidable tax lien arising in connection with an ad valorem tax on real or personal property of the estate)’’ after ‘‘under this title’’ in introductory provi- sions. Subsec. (b)(2). Pub. L. 109–8, § 701(a)(2), inserted ‘‘(ex- cept that such expenses, other than claims for wages, salaries, or commissions that arise after the date of the filing of the petition, shall be limited to expenses in- curred under chapter 7 of this title and shall not in- clude expenses incurred under chapter 11 of this title)’’ after ‘‘section 507(a)(1)’’. Subsecs. (e), (f). Pub. L. 109–8, § 701(a)(3), added sub- secs. (e) and (f). 1994—Subsec. (b)(2). Pub. L. 103–394, § 304(h)(4), sub- stituted ‘‘507(a)(6), or 507(a)(7)’’ for ‘‘or 507(a)(6)’’. Subsec. (d). Pub. L. 103–394, § 501(d)(23), substituted ‘‘Internal Revenue Code of 1986’’ for ‘‘Internal Revenue Code of 1954 (26 U.S.C. 6323)’’. 1986—Subsec. (b)(2). Pub. L. 99–554 inserted reference to section 507(a)(6) of this title. 1984—Subsec. (b). Pub. L. 98–353, § 477(a)(1), sub- stituted ‘‘a tax’’ for ‘‘taxes’’ in provisions preceding par. (1). Subsec. (b)(2). Pub. L. 98–353, § 477(a)(2), substituted ‘‘any holder of a claim of a kind specified’’ for ‘‘claims specified’’, ‘‘section 507(a)(1)’’ for ‘‘sections 507(a)(1)’’, and ‘‘or 507(a)(5) of this title’’ for ‘‘and 507(a)(5) of this title’’. Subsec. (b)(3). Pub. L. 98–353, § 477(a)(3), substituted ‘‘allowed tax claim’’ for ‘‘allowed claim’’. Subsec. (c). Pub. L. 98–353, § 477(b), substituted ‘‘hold- er of a claim is entitled’’ for ‘‘creditor is entitled’’ and ‘‘holders’’ for ‘‘creditors’’ in two places. Subsec. (d). Pub. L. 98–353, § 477(c), substituted ‘‘the priority of which’’ for ‘‘whose priority’’ and ‘‘the same as if such lien were a tax lien’’ for ‘‘the same as a tax lien’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–8 effective 180 days after Apr. 20, 2005, and not applicable with respect to cases commenced under this title before such effective date, except as otherwise provided, see section 1501 of Pub. L. 109–8, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1994 AMENDMENT Amendment by Pub. L. 103–394 effective Oct. 22, 1994, and not applicable with respect to cases commenced under this title before Oct. 22, 1994, see section 702 of Pub. L. 103–394, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–554 effective 30 days after Oct. 27, 1986, see section 302(a) of Pub. L. 99–554, set out as a note under section 581 of Title 28, Judiciary and Judicial Procedure. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–353 effective with respect to cases filed 90 days after July 10, 1984, see section 552(a) of Pub. L. 98–353, set out as a note under section 101 of this title. § 725. Disposition of certain property After the commencement of a case under this chapter, but before final distribution of property of the estate under section 726 of this title, the trustee, after notice and a hearing, shall dispose of any property in which an entity other than Page 203 TITLE 11—BANKRUPTCY § 726 the estate has an interest, such as a lien, and that has not been disposed of under another sec- tion of this title. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2607; Pub. L. 98–353, title III, § 478, July 10, 1984, 98 Stat. 381.) HISTORICAL AND REVISION NOTES LEGISLATIVE STATEMENTS Section 725 of the House amendment adopts the sub- stance contained in both the House bill and Senate amendment but transfers an administrative function to the trustee in accordance with the general thrust of this legislation to separate the administrative and the judicial functions where appropriate. SENATE REPORT NO. 95–989 This section requires the court to determine the ap- propriate disposition of property in which the estate and an entity other than the estate have an interest. It would apply, for example, to property subject to a lien or property co-owned by the estate and another entity. The court must make the determination with respect to property that is not disposed of under another sec- tion of the bankruptcy code, such as by abandonment under section 554, by sale or distribution under 363, or by allowing foreclosure by a secured creditor by lifting the stay under section 362. The purpose of the section is to give the court appropriate authority to ensure that collateral or its proceeds is returned to the proper secured creditor, that consigned or bailed goods are re- turned to the consignor or bailor and so on. Current law is curiously silent on this point, though case law has grown to fill the void. The section is in lieu of a section that would direct a certain distribution to se- cured creditors. It gives the court greater flexibility to meet the circumstances, and it is broader, permitting disposition of property subject to a co-ownership inter- est. Editorial Notes AMENDMENTS 1984—Pub. L. 98–353 substituted ‘‘distribution of prop- erty of the estate’’ for ‘‘distribution’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–353 effective with respect to cases filed 90 days after July 10, 1984, see section 552(a) of Pub. L. 98–353, set out as a note under section 101 of this title. § 726. Distribution of property of the estate (a) Except as provided in section 510 of this title, property of the estate shall be distrib- uted— (1) first, in payment of claims of the kind specified in, and in the order specified in, sec- tion 507 of this title, proof of which is timely filed under section 501 of this title or tardily filed on or before the earlier of— (A) the date that is 10 days after the mail- ing to creditors of the summary of the trust- ee’s final report; or (B) the date on which the trustee com- mences final distribution under this section; (2) second, in payment of any allowed unse- cured claim, other than a claim of a kind spec- ified in paragraph (1), (3), or (4) of this sub- section, proof of which is— (A) timely filed under section 501(a) of this title; (B) timely filed under section 501(b) or 501(c) of this title; or (C) tardily filed under section 501(a) of this title, if— (i) the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under section 501(a) of this title; and (ii) proof of such claim is filed in time to permit payment of such claim; (3) third, in payment of any allowed unse- cured claim proof of which is tardily filed under section 501(a) of this title, other than a claim of the kind specified in paragraph (2)(C) of this subsection; (4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exem- plary, or punitive damages, arising before the earlier of the order for relief or the appoint- ment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not com- pensation for actual pecuniary loss suffered by the holder of such claim; (5) fifth, in payment of interest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this subsection; and (6) sixth, to the debtor. (b) Payment on claims of a kind specified in paragraph (1), (2), (3), (4), (5), (6), (7), (8), (9), or (10) of section 507(a) of this title, or in paragraph (2), (3), (4), or (5) of subsection (a) of this section, shall be made pro rata among claims of the kind specified in each such particular paragraph, ex- cept that in a case that has been converted to this chapter under section 1112, 1208, or 1307 of this title, a claim allowed under section 503(b) of this title incurred under this chapter after such conversion has priority over a claim allowed under section 503(b) of this title incurred under any other chapter of this title or under this chapter before such conversion and over any ex- penses of a custodian superseded under section 543 of this title. (c) Notwithstanding subsections (a) and (b) of this section, if there is property of the kind specified in section 541(a)(2) of this title, or pro- ceeds of such property, in the estate, such prop- erty or proceeds shall be segregated from other property of the estate, and such property or pro- ceeds and other property of the estate shall be distributed as follows: (1) Claims allowed under section 503 of this title shall be paid either from property of the kind specified in section 541(a)(2) of this title, or from other property of the estate, as the in- terest of justice requires. (2) Allowed claims, other than claims al- lowed under section 503 of this title, shall be paid in the order specified in subsection (a) of this section, and, with respect to claims of a kind specified in a particular paragraph of sec- tion 507 of this title or subsection (a) of this section, in the following order and manner: (A) First, community claims against the debtor or the debtor’s spouse shall be paid from property of the kind specified in sec- tion 541(a)(2) of this title, except to the ex-