Magazine article Business Credit

In Trusts We Trust or ... Pigs Get Fat and Everyone Gets Slaughtered

Magazine article Business Credit

In Trusts We Trust or ... Pigs Get Fat and Everyone Gets Slaughtered

Article excerpt

The recent 5th Circuit Court of Appeals case In re Al Copeland Enterprises, Inc., illustrates the power of a trust in a bankruptcy case. In this case, Texas law created a trust which provided that sales tax receipts were to be held for the benefit of the state.

Al Copeland Enterprises, Inc. owned two chains of fried chicken restaurants in Texas and was required to collect sales tax from each customer. However, the debtor did not remit the collected funds to the state controller prepetition. Instead, it chose to litigate the state's right to receive the money, whether interest would be owed on the collected, yet unpaid sales taxes, and whether the liability for taxes could be paid out over six years.

The bankruptcy court held, and the Court of Appeals affirmed, that the sales taxes collected by Al Copeland Enterprises, Inc. were actually owned by Texas and were held in trust for the state. Therefore, the state was entitled to interest on the funds that were being held by the debtor.

The Bankruptcy Code provides that property of the bankruptcy estate does not include property (or money) held by the debtor yet actually owned by another party. In this case, the debtor had possession of the sales tax receipts, yet the State of Texas actually owned those funds. Therefore, those funds were not subject to the claims of the debtor's general creditors.

Congress Adds Fuel to the Fire

A similar trust-fund arrangement was created by Congress when it amended the Perishable Agricultural Commodities Act (PACA) to provide that proceeds from the sale of perishable agriculture commodities were to be held in trust for the benefit of the seller of the commodities. The seller must take certain steps to claim the benefits of the trust. In creating the statutory trust, Congress realized that the "trust" status would elevate those suppliers to a "super-priority" position. Indeed, the super-priority position was assured when Congress provided that the trust attached to almost all of the accounts receivable and cash of the debtor provided that any part thereof came from the sale of perishable agricultural commodities. This additional protection is enjoyed by large corporations, family farmers, and "middlemen" alike.

The beneficiaries of these and other trusts truly believe in the benefits of their trust rights since the effect of each trust is to place that particular creditor ahead of unsecured trade creditors. In every bankruptcy case, creditors have gone unpaid. However, only a very few can claim a trust relationship with the debtor. …

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