DEBTOR CASE NO. 91-20281





This matter is before the Court on the trustee's Objection to Claim filed herein on July 13, 1992, in regard to claim number 8 of Alvin A. Gould ("Gould"), a creditor of the debtor. This claim was filed as a priority claim in the amount of $4,515.69. The trustee maintains that it is not a priority claim, pursuant to 11 U.S.C. '507, but a general unsecured claim. Gould has filed a Response to the Trustee's Objection to Claim.

The record in this case shows that Gould's priority claim of $4,515.69 is for ad valorem property taxes paid to various taxing authorities including the Commonwealth of Kentucky, Kenton County, and the City of Covington. These taxes had been assessed on real property located at 18-20 West Pike St., Covington. The debtor had executed a note payable to Gould in the amount of $340,000.00 on July 22, 1988. On the same date the debtor executed a mortgage in favor of Gould on the subject real property to secure its liability on the note.

The entire principal of the note was due and payable on July 22, 1989. The debtor failed to pay the principal on that date. After granting several extensions, Gould made demand on the debtor for payment in full on April 13, 1990. The debtor failed to pay pursuant to the demand or otherwise. In a real estate foreclosure proceeding, The City of Covington, Kentucky v. Res Com, Inc., et al., Civil Action No. 89-CI-02350, the court found that Gould had a first and prior lien on the property by reason of the mortgage and that the mortgage was in default.

The court directed that the property be sold by the Master Commissioner, and that subject to the payment of court costs and delinquent ad valorem real estate taxes, the judgment of Gould should be satisfied from the proceeds of the sale. As set out above, Gould paid the delinquent taxes. Upon payment of the taxes, Gould received a Certificate of Transfer from the Sheriff of Kenton County which transferred the tax claim and the tax lien of the various taxing authorities to him.

The trustee's Objection to Claim is based on two contentions: one, that '507 prohibits assignment or "subordination" of a claim entitled to priority and two, that the taxes in question here do not qualify as a claim which is entitled to priority. Gould has addressed the second contention by reference to '507(a)(7)(B), which gives priority to "a property tax assessed before the commencement of the case and last payable without penalty after one year before the date of filing of the petition." As Gould points out, the Commonwealth would have a priority claim for 1990 property taxes pursuant to this section. Pursuant to KRS 132.220(1), these taxes were assessed on January 1, 1990. The debtor filed its petition in this Court on February 20, 1991. The taxes were therefore assessed before the commencement of the case. One year before the date of filing of the petition is February 20, 1990. The taxes were last payable without penalty on December 31, 1990, which date is "after one year before the filing of the petition". Therefore, the taxes are entitled to priority pursuant to '507(a)(7)(B).

As concerns the trustee's contention that priority claims may not be assigned, Gould argues that '507(d) deals with the subrogation of claims to priority, that he is not the subrogee of the claim but the assignee, and that therein lies a crucial difference. He cites In re Missionary Baptist Foundation of America, 667 F.2d 1244 (5th Cir. 1982), and In re Ted True, Inc., 94 B.R. 423 (Bkrtcy.N.D.Tex. 1988) in support of this proposition. These cases do distinguish between assignees and subrogees. The court in In re Ted True, Inc., supra p. 427, stated that

[s]ubrogation is broad enough to include every instance in which one party pays a debt for which another party is responsible so long as the payment was made under compulsion or to protect the party making the payment and in the discharge of some existing liability. (Cite omitted). Where a right to subrogation exists, the general rule is an assignment adds nothing to the right; recovery is by virtue of a right in equity, not by virtue of a legal right under an assignment.

The court went on to say that if a tax payment was completely voluntary, it was an assignment. Id.

Gould maintains that his payment of the delinquent ad valorem property taxes was completely voluntary, that "[h]is payment was not compulsory to protect his own interest in discharging some personal tax liability;..." (Gould's Memorandum in Response, p. 4). Gould's argument does not, however, address the fact that as the mortgagee of the subject property, he had an interest to protect, i.e., his security interest in the property. The tax lien of the various taxing entities is a first and prior lien for five years from the date of assessment. See KRS 134.420. Absent such payment, his security interest is inferior to that of the taxing authorities. Payment of delinquent property taxes by a lienholder, however, entitles him to be "...subrogated to the lien of the state, county or taxing district therefor", pursuant to KRS 134.080. (Emphasis added).

It is the opinion of this Court that Gould's action in paying the delinquent property taxes was not completely voluntary, that it was taken to protect his own security interest in the property, and that it resulted in his coming within the purview of KRS 134.080, which provides for his subrogation to the lien of the taxing authorities. It is further the opinion of this Court that Gould is a subrogee and not an assignee and that the trustee may therefore avoid his claim pursuant to 11 U.S.C. '507(d). An order in conformity with this opinion will be entered separately.


By the Court -








Copies to:


Michael L. Baker, Esq., Trustee

Robert L. Winter, Jr., Esq.