CHAPTER 5:   INDIVIDUAL COMMISSIONER VIEWS

Dissent from Recommendation to Amend Section 724(b)

Babette Ceccotti

Revenue shortfalls experienced by local governments undoubtedly stem from any number of causes. The role of this relatively obscure section of the Bankruptcy Code in creating revenue shortages perhaps has been overstated in the drive to reverse a long-standing policy to protect the payment of wage and other priority claims in the most desperate bankruptcy cases.

Some updating of section 724(b) may be warranted in light of the expansion of claim priorities under section 507(a). Many who commented on the section 724(b) proposals, including a number of local taxing authorities, were not opposed to maintaining the subordination of tax liens to a limited list of priority claims that included wage priority claims under section 507(a)(3) and(4). Criticism regarding the operation of section 724(b) focused on other types of expenses entitled to payment ahead of tax liens, most notably, professional fees incurred in connection with a pre-conversion Chapter 11 case. Other complaints stemmed from examples where funds generated by the operation of section 724(b) may have compensated others in remote locations because the bankruptcy case was not filed in the community where the property was located. These are insufficient grounds to reverse an important policy originally intended to protect wage claims and Chapter 7 administrative expenses. Senate bill S. 1149, known as "The Investment in Education Act of 1997," 143 Cong. Rec. S8823 (September 4, 1997), correctly restores the wage priorities that are subordinated to ad valorem tax liens under the Commission's Recommendation.

Delineating the payment priorities involves making fundamental choices about the bankruptcy distribution scheme. Amendments to section 724(b) should not be undertaken without a more thorough and exacting review of the competing interests.