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In Re: Southeast Waffles, LLC v. United States Department of

December 6, 2012


Appeal from the United States Bankruptcy Appellate Panel. No. 3:08-BK-07552--Keith M. Lundin, U.S. Bankruptcy Judge.

The opinion of the court was delivered by: Stafford, District Judge.


Pursuant to Sixth Circuit I.O.P. 32.1(b)

Argued: October 9, 2012

Before: BOGGS and CLAY, Circuit Judges; and STAFFORD, District Judge.*fn1


The appellant-debtor, Southeast Waffles, LLC ("SEW"), appeals the Bankruptcy Appellate Panel's affirmance of the bankruptcy court's order dismissing SEW's adversary proceeding for failure to state a claim. SEW filed its adversary proceeding against the United States in SEW's Chapter 11 bankruptcy case, seeking avoidance of prepetition payments of tax penalties as fraudulent transfers under the Bankruptcy Code, 11 U.S.C. § 548(a)(1)(B), and the Tennessee Uniform Fraudulent Transfer Act ("TUFTA"), Tenn. Code Ann. § 66-3-301 et seq. We AFFIRM.



As alleged in SEW's adversary complaint, the facts are as follows:

SEW, a limited liability corporation, was formed in 1999 for the purpose of purchasing, and operating as a franchisee, Waffle House restaurants. When SEW filed its Chapter 11 petition on August 25, 2008 (the "Petition Date"), SEW operated approximately 113 Waffle House restaurants located in Tennessee, Alabama, Mississippi, and Kentucky.

Throughout the period from January 1, 2005, to the Petition Date, SEW failed to pay all of the federal income tax withholding, social security (FICA), and unemployment (FUTA) taxes that were due to the Internal Revenue Service ("IRS"). SEW also failed to timely file all returns relating to these taxes. Because SEW employed many hundreds of individuals in the restaurants it operated, the payments due to the IRS for federal income tax withholding, FICA, and FUTA taxes were sizable.

During the four years prior to the Petition Date, the IRS assessed penalties well in excess of $1,500,000 for SEW's failure to timely file its tax returns and to fully and timely pay the taxes due. Throughout this time period, SEW was insolvent and owed unsecured debts to one or more creditors.

After the penalties were assessed, SEW made payments that were applied to its tax obligations and also made several undesignated prepetition payments to the IRS that were applied in partial satisfaction of the assessed penalties. SEW's complaint does not make clear how the IRS divided SEW's payments among penalties, taxes, and interest.


After filing its voluntary Chapter 11 petition in the United States Bankruptcy Court for the Middle District of Tennessee (the "Bankruptcy Court"), SEW operated its business and managed its properties as debtor-in-possession until SEW sold substantially all of its assets effective October 1, 2009. No trustee was appointed in SEW's bankruptcy case. A liquidation agent, Gary M. Murphey, was appointed to administer SEW's residual assets. Murphey continues to serve in that role.

Pursuant to its confirmed Chapter 11 Plan, SEW retained "Recovery Causes of Action," including all avoidance actions, belonging to it or to the bankruptcy estate. SEW filed this avoidance action on August 24, 2010, seeking recovery from the IRS of prepetition tax penalty payments in the amount of $637,652.07 or, in the alternative, an offset in the amount of the penalty payments against the tax amounts still owed to the IRS. In its complaint, SEW alleged that (1) "the imposition and payment of these penalties provided no value to [SEW]" because "these penalties did not decrease in any way the amount actually due from [SEW] for federal income tax withholding, social security and FUTA taxes"; (2) SEW "did not receive reasonably equivalent value in exchange for the Penalty Payments"; (3) "[a]t the time that [SEW] made most of the Penalty Payments, [SEW] was insolvent"; and (4) "[e]ach Penalty Payment that SEW made while insolvent . . . is avoidable by [SEW] pursuant to 11 U.S.C. 548 and 544, as well as Tenn. Code Ann. § 66-3-301 et seq." SEW did not allege that the penalty obligations--those already paid as well as those then unpaid--were themselves avoidable under the fraudulent-transfer statutes.

The United States filed a motion to dismiss SEW's complaint for failure to state a claim, arguing that SEW's prepetition tax-penalty payments did not and could not constitute fraudulent transfers because, as a matter of law, the dollar-for-dollar reduction in SEW's antecedent tax-penalty liabilities constituted reasonably equivalent value for the penalty payments. SEW having failed to allege that the penalty obligations were themselves avoidable, the United States understandably focused its motion to dismiss exclusively on SEW's claims that the penalty payments were avoidable.

In response to the government's motion, SEW continued to assert that each of the penalty payments was a ...

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