North Slope Borough v. Barstow (In re Bankruptcy Estate of MarkAir, Inc.)

North Slope Borough and the Municipality of Anchorage (Creditors) held tax liens *1059 on real property formerly owned by MarkAir, Inc., a Chapter 7 bankruptcy debtor. The Creditors seek part of the proceeds from a sale of that property by the debt- or’s estate. The Trustee of the estate, William Barstow, seeks to subordinate the Creditors’ tax-lien claims entirely to the claims of priority unsecured creditors pursuant to § 724(b) of the Bankruptcy Code, 11 U.S.C. § 724 (b). We hold that, under § 724(b), priority unsecured creditors have a right to obtain only that portion of the proceeds equaling the amount of the tax liens; any remaining proceeds go first to junior lien claimants, then to the holders of the tax liens insofar as their claims were not already satisfied and, finally, to the estate. In the circumstances, the Creditors are entitled to a share of the proceeds. Accordingly, we reverse the contrary decision of the district court and reinstate the decision of the bankruptcy court.

FACTUAL AND PROCEDURAL BACKGROUND

In June of 1992, MarkAir filed for bankruptcy under Chapter 11. After an unsuccessful reorganization, the case was converted to a Chapter 7 proceeding. The…