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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF NEW YORK

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IN RE:

GRACO TRUCKING CORP. CASE NO. 94-62438

Debtor Chapter 11

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APPEARANCES:

DAFFNER And TANG, ESQS. HOWARD DAFFNER, ESQ.

Attorneys for Debtor Of Counsel

138 Central Avenue

Albany, New York 12206

WILLIAM F. LARKIN, ESQ.

Assistant U.S. Attorney

Attorney for Internal Revenue

Service

U.S. Department of Justice

P.O. Box 7198

100 South Clinton Street

Syracuse, New York 13261-7198

HISCOCK & BARCLAY, LLP J. ERIC CHARLTON, ESQ.

Attorneys for Key Bank Of Counsel

Financial Plaza

Syracuse, New York 13202

Hon. Stephen D. Gerling, Chief U.S. Bankruptcy Judge

MEMORANDUM-DECISION, FINDINGS OF FACT,

CONCLUSIONS OF LAW AND ORDER

This contested matter is before the Court by way of an

Order to Show Cause dated March 26, 1996, granted upon the

Application of Graco Trucking Corp. ("Debtor") dated March 25,

1996, and a Motion to Impose A Stay of Collection filed by the

Debtor, also on March 26, 1996.

Opposition was interposed by the Internal Revenue Service

("IRS") and the contested matter was orally argued at the Court's

April 2, 1996 motion term in Syracuse, New York.

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JURISDICTIONAL STATEMENT

The Court has jurisdiction of this contested matter

pursuant to 28 U.S.C. §§1334(b), 157(a),(b)(1) and (b)(2)(A),(G)

and (O).

FACTS

Debtor, which operates a trucking business, filed a

voluntary petition pursuant to Chapter 11 of the Bankruptcy Code

(11 U.S.C. §§101-1330) ("Code") on September 8, 1994. On or about

September 19, 1994, the IRS filed a Proof of Claim in the amount of

$315,868.20, which included a claim of $254,268.20 secured by

various federal tax liens, an unsecured priority claim of $56,000,

and an unsecured general claim of $5,600.

On or about February 21, 1995, the Debtor and the IRS

entered into an "Agreement For Use of Cash Collateral" ("Cash

Collateral Agreement") which was thereafter approved by an Order of

this Court dated April 7, 1995 ("Cash Collateral Order"). In

significant part, the Cash Collateral Agreement required the Debtor

to 1) provide the IRS with monthly operating reports pursuant to

Federal Rule of Bankruptcy Procedure ("Fed.R.Bankr.P.") 2015 on the

same day that each report was filed with the Court; 2) provide the

IRS with listings of its aged accounts receivable; 3) file all past

due tax returns by August 1, 1995 or 60 days prior to the

submission of a plan of reorganization, whichever was earlier; 4)

pay each federal tax deposit when due and submit proof to the IRS

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within 3 working days of the deposit; 5) propose a plan of

reorganization on or before October 1, 1995 and, 6) commencing

December 1, 1994, make monthly payments of $1,949.00 to the IRS to

be applied to its" pre-petition priority debts."

Paragraph 9 of the Cash Collateral Agreement provided

that in the event of a default of any of the aforementioned

conditions, the IRS might declare the Debtor in default and that a

failure to declare a default did not constitute a waiver of that

right at a later date.

Paragraph 10 of the Cash Collateral Agreement stated that

upon default, the entire unpaid liability described in the

Agreement to the extent secured as of the filing date, as well as

any current liabilities, would become due and owing immediately

upon demand by the IRS.

Finally, paragraph 11 of the Cash Collateral Agreement

provides that if the default was not corrected within 15 days of

the demand, the IRS could proceed with collection efforts

unencumbered by the stay provisions of Code §362.

On or about February 1, 1996, the IRS mailed the Debtor

a Notice of Default advising the Debtor of 5 separate events of

default under the Cash Collateral Agreement, declaring the Debtor

to be in default, advising Debtor that the IRS was entitled to

proceed to collect the sum of $270,105.42 and terminating Debtor's

right to further use of cash collateral. The Notice of Default

also advised the Debtor that failure to pay $270,105.42 within 17

days of the date of mailing would result in the IRS "proceeding to

collect the liability using the administrative collection

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provisions available in the Internal Revenue Code." (See Notice of

Default dated February 1, 1996.)

Within 15 days of the IRS Notice of Default, Debtor filed

its 1994 and 1995 Federal Unemployment Tax Returns (Form 940) and

paid the post-petition federal tax deposits and also paid the

monthly payments due under the Cash Collateral Agreement for the

months of December 1995, January 1996 and February 1996. Debtor

did not file its monthly operating reports for January and February

1996 with the IRS, did not file a plan of reorganization by October

1, 1995 and has not paid the sum of $270,105.42 to the IRS.

On March 6, 1996, the IRS served a Notice of Levy on

Debtor's bank and upon parties with whom Debtor has current

contracts.

DISCUSSION

The IRS argues that Debtor's motion is procedurally

incorrect, that what Debtor seeks is a preliminary injunction for

which it had to commence an adversary proceeding pursuant to Fed.

R.Bankr.P. 7001(7). Additionally, the IRS asserts that since the

stay has been lifted due to Debtor's default under the Cash

Collateral Agreement, the Anti-Injunction Act (26 U.S.C. §7421)

prohibits the issuance of any restraint against the collection of

tax by the IRS.

With regard to the former argument, this Court has

consistently held that where the parties are afforded due process

of law and are not prejudiced thereby, this Court can treat a

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1 The Court's February 29, 1996 Order resulted from a motion,

initially filed by the U.S. Trustee in August 1995 and thereafter

adjourned numerous times, seeking to dismiss Debtor's Chapter 11

case for failure to file timely operating reports, pay quarterly

fees due the U.S. Trustee and failure to file a plan of

reorganization. Both the IRS and the State of New York Department

of Taxation and Finance joined in the motion.

contested matter filed pursuant to Fed.R.Bankr.P. 9014 as an

adversary proceeding. See In re Command Services Corp., 102 B.R.

905, 908 (Bankr. N.D.N.Y. 1989). As to the IRS' invocation of the

Anti-Injunction Statute, that argument has merit only if the Court

concludes that the stay imposed by Code §362(a) has been vacated.

The Debtor interprets the Cash Collateral Agreement as

providing it with a "15 day grace period during which it could cure

any defaults" (see Affidavit of Patricia A. Conhaim in Support of

Motion, sworn to March 26, 1995). The Debtor, however,

acknowledges that it did not cure its default as regards those

portions of the Cash Collateral Agreement that required it to

provide the IRS with copies of its monthly operating reports, as

well as to file a plan of reorganization by October 1, 1995. In

defense of its failure to comply with this latter condition, Debtor

points to a Conditional Order of this Court dated February 29,

1996, which requires inter alia the filing of a Disclosure

Statement and Plan of Reorganization by April 30, 1996. At oral

argument, Debtor asserted that the IRS' action in enforcing its

secured claim "denudes" the Court's February 29th Order.1

The IRS, on the other hand, correctly reads the Cash

Collateral Agreement as providing that in the event of a default,

the Debtor was given l5 days following demand to pay the IRS its

entire unpaid liability which was alleged in the Notice of Default

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dated February 1, 1996, as being $270,105.42, together with any

unpaid current liabilities" (see Exhibit A attached to the Conhaim

Affidavit). There is no dispute that the Debtor did not tender the

sum of $270,105.42 to the IRS within 15 days of February 1, 1996.

Thus, on or about February 18, 1996, the stay imposed pursuant to

Code §362(a) was vacated, and the IRS was free to pursue its

collection efforts.

While Debtor makes some suggestion that the IRS has

waived its right to enforce the Cash Collateral Agreement by not

issuing a Notice of Default in October 1995 when Debtor failed to

file a plan of reorganization or on other occasions when it failed

to timely file monthly operating reports, make adequate protection

payments, file timely tax returns or make timely tax deposits,

Debtor's most meritorious argument is that the collection activity

of the IRS will force the Debtor to fail just when "it has the best

opportunity in years to turn around its business." ( See

Supplemental Affirmation of Howard Daffner, Esq. in Support of

Motion To Impose Stay of Collection, dated April 1, 1996). Thus,

it implores the Court to exercise its equitable powers pursuant to

Code §105 and effectively modify the Cash Collateral Agreement so

as to render it compatible with Debtor's current intentions.

As the IRS points out, the U.S. Court of Appeals for the

Fifth Circuit in the case of Matter of Southmark Corp., 49 F.3d

llll, lll6 (5th Cir. 1995), appropriately drew a perimeter around

the bankruptcy court's equitable power when it observed that Code

§105 does not "empower the bankruptcy courts to act as 'roving

commission[s] to do equity'" (citations omitted). "Even the broad

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powers of the bankruptcy courts to fashion equitable

remedies....must be exercised only within the confines of the

Bankruptcy Code (citations omitted)." "The Statute does not create

substantive rights that are otherwise unavailable under applicable

law...." (citation omitted).

The Cash Collateral Agreement negotiated between Debtor

and the IRS in February 1995 was not the result of coercion by

either party. It was submitted to this Court on notice pursuant to

Fed.R.Bankr.P. 4001(b), and was approved by Court Order. Despite

Debtor's apparent misinterpretation of certain of the terms of the

Cash Collateral Agreement, it is admittedly in default of others

and has not cured those defaults. "[A] Stipulation freely entered

into by the parties is binding on the parties" Matter of B.O.S.S.

Partners I, 37 B.R. 348, 350 (Bankr. M.D.Fla. 1984).

While a cash collateral order may be considered non-final

in the sense that it is subject to change if the circumstances upon

which it is premised change, (Matter of Lafayette Dial, Inc. 92

B.R. 798, 799 (Bankr. N.D.Ind. 1988)) at no time did the Debtor

herein, prior to its default, seek to modify the Cash Collateral

Agreement or the Order approving it. As the bankruptcy court

observed in Lafayette Dial, supra

This Court is fully cognizant that it sits as

a court of equity and as such wields vast

equitable powers. Ultimately the debtor asks

the court to use these powers to both relieve

it of its agreement with the Bank and to

condone its failures to comply. The Court

declines to do so.

'[O]nce a Stipulation has been entered into

and approved by the court the express

agreement of the parties will be strictly

enforced. This court will not use its equity

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powers to disregard the express agreement and

allow the defaulting party another chance to

do what it has failed to accomplish. Id. at

802, quoting In re Borchardt, 47 B.R. 879, 881

(Bankr. D.Minn. 1985).'

Having considered all of the foregoing, the Court will

not entertain the relief sought by the Debtor and its motion is,

therefore, denied.

IT IS SO ORDERED.

Dated at Utica, New York

this 15th day of April 1996

______________________________

STEPHEN D. GERLING

Chief U.S. Bankruptcy Judge