Opinion
Case No. 15-34179 Adv. No. 16-3100
01-19-2018
In re: KENT C. DAVIS AND MINDI S. DAVIS Debtors KENT C. DAVIS AND MINDI S. DAVIS Plaintiffs v. UNITED STATES OF AMERICA, Defendant
Chapter 7
MEMORANDUM DECISION GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT [Docket Number 13]
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The matter is before this Court on Defendant's Motion for Summary Judgment ("Motion") [Docket Number 13] filed by Defendant United States of America on behalf of the Internal Revenue Service ("IRS"); the Plaintiffs' Memorandum in Opposition to the Defendant's Motion for Summary Judgment [Docket Number 20] filed by Plaintiff-Debtors Kent and Mindi Davis (collectively "Debtors"); and Defendant's Reply Memorandum in Support of Motion for Summary Judgment [Docket Number 27].
On summary judgment, the IRS requests a determination that Debtor Kent Davis's federal tax obligations for the tax periods of 2004, 2005, 2006, 2008, 2009 and 2010 are nondischargeable in the Debtors' bankruptcy case pursuant to Bankruptcy Code Sections 523(a)(1) and 507(a)(8). Debtors oppose the request arguing that some of the federal tax obligations were paid through Debtor Kent Davis's prior Chapter 13 case. That case was dismissed prior to discharge and completion of the Chapter 13 plan. However, the Debtors assert that the IRS "misapplied" the payments in a manner different from what was called for under the Bankruptcy Code and prior Chapter 13 plan, which caused an unwarranted increase in the priority amount of the debt.
Upon review of the parties' legal arguments and evidentiary materials, this Court concludes that the IRS's Motion has merit. Consequently, summary judgment is granted to the IRS based on this Court's determination that Debtor Kent Davis's federal tax obligations owed to the IRS for the years 2004, 2005, 2006, 2008, 2009 and 2010 are nondischargeable in the Debtors' bankruptcy case as a matter of law.
I. BACKGROUND
Debtors filed their current Chapter 7 case, Case No. 15-34179 ("2015 Bankruptcy Case") on December 28, 2015 and received their discharge on May 3, 2016. On October 20, 2016, they filed an adversary complaint against the IRS requesting that the $81,215.62 obligation owed to the IRS per its proof of claim for the tax years 2004, 2005, 2006, 2008, 2009 and 2010 (collectively "Tax Obligations") be determined a dischargeable debt in the Debtors' bankruptcy case [Docket Number 1]. In the adversary complaint, the Debtors allege that the entire amount claimed due by the IRS constitutes a dischargeable debt "because the taxes and penalties claimed are not taxes as defined in 11 U.S.C. Section 523(a)(1)" [Id., ¶ 7].
As noted later in this decision, the IRS's proof of claim was subsequently amended and reduced to $54,469.53 [Bankruptcy Case Number 15-34179, Proof of Claim 1-2].
After filing its answer, the IRS filed its Motion asserting that, as a matter of law, it is entitled to a determination that the Tax Obligations are nondischargeable in the Debtors' bankruptcy case. Relevant to the IRS's position is the fact that Debtor Kent Davis filed a prior Chapter 13 bankruptcy petition in Case No. 11-34893 ("2011 Bankruptcy Case") on September 6, 2011 [Bankruptcy Case Number 11-34893, Docket Number 1]. In the 2011 Bankruptcy Case, the IRS filed a proof of claim totaling $147,917.59 which, as amended, included a secured claim of $9,575.73 for the 2009 tax period, an unsecured priority claim of $37,198.90 for the 2004, 2008, 2009 and 2010 tax periods, and a general unsecured claim in the amount of $101,142.96 for the 2005, 2006 and 2007 tax periods [Id., Proof of Claim # 4-3].
The 2011 Bankruptcy Case, however, did not complete. Specifically, Debtor Kent Davis filed a motion to dismiss the 2011 Bankruptcy Case prior to plan completion and discharge [Id., Docket Number 54]. The order of dismissal was entered on November 5, 2015 [Id., Docket Number 55]. The 2011 Bankruptcy Case remained pending for over four years, or, specifically, 1521 days, prior to dismissal. Furthermore, the dismissal of Debtor Kent Davis's 2011 Bankruptcy Case on November 5, 2015 occurred only 53 days prior to the Debtors' filing of the 2015 Bankruptcy Case on December 28, 2015.
During the 2011 Bankruptcy Case, Debtor Kent Davis made payments toward the Tax Obligations. The payments, as reflected in the Chapter 13 Trustee's Certification of Final Payment and Case History ("Chapter 13 Trustee's Distribution") [Adv. No. 16-3100, Docket Number 20, Ex. 2], were distributed by the Chapter 13 Trustee as follows: $37,198.90 toward the IRS's priority unsecured claim, $3,622.26 toward the IRS's general unsecured claim and $9,575.73 (excluding interest) toward the IRS's secured claim.
While the IRS did apply Debtor Kent Davis's payments made during the 2011 Bankruptcy Case toward the Tax Obligations, the IRS did not do so in the manner reflected in the Chapter 13 Trustee's Distribution. Instead, the IRS provides the Declaration of IRS Insolvency Specialist Anna Stephens ("Stephens Declaration") [Docket Number 13, attached Stephens Declaration and Ex. A] and Debtor Kent Davis's tax transcripts for the tax period 2004-2010 to support that payments were applied in a different manner. Specifically, the IRS applied $35,297 toward the general unsecured claim for the 2007 tax period, $14,111.90 toward the general unsecured claim for the 2006 tax period and $6,122.31 towards the 2004 tax period [Id., Stephens Declaration ¶ 5].
Although the Debtors have received a discharge in their current 2015 Bankruptcy Case, the IRS asserts that the outstanding Tax Obligations remain nondischargeable pursuant to 11 U.S.C. §§ 523(a)(1) and 507(a)(8). The IRS's basis for nondischargeability includes the priority treatment provided by applying the three-year lookback period in 11 U.S.C. § 507(a)(8)(A)(i) and the 240-day assessment in 11 U.S.C. § 507(a)(8)(A)(ii), both of which the IRS asserts were tolled during the prior 2011 Bankruptcy Case. The IRS also relies on the fact that Debtor Kent Davis did not file a tax return for the 2006 tax period until after the IRS made a formal assessment. According to the Stephens Declaration, Debtor Kent Davis's tax return was due for the 2006 tax year on April 15, 2007 [Docket Number 13, Stephens Declaration ¶ 8]. The IRS assessed Debtor Kent Davis's tax liability on March 23, 2009 [Id.]. Debtor Kent Davis did not file his 2006 tax return until September 7, 2011 [Id.].
In response, the Debtors do not dispute that the application of 11 U.S.C. §§ 523(a)(1) and 507(a)(8) renders their Tax Obligations nondischargeable but, instead, argue that the IRS "misapplied" payments following the dismissal of Debtor Kent Davis's 2011 Bankruptcy Case. Essentially, the Debtors assert that the IRS should have applied the payments made during the 2011 Bankruptcy Case in the manner set forth in the confirmed plan and the Chapter 13 Trustee's Distribution.
The Debtors further assert that the IRS's secured claim is based on a lien that is not properly perfected [See Docket Number 20, p. 3]. However, the Debtors' claims in the adversary complaint focus on the dischargeability of the Tax Obligations and do not seek a declaration regarding the validity of the IRS's lien nor have the Debtors provided evidentiary materials that support their argument with respect to the lien. As such, this Court does not address the validity of the IRS's secured claim on summary judgment and, instead focuses solely on the dischargeability of the Tax Obligations under 11 U.S.C. § 523(a).
In reply to the Debtors' arguments, the IRS provides the Supplemental Declaration of IRS Insolvency Specialist Anna Stephens ("Supplemental Declaration") [Docket Number 27, attached Supplemental Declaration]. In the Supplemental Declaration, Stephens attests that, had the IRS applied the Debtor's payments from the 2011 Bankruptcy Case in conformance with the Chapter 13 Trustee's Distribution, the Debtors' tax liability in the current 2015 Bankruptcy Case would be even greater: totaling $97,520.70 [Id., Supplemental Declaration ¶ 5].
Stephens further states that she reviewed the IRS's proofs of claim from both the 2011 and 2015 Bankruptcy Cases as well as the IRS's tax account transcripts and concluded that Debtor Kent Davis was entitled to additional adjustments to the Tax Obligations [Id., Supplemental Stephens Affidavit, ¶¶ 6-8]. Following that review, the IRS filed an amended Proof of Claim taking into account the additional adjustments, which reduces Debtor Kent Davis's total tax liability from $81,215.62 to $54,469.53 for the years 2004, 2005, 2006, 2008, 2009 and 2010 [Id.; Bankruptcy Case Number. 15-34179, Proof of Claim # 1-2].
II. STANDARD FOR SUMMARY JUDGMENT
The IRS requests summary judgment pursuant to Federal Rule of Civil Procedure ("Rule") 56 incorporated in bankruptcy adversary proceedings by Federal Rule of Bankruptcy Procedure 7056. Rule 56 provides that the court shall grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law" using appropriate citations to materials in the record. Fed. R. Civ. P. 56(a) and (c).
In order to prevail on summary judgment, the moving party, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). Thereafter, the opposing party "must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Id. at 587-88. Nonetheless, mere conclusory allegations or unsupported opinions of the nonmovant are insufficient to defeat a motion for summary judgment. Id. at 586-88. See also Blaney v. Cengage Learning, Inc., 2011 WL 1532032, at *7, 2011 U.S. Dist. LEXIS 43780, at *19-20 (S.D. Ohio Apr. 22, 2011) ("Although the summary judgment standard requires that evidence of record be viewed in the light most favorable to the nonmoving party, it does not require that all bald assertions and subjective unsupported opinions asserted by the nonmoving party be adopted by a court.").
III. LEGAL ANALYSIS
At issue is whether the federal Tax Obligations owed by Debtor Kent Davis are subject to discharge in bankruptcy. In general, a Chapter 7 discharge relieves debtors from the obligation to pay their prepetition debts. 11 U.S.C. § 727(b); United States v. Storey, 640 F.3d 739, 743 (6th Cir. 2011). However, specific types of debts are excepted from discharge as outlined in Bankruptcy Code Section 523. See 11 U.S.C. § 727(b). The IRS carries the burden of proving the Tax Obligations are excepted from discharge under Section 523 by a preponderance of the evidence. Storey, 640 F.3d at 746. Furthermore, Section 523 exceptions to discharge are to be strictly construed in favor of debtors. Id. at 743.
In the text of this decision, use of the terms "Bankruptcy Code Section" or "Section" are references to provisions of Title 11 of the United States Code.
The IRS asserts that the Tax Obligations are nondischargeable pursuant to Bankruptcy Code Section 523(a)(1) which states, in relevant part:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(1) for a tax or a customs duty—
(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, or equivalent report or notice, if required—
11 U.S.C. § 523(a)(1)(A) and (B). The IRS sets forth three arguments to support the nondischargeability of the Tax Obligations under this provision. First, the IRS asserts that the tax liabilities for the years 2004, 2005, 2008, 2009 and 2010 are priority debts under Section 507(a)(8) making the obligations nondischargeable under Section 523(a)(1)(A). Second, the IRS argues that Debtor Kent Davis's 2006 tax debt is excepted from discharge under Section 523(a)(1)(B) because he did not file a return until several years after it was due and only after the IRS made a formal assessment. Finally, the IRS asserts that it was under no obligation to apply the payments made by Debtor Kent Davis during the 2011 Bankruptcy Case in the manner set forth in the confirmed plan and the Chapter 13 Trustee's Distribution because that case was voluntarily dismissed prior to completion of payments under the plan and discharge. This Court will address each argument in turn. A. Section 523(a)(1)(A): Nondischargeability Based on Section 507(a)(8) Priority(i) was not filed or given; or
(ii) was filed or given after the date on which such return, report or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition[.]
Section 523(a) excepts from discharge any tax "of the kind and for the periods specified in . . . 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed[.]" 11 U.S.C. § 523(a)(1)(A). In turn, Section 507(a) describes the priority of certain claims in the distribution of a debtor's assets with Section 507(a)(8)(A) providing eighth priority to:
. . . allowed unsecured claims of governmental units, only to the extent that such claims are for—
(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition—
(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;
(ii) assessed within 240 days before the date of the filing of the petition, exclusive of—
11 U.S.C. § 507(a)(8)(A). Both the priority created for tax obligations arising from returns due during the three-year lookback period described in Section 507(a)(8)(A)(i) and the priority for taxes assessed in the 240-day period prior to bankruptcy described in Section 507(a)(8)(A)(ii) are relevant to the IRS's argument that Debtor Kent Davis's 2004, 2005, 2008, 2009 and 2010 taxes are nondischargeable in the 2015 Bankruptcy Case. 1. Application of the three-year lookback period, as statutorily tolled, renders the 2008, 2009, and 2010 tax obligations priority nondischargeable debts.(I) any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days; and
(II) any time during which a stay of proceedings against collections was in effect in a prior case under this title during that 240-day period, plus 90 days.
Section 507(a)(8)(A)(i) provides what is known as the "three-year lookback period" meaning that "[i]f the IRS has a claim for taxes for which the return was due within three years before the bankruptcy petition was filed, the claim enjoys eighth priority under § 507(a)(8)(A)(i) and is nondischargeable in bankruptcy under § 523(a)(1)(A)." Young v. United States, 535 U.S. 43, 46 (2002) (noting that claims for which the returns were due more than three years before the petition was filed become dischargeable). In Young, the United States Supreme Court further concluded that the three-year lookback period is subject to equitable tolling during the pendency a prior bankruptcy case. Id. at 54. The equitable tolling described in Young was subsequently enacted in 2005 as a free-standing paragraph added to the end of Section 507(a)(8)(G) stating:
The free-standing paragraph was added as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days.11 U.S.C. § 507.
In the current 2015 Bankruptcy Case, the three-year lookback period would normally extend back to December 28, 2012. However, due to the free-standing paragraph following Section 507(a)(8)(G), the three-year lookback period is tolled or suspended during the pendency of the prior 2011 Bankruptcy Case plus 90 days. The 2011 Bankruptcy Case remained pending for a little over four years, or, more specifically, 1521 days. Adding the additional 90 days as provided in the free standing paragraph, the three-year lookback period is extended to include obligations arising from tax returns that were due on or after July 31, 2008. Because Debtor Kent Davis's federal tax returns for the 2008, 2009 and 2010 tax period were all due after July 31, 2008, the IRS asserts that Debtor Kent Davis's tax obligations for these years are priority obligations pursuant to Section 507(a)(8)(A)(i). The Debtors provide no conflicting arguments or evidentiary materials. Consequently, this Court concludes that the tax obligations for 2008, 2009 and 2010 are nondischargeable pursuant to Sections 507(a)(8)(A)(i) and 523(a)(1)(A). 2. Application of the 240-day assessment period for taxes assessed during that time period prior to a bankruptcy filing, statutorily suspended during the pendency of the 2011 Bankruptcy Case, renders the 2004 and 2005 tax obligations priority nondischargeable debts.
Tax obligations are also provided priority treatment pursuant to Section 507(a)(8)(A)(ii) if the taxes were "assessed within 240 days before the date of the filing of the petition[.]" 11 U.S.C. § 507(a)(8)(A)(ii). Like the three-year lookback period, this 240-day assessment period is subject to tolling. More specifically, excluded from the 240-day time period is "any time during which a stay of proceedings against collections was in effect in a prior case under this title during that 240-day period, plus 90 days." 11 U.S.C. § 507(a)(8)(A)(ii)(II).
Debtor Kent Davis filed his prior Chapter 13 bankruptcy petition on September 6, 2011. The IRS provides uncontroverted evidence that Debtor Kent Davis's 2004 tax obligation was assessed on October 17, 2011 and his 2005 tax obligation was assessed on October 24, 2011 [Docket Number 13, attached Stephens Declaration ¶ 8]. Furthermore, the Debtors' 2015 Bankruptcy Case petition was filed on December 28, 2015 less than two months after Debtor Kent Davis's 2011 Bankruptcy Case was dismissed on November 5, 2015. By excluding the time during which the prior 2011 Bankruptcy Case was pending, Debtor Kent Davis's 2004 and 2005 tax obligations are considered to be assessed during the 240 days prior to the 2015 Bankruptcy Case. As such, the 2004 and 2005 tax obligations are nondischargeable priority debts pursuant to Section 507(a)(8)(A)(ii) and Section 523(a)(1)(A). B. Section 523(a)(1)(B): Nondischargeability Based on a Late-Filed Return
The IRS asserts that Debtor Kent Davis's 2006 federal tax obligation is nondischargeable pursuant to Section 523(a)(1)(B) which states:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--
(1) for a tax or a customs duty—
* * *
(B) with respect to which a return, or equivalent report or notice, if required--
(i) was not filed or given; or
11 U.S.C. § 523(a)(1)(B)(i) and (ii). Subsection (i) of Section 523(a)(1)(B) excepts from discharge tax liabilities for which the debtor never filed or gave a return. United States v. Martin (In re Martin), 542 B.R. 479, 483-84 (B.A.P. 9th Cir. 2015). Subsection (ii), on the other hand, deals with tax liabilities for which the debtor filed a return, but the filing was untimely. Id. at 484. Subsection (ii) describes what has been termed the "two-year rule" and excludes from discharge taxes for which a return was filed after its due date but only if the return was filed within two years of the bankruptcy filing. McBride v. City of Kettering (In re McBride), 534 B.R. 326, 331 (Bankr. S.D. Ohio 2015). In this case, the IRS does not argue the two-year rule but, instead, that Debtor Kent Davis's tax return for the 2006 tax year was filed so late that it does not qualify as a return at all making his 2006 federal tax obligation nondischargeable pursuant to Section 523(a)(1)(B)(i).(ii) was filed or given after the date on which such return, report or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition[.]
Relevant to the discussion, is the definition of a "return" codified in 2005 in a hanging paragraph to Section 523(a):
For purposes of [§ 523(a)], the term "return" means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.11 U.S.C. § 523(a)(*). This hanging paragraph, often cited as Section 523(a)(*), sets the general requirement that, to be a "return," the document must satisfy the requirements of applicable nonbankruptcy law including filing requirements. Id.
The hanging paragraph was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Courts have adopted differing approaches to determining whether a late-filed return, even one filed only one day late, meets applicable filing requirements and qualifies as a return under Section 523(a)(*). See McBride, 534 B.R. at 333-35 (discussing the different approaches to untimely returns). However, both before and after the adoption of Section 523(a)(*), courts have been in general agreement that a return filed very late and only after a taxing authority has independently assessed the taxpayer's liability does not qualify as a return and the resulting tax obligation is excepted from discharge pursuant to Section 523(a)(1)(B). See Justice v. United States (In re Justice), 817 F.3d 738, 746 (11th Cir. 2016), cert. denied, 137 S.Ct. 1375 (2017) (determining a tax obligation to be nondischargeable ". . . where a taxpayer files many years late, without any justification at all, and only after the IRS has issued notices of deficiency and has assessed his tax liability . . . ."); Fahey v. Mass. Dept. of Rev. (In re Fahey), 779 F.3d 1, 10 (1st Cir. 2015) (adopting a bright line test that a late-filed tax return is not a return under Section 523(a)(*) and the corresponding tax obligation is nondischargeable pursuant to Section 523(a)(1)(B)); United States v. Hindenlang (In re Hindenlang), 164 F.3d 1029, 1034-35 (6th Cir. 1999) (pre-BAPCPA decision adopting the Beard test and holding that a federal tax return filed after a formal assessment of the deficiency does not qualify as a return because it no longer serves any tax purpose nor has any effect under the Internal Revenue Code); Earls v. United States (In re Earls), 549 B.R. 871, 876 (Bankr. S.D. Ohio 2016) (following Hindenlang).
The hanging paragraph provides one exception allowing a late-filed return to comply with this definitional provision if it is prepared by the Secretary of the Treasury with input from the taxpayer pursuant to Section 6020(a) of the Internal Revenue Code. 11 U.S.C. § 523(a)(*). No party has asserted that this exception applies in this case.
On summary judgment, the relevant facts regarding the untimely filing of Debtor Kent Davis's tax return are undisputed. Debtor Kent Davis's tax return for the 2006 tax year was due on April 15, 2007 [Docket Number 13, attached Stephens Declaration, ¶ 8]. The IRS filed a substitute for return or SFR (i.e. the mechanism by which the IRS determines a debtor's tax liability when a return is not filed) on September 1, 2008 [Id., ¶ 9]. Subsequently, the IRS made a deficiency assessment based on the SFR on March 23, 2009 [Id.]. Debtor Kent Davis did not file a return for the 2006 tax year until September 7, 2011 [Id.]. On summary judgment, the Debtors provide no reason or justification for the late filing of his 2006 tax return more than four years after it was due.
Based on the case law regarding untimely returns, this Court concludes that Debtor Kent Davis's belated filing of his federal tax return after the SFR and deficiency assessment does not constitute a "return" under Section 523(a)(*). Consequently, his resulting tax obligation for the 2006 tax year is nondischargeable pursuant to Section 523(a)(1)(B). C. The IRS's Payment Allocation Upon Dismissal of the 2011 Bankruptcy Case
On summary judgment, the Debtors make only one argument to support the dischargeability of the Tax Obligations: that the IRS applied the Chapter 13 plan payments made by Debtor Kent Davis during the prior 2011 Bankruptcy Case in a manner substantially different than what was called for under the confirmed plan and as reflected in the Chapter 13 Trustee's Distribution. The Debtors argue that Debtor Kent Davis's plan payments were "earmarked" for payment of the IRS's priority claims for the tax years 2004, 2008, 2009 and 2010, but were, instead, applied by the IRS to its general unsecured claim for the 2006 and 2007 years. The IRS admits these facts but asserts that, upon Debtor Kent Davis's voluntary dismissal of the 2011 Bankruptcy Case prior to discharge, the plan was no longer binding on the IRS and it could apply the payments received during the 2011 Bankruptcy Case in a different manner. This Court agrees.
Had the IRS applied the payments received during Kent Davis's 2011 Bankruptcy Case in the manner proscribed by the plan and the Chapter 13 Trustee's Distribution, the IRS asserts that Debtor Kent Davis's nondischargeable tax obligations in the current 2015 Bankruptcy Case would actually be higher [Docket Number 27, pp. 4-5 and Supplemental Declaration, ¶ 5]. This assertion is disputed by the Debtors [Docket Number 20, p. 3]. However, this dispute is rendered immaterial by this Court's conclusion that the IRS was not required to apply payments received during the 2011 Bankruptcy Case in the manner proscribed by the plan and Chapter 13 Trustee's Distribution following the dismissal of that case without discharge. --------
While a confirmed Chapter 13 plan binds both a debtor and his creditors to its terms pursuant to Bankruptcy Code Section 1327(a), the plan's binding effect is unwound upon the dismissal of the case prior to discharge. More specifically, under Bankruptcy Code Section 349 and case law interpreting the statute, the pre-discharge dismissal of the case terminates the Chapter 13 plan and returns the parties to the positions they were in before the case was initiated. In re Sanitate, 415 B.R. 98, 104-06 (E.D. Penn. 2009); In re Hamilton, 493 B.R. 31, 41 (Bankr. M.D. Tenn. 2013); Crump v. TitleMax (In re Crump), 467 B.R. 532, 535 (Bankr. M.D. Ga. 2010). See also Wells Fargo Bank v. Oparaji (In re Oparaji), 698 F.3d 231, 238 (5th Cir. 2012).
Courts addressing the issue focus on the bargained for exchange represented by a Chapter 13 plan. When a debtor fails to fulfill his part of the bargain leading to dismissal, "'a resulting finding that [the] confirmed plan is terminated serves to prevent a debtor from obtaining the benefits of those terms in a plan which are advantageous to the debtor.'" Oparaji, 698 F.3d at 238 (further citation omitted). As such, while the dismissal of the case renders the former debtor no longer obligated to tender plan payments, it also frees creditors from compliance with the plan's provisions. Id.; Hamilton, 493 B.R. at 41. It follows that upon dismissal, creditors are no longer burdened by the Bankruptcy Code's "priorities and protocols" and can pursue their rights under applicable nonbankruptcy law as if the bankruptcy case had not been filed. Hamilton, 493 B.R. at 41-42. See also Williams v. IMC Mortg. Co. (In re Williams), 246 B.R. 591, 596-97 (B.A.P. 8th Cir. 1999) (noting that § 349 seeks to undo the effect of the bankruptcy filing and place the creditor in its pre-bankruptcy position giving the creditor the same rights and remedies it would have prior to the petition filing date).
When Debtor Kent Davis voluntarily dismissed his 2011 Bankruptcy Case prior to completion of payments and discharge, the effect was to terminate the confirmed Chapter 13 plan and return the IRS to the position it was in prior to the filing of the case. At that point, the IRS was under no obligation to follow the terms of the confirmed plan nor the Bankruptcy Code's "priorities and protocols" and could, instead, apply the payments it received in accordance with applicable nonbankruptcy law.
IV. CONCLUSION
Based on the foregoing, Defendant's Motion for Summary Judgment [Docket Number 13] is GRANTED. Debtor Kent Davis's Tax Obligations owed to the IRS for the tax years 2004, 2005, 2006, 2008, 2009 and 2010 are determined to be nondischargeable in the Debtors' 2015 Bankruptcy Case pursuant to Bankruptcy Code Sections 523(a)(1) and 507(a)(8).
SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Beth A. Buchanan
United States Bankruptcy Judge Dated: January 19, 2018 Distribution List:
Randall E. Breaden, Esq.
Brandi Stewart, Esq.