Opinion
No. 92-5188-8B3
October 14, 1993
Opinion
THIS CAUSE came on for hearing upon Debtors' Objection to Proof of Claim of the Internal Revenue Service (Service). The Court, having heard the argument of counsel and having reviewed the United States of America's, representing the Service, Objection to Confirmation, Objection to the Internal Revenue Service's Proof of Claim, the record, and the memoranda filed by counsel, finds the undisputed facts as follows:
In a closing agreement executed on March 26, 1992, Debtors agreed they were liable for $70,165.83. This liability embodied income taxes, interest, and penalties, including fraud penalties, for the years 1985, 1986, and 1987. On April 16, 1992, Debtors filed a petition for relief under Chapter 13 of Title 11 of the United States Code (Bankruptcy Code). The Service timely filed a proof of claim for $70,165.83, which was composed of an unsecured priority claim of $32,588.92 and an unsecured general claim of $37,576.91. Debtors objected to the Service's proof of claim, asserting the tax fraud liabilities were not entitled to priority under 11 U.S.C. § 507(a)(7)(a)(iii).
The Service's claim is the only proof of claim filed in this case and the only liability Debtors wish to pay under their Chapter 13 plan. Debtors propose to pay the Service 20% of its claim over a period of thirty-six months. The Service, objected to the confirmation of the plan based on a lack of good faith. 11 U.S.C. § 1325(a)(3).
Generally, a governmental unit such as the Service, may have a priority claim provided the claim satisfies 11 U.S.C. § 507(a)(7)6(A)(i), (ii) or (iii). Debtors' argument is 11 U.S.C. § 507(a)(7)(A)(iii), to which the Service's tax fraud claims appear to conform, excludes tax fraud claims by reference to 11 U.S.C. § 523(a)(1)(C). If the tax fraud claims are not entitled to priority those claims are subject to "super discharge" of 11 U.S.C. § 1328(a) as an unsecured claim.
Under 11 U.S.C. § 507(a)(7)(A)(i) and (ii), the Service's claim would unquestionably be entitled to priority, had there been an assessment or a return due within three years before the date of filing the petition. Since there are no facts to support the application of those subparagraphs, the Service's claim must be placed solely within the purview of 11 U.S.C. § 507(a)(7)(A)(iii).
Bankruptcy Code Section 507(a)(7)(A)(iii) establishes priority for tax claims ". . . other than a tax of a kind specified in section . . . 523(a)(1)(C)." Section 523(a)(1)(C) states "a tax . . . with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax . . . ." Thus, a fraud tax claim is specifically excluded as a priority claim. Therefore, Debtors claim tax fraud liabilities are afforded treatment in a Chapter 13 case, unavailable in Chapters 7, 11, or 12.
Under all of these Chapters there are provisions that affirmatively prevent relief from tax fraud liability. See 11 U.S.C. § 727, 1141(d), and 1228(a)(2). Chapter 12 is a hybrid chapter developed with Chapter 13 in mind and having a provision which excepts tax fraud claims from discharge would support Debtors' argument the legislature intended tax fraud claims to be treated as general unsecured liabilities.
In support of the argument, Debtors rely upon Muina v. United States (In re Muina), 75 B.R. 192 (Bankr.S.D.Fla. 1987). In Muina, the Tax Court had found there was a deficiency in the debtors' income tax for the year 1981, and the debtors were liable for a fraud penalty. As in the instant case, all liabilities for taxes were assessable after the commencement of the Chapter 13 case. The debtors in Muina, argued the language of 11 U.S.C. § 507(a)(7)(A)(iii) specifically excluded the taxes named in 11 U.S.C. § 523(a)(1)(C) as being priority claims. The Bankruptcy Court in Muina found the taxes owed by the debtors were not entitled to priority. 11 U.S.C. § 507(a)(7)(A)(iii); 11 U.S.C. § 523(a)(1)(C).
While there is a paucity of authority considering Muina, another court has held priority status would not be afforded a tax liability specified in 11 U.S.C. § 523(a)(1)(B) or 523(a)(1)(C) in a Chapter 13 case.Torrente v. United States (In re Torrente), 75 B.R. 193 (Bankr.S.D.Fla. 1987). The Court in Torrente made a finding the tax was not the type described in 11 U.S.C. § 523(a)(1)(B), and by negative inference, a 11 U.S.C. § 523(a)(1)(B) or (C) tax claim would be a general unsecured claim and not entitled priority.
On brief, the Service questions the corollary that follows from Muina and Torrente, stating "[i]t is difficult to understand how Congress could have intentionally provided Chapter 13 debtors who had committed tax fraud, should be allowed to escape the full measure of liability for their fraudulent behavior." Yet, this is not the first unusual result in Chapter 13 addressed by Congress. See Rowland v. California Men's Colony, Unit II Men's Advisory Council, 113 S.Ct. 716 (1993). Prior to November 15, 1990, a drunk driver could discharge payment of a civil judgment by filing under Chapter 13. Congress responded to the problem. Pub.L. 101-581, Nov. 15, 1990 (adding § 1328(c)(2)). Although not dischargeable under Chapter 7, student loans were not exceptions to discharge under Chapter 13 until Subsection (a)(2) of 11 U.S.C. § 1328 was amended by the Student Loan Default Prevention Initiative Act of 1990. Pub.L. 101-508, Nov. 5, 1990 (as part of the Omnibus Reconciliation Act). In addition, convicted felons were permitted to discharge their restitution obligations to victims or the State, by filing a Chapter 13. Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552 (1990). Thereafter, Chapter 13 was amended to make criminal restitution non-dischargeable. Criminal Victims Protection Act, Pub.L. 101-581, § 3, 104 Stat. 2865 (Nov. 15, 1990) (adding § 1328(c)(3)).
In the dissenting opinion of Davenport, Justices O'Conner and Blackmun regarded the majority opinion as an invitation to use the Code as a "shield" to protect a criminal from punishment. This was predicted to cause sentencing courts with the dilemma of harsher sentences or a restitution agreement. The harsher sentence could not be affected by a Bankruptcy Court, but a restitution agreement could be altered.
From the clear language of the Bankruptcy Code, tax fraud claims are not afforded priority in Chapter 13 cases. Inasmuch as "the statutory scheme is coherent and consistent, there . . . is no need for a court to inquire beyond the plain language of the statute." United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989). It is up to Congress to change this result, not this Court.
Since fraud claims of the Service are general unsecured and not priority, they are dischargeable under 11 U.S.C. § 1328(a). A properly filed proof of claim is prima facie evidence of the validity and amount of the claim. Fed.R.Bankr.P. 3001(f). A proof of claim is the creditor's statement of the amount and character of the claim. In re Padget, 119 B.R. 793, 797 (Bankr.D.Colo. 1990). The claim is allowed absent objection. 11 U.S.C. § 502(a). Debtor has made no objection to the character or amount of the Service's claim for any of the years 1985, 1986, or 1987. All of the liabilities for those years are prima facie allowed.
"In short, a proper claim timely filed stands, absent objection."In re Padget, 119 B.R. 793, 798 (Bankr.D.Colo. 1990). In Padget, the creditor filed a proof of claim stating its claim was secured by vast collateral. The plan was confirmed treating the creditor's claim as secured. Creditor argued the collateral was valueless and its claim should have been treated as a general unsecured claim. Id. at 795-96. The court concluded the trustee properly treated the claim as secured because the proof of claim was, on its face, for a secured claim. Id. at 798. The court rejected the creditor's argument, pursuant to 11 U.S.C. § 506(a), the trustee was required to treat the claim as unsecured to the extent it exceeded the value of the collateral securing the claim, notwithstanding the designation of the claim in the proof of claim, id. at 794. The court concluded the creditor was not entitled to assert an unsecured claim for the deficiency after the sale of the collateral without filing an amended or supplemental proof of claim or otherwise providing sufficient notice of the same to the trustee. Id. at 796.
The Service questions whether debtor may take advantage of Chapter 13 and meet the good faith requirement of 11 U.S.C. § 1325(a)(3) where the debts sought to be discharged arise from tax fraud. Under 11 U.S.C. § 1325(a)(3), a Chapter 13 plan must be proposed in good faith. The good faith requirement is one of the most important confirmation findings to be made by the Court in a Chapter 13 case. In re Kitchens, 702 F.2d 885 (11th Cir. 1983); In re Whipple, 138 B.R. 137 (Bankr.S.D.Ga. 1991).
Unfortunately, "good faith" is not defined in the Bankruptcy Code with respect to the proposal of a Chapter 13 plan. In Kitchens, the court adopted an inexhaustive list of eleven factors pronounced in In re Hale, 65 B.R. 893 (Bankr.S.D.Ga. 1986), to find the existence of good faith.Kitchens, 702 F.2d at 888-89.
Those factors relied upon in Kitchens include, but are not limited to:
1) The amount of the debtor's income from all sources;
2) The living expenses of the debtor and his dependents;
3) The amount of attorney's fees;
4) The probable or expected duration of the debtor's Chapter 13 plan;
5) The motivations of the debtor and his sincerity in seeking relief under the provisions of Chapter 13;
6) The debtor's degree of effort;
7) The debtor's ability to earn and the likelihood of fluctuation in his earnings;
8) Special circumstances such as inordinate medical expenses;
9) The frequency with which the debtor has sought relief under the Bankruptcy Reform Act and its predecessor;
10) The circumstances under which the debtor has contracted his debts and his demonstrated bona fides, or lack of same, in dealing with his creditors;
11) The burden which the plan's administration would place on the Trustee.
Additionally, the Court adopted substantiality of repayment and potential nondischargeability of the debt in a Chapter 7 case as factors to be considered in finding good faith. In re Hale, 65 B.R. 893, 895 (Bankr.S.D.Ga. 1986). This has become known as the "totality of the circumstances" test and has been adopted by other courts. In re LeMaire, 898 F.2d 1346 (8th Cir. 1990); In re Smith, 848 F.2d 813 (7th Cir. 1988); In re Okoreeh-Baah, 836 F.2d 1030 (6th Cir. 1988); Neufeld v. Freeman, 794 F.2d 149 (4th Cir. 1986); In re March, 83 B.R. 270 (Bankr.E.D.Pa. 1988).
The Service comments Debtors could not discharge this debt in a Chapter 7 case. The potential nondischargeability of a debt in a Chapter 7 case is a limited factor to be considered. However, this factor does not per se, establish bad faith under 11 U.S.C. § 1325(a)(3), but rather is simply one of many factors to be considered in applying the totality of the circumstances standard. See Kitchens, 702 F.2d at 889.
The Service also questions Debtors' motivations in seeking relief under the provisions of Chapter 13. The Service contends Debtors' Chapter 13 plan was not proposed in good faith simply because Debtors' filed for bankruptcy faster than a creditor could perfect a lien. This is not a controlling argument, but there is substance to the point there is only one creditor, the Service, and they wish to reduce the Service's claim to 20%. See In re Smith, 848 F.2d 813 (7th Cir. 1988); In re Rimgale, 669 F.2d 426 (7th Cir. 1982).
Congressional intent, in relation to 11 U.S.C. § 1325(a)(3):
. . . as amended, neither prescribes nor authorizes the imposition by the court of a requirement that a chapter 13 plan propose any arbitrary minimum percentage or amount to creditors. Instead, it contemplates that the court determine whether the plan proposed in the particular case represents a good-faith effort to settle the claims of creditors to the extent feasible . . . during the pendency of the proposed extension period as permitted under subsection 1325 . . . . [T]he court [could] confirm a chapter 13 plan which proposes no dividend whatever to holders of allowed unsecured claims or that the court deny confirmation of a plan proposing a 95% dividend to the holders of such claims.
H.R. Rep. No. 1195, 96th Cong., 2d Sess. pt. 1, at 24-26 (1980). Again, the amount of a debtor's payments under the plan is only one of issue to be considered as part of the good faith standard as juxtaposed against disposable income test and best interests of creditors test. See 11 U.S.C. § 1325(a)(4) and (b); Smith, 848 F.2d at 818.
To establish a lack of good faith, there should be a showing of serious misconduct or abuse on the part of the debtors. Id. When, as in this Chapter 13 case, the trustee does not object to confirmation, the burden is on the party objecting to confirmation to prove the existence of some factor to prevent confirmation. The Service has only claimed the filing of bankruptcy three weeks after signing the closing agreement is evidence of a plan to defraud the federal government. Yet, Debtor-Husband is on a fixed income, and could be legitimately concerned about the disposition of the home if the federal tax lien attaches. Debtors have used the Bankruptcy Code just as it should be used to obtain a fresh start where subject to a real and substantial threat of economic harm.
This Court is unpersuaded that a debtor has a plan to defraud the federal government where expenses and debts have been accurately stated and there has been no fraudulent misrepresentation in seeking relief under Chapter 13. Debtors had the same information as did the Service. This scenario is no different than Congress' initial enactment of the Bankruptcy Code which allowed criminal restitution payments to be discharged. Congressional mandate changed that result. It is up to Congress to change the instant result. "[T]he [C]ourt's only inquiry is to determine whether the debtor seeks to abuse the bankruptcy law by employing it for a purpose for which it was not intended." In re Clinton Centrifuge, Inc., 72 B.R. 900, 905 (Bankr.E.D.Pa. 1987). Congress allows an eligible debtor the opportunity to reorganize. This promotes open access to the bankruptcy process. See In re Johns-Manville Corp., 36 B.R. 727, 735-37 (Bankr.S.D.N.Y.), appeal denied, 39 B.R. 234 (1984). Debtor is both eligible for relief in Chapter 13 and his position is consistent with the statutory language. At confirmation, the Court considered all these factors associated with the good faith continuum, and confirmed the Chapter 13 plan for sixty (60) months as such was determined to be within the best efforts of the Debtors and, considering all the circumstances in this case, established cause to extend the plan's term.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Debtors' Objection to Proof of Claim of the Internal Revenue Service is sustained. It is further
ORDERED, ADJUDGED AND DECREED that the tax fraud claims of the Internal Revenue Service are general unsecured liabilities not given priority status in this Chapter 13 case. It is further
ORDERED, ADJUDGED AND DECREED that the United States' Objection to Confirmation is overruled.