Opinion
Case No. 03-17509-8B3.
March 17, 2005
ORDER ON MOTION FOR PARTIAL SUMMARY JUDGMENT BY UNITED STATES
THIS CAUSE came on for hearing upon Motion By United States for Partial Summary Judgment in Contested Matter Arising from Debtor's Second Amended Objection to Claim of Internal Revenue Service ("IRS Motion") in the above captioned case. This Court has considered all arguments and evidence consistent with a ruling on a motion for summary judgment. In considering whether summary judgment is warranted, this Court adheres to the standards set forth by the United States Supreme Court. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986) (holding the standard of proof in summary judgment rulings is the same as it would be at trial); Celotex v. Catrett, 477 U.S. 317, 323-35 (1986) (discussing the appropriate burdens of proof and types of evidence to use in summary judgment decisions);Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-88 (1986) (detailing the elements of summary judgment analysis). After considering the IRS Motion, together with the record, the Court finds as follows.
MOTION FOR PARTIAL SUMMARY JUDGMENT BY IRS
The IRS Motion seeks as a matter of law a determination of four of the seven contested issues raised in Debtor's Second Amended Objection to Claim of Internal Revenue Service, filed July 20, 2004 ("Second Amended Objection"). Determination of these legal issues will clarify matters for trial, but cannot resolve the Second Amended Objection in its entirety as there are numerous issues of material fact. The claim at issue in this ruling stems from Debtor's liability to the IRS for amounts attributable to employment tax. The employment taxes were previously part of an IRS claim were included in a confirmed Chapter 11 Plan in a prior bankruptcy case.
On November 15, 2004, Debtor filed a Third Amended Objection to Claim of Internal Revenue Service. As the Third Amended Objection to Claim of Internal Revenue Service was not noticed for hearing on December 13, 2004, the Court does not address its content in this Order. However, to the extent any of the issues raised in the Third Amended Objection to Claim of Internal Revenue Service are the same as those addressed in this Order, this Order shall be conclusive of those issues.
See Second Amended Plan of Reorganization of Robert E. Malke, at Art. 4, para. 4.4, Ch. 11 Case No. 90-1729-8B1, Docket No. 233 (May 27, 2004) (confirmed, Docket No. 253 (Aug. 15, 1994)).
The issues addressed herein include:
A. Debtor's objection to the amount of the IRS secured claim filed in this case, seeking to limit the amount of the claim to the amount stated in certain IRS liens plus interest.
Para. 1, Debtor's Second Amended Objection.
B. Debtor's objection to the interest amount in the IRS claim on the grounds the amount should not include "gap interest."
Para. 2, Debtor's Second Amended Objection. Gap interest is the term generally understood to refer to interest accruing after the petition date until the date of confirmation in reorganization case.
C. Debtor's objection to an amount in the general unsecured claim on the grounds it calculates interest when there is no tax due.
Para. 6, Debtor's Second Amended Objection.
D. Debtor's objection to paying any interest to the IRS on the grounds Debtor tendered full payment of the outstanding balance in January of 2001.
Para. 7, Debtor's Second Amended Objection.
EFFECT OF FEDERAL NOTICE OF TAX LIEN ON AMOUNT OF IRS SECURED CLAIM
Initially, the Court finds Debtor has not offered any legal authority, controlling or otherwise, in support of limiting the amount of the IRS secured claim to the amount of tax listed on an individual notice of tax lien. The Internal Revenue Code provides for tax liens to arise as follows:
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.
26 U.S.C. § 6321 (emphasis added).
Under this broad grant of authority it is obvious any notice of a tax lien will only be able to provide a snapshot of the amounts due and owing under this provision on that date. The Court notes other courts have rejected this argument for the same reasons, finding a notice is simply what it says — notice of the lien and the obligation it arises from in the amount owed at that time.See Peterson v. United States, 511 F.Supp. 250, 256 (D.C.Utah 1981); Leslie v. Commissioner, (In re Leslie), 103 B.R. 775, 777 (Bankr. S.D.W.Va. 1989). The Court grants the IRS Motion, finding no genuine issues of material fact remain regarding limiting the IRS claim to the amount on the face of a federal tax lien. The Court holds as a matter of law there is no controlling legal authority to limit the IRS secured claim to the amount, or sum of amounts, found on the face of a notice of federal tax lien.
PERMISSIBILITY OF "GAP INTEREST"
Debtor urges this Court to adopt the position that the IRS should not be able to collect interest accruing postpetition and preconfirmation in his prior Chapter 11 reorganization case. In reference to the gap in time between the petition date and confirmation date, the interest in question is referred to as "gap interest." In this case, the gap period is a lengthy four and a half years, beginning February 26, 1990 and ending on August 15, 1994. The Debtor refers the Court to a lone unpublished bankruptcy decision, In re Heisson, Ch. 11 Case No. 91-42859-JFQ, rev'd United States v. Heisson, 217 B.R. 1 (D. Mass 1997) in support of applying this proposition and sustaining the objection. The seminal case establishing an individual may be held personally liable for postpetition interest on nondischargeable claims, despite the inability to claim the same interest from the bankruptcy estate, is a United States Supreme Court opinion decided under the Bankruptcy Act, Bruning v. U.S., 376 U.S. 358, 362-363 (1964). The 10th Circuit Court of Appeals case offered by the IRS in support of a gap interest claim, Tuttle v. Tuttle, In re Tuttle, 291 F.3d 1238, 1243-1244 (10th Cir. 2002), contains the following detailed account ofBruning's history after the Bankruptcy Code was adopted:
. . . the great weight of authority clearly supports applying Bruning to cases brought under the Bankruptcy Code, including Chapter 11 cases. Although a few bankruptcy courts have held Bruning inapplicable to Bankruptcy Code cases, those decisions subsequently were reversed. E.g., In re Heisson, 192 B.R. 294, 296 (Bankr.D.Mass. 1996) (Chapter 11 proceedings), rev'd, 217 B.R. 1 (D.Mass. 1997); In re Reich, 66 B.R. 554, 557-58 (Bankr.D.Colo. 1986) (Chapter 7 proceedings), rev'd, 107 B.R. 299 (D.Colo. 1989); In re Frost, 19 B.R. 804, 810 (Bankr.D.Kan. 1982) (concluding in Chapter 13 proceeding that "fresh start" policy of Bankruptcy Code undermined rationale of Bruning), vacated on relevant ground as unripe, 47 B.R. 961 (D.Kan. 1985). Moreover, literally all of the circuit courts to consider the issue have concluded that Bruning applies to Bankruptcy Code proceedings. E.g., In re *1244 Cousins, 209 F.3d 38, 41 (1st Cir. 2000) (Chapter 12 proceedings); In re Artisan Woodworkers, 204 F.3d 888, 891-92 (9th Cir. 2000) (Chapters 11 and 12 proceedings); In re Johnson, 146 F.3d 252, 260 (5th Cir. 1998) (Chapter 7 proceedings); In re Burns, 887 F.2d 1541, 1543 (11th Cir. 1989) (Chapter 7 proceedings); In re Hanna, 872 F.2d at 830-31 (Chapter 7 proceedings); see also Leeper v. Pennsylvania Higher Educ. Assistance Agency, 49 F.3d 98, 104 (3d Cir. 1995) (Chapter 13 proceedings involving question of post-petition interest on nondischargeable student loan).
291 F.3d at 1243-1244 (emphasis added).
In Burns v. United States, (In re Burns), 887 F.2d 1541, 1543 (11th Cir. 1989), the Eleventh Circuit Court of Appeals also adopted Bruning, stating
In Hanna, the Eighth Circuit thoroughly analyzed congressional intent regarding the Bruning rule, concluding that Congress did not intend to change the pre-Code law. See 872 F.2d at 830-31. We concur in the Hanna analysis and, in lieu of filling the tomes that record appellate opinions with a repeat of its proofs, we adopt that analysis as our own. Inasmuch as we conclude that the post-petition interest on a nondischargeable tax debt is nondischargeable, the rulings of the courts below must be reversed.
Burns, 887 F.2d at 1543 (ruling in a Chapter 13 Debtor's adversary proceeding to determine priority status, amount and dischargeability of federal income tax liabilities).
The Court finds there are no genuine issues of material fact remaining with regard to whether gap interest may be sought. Thus, the Court holds as a matter of law there is no controlling legal authority in support of Debtor's objection to claim on the grounds the IRS may not collect gap interest.
In making this ruling, the Court makes no finding at this time of whether the interest in this case is properly characterized as gap interest, or is simply interest due as a consequence of Debtor's alleged failure to complete his Chapter 11 payments to the IRS. Also, the Court makes no finding at this time regarding the appropriate rate of interest, e.g. statutory v. Chapter 11 plan. The Court notes, the record appears to reflect Debtor did not complete his Chapter 11 plan payment obligations to the IRS. However, the Court notes the Debtor's Third Amended Objection to Claim of Internal Revenue Service raised an additional theory that the discharge in his previous Chapter 11 case bars the IRS from collecting gap interest.
Though the issue of the relevance of a Chapter 11 discharge to the collection of gap interest is not ripe for decision at this time, the Court finds the following passage is instructive with regard to this issue:
The Bankruptcy Court concluded that Bruning did not apply to the present case because it dealt with non-dischargeable claims which were only partially paid in the bankruptcy proceeding, whereas, here the claims are to be fully paid in the bankruptcy proceedings. The Court draws that distinction apparently to reconcile § 1141(d)(2) and § 1129(a)(9)(C), but the effort, in this Court's opinion, was unnecessary.
Several circuit courts have rejected the distinction altogether. River Coal, 748 F.2d at 1107; Eby, 456 F.2d at 925; Johnson Electrical, 442 F.2d at 284. The distinction between post-petition interest where the underlying tax is left unpaid and where it is fully paid "is not sufficiently substantial to warrant a different result. Either the filing of the petition stops the running of interest on federal tax claims against a bankrupt or it does not." Johnson Electrical, 442 F.2d at 284. Similarly, the Third Circuit in Eby noted: That the underlying taxes were later paid in full here does not affect the fact that appellant had the use of the Government's money during the period of the reorganization proceeding, and that since the underlying debt is not discharged by operation of Section 17 of the Bankruptcy Act, 11 U.S.C. § 35 (1964) neither is the interest which accrues by reason of the use of such money during the pendency of the proceedings. 456 F.2d at 925. The nature and purpose of interest does not change simply because the underlying debt is satisfied or fully provided for under the plan.
Heisson, 217 B.R. at 4.
Additionally, the Court notes for the record the confirmed Chapter 11 plan provision concerning priority creditors' ability to enforce their claims in the event of a default states:
The IRS and Pinellas County [the only other priority tax creditor in the case] shall be entitled to retain any enforcement mechanisms available to them under applicable State or Federal law. However, all such enforcement mechanisms shall be deemed abated and shall not constitute a cloud or lien on the property revested in the Debtor by this Plan provided the Debtor makes the payments called for herein. Nevertheless, in the event the Debtor fails to make two consecutive payments called for hereunder, then this class of priority claimants shall be entitled to enforce their pre-petition claims as if no Chapter 11 proceeding had been filed or confirmed.
Second Amended Plan of Reorganization of Robert E. Malke, at Art. 4, para. 4.4, Ch. 11 Case No. 90-1729-8B1, Docket No. 233 (May 27, 2004) (confirmed, Docket No. 253 (Aug. 15, 1994)).
All of these fact issues remain for trial.
DEBTOR'S ALLEGATION OF INTEREST CLAIM WHEN NO TAX IS DUE AND DEBTOR'S ASSERTION THE IRS SHOULD BE PRECLUDED FROM COLLECTING INTEREST AFTER PAYMENT IS TENDEREDThe Court begins by noting neither party offers any legal authority in support of, or in opposition to, the issues raised in these two paragraphs. However, the Court finds both accusations necessarily turn on facts that remain in dispute. Specifically, the suggestion that the interest portion included in the general unsecured portion of the IRS's proof of claim is calculated where no tax is due clearly requires the Court to make factual findings. Determining whether the Debtor in fact ever tendered full payment to the IRS is also a key factor in deciding the validity of Debtor's objection to interest after this alleged event. For these reasons, the Court denies the IRS Motion on the issue of the interest on an unsecured claim and on the issue of whether Debtor ever tendered payment to the IRS. Genuine issues of material fact remain with regard to both paragraphs 6 and 7 of Debtor's Second Amended Objection.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED the Motion By United States for Partial Summary Judgment in Contested Matter Arising from Debtor's Second Amended Objection to Claim of Internal Revenue Service be, and the same is hereby, granted in part as to paragraphs 1 and 2 of Debtor's Second Amended Objection to Claim of Internal Revenue Service. It is further
ORDERED, ADJUDGED AND DECREED the Motion By United States for Partial Summary Judgment in Contested Matter Arising from Debtor's Second Amended Objection to Claim of Internal Revenue Service be, and the same is hereby, denied in part as to paragraphs 6 and 7 of Debtor's Second Amended Objection to Claim of Internal Revenue Service. It is further
ORDERED, ADJUDGED AND DECREED due to the impending retirement of the presiding Judge, the Court, by separate order, shall set this matter down for either a status conference or a final evidentiary hearing before the new Judge assigned to this matter.
DONE AND ORDERED.