Opinion
No. 87-028875F
February 17, 1994
D. Bruce Hanes, Hanes Associates, P.C., Philadelphia, Pennsylvania, attorney for the debtors.
Robert S. Attardo, U.S. Department of Justice, Tax Division, Washingtion, D.C., attorney for the Internal Revenue Service.
Opinion
The instant controversy arose upon the debtors' filing, on March 23, 1993, a pleading styled "Petition to Reopen Bankruptcy Case and to Enforce Order Discharging Debtor [sic] After Completion of Chapter 13 Plan." At bottom, the debtors seek a determination that the discharge injunction found in section 524(a) bars collection efforts undertaken by the respondent, Internal Revenue Service. See generally Matter of Rosteck, 899 F.2d 694 (7th Cir. 1990).
As the IRS does not raise the issue of sovereign immunity, I do not decide its applicability to this dispute. See Bolden v. Southeastern Pennsylvania Transp. Auth., 953 F.2d 807, 812 (3d Cir. 1991), cert. denied, ___ U.S. ___, 112 S.Ct. 2281 (1992) (if Eleventh Amendment immunity is not raised, it need not be considered by a trial court).
The relevant facts surrounding this dispute between the debtors and the Internal Revenue Service are not controverted; the parties differ only on the legal consequences of these facts, i.e., whether the debtors' obligation to the IRS has been discharged in bankruptcy.
A short summary of the facts will put the precise issue before me in context.
I.
The debtors filed a joint petition in bankruptcy under chapter 13 on June 11, 1987. Among the creditors identified in the debtors' chapter 13 statement of debts was the Internal Revenue Service, which was listed as having a priority debt for taxes owing for the years 1971, 1972 and 1973. The amount of the claim was not listed; however, the amount owed was stated to be unknown. Further, the claim itself was listed as disputed.
At the hearing held on the instant petition, the parties offered into evidence a document entitled "Stipulated Facts," signed by both counsel; the stipulation was admitted as Ex. J-1. Paragraph one of the stipulation states that "[t]he entire bankruptcy file in this matter is admitted into evidence as part of any proceeding to reopen the debtors' bankruptcy case and to enforce the order discharging debtor [sic]." Thus, certain of the facts recited above have been gleaned from the bankruptcy file maintained by the bankruptcy court clerk's office; other facts in evidence were taken from the testimony and evidence offered and accepted at the hearings.
Federal Rule of Bankruptcy Procedure 1007(a) requires debtors filing for bankruptcy protection under chapter 13 to file a list containing the name and address of each creditor; Local Rule 1007.2 requires that the debtors file, "within the time limits specified in F.R.B.P. 1007(a) and (c) . . . a master list (matrix) on the form prescribed by the clerk." The debtors filed such master list on July 2, 1987; on that list appears the following entry:
At the time of the debtors' filing, Interim Local Rule 1007 was in effect, the language of which does not differ from the current local rule.
Internal Revenue Service c/o Special Procedures P.O. Box 12051 Philadelphia, PA 19103
The parties have stipulated that the debtors listed the IRS as a creditor on the "Master Sheet (matrix)" and on the "master mailing list", and that on both lists the correct address for the Internal Revenue Service was given. Ex. J-1, ¶¶ 4-6. However, the debtors' chapter 13 bankruptcy statement of priority debts disclosed the IRS address only as "Philadelphia, PA"; no post office box or direction to Special Procedures was mentioned.
The docket entries indicate that the matrix was filed on July 2, 1987 and the master mailing list filed on September 21, 1987.
The first date for the meeting of creditors, 11 U.S.C. § 341, was set for June 1, 1988. Pursuant, then, to Fed.R.Bankr.P. 3002(c), the parties agree that the deadline for creditors filing proofs of claim in this bankruptcy was August 30, 1988. The IRS admits that it did not file a claim on or before the August 30, 1988 deadline; further, it admits that at no time prior to the eventual entry of discharge did it file any claim. Ex. J-1, ¶ 9.
The parties note that the docket entries in this case incorrectly reflect a claims bar date of June 29, 1987. Ex. J-1, ¶ 8. This was an error by the court clerk. The bar date is dependent upon the date scheduling the section 341 meeting, and that meeting was first scheduled for June 1, 1988.
In their petition, the debtors alleged that the IRS "had notice of the aforementioned Bankruptcy petition." Debtors' Petition to Reopen . . .," ¶ 3. Based upon the evidence of record, the debtors now concede that the IRS only received "actual notice of the debtors' petition at a point between the bar date (August 30, 1988) and the confirmation of the debtors [sic] plan (August 1, 1989)." Debtors' Memorandum, at 2.
The IRS is more precise on the date it became aware of the debtors' bankruptcy case. From the evidence presented, it appears that the IRS first learned of the debtors' bankruptcy shortly after April 11, 1989, through a letter received from the debtors' attorney. Ex. G-2 (letter from debtors' counsel dated April 11, 1989, advising the IRS of the chapter 13 petition filed on behalf of Peter and Marie Serubo).
Although the debtors do not now appear to dispute that the IRS did not receive timely notice of the bankruptcy (and of the claims bar date), I note that undergirding this acceptance is the information contained in a letter sent from the chapter 13 standing trustee on April 21, 1988 to counsel for the debtors.
This letter informs counsel that a notice sent by the trustee to the IRS, informing it of the debtors' bankruptcy filing, the date of the meeting of creditors and the claims bar date, which was sent to the incomplete address provided by the debtors in their bankruptcy statement, had been returned to the office of the standing trustee by the U.S. Postal Service due to an incomplete address. The letter asked debtors' counsel to "notify" the IRS of the bankruptcy filing and to certify such notification to the court. It further requested counsel to provide the correct address for the IRS. Ex. G-1.
The standing chapter 13 trustee testified that at the time this chapter 13 case commenced, he would send notice of the bankruptcy filing to all creditors. Whenever his notice to a creditor was returned, it was his practice to notify debtors' counsel, through a form letter.
Further, the trustee explained that it was his practice to send notice to creditors using the addresses listed in the debtors' chapter 13 statement rather than at the addresses disclosed in the master mailing list. In this instance, the IRS address listed in the debtors' statement was incorrect. Since that address was incomplete, the trustee's notice to the IRS was returned as undeliverable.
The evidence does not disclose that all these steps were taken; indeed, the record implies that no notice was provided to the IRS until one year later by virtue of the April 11, 1989 letter of counsel.
As noted above, an order confirming the debtors' plan, upon recommendation of the chapter 13 trustee, was issued on August 1, 1989.See In re Hines, 723 F.2d 333 (3d Cir. 1983). Thus, the IRS received notice of the debtors' pending bankruptcy case prior to the debtors' plan confirmation but after the deadline to all creditors for filing proofs of claim.
When the IRS learned of the bankruptcy filing, it did not seek leave to file any proof of claim, but rather chose to remain inactive in the case. Conversely, the debtors never sought to file a proof of claim on behalf of this creditor. Fed.R.Bankr.P. 3004. And the deadline for such a filing by the debtors would have been September 29, 1988 — about five months after the debtors learned that the IRS had not received notice of their bankruptcy filing.
The testimony reflected that at some point after receiving notice, the IRS reviewed the bankruptcy court file. The precise date it did so is not clear, other than this occurred prior to the entry of the discharge order.
Also relevant to the instant dispute is that the debtors did not file any chapter 13 plan until February 4, 1988. See Fed.R.Bankr.P. 3015(b) (chapter 13 plan due within fifteen days of the date the bankruptcy case commenced unless the court orders otherwise). On January 13, 1988, the debtors' counsel filed a "Motion for an Order Excusing the Debtors' Past Failure to Make Payments . . . And For an Extension of Time in which Debtors' [sic] May File a Plan." Docket number 12. This motion was made in response to the standing chapter 13 trustee's motion to dismiss the case for the debtors' failure to make timely payments; the trustee later withdrew his motion.
That motion stated that the debtors had not yet proposed a plan because
[m]ost, if not all debts and liabilities as enumerated with the Debtor's [sic] Chapter 13 Petition and Schedules, with amendments, are contingent liabilities regarding the entity Plachter [which was then a debtor in a separate chapter 11 bankruptcy case]. . . . Plachter has entered into an Agreement for Sale in the amount of $1,300,000.00 concerning real property, 776 Adams Avenue, Philadelphia, Pennsylvania. The proceeds from this sale will be distributed to the creditors of the Debtors herein. . . . The sale of the real property is contemplated to take place on or before March 1, 1988. Thereafter, the Debtors herein will be in a position to amend their Schedules to reflect actual amounts which are due to their creditors and to submit a Plan to the Court for confirmation under this Chapter 13 proceeding.
Motion, ¶ 5-7. The motion was scheduled to be heard on February 10, 1988. Docket number 12. Prior to that date, on February 2, 1988, the trustee withdrew his motion to dismiss, filed in December 1987. On February 4, 1988, the debtors filed their proposed chapter 13 plan. Docket entry 17.
Further, the debtors requested, by motion dated February 2, 1988, permission to file a plan extending over a 60 month period. Docket number 15. Their motion, pursuant to section 1322(c), stated the following reasons for this request:
Currently, co-debtor, Peter J. Serubo, is unemployed and co-debtor, Marie Serubo, is currently able to fund the proposed Plan in an amount not greater than $38.68 per month. Debtors believe that, within the time frame of the proposed Plan, Peter J. Serubo will be gainfully employed and the Debtors herein will be able to increase their proposed payments under the Plan.
At the time of the bankruptcy filing, Mr. Serubo was incarcerated in federal prison. Interrogatories Directed To Peter J. Serubo and Answers in Lieu of 341 Hearing, Docket number 27. According to the criminal docket in the matter of United States v. Peter Serubo, which was attached to a proof of claim filed in the bankruptcy proceeding by the debtor's criminal attorney, F. Emmet Fitzpatrick, Esq., Peter Serubo was sentenced to a term of imprisonment. The debtors' plan envisioned that Peter Serubo would be released from prison during the 60 months of the bankruptcy plan's duration, and would be able to contribute under that plan.
Based upon this request, the debtors were granted permission to extend the length of their Chapter 13 plan to five years.
Despite the grant of these motions, the debtors only proposed one plan in this case. The plan, dated February 1, 1988, proposed to pay $38.68 per month. The debtors never amended their plan to increase their monthly plan payments. Instead, in August 1990, they filed a pleading asserting that their payment obligations under their plan were complete and requesting that a chapter 13 discharge order be entered.
Initially, the chapter 13 trustee opposed this request; however, he later withdrew his opposition. Thus, on March 13, 1991, an order granting the debtors a discharge in bankruptcy under section 1328(a) was entered and this bankruptcy case was closed on April 1, 1991. As a result, the debtors were able to complete their plan in about three years. The chapter 13 trustee's final report states that the debtors paid only $2,320.60 under their plan, and that unsecured proofs of claim were filed in the amount of about $356,000.00.
To be eligible for chapter 13 relief, a chapter 13 debtor can have noncontingent, liquidated unsecured claims totalling less than $100,000.00. 11 U.S.C. § 109(e). Even without considering the IRS debt, discussed immediately below, it appears that these debtors possibly were ineligible for chapter 13 relief. See Ekeke v. United States, 133 B.R. 450 (S.D.Ill. 1991); In re Gordon, 127 B.R. 574 (Bankr.E.D.Pa. 1991). However, bankruptcy eligibility is not a jurisdictional issue,see, e.g., Rudd v. Laughlin, 866 F.2d 1040, 1042 (8th Cir. 1989); Matter of Phillips, 844 F.2d 230, 235-36 n. 2 (5th Cir. 1988), and so can be waived if not raised.
Shortly thereafter, on or about May 20, 1991, the IRS filed a "Notice of Intent to Levy" on all property owned by the debtors for tax indebtedness which occurred prior to the entry of discharge; the IRS also filed, on or about July 15, 1992, a "Notice of Federal Tax Lien Under Internal Revenue Laws" for tax indebtedness occurring prior to the discharge. Ex. J-1, ¶¶ 11, 12. The amount claimed as owing by the IRS on this prepetition claim was in excess of $350,000.00.
At a hearing held on August 31, 1993, counsel for the parties explained that the IRS claimed an amount due between $350,000.00 and $380,000.00 and that the debtors had challenged this claim in United States Tax Court.
On March 23, 1993, the debtors filed the instant motion. The debtors now aver that these postbankruptcy actions of the IRS are in contravention of the March 13, 1991 order granting discharge, and request that I reopen the case and have an order "issued in their favor . . . that the Internal Revenue Service, its agents and/or employees be ordered to comply with the Bankruptcy Court's Order of March 13, 1991." Petition to Reopen, at pp. 2-3.
There was a delay in hearing this motion because the clerk of court had difficulty in retrieving the court file from its location in storage.
In sum, it is the position of the debtors that their debt to the IRS has been discharged and they request enforcement of the statutory injunction created by section 524(a) of the Code. The IRS counters that as it did not have timely notice of the claims bar date, it was prevented from holding an allowed claim which could have been provided for in the debtors' plan. The chapter 13 discharge provisions, found in subsection 1328(a), it argues, do not then apply and so its claim was never discharged. In addition, the IRS contends that principles of due process and fundamental fairness preclude the discharge of its claim.
I agree with the parties' implicit assumption that this court is possessed of jurisdiction to hear and decide the issue before it. See, e.g., Matter of Barnes, 969 F.2d 526, 527-28 (7th Cir. 1992) (bankruptcy court has power to reopen a closed case to determine the scope of the discharge injunction); In re Smurzynski, 72 B.R. 368 (Bankr.N.D.Ill. 1987) (same); see also 11 U.S.C. § 350(b) (expressly permitting a court to reopen a bankruptcy case to afford the debtor relief).
II. A.
It appears unchallenged by the parties that the IRS's claim against the debtors for delinquent tax payments would have been characterized in the bankruptcy as one entitled to priority, pursuant to 11 U.S.C. § 507(a)(7). Indeed, the debtors listed their tax liabilities to the IRS on their chapter 13 statement as a priority debt.
Section 1322(a)(2) requires that a chapter 13 plan must provide for payment of all priority claims in full, with interest, unless the holder of that claim agrees otherwise. E.g., In re Northrup, 141 B.R. 171 (N.D.Iowa 1991). Therefore, if the IRS had asserted its priority claim, it would have been entitled to repayment in full.
To receive a distribution from plan payments, however, it is incumbent upon the priority creditor (here, the IRS) to file a timely proof of claim for any prepetition tax owed; for if it does not, any priority tax claim that is properly scheduled and noticed, and for which the plan proposes full payment, will be discharged upon completion of the plan's terms, regardless of whether funds are not distributed to the IRS because it failed to comply with the claims bar date. Accord United States v. Clark, 1993 U.S. Dist. Lexis 17566 (D.Utah 1993); In re Ryan, 1990 U.S. Dist. Lexis 6440 (E.D.Tenn. 1990); In re Tomlan, 102 B.R. 790 (E.D.Wash. 1989), aff'd, 907 F.2d 114 (9th Cir. 1990); In re Richards, 50 B.R. 339 (E.D.Tenn. 1985); In re Border, 116 B.R. 588 (Bankr.S.D.Ohio 1990).
As stated by a bankruptcy commentator, although chapter 13 requires the plan to provide for payment in full of all priority claims,
only priority claims actually filed must be paid. If a plan provides for payment of a priority claim and that claim is not paid only because it was never filed by the holder of the claim, the claim is dischargeable under section 1328(a).
L. King, 5 Collier on Bankruptcy, ¶ 1322.03 at 1322-7 (15th ed. 1993).
The parties assume that the debtors' confirmed plan provided for the payment in full of allowed priority claims. On this point, the plan stated the following:
2. from the payment so received, the trustee shall make disbursements as follows:
a. The priority payments required by Rule 13-309(a).
The reference to Rule 13-309(a) concerns a procedural rule in chapter XIII cases under the former Bankruptcy Act. This rule was supplanted in April, 1983 by the Federal Rules of Bankruptcy Procedure and no counterpart to this rule exists under the present Bankruptcy Code.
Since no payment of priority debts have been due under the Code since April 1983, one could argue that the debtors' plan never provided for payment of priority tax claims. And if the plan, by its own terms, never provided for this debt, then the outcome of the instant dispute is simple. Section 1328(a) only discharges debts "provided for by the [confirmed] plan or disallowed under section 502. . . ." The IRS claim was never disallowed under section 502. So, if the plan did not provide for this claim, it would not be covered by the scope of the debtors' discharge.
Since the IRS does not raise this issue, I will make the same assumption as the parties: that had the IRS filed a timely priority proof of claim the debtors' plan would have provided for payment in full of this debt.
Here, however, the IRS was not supplied with actual or constructive notice of the debtors' bankruptcy case prior to the deadline for filing proofs of claim. The question posed by this contested matter is the effect of this failure upon the scope of the debtors' discharge.
B.
Although not raised by either party, there is a potential constitutional issue which lurks within the discussion of the central question of this dispute. Because the parties do not raise the issue, I need not resolve it; however, a survey of the issue is necessary to understand the different approaches courts have taken when faced with controversies similar to that raised in this matter.
It appears axiomatic that if a creditor is to be enjoined from attempting to collect a debt owed to it by virtue of federal bankruptcy law, that creditor should be entitled (by due process principles) to notice of (and the right to participate in) the bankruptcy case. Accord City of New York v. New York, New Haven Hartford R.R. Co., 344 U.S. 293, 297 (1953); In re Harbor Tank Storage Co., 385 F.2d 111 (3d Cir. 1967). Among the notice of rights to which a creditor is entitled is notice of any deadline to file a proof of claim, if such a filing is a prerequisite to receiving a distribution from the bankruptcy estate. Accord City of New York v. New York, New Haven Hartford R.R. Co.; In re Remington Rand Corp., 836 F.2d 825, 833 (3d Cir. 1988).
Even though the federal government is not a "person" entitled to protection under the Fifth Amendment of the United States Constitution, guaranteeing "due process" of law, it nonetheless must be afforded those basic principles of justice which require notice, and an opportunity to be heard. U.S. v. Cardinal Mine Supply, Inc., 916 F.2d 1087, 1092 (6th Cir. 1990). Accord e.g., In re Remington Rand Corp., 836 F.2d 825, 833 (3d Cir. 1988) (government entitled to request permission to file a late proof of claim where debtor failed to notify government of claims bar date in chapter 11 case); In re Avery, 134 B.R. 447, 448-49 (Bankr.N.D.Ga. 1991) (fundamental due process mandates that IRS be given notice and opportunity to participate).
There are numerous decisions over the years which (address the problem of the type of notice which is required. That issue, though, is not relevant in this dispute. But it is useful to note that under the current chapter 13 procedure — unlike chapter 11 — the deadline for filing proofs of claim is fixed by a nationwide rule of procedure, Fed.R.Bankr.P. 3002(c), and not ad hoc by the bankruptcy court. Compare In re Vertientes, Ltd., 845 F.2d 57 (3d Cir. 1988) (discussing claims bar date issues in chapter 11 cases).
Recently, the Supreme Court construed Fed.R.Bankr.P. 9006(b)(1), which permits a bankruptcy court to extend a court imposed bar date in a chapter 11 case due to a creditor's "excusable neglect." Pioneer Inv. Serv. Co. v. Brunswick Assoc. Ltd. Partnership, ___ U.S. ___, 113 S.Ct. 1489 (1993). However, the procedural rules expressly omit excusable neglect as a basis for extending the bar date established by Rule 3002(c) — the chapter 7, 12, and 13 bar date provision. Fed.R.Bankr.P. 9006(b)(3);accord, e.g., Jones v. Arross, 9 F.3d 79, 81 (10th Cir. 1993).
It seems likely that if a creditor in a chapter 11 case never received notice of the court established bar date, such a failure would constitute excusable neglect to extend the deadline for filing proofs of claim. See In re Remington Rand Corp. But does this same lack of notice permit the extension of the claims bar date in a 13 case, given the language of the procedural rules?
In a chapter 7 case, the provisions of section 523(a)(3) may render this concern less significant. This subsection of the Code makes nondischargeable the debts of all creditors who did not have notice of the bankruptcy filing prior to the expiration of the claims bar date. See generally In re Beezley, 994 F.2d 1433, 1436 (9th Cir. 1993) (O'Scannlain, concurring). If the creditor's claim is nondischargeable, then it may not be constitutionally significant if that creditor is unable to file a proof of claim and thus participate in the debtor's estate. See Jones v. Arross.
The dispute over the proper interpretation of section 523(a)(3) in the context of a no-asset chapter 7 case has not focused upon the due process rights of creditors who never received notice of the bankruptcy filing prior to discharge. Compare, e.g., Matter of Stone, 10 F.3d 285 (5th Cir. 1994) with, e.g., In re Beezley. Without intending to suggest that constitutional issues are being overlooked in such chapter 7 cases, I note only that even the existence of such issues is not now before me.
But nondischargeable debts defined by section 523(a)(3) do not fall outside the scope of a discharge under section 1328(a) — that is, a discharge received by a chapter 13 debtor when she completes her obligations under a confirmed plan. See, e.g., In re Cole, 146 B.R. 837, 841 (D.Colo. 1992). The chapter 13 discharge is so broad that it reaches most debts made nondischargeable in chapter 7. See generally Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552 (1990). Thus, one could argue that section 1328(a) permits the dischargeability of debts held by creditors who were never given notice of the chapter 13 filing, and so never had the opportunity to participate in the administration of that case.
Therein lies the constitutional issue. If Congress has the power under the bankruptcy clause found in Article I of the Constitution to render dischargeable debts held by creditors who are unaware of a bankruptcy filing, does the due process clauses found in the Fifth and Fourteenth Amendments override this power, at least in certain instances?
C.
As my colleague Bankruptcy Judge Scholl noted, courts have taken two general approaches to prevent an interpretation of section 1328(a) of the Code and Rules 3002(c) and 9006(b)(3) which would bar a creditor who had no notice of the bankruptcy filing from both having its claim discharged and being prevented from filing a proof of claim. In re Greenburgh, 151 B.R. 709, 713 (Bankr.E.D.Pa. 1993).
Some courts hold that the statutory (or common law) grant of general equitable authority — e.g., 11 U.S.C. § 105(a); accord In re Anderson, 159 B.R. 830 (Bankr.N.D.Ill. 1993) (bankruptcy court is a court of equity) — empowers them to permit a creditor without notice of a chapter 13 filing to submit a valid proof of claim even beyond the bar date. E.g., U.S. v. Cardinal Mine Supply, Inc., 916 F.2d 1087, 1092 (6th Cir. 1990); In re Cole; In re Anderson; In re Avery, 134 B.R. 447 (Bankr.N.D.Ga. 1991). If such a creditor can seek distribution from the estate, then they view the constitutional issue as averted.
Other courts avoid the constitutional issue by their construction of section 1328(a). They conclude that a claim of a creditor who was never given notice of the chapter 13 bankruptcy filing, and so of the deadline for filing claims, is not "provided for by the plan" within the meaning of section 1328(a). Since the scope of chapter 13 discharge only includes claims so provided for, the claims of these creditors are not discharged. E.g., In re Tipton, 118 B.R. 12, 14 (Bankr.D.Conn. 1990); In re Gamble, 85 B.R. 150, 152 (Bankr.N.D.Ala. 1988); In re Cash, 51 B.R. 927, 929 (Bankr.N.D.Ala. 1985).
As with chapter 7 cases, see In re Ford, 159 B.R. 590 (Bankr.D.Or. 1993), these courts implicitly hold that the resulting nondischargeability of the claim satisfies due process concerns.
III.
As I stated earlier, neither the debtors nor the IRS construes the Code and the procedural rules as creating a constitutional problem. Instead, they argue as follows.
The debtors support the reasoning of the first group of decisions just referred to. That is, they suggest that a chapter 13 creditor who is not notified of the chapter 13 case or the claims bar date has the right to file an otherwise untimely proof of claim once it receives notice. Since the IRS elected not to do so, the debtors maintain that its priority tax claim is discharged just as if the IRS had been given proper notice and then failed to file a timely proof of claim.
In contrast, the IRS supports the reasoning of those decisions which construe section 1328(a) as restricting the scope of the chapter 13 discharge to those claimants who had proper notice of the claims bar date. Implicitly, the IRS suggests that it either had no right to file any claim or that its claim would be discharged only if it elected to file. See generally In re Grynberg, 986 F.2d 367 (10th Cir.) (creditor holding a nondischargeable claim in a chapter 11 case may elect to forego any distribution under the debtor's plan by not filing any proof of claim and then proceed to collect at the conclusion of the bankruptcy case),cert. denied, ___ U.S. ___, 114 S.Ct. 57 (1993).
In most disputes of this type, a bankruptcy court might be obligated to decide which of these two approaches Congress intended (since the question of a constitutional restriction on congressional intent has not been placed in issue). Given the Third Circuit's analysis in Vertientes, courts in this circuit may be foreclosed from concluding, as the debtors suggest, that a bankruptcy court in a chapter 13 case has any power to extend the claims bar date, except in those circumstances described in Fed.R.Bankr.P. 3002(c)(1)-(6):
[U]nder Rule 9006(b)(1), a bankruptcy court does have discretion to extend time to file a proof of claim, but only under the circumstances set forth in the two situations described in the Rule.
* * *
The court has no discretion to grant an extension simply because no prejudice would result, or for any other equitable reason.
845 F.2d at 59-60. Although Vertientes concerned a chapter 11 bar date, its conclusions continue this circuit's strict application of the claims filing deadline which existed under the former Bankruptcy Act. See, e.g., In re Pigott, 684 F.2d 239 (3d Cir. 1982); In re Supernit, 186 F.2d 130 (3d Cir. 1950).
The Vertientes court stated that "Pigott is still good law [under the Code] in certain respects. . . ." 845 F.2d at 59.
Thus, in this circuit, the government's position may be correct. See also Jones v. Arross (lack of notice does not permit a bankruptcy court in a chapter 7 case to allow the creditor to file a late proof of claim). However, I need not decide that precise point. For the following reasons, I conclude that even if I were to accept the debtors' interpretation of the Code and procedural rules, it is appropriate on these particular facts to deny the debtors' the injunctive relief they seek.
While in this dispute the creditor takes the position that it cannot file a late proof of claim — even though it had no prior notice of the bar date — in some instances it may be preferable to the creditor to be able to receive a distribution from the bankruptcy estate rather than hold a nondischargeable claim.
IV. A.
The relief sought by the debtors is the enforcement of the statutory injunction against the IRS for allegedly violating the scope of the statutory discharge injunction found in section 524(a) of the Code. See generally Matter of Rosteck; In re Elias, 98 B.R. 332 (N.D.Ill. 1989). Obviously, if the IRS is correct — that the lack of notice made its claim nondischargeable — then section 524(a) would not prevent this creditor from proceeding with its present collection efforts. See In re Grynberg. The debtors have been discharged and their case closed. The automatic stay barring creditors from collecting on their debts has terminated. 11 U.S.C. § 362(c). There is no legal basis to enjoin the IRS from proceeding. See id.; In re Harrell, 57 B.R. 88 (Bankr.D.S.C. 1985). See also In re Embry, 10 F.3d 401 (6th Cir. 1993) (automatic stay does not prevent creditor from holding nondischargeable claim from collection efforts against nonestate property).
An analysis of the debtors' position is more intricate.
If one assumes — as the debtors posit — that a creditor in a chapter 13 case has a duty to file a proof of claim if it first learns of the chapter 13 filing after the claims bar date, by what deadline must such claims be filed? Neither the Code nor the rules establish one. In a chapter 11 context, the Third Circuit has instructed that a motion by a creditor who receives untimely notice to file a proof of claim should be granted if the creditor "acted promptly and diligently." In re Remington Rand Corp., 836 F.2d at 833. In a chapter 7 case, the Sixth Circuit reached a similar conclusion:
Due process and equitable concerns require that when a creditor does not have notice or actual knowledge of a bankruptcy, the creditor must be permitted to file tardily when the creditor does so promptly after learning of the bankruptcy.
United States v. Cardinal Mine Supply, Inc., 916 F.2d at 1089.
Indeed, a similar problem arises in a chapter 11 context involving administrative claims. These are claims which arise during the bankruptcy case itself, and are discharged by virtue of section 1141(d). In re Benjamin Coal Co., 978 F.2d 823 (3d Cir. 1992). Since these claims do not arise prepetition, the holders are not technically creditors, as defined in section 101(10) of the Code; nor do they file proofs of claim under sections 501 and 502. Accord, e.g., In re Polysat, Inc., 152 B.R. 886 (Bankr.E.D.Pa. 1993). Instead, under section 503, these claimants are entitled, if they so choose, to file a "request for payment."
Neither the statute nor the rules establish any deadlines for making such a request. Id. And the date of the entry of an order of discharge does not by itself establish the deadline. Id.
Occasionally, a bankruptcy court may establish a deadline for filing requests for administrative payment, when the fixing of a bar date would aid in the reorganization efforts and also be fair to those claimants. But when a bar date has not been established, it would appear that the deadline would be that imposed by principles of laches. Id., at 896.
I assume without now deciding that laches in this context could be applied to the federal government. See In re Remington Rand Corp. (case remanded to determine whether the federal government acted sufficiently promptly). See also Costello v. United States, 365 U.S. 265, 282 (1961) (assumed arguendo that laches would be applicable against the federal government but, on the facts presented, inappropriate).
B.
In general terms, the defense of laches acts as a bar to an action when there has been an inexcusable delay in acting, and prejudice resulting to the party asserting the defense from such delay. E.g., Thomas P. Carney, Inc. v. School Dist. of Philadelphia, 633 F. Supp. 1273, 1283 (E.D.Pa. 1986). As the Third Circuit Court of Appeals explained, the elements of laches are "1) a lack of diligence by the party against whom the defense is asserted, and 2) prejudice against the party asserting that defense."Waddell v. Small Tube Products, Inc., 799 F.2d 69, 74 (3d Cir. 1986). The party asserting the defense (here, it would be the debtors) bears the burden of proof. EEOC v. Great Atlantic Pacific Tea Co., 735 F.2d 69, 80 (3d Cir.), cert. dismissed, 469 U.S. 925 (1984).
C.
At this point, it is important to recall that the IRS's priority tax claim was entitled to be paid in full, with interest, in this chapter 13 case. If the IRS were permitted now to file a proof of claim, because there was no laches defense to its filing, the result would be no more beneficial to the debtors than the conclusion that the tax debt was nondischargeable. Given the five year limitation on chapter 13 plans found in section 1322(c), the debtors would be forced immediately to repay this tax claim. Since the IRS is now seeking immediate payment from them, granting the debtors' requested equitable relief would be pointless. Moreover, their discharge as to the claims of creditors who received proper notice could be in jeopardy if the IRS were permitted to file an untimely proof of claim at this point.
Accordingly, for the debtors to obtain the relief they now seek, they are implicitly requesting a determination that — again, assumingarguendo that the government had a duty to file an untimely claim — laches principles required the IRS to file a proof of claim years ago — although not stated, perhaps by the date of the confirmation hearing in August 1989.
If one assumes that the belated notice given to the IRS by the debtors in April 1989 placed an affirmative duty upon this creditor to file a late proof of claim, then one might conclude a lack of diligence on the IRS's part in failing to take any action prior to confirmation five months later. But how were the debtors prejudiced by this inaction?
For the following reasons, in ascending order of importance, I conclude that they were not.
First, the debtors had the right under Rule 3004 to file a proof of claim on the IRS's behalf; this they failed to do, even though the knew prior to the deadline under Rule 3004 that the IRS had no notice of their bankruptcy filing. Second, they (through their attorney) waited almost one year before heeding the standing chapter 13 trustee's request to provide new notice to the IRS, because the first notice was undeliverable. Third, had the IRS filed a proof of claim, the IRS claim would be entitled to full payment, with interest. The IRS will do no better if its claim were treated simply as nondischargeable. Fourth, the amount of the IRS debt by itself may have rendered the debtors ineligible for chapter 13 bankruptcy relief. See 11 U.S.C. § 109(e). While no other party raised this issue, the IRS might have raised it, had the IRS participated in this chapter 13 case.
Fifth, and most important, this is not a situation where chapter 13 debtors have made significant payments to creditors of a lower priority because of the failure of a creditor with a higher priority to act.
In reorganization cases (under chapters 11, 12, and 13) priority creditors are entitled to be repaid in full (although the required timing of payment may differ, depending upon the level of priority). Reorganization debtors have a duty to insure that the amount paid to creditors is not less than these creditors would receive in a chapter 7 liquidation. 11 U.S.C. § 1325(a)(4). Once this threshold is achieved, if all the claims will be discharged, it may matter little to the debtor how her payments are apportioned in the reorganization plan.
Thus, for example, if a debtor proposes to pay $500.00 per month for 36 months under a chapter 13 plan, whether these funds are distributed only to priority creditors or also to general unsecured creditors is of little significance to the debtor so long as all of the claims are discharged. But if the priority claims are not discharged, then the debtor wants to insure those nondischargeable claims — since they have a priority of payment — are repaid before any general creditors receive a distribution.
As a practical matter, the inaction of the IRS after notice of the bankruptcy filing was very risky. Given the different approaches to the treatment of claims of creditors who had no notice of the bankruptcy bar date and the absence of binding circuit decision precisely on point, some affirmative action may have been the safer course. In a chapter 13 case, if a priority creditor has not filed a proof of claim, then nonpriority creditors will receive the entire distributions under the plan, and prejudice to the debtor of a type just described could occur.
But in this instance, the debtors made only minimal plan payments to nonpriority creditors — $2,320.00 on claims in excess of $356,000.00 — and thus would not suffer meaningful prejudice if the IRS could not now file a proof of claim.
Also mentioned earlier, the file in this case disclosed that the debtors delayed filing any plan because a related corporate debtor was going to liquidate its real estate and the proceeds from that sale would be used to fund the debtors' plan. See supra, pp. 6-7. Those proceeds were never so used. The debtors then sought permission to have a 60 month plan to be funded by the husband/debtor's future employment. That income also was never made a part of this reorganization case.
Obviously, given the amount asserted by the IRS in unpaid prepetition taxes, both of the debtors' promised funding sources would likely have been necessary for a successful chapter 13 reorganization. But when the IRS never filed a proof of claim, the debtors were able to have their original reorganization plan approved with minimal payments to their general nonpriority creditors.
Therefore, for all of these reasons, I would not conclude that these debtors were prejudiced by the IRS's inaction. Thus, if the IRS were obligated to act, the time period for filing a proof of claim would not have expired in these unusual circumstances.
V.
In conclusion, the debtors request that this court exercise its equitable powers, determine that a substantial tax obligation allegedly owed to the IRS has been discharged, and enjoin the IRS from proceeding with its present collection efforts in the United States Tax Court.
On the facts of record in this dispute, the debtors are not entitled to the relief they seek. See also Ekeke v. United States (chapter 13 case dismissed postconfirmation when the debtor was ineligible for relief and the confirmed plan did not provide for full payment to the IRS). Cf. Lewis v. Attorney General, 878 F.2d 714, 723 (3d Cir. 1989) (party seeking equitable relief must have "clean hands"). Accordingly, their motion shall be denied.
An appropriate order shall be entered.