Morgan v. U.S., 98-8159

• Decision Date: 26 July 1999
• Docket Number: No. 98-8159,98-8159
• Citation: 182 F.3d 775
• Parties: (11th Cir. 1999) IN RE: Jimmy Roger MORGAN; Jamie Lynne Morgan, Debtors. Jimmy Roger Morgan; Jamie Lynne Morgan, Plaintiffs-Appellants, v. United States of America, by and through the Internal Revenue Service, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 775

182 F.3d 775 (11th Cir. 1999)

IN RE: Jimmy Roger MORGAN; Jamie Lynne Morgan, Debtors.

Jimmy Roger Morgan; Jamie Lynne Morgan, Plaintiffs-Appellants, v. United States of America, by and through the Internal Revenue Service, Defendant-Appellee.

No. 98-8159.

United States Court of Appeal, Eleventh Circuit.

July 26, 1999.

Appeal from the United States District Court for the Northern District of Georgia. (No. 1:97-CV-604-JEC), Julie Carnes, Judge.

Before COX, CARNES and HULL, Circuit Judges.

PER CURIAM:

Chapter 13 debtors, Jimmy Roger Morgan and Jamie Lynne Morgan, filed a successive bankruptcy petition in January 1995. They now appeal the district court's order denying their objection to the Internal Revenue Service's claim as a priority claim. The district court held that IRS's claim was a priority claim because the three year priority period of 11 U.S.C. 507(a)(8)(A)(i) was tolled during the pendency of the Morgans' first Chapter 13 case. We vacate and remand.

I. BACKGROUND

The relevant facts are undisputed. The Morgans first filed for relief under Chapter 13 of the Bankruptcy Code in August 1990. In that case, the Internal Revenue Service ("IRS") filed a proof of claim for income taxes owed by the Morgans for the years 1987, 1988, and 1989 in the amount of $29,207. Shortly after filing their petition, the Morgans filed a repayment plan in accordance with 11 U.S.C. 1322. The Morgans' Chapter 13 plan proposed to pay in full all claims classified as "priority claims" under 11 U.S.C. 1322(a)(2), including the IRS claim, and was confirmed in November 1990.

The Morgans, however, failed to make all of the payments required by their Chapter 13 plan. For this reason, the United States trustee moved to dismiss the Morgans' first bankruptcy case. The bankruptcy judge dismissed the Morgans' first case in October 1994. While the Morgans made some payments to the IRS during their first Chapter 13 proceeding, they did not make all of the payments required and the IRS claim was not satisfied prior to the dismissal.

Soon after, in January 1995, the Morgans filed a second Chapter 13 petition. The IRS again filed a proof of claim for income taxes owed by the Morgans for the years 1987, 1988 and 1989. The IRS asserted that this was a "priority claim" pursuant to 11 U.S.C. 507(a)(8)(A)(i) and due to be paid in full.¹ The Morgans objected, arguing that 507(a)(8)(A)(i) only grants priority status to claims less than three years old. The Morgans argued that because these tax liabilities were over three years old, they were not entitled to priority status. The bankruptcy judge concluded, however, that the three year priority period allowed for unpaid income taxes should be tolled during the pendency of the Morgans' first bankruptcy proceeding. On this basis, the bankruptcy judge entered an order denying the Morgans' objection to the IRS claim. The district court affirmed the bankruptcy judge's decision. The Morgans appeal.

II. ISSUE & STANDARD OF REVIEW

The narrow issue that we must address is whether the three year priority period of 11 U.S.C. 507(a)(8)(A)(i), which governs income tax claims, may be tolled during the pendency of a prior bankruptcy proceeding. This is a question of law involving the interpretation and application of the Bankruptcy Code, and our review is de novo. See In re James Cable Partners, L.P., 27 F.3d 534, 536 (11th Cir.1994).

III. CONTENTIONS OF THE PARTIES

On appeal, the Morgans contend that their tax liability for 1987, 1988 and 1989 should be discharged in their second Chapter 13 proceeding, because the tax liability is older than the three years allowed under 507(a)(8)(A)(i). The Morgans argue that the plain language of the Bankruptcy Code does not allow for tolling this three year priority period during the pendency of their first bankruptcy proceeding.

The IRS, on the other hand, contends that an automatic stay during the Morgans' first bankruptcy proceeding prevented it from collecting the tax liability. For this reason, the IRS argues, the three year priority period of 507(a)(8)(A)(i) should be tolled during the pendency of the Morgans' first Chapter 13 case and the tax liability should not be discharged.

IV. DISCUSSION

Priority claims under 11 U.S.C. 507(a)(8)(A)(i) are due to be paid in full under a Chapter 13 repayment plan, see 11 U.S.C. 1322(a), and also receive protection against discharge. See 11 U.S.C. 523(a)(1). Section 507(a)(8)(A)(i) provides that unpaid income taxes are entitled to "priority status" so long as the tax returns were due less than three years before the filing date of the bankruptcy petition.² Neither party disputes that the tax liability in question is now more than three years old and normally would be discharged under 11 U.S.C. 1328(a).³

In this case, the IRS was prevented from collecting the unpaid income taxes during the pendency of the first bankruptcy proceeding by the provisions of the confirmed plan and the automatic stay imposed by 11 U.S.C. 362(a)(6). The IRS contends that in cases like this, the three year priority period should be tolled during the pendency of the first bankruptcy proceeding.

Bankruptcy law aims to serve both the debtor and the creditor. While the law attempts to give an honest debtor a fresh start, In re Folendore, 862 F.2d 1537, 1540 (11th Cir.1989), Congress also "intended to give the government the benefit of certain time periods to pursue its collection efforts." See In re Richards, 994 F.2d 763, 765 (10th Cir.1993). Both parties agree that the plain language of the Bankruptcy Code fails to provide explicitly for tolling the three year priority period in 507(a)(8)(A)(i).⁴ Thus, the question we face is whether the priority period of 507(a)(8)(A)(i) may be tolled during a prior bankruptcy proceeding in the absence of explicit language in applicable statutes permitting such tolling.

Every circuit that has addressed this issue, except for the Fifth Circuit, has concluded that the three year priority period may be tolled during a prior bankruptcy proceeding. The circuits differ in their reasoning as to why tolling is permitted. A majority of the circuits rely upon an interpretation of 11 U.S.C. 108(c) to answer this question. Section 108(c) extends the statute of limitations for creditors, "if applicable nonbankruptcy law ... fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor" and the creditor is hampered from proceeding outside the bankruptcy court because of the automatic stay.⁵ These courts have concluded that 108(c), considered in conjunction with 26 U.S.C. 6503(b) of the Internal Revenue Code (which suspends the limitation period on tax collection against a debtor), tolls the three year priority period. See In re Waugh, 109 F.3d 489 (8th Cir.), cert. denied, 118 S.Ct. (1997); In re Taylor,81F.3d 20, 23 (3d Cir.1996); In re Montoya, 965 F.2d 554, 556 (7th Cir.1992); see also In re West, 5 F.3d 423 (9th Cir.1993) (suspending the running of 507(a)(7)(ii)'s 240-day priority period). Both the bankruptcy judge and the district court followed the majority approach and concluded that 108(c) and 6503(b) work in conjunction to toll the three year priority period during the pendency of the Morgans' first bankruptcy proceeding.

Other courts have held, however, that the plain language of 11 U.S.C. 108(c) is insufficient to toll the priority period of 507(a)(8)(A)(i). See In re Quenzer, 19 F.3d 163, 165 (5th Cir.1993) (concluding that 108(c) was insufficient to allow for the tolling of the three year period); see also In re Eysenbach, 170 B.R. 57 (Bankr.W.D.N.Y.1994) ("As a provision of the Bankruptcy Code, section 507 is obviously not subject to the tolling powers of section 108(c)."); In re Gore, 182 B.R. 293 (Bankr.S.D.Ala.1995). These courts rely on the plain language of 108(c) which states that it only applies to "nonbankruptcy law" and "nonbankruptcy proceedings" and therefore could not apply to the bankruptcy provision, 507(a)(8)(A)(i). We agree.

Although we conclude that 108(c) is insufficient to toll the three year priority period, we find support for tolling the priority period in 11 U.S.C. 105(a).⁶ The IRS argued in the bankruptcy court that the court's equitable powers under 11 U.S.C. 105(a) were sufficient to toll the three year priority period. The bankruptcy court and the district court found it unnecessary to reach that question, finding instead that tolling the priority period was mandated.

We have long held that " '[b]ankruptcy courts are indeed courts of equity, and they have the power to adjust claims to avoid injustice or unfairness.' " In re Empire for Him, Inc., 1 F.3d 1156, 1160 (11th Cir.1993) (quoting In re Saybrook Mfg. Co., 963 F.2d 1490, 1495 (11th Cir.1992)). Section 105(a) grants the bankruptcy court the power to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions" of the Bankruptcy Code and take "any action or mak[e] any determination necessary to enforce or implement court orders or rules, or to prevent an abuse of process."⁷ The Tenth Circuit, in In re Richards, 994 F.2d at 765, held that 11 U.S.C. 105(a) is broad enough "to suspend the 240 day assessment period in 11 U.S.C. 507(a)(7)(A)(ii)." We find the Tenth Circuit's rationale persuasive, and, like the Ninth Circuit Bankruptcy Appellate Panel, we believe this rationale also applies to the three year priority period set forth in 507(a)(8)(A)(i). See, In re Gurney, 192 B.R. 529, 537 (9th Cir.BAP 1996). As a result, we conclude that 11 U.S.C. 105(a) is broad enough to permit a bankruptcy court, exercising its equitable powers, to toll the three year priority period, where appropriate, during the pendency of a debtor's prior bankruptcy proceeding.

"Interpreting [the Bankruptcy Code] literally would allow a debtor to create an 'impenetrable refuge' by filing a bankruptcy petition, waiting for [ 507(a)(8)'...