Stavriotis, Matter of

• Decision Date: 23 October 1992
• Docket Number: No. 91-3096,91-3096
• Citation: 977 F.2d 1202
• Parties: -6169, 61 USLW 2270, 93-1 USTC P 50,081, 24 Fed.R.Serv.3d 188, Bankr. L. Rep. P 74,971 In the Matter of Emil STAVRIOTIS and Judith Stavriotis, Debtors. Appeal of UNITED STATES of America.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1202

977 F.2d 1202

70 A.F.T.R.2d 92-6169, 61 USLW 2270,

93-1 USTC P 50,081,

24 Fed.R.Serv.3d 188, Bankr. L. Rep. P 74,971

In the Matter of Emil STAVRIOTIS and Judith Stavriotis, Debtors Appeal of UNITED STATES of America.

No. 91-3096.

United States Court of Appeals Seventh Circuit.

Argued May 28, 1992.

Decided Oct. 23, 1992.

Fred Foreman, U.S. Atty., Office of the U.S. Atty., Criminal Div., Joel Nathan, Chicago, Ill., Gary R. Allen, Gary D. Gray, Bridget Rowan (argued), Douglas W. Snoeyenbos, Dept. of Justice, Tax Div., Appellate Section, Washington, D.C., for U.S.

Arthur P. Sanderman (argued), Ronald M. Brown, Mitchell A. Cohen, Brown & Shinitzky, Chicago, Ill., for Stavriotis.

Before CUMMINGS and FLAUM, Circuit Judges, and LEE, District Judge. ¹

CUMMINGS, Circuit Judge.

The question presented in this appeal is whether the bankruptcy court abused its discretion when, after the bar date for filing claims, it refused the Internal Revenue Service's request to amend a proof of claim. The Internal Revenue Service had sought to amend its original proof of claim in order to increase the debtors' 1981 tax liability from $11,132.93 to $2,435,078.39, and in order to add tax liability for 1982, an additional tax year.

I. Facts

In October 1985, Emil and Judith Stavriotis ("the debtors") filed a voluntary petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. The Bankruptcy Court for the Northern District of Illinois set November 6, 1986, as the deadline, or "bar date," for filing all claims against the debtors' estate. On October 2, 1986, approximately one month prior to the bar date, the IRS filed a timely proof of claim for 1981 and 1984 income taxes and related penalties in the total amount of $11,132.93. The IRS based its claim amount on the debtors' amended tax returns rather than an independent audit or assessment.

At the time the bar date was set, the IRS was still in the process of auditing the debtors' tax liability for the 1981 tax year. Although the IRS knew of the bar date and its continuing audit, it never requested an extension of the bar date or notified other creditors that such an audit was being conducted. ²

After the IRS completed its audit, it concluded that loss deductions taken by the debtors with respect to various real estate ventures should be disallowed. As a result of those disallowances, on April 22, 1987, approximately five months after the bar date, and under Rule 7015 of the Federal Bankruptcy Rules, the IRS sought to amend its claim for the total amount of income tax and related penalties. According to the IRS, the amended amount of taxes owed by the debtors was $2,449,523.74. Of that amount, $2,435,078.39 resulted from the debtors' 1981 return and $14,445.35 resulted from unpaid income tax for 1982. The amount of money the IRS sought to collect in its amended claim was more than 220 times greater than the amount it had claimed in its timely filed proof of claim.

The debtors objected to the amended proof of claim on both substantive and procedural grounds. Both the debtors and the government filed cross-motions for summary judgment on the procedural question of whether the amended claim should be permitted. The IRS asserted no excuse for its failure to file its second claim before the bar date or for its failure to request an extension of the bar date.

Bankruptcy Judge Katz refused to permit the IRS's requested amendment and granted summary judgment on behalf of the debtors. The bankruptcy court held that the two claims were dissimilar in kind and amount, and that a consideration of equitable factors did not warrant permission of the amendment. ³ Thus that court limited the IRS's claim to its original claim for $11,132.93 for 1981 and 1984 income taxes and related penalties. The government appealed that judgment to the United States District Court for the Northern District of Illinois. Writing for that court, Judge Duff affirmed the judgment entered by the bankruptcy court. 129 B.R. 127. It is from that judgment that the present appeal was taken.

II. Analysis

The disposition of a motion to amend a proof of claim falls within the sound discretion of the bankruptcy court. See In the Matter of Unroe, 937 F.2d 346, 350 (7th Cir.1991); Deasy v. Hill, 833 F.2d 38, 40 (4th Cir.1987), certiorari denied, 485 U.S. 977, 108 S.Ct. 1271, 99 L.Ed.2d 483; In re International Horizons, Inc., 751 F.2d 1213, 1216 (11th Cir.1985); In re Lanman, 24 B.R. 741, 743 (Bankr.N.D.Ill.1982). On appeal, this Court reviews that decision for abuse of discretion. Of course, review based on the abuse of discretion standard does not mean no appellate review. In re Ronco, Inc., 838 F.2d 212, 217-218 (7th Cir.1988). Under that standard an abuse of discretion will be found if 1) the decision was based on an erroneous conclusion of law, 2) the record contains no evidence on which the bankruptcy court could have based its decision, or 3) the factual findings are clearly erroneous. Deitchman v. E.R. Squibb & Sons, Inc., 740 F.2d 556, 563-564 (7th Cir.1984).

A. Rule 7015

We begin our analysis with Bankruptcy Rule 7015. That Rule states that "Rule 15 F.R.Civ.P. applies in adversary proceedings." Ordinarily, "the filing of an objection to a proof of claim * * * is a contested matter," not an adversary proceeding. Advisory Committee Note to Bankruptcy Rule 9014. But as this Court noted in Unroe, 937 F.2d at 348, Bankruptcy Rule 9014 permits a court, at its discretion, to extend Rule 7015 to contested matters as well as adversary proceedings. In this case Rule 7015 should apply by analogy for two reasons. First, Part VII of the bankruptcy rules is "based on the premise that to the extent possible practice before the bankruptcy courts and the district court should be the same." Advisory Committee Note to Bankruptcy Rule 7001. In light of this rationale even though bankruptcy courts are not required to do so, many such courts choose to apply Rule 7015 by analogy. See, e.g., In re AM International Inc., 67 B.R. 79, 81 (N.D.Ill.1986); see also In re Calisoff, 94 B.R. 1002, 1004 n. 2 (Bankr.N.D.Ill.1988). Second, the district court applied Rule 7015 and both parties agree that this Court should apply Rule 7015 as well. For these reasons, we apply Bankruptcy Rule 7015, and through it, Federal Rule of Civil Procedure 15.

Federal Rule of Civil Procedure 15(a) provides that "a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires." Rule 15 favors liberal amendment of pleadings in order to insure consideration of claims on their merits. But while leave to amend should generally be granted, courts have noted that it is inappropriate in some circumstances. Amendola v. Bayer, 907 F.2d 760, 764 (7th Cir.1990) (affirming denial of leave to amend claim where 1) litigant was aware of the facts underlying the claim before the filing deadline and presented no excuse for failing to raise the claim earlier, 2) opposing party would be unduly prejudiced, and 3) delay would impair the public interest in prompt resolution of disputes). As the Supreme Court stated in Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962):

If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reason--such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.--the leave should, as the rules require, be "freely given." Id.; see also, Eades v. Thompson, 823 F.2d 1055, 1062-1063 (7th Cir.1987).

In this case, both the bankruptcy court and the district court agree that the interests of justice require that the IRS should not be permitted to amend its claim. That conclusion is informed in part by the dramatic increase in the claim amount which came as an unfair surprise to other creditors, and perhaps to the debtors. As the bankruptcy court noted, relying on In re AM International, Inc., 67 B.R. 79 (N.D.Ill.1986), a claim for approximately $11,000 does not give parties notice of a claim of over $2,000,000. Even though the creditors had notice that the amount of taxes owed "had not yet been determined" and was subject to litigation, the creditors had no reason to believe that the debt might be so extensive. The debtors in their disclosure statements and the government in its original proof of claim had estimated the amount in dispute at approximately $10,000-$12,000.

The government asserts that notice of the amount of claim is immaterial because proofs of claim may have "little correlation to the final relative amounts in which creditors will share any distribution," and primarily serve to determine "the universe of participants in the debtor's case." In re Kolstad, 928 F.2d 171, 173-174 (5th Cir.1991), certiorari denied, --- U.S. ----, 112 S.Ct. 419, 116 L.Ed.2d 439. However, the purpose of the filing deadlines is "to enable the debtor and his creditors to know, reasonably promptly, what parties are making claims and in what general amounts." Id. at 173-174 (emphasis added). See Bankr.R. 3001 and Official Form Nos. 20 and 21 (requiring a proof of claim to include the amount the debtor owes the claimant and little other information). But were the huge disparity in the amount of the claim the only concern, we might still be persuaded that the IRS should prevail. The Bankruptcy Code rests on a foundation of equity. United States v. Energy Resources Co., 495 U.S. 545, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990); In re Longardner & Associates Inc., 855 F.2d 455, 462 (7th Cir.1988), certiorari denied, 489 U.S. 1015, 109 S.Ct. 1130, 103...