977 F.2d 1202 (7th Cir. 1992), 91-3096, Matter of Stavriotis

Docket Nº:91-3096.
Citation:977 F.2d 1202
Party Name:24 Fed.R.Serv.3d In the Matter of Emil STAVRIOTIS and Judith Stavriotis, Debtors. Appeal of UNITED STATES of America.
Case Date:October 23, 1992
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 1202

977 F.2d 1202 (7th Cir. 1992)

24 Fed.R.Serv.3d

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

October 23, 1992

Argued May 28, 1992.

Page 1203

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.

Page 1204

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...

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