Becker's Motor Transp., Inc., Matter of
| Decision Date | 04 September 1980 |
| Docket Number | No. 79-2796,No. B-74-2050,No. B-74-2051,B-74-2050,B-74-2051,79-2796 |
| Citation | 632 F.2d 242,2 C.B.C.2d 1078 |
| Parties | 81-1 USTC P 9348, 2 Collier Bankr.Cas.2d 1078, 6 Bankr.Ct.Dec. 1014, Bankr. L. Rep. P 67,605 In the Matter of BECKER'S MOTOR TRANSPORTATION, INC., a New Jersey Corporation with its principal place of business in the State of New Jersey, Debtor (Bankruptcy) In the Matter of NEEDHAM'S MOTOR SERVICE, INC., a Delaware Corporation with its principal place of business in the State of New Jersey, Debtor (Bankruptcy) v. DEPARTMENT OF the TREASURY, INTERNAL REVENUE SERVICE, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
Crummy, Deldeo, Dolan & Purcell, Newark, N. J., for appellees; Donald H. Steckroth (argued), Newark, N. J., of counsel.
M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Karl Schmeidler, Michael J. Roach (argued), Attys., Tax Div., Dept. of Justice, Washington, D. C., for appellant; Robert J. Del Tufo, U. S. Atty., Newark, N. J., of counsel.
Before SEITZ, Chief Judge, ADAMS, Circuit Judge, and LORD, Chief District Judge. *
This appeal from an order of the district court, affirming the issuance by the bankruptcy court of a summary judgment and an injunction in favor of debtors, raises a number of difficult questions regarding the law of bankruptcy. The threshold inquiry is whether the bankruptcy court had jurisdiction to reopen a Chapter XI proceeding to adjudicate the personal liability of a rehabilitated debtor for pre-petition penalties and post-petition interest on a nondischargeable tax debt that had been satisfied pursuant to a plan of arrangement. If the bankruptcy court had jurisdiction, we must next determine whether it was barred from issuing injunctive or declaratory relief with respect to the collection of taxes assessed after the arrangement was completed. Finally, on the merits we are required to consider whether the Internal Revenue Service was estopped from attempting to collect pre-petition penalties and both pre-petition and post-petition interest.
On December 12, 1974, the plaintiffs, Becker's Motor Transportation, Inc., and Needham's Motor Service, Inc., filed petitions for an arrangement under Chapter XI of the Bankruptcy Act. The Internal Revenue Service (IRS) filed proofs of claim in the amount of $74,792.04 against the debtors' estate on October 21, 1975 for nondischargeable tax debts and pre-petition interest owed by Becker's and Needham's. In filing the proofs of claim, the IRS left blank the line on the form designated "(D)ollar amount per day at which interest will accrue after date of this statement." After all claims had been filed, the debtors proposed a joint plan of arrangement, which was confirmed by the bankruptcy court on December 1, 1976. In order to obtain sufficient cash for the consummation of the plan, the debtors borrowed over $550,000.00.
Pursuant to an order of distribution issued in conformity with the plan, the tax indebtedness that had been claimed by the IRS was paid in full; nonpriority creditors received payment at the rate of 7 1/2 cents per dollar. Following distribution, the arrangement estate was closed and the debtors resumed business operations. Thereafter, in September 1977, the IRS sought to collect from the rehabilitated debtors $34,960.14 in pre-petition penalties and post-petition interest on the satisfied tax debts. No notice of these claims had been provided during the arrangement.
On May 18, 1978, the debtors applied to the bankruptcy court, which had closed the estate, for an order reopening the proceedings. On the same day, the request was granted and the debtors filed a complaint seeking declaratory and injunctive relief against any further collection efforts by the IRS. The IRS moved unsuccessfully to dismiss the complaint, and the debtors later moved for summary judgment. After hearing oral argument, the bankruptcy court granted the debtors' motion and enjoined further IRS collection efforts.
The IRS appealed to the district court, which, following oral argument, affirmed the orders of the bankruptcy court. In an unpublished opinion, the district court held that the IRS was equitably estopped from asserting claims for which it had not given notice during the Chapter XI proceeding. The district court stated that the debtors had relied to their detriment on the assumption that such claims would not be asserted following completion of the plan. The district judge further held that the bankruptcy court had been empowered to enjoin the collection efforts by the IRS, notwithstanding the prohibition against such injunctions contained in 26 U.S.C. § 7421(a)(1976), on the ground that the rehabilitative purpose reflected in the Bankruptcy Act overrides the force of the anti-injunction statute.
On this appeal, the IRS argues that the bankruptcy court had no jurisdiction to reopen the arrangement proceedings solely for the purpose of enjoining the collection of penalties and interest on the debtors' nondischargeable tax debts. The IRS further contends that the district court incorrectly held that the failure of the IRS to give notice during the proceedings of its intention to collect pre-petition penalties and post-petition interest barred collection of these sums following completion of the plan. Moreover the IRS urges that even if there was jurisdiction and even if the government was equitably estopped, the district court was mistaken in upholding the injunction issued by the bankruptcy court.
We vacate the judgment of the district court and remand.
The initial issue before us is whether bankruptcy courts are vested with jurisdiction to adjudicate the personal liability of an arranged debtor who seeks declaratory and injunctive relief against collection of tax claims in a reopened proceeding. We note that this question, like all others in the present case, is governed not by the Bankruptcy Reform Act of 1978, Pub.L.No.95-598, 11 U.S.C.A. §§ 101-151326, but by the old Bankruptcy Act (formerly codified at 11 U.S.C.). Although the 1978 Act took effect on October 1, 1979, the Act's savings provision provides:
A case commenced under the Bankruptcy Act, and all matters and proceedings in or relating to any such case, shall be conducted and determined under such Act as if this Act had not been enacted, and the substantive rights of parties in connection with any such bankruptcy case, matter, or proceeding shall continue to be governed by the law applicable to such case, matter, or proceeding as if the Act had not been enacted.
Pub.L.No.95-598, § 403(a), 11 U.S.C.A. note preceding § 101. The present controversy has consistently been characterized by the parties, the bankruptcy court, and the district court as a reopening of the proceedings begun in 1974, and we are asked to adjudicate rights and liabilities that stem from the plan of arrangement entered into as a result of those proceedings. We believe the savings provision of the 1978 Act requires that the proceedings on reopening "shall continue to be governed by the law applicable to" the proceedings initiated in 1974. Also, we note that on May 18, 1978, when the debtors applied to the bankruptcy court for the order reopening the proceedings, the 1978 Act was not yet in effect. Under these circumstances, we conclude that the old Bankruptcy Act must be applied.
In no case brought to our attention has the jurisdictional question been squarely addressed. 1 Nonetheless, § 2(a)(2A) of the old Act (formerly codified at 11 U.S.C. § 11(a)(2A)) appears to have vested the bankruptcy courts with jurisdiction to resolve the validity of claims for tax penalties and interest assessed against a debtor. That section confers on courts of bankruptcy jurisdiction to "(h)ear and determine ... any question arising as to the amount or legality of any unpaid tax, whether or not previously assessed" (emphasis added). 2 Further, this jurisdiction is not defeated simply because the estate was closed following the 1976 arrangement, since bankruptcy courts are vested with broad discretion to reopen cases after an estate has been administered. See, e. g., In Re Seats, 537 F.2d 1176 (4th Cir. 1976). Section 2(a)(8) of the old Act (formerly codified at 11 U.S.C. § 11(a) (8)) authorizes bankruptcy courts to "reopen estates for cause shown," and Bankruptcy Rule 515 provides that "(a) case may be reopened, on application by the bankrupt, or other person to administer assets, to accord relief to the bankrupt, or for other good cause" (emphasis added). We read §§ 2(a)(2A), 2(a)(8) and Bankruptcy Rule 515 as conferring on courts of bankruptcy jurisdiction to reopen a closed estate for the purpose of providing "relief to the bankrupt" by adjudicating the bankrupt's personal liability for tax penalties and interest.
The next question we resolve is whether the bankruptcy court was authorized to grant the equitable relief requested by plaintiffs. The IRS urges that a bankruptcy court is prohibited from enjoining IRS collection efforts, and that the district court therefore erred in sustaining the injunction issued by the bankruptcy court. 26 U.S.C. § 7421(a) states in pertinent part:
Except as provided in sections 6212(a) and (c), 6213(a), and 7426(a) and (b) (1), no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person . . .
Although the district court found the exemptions set forth in § 7421(a) inapplicable to this case, it nevertheless held that the bankruptcy court had properly enjoined the IRS collection efforts on the ground that the case fell within the ambit of Bostwick v. United States, 521 F.2d 741 (8th Cir. 1975), which represents a judicially created exception to the strictures of § 7421(a). In Bostwick, the Court of Appeals for the Eighth Circuit, in upholding the issuance of an injunction against...
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