Dold v. Rainbows United, Inc. (In re Rainbows United, Inc.)

• Decision Date: 04 March 2016
• Docket Number: Adv. No. 15–5144,Case No. 09–12457
• Citation: 547 B.R. 430
• Parties: IN RE: RAINBOWS UNITED, INC., Debtor. Lorraine A. Dold, Plaintiff, v. Rainbows United, Inc., Defendant.
• Court: U.S. Bankruptcy Court — District of Kansas

547 B.R. 430

IN RE: RAINBOWS UNITED, INC., Debtor.

Lorraine A. Dold, Plaintiff,

v.Rainbows United, Inc., Defendant.

Case No. 09–12457

Adv. No. 15–5144

United States Bankruptcy Court, D. Kansas.

Signed March 4, 2016

Nicholas R. Grillot, Edward J. Nazar, Hinkle Law Firm, L.L.C., Wichita, KS, Patricia A. Reeder, Woner Glenn Reeder & Girard, P.A., Topeka, KS, for Debtor.

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS

Robert E. Nugent, United States Chief Bankruptcy Judge

When Rainbows United's chapter 11 plan was confirmed, its confirmation order discharged "any debt" that Rainbows had incurred up to that time, no matter whether the holders of those debts had filed proofs of claim, the claims had been allowed, or the claimants had accepted the plan.¹ The Bankruptcy Code defines "debt" as "liability on a claim" and "claim" as a "right to payment," one that can be, among other things, merely contingent.² A contingent claim arises at the time the conduct that causes it occurs, even if the claim is not asserted or does not actually accrue until later.³

Before Rainbows filed its chapter 11 case in 2009, Lorraine Dold was its president. And, while she was president, Rainbows failed to remit trust fund payroll taxes to the Internal Revenue Service for the years 2007, 2008, and 2009. Rainbows scheduled Ms. Dold as a creditor because it owed her a small amount for employee expenses. In its chapter 11 plan, Rainbows proposed that, after confirmation, those taxes (over $2.0 million plus penalties) would be paid over a five year period. Under the plan, the IRS would forbear pursuing the penalties if Rainbows paid the taxes and interest, but would not forgive them. The plan provided that it could collect the penalties if the debtor missed any payments. After the plan was confirmed in 2010, Rainbows paid all of the taxes and interest. Only then did the IRS assess a "trust fund recovery penalty" (TFRP) against Ms. Dold which it began to collect by setting off her income tax refunds.⁴

Rainbows' articles of incorporation include a provision that indemnifies its officers against threatened legal action that arises out of an officer's conduct if that officer's "acts are not in question" or if, in the opinion of independent legal counsel, that officer "acted in good faith and in the reasonable belief" that the actions were in the best interests of Rainbows.⁵ After the IRS began to collect the TFRP from her in 2015, Ms. Dold sued Rainbows in state court for indemnification against that obligation. Rainbows removed that case here and moved to dismiss the complaint for failure to state a plausible claim.

Assuming that Ms. Dold's "acts are not in question" or that she "acted in good faith" such that the corporation's indemnification provisions have been triggered, her claim against Rainbows for that indemnity arose when the corporation failed to remit the taxes beginning in 2007. Federal law made it likely she would be liable for the TFRP beginning at that time even though the IRS did not assess that liability against her until much later. Accordingly, Ms. Dold's indemnification claim, like all of Rainbows' other pre-confirmation debts, has been discharged. Because she has failed to state a claim against the debtor, her complaint must be dismissed.⁶

Rule 12(b)(6) Standards

A plaintiffs complaint states a claim upon which relief may be granted when the facts as pled could plausibly support a cause of action against the defendant without regard for whether plaintiff could ultimately prevail on the claim.⁷ The claim must be plausible on its face.⁸ A plausible claim is one that shows more than a sheer possibility and less than a probability that she is entitled to the relief she seeks.⁹

For purposes of this motion, I must take the allegations Ms. Dold pled in the petition to be true.¹⁰ In addition, I can also consider matters filed in Rainbows' chapter 11 bankruptcy case without converting the motion to dismiss to one for summary judgment under Fed. R. Civ. P. 12(d).¹¹ Accordingly, I have taken judicial notice of Rainbows' schedules, claims register, chapter 11 plan, and the order of confirmation entered in the case.¹² The following facts control this motion.

Facts¹³

Rainbows United, Inc. is a not-for-profit corporation in Wichita, Kansas. It filed a chapter 11 bankruptcy petition here on July 30, 2009. Lorraine Dold was the president and chief executive officer of Rainbows from July 5, 1988 until she was terminated on August 20, 2009. Ms. Dold was listed as a creditor on Schedule E (for unreimbursed business expenses) and received notice of Rainbows' bankruptcy and the claims bar date. She did not file a proof of claim.¹⁴

The IRS did.¹⁵ Its unsecured priority tax claim against Rainbows as of the date of the petition for unpaid quarterly employee withholding trust fund taxes incurred during the years 2007–2009 totaled $2,355,689.32 in taxes and interest. The IRS also asserted an unsecured general claim for $764,366.07, representing a penalty on the unpaid trust fund tax deposits. Ms. Dold alleges in paragraph 8 of her complaint that the amount of the penalties assessed and now at issue exceeds $60,000. The precise amount of the tax penalty is not relevant to deciding this motion.

After the bar date expired, Rainbows filed its chapter 11 plan of reorganization.¹⁶ In it, Rainbows proposed to pay its priority tax claims, including those owed to the IRS on account of unpaid trust fund taxes, with interest, within five years of the effective date of the plan. So long as its plan payments remained current, Rainbows would not have to pay the unsecured penalty. While forbearing to collect the penalty, the IRS did not abate it. Instead, it expressly reserved the right to collect the penalty if Rainbows defaulted on its plan payments. The plan made no provision for paying officer indemnification claims. Ms. Dold did not object to the confirmation of Rainbows' plan. The Court confirmed it on March 29, 2010.¹⁷ The confirmation order modified the plan's contents to provide that if Rainbows successfully completed the plan payments, the penalty portion of the IRS's tax claim against Rainbows "will be waived and deemed satisfied." Rainbows completed its plan payments to the IRS, paying all outstanding employment taxes and interest in full as provided under the plan.

Sometime in 2015, the IRS assessed the "responsible person" TFRP against Ms. Dold as Internal Revenue Code § 6672 provides.¹⁸ It collected $2,037 from Ms. Dold by setting off her tax refunds. When Ms. Dold was an officer at Rainbows, the corporation's Articles of Incorporation provided for the indemnification of officers and directors against threatened or actual claims against them based upon their conduct if the director or officer had "acted in good faith and in the reasonable belief that the actions were in or not opposed to the best interests of the Corporation."¹⁹ Ms. Dold invokes that provision here and alleges that she has incurred attorney fees in excess of $10,000 in defending against the IRS's efforts to collect the TFRP.

In September of 2015, Ms. Dold sued Rainbows in state court to enforce the indemnification provision under the Articles and state law, and requested damages in excess of $70,000.²⁰ Rainbows removed the lawsuit to the bankruptcy court²¹ and filed the current motion to dismiss under Fed. R. Civ. P. 12(b)(6) as made applicable to adversary proceedings by Fed. R. Bankr. P. 7012(b).²²

Analysis

Confirmation generally discharges all pre-confirmation debts of a corporation.

The effect of confirmation of a chapter 11 plan is described in Bankruptcy Code § 1141, in relevant part:

(a) Except as provided in subsection (d)(2) and (d)(3) of this section [neither of which is applicable here], the provisions of a confirmed plan bind the debtor, ... any creditor ..., whether or not the claim ... of such creditor is impaired under the plan and whether or not such creditor has accepted the plan.

* * *

(d)(1) Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan—(A) discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this title, whether or not—

(i) a proof of the claim based on such debt is filed or deemed filed under section 501 of this title;

(ii) such claim is allowed under section 502 of this title; or

(iii) the holder of such claim has accepted the plan; ...²³

Thus, except in circumstances not present here,²⁴ when a plan is confirmed, the debtor is discharged from any debt that arose prior to the confirmation date. Ms. Dold says that her indemnification claim arose post-confirmation—after Rainbows did not pay its tax penalty and the IRS assessed the "responsible person" TFRP against her.

Officers of corporations that fail to pay trust fund taxes are subject to TFRPs.

Plaintiffs personal liability for the TFRP derives from § 6672 of the Internal Revenue Code. Employers are required to withhold federal social security and income taxes from their employees' wages as those wages are paid, and pay over the taxes quarterly to the government. The accumulated withholdings are deemed to constitute a "special fund in trust for the United States" and are commonly referred to as trust fund taxes.²⁵ Officers and other principals are encouraged to withhold and deposit trust fund taxes by I.R.C. § 6672(a), which penalizes those persons within an employer's business who are responsible for collecting and paying over the withheld taxes but willfully fail to do so.²⁶

It provides:

(a) General rule.—Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, ... shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not

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