Hanna, In re
| Decision Date | 21 April 1989 |
| Docket Number | No. 88-1647,88-1647 |
| Citation | 872 F.2d 829 |
| Parties | , 20 Collier Bankr.Cas.2d 1452, 19 Bankr.Ct.Dec. 438, Bankr. L. Rep. P 72,863 In re Ronald Joseph HANNA and Marjorie Ruth Saunders Hanna. Ronald Joseph HANNA and Marjorie Ruth Saunders Hanna, Appellees, v. UNITED STATES of America, Appellant. Internal Revenue Service and Iowa Department of Revenue and Finance. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Raymond W. Hepper, Washington, D.C., for appellant.
John F. Pirog, Sioux City, Iowa, for appellees.
Before HEANEY * and BEAM, Circuit Judges, and LARSON, ** Senior District Judge.
Ronald Hanna and Marjorie Hanna filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Among the debts scheduled in their petition were unpaid federal and state income taxes. The bankruptcy court concluded that postpetition interest and postpetition penalties on these taxes were discharged. The United States government appealed to the district court and it affirmed. The government now appeals to this Court. We reverse.
The first question raised on appeal is whether postpetition interest may be enforced as a continuing nondischargeable obligation against Chapter 7 debtors subsequent to the liquidation.
In a case under the 1950 Bankruptcy Act, the Supreme Court held that postpetition interest on an unpaid tax debt not discharged remains, after bankruptcy, a personal liability of the debtor. Bruning v. United States, 376 U.S. 358, 363, 84 S.Ct. 906, 909, 11 L.Ed.2d 772 (1964). The bankruptcy court, in this instance, determined that Bruning was inapplicable under the 1978 Bankruptcy Code and that postpetition interest on a tax liability is dischargeable, relying on the language of 11 U.S.C. Sec. 502(b)(2), the "fresh start" policy of the bankruptcy laws and In re Frost, 19 B.R. 804, 810 (Bkrtcy D.Kan.1982), rev'd on other grounds, 47 B.R. 961 (D.Kan.1985).
Section 727 of the Bankruptcy Code governs discharge in a Chapter 7 case. In general, that section discharges a debtor from all debts that arose before the petition was filed, except those debts that are specified in section 523. As relevant here, section 523(a)(1) excepts from discharge taxes that are entitled to priority under section 507(a)(7) whether or not a claim for such tax is filed or allowed. The taxes involved in this case were admittedly entitled to priority and, thus, rendered nondischargeable. The interest that accrues on such is an integral part of the underlying tax claim and is generally treated the same as the underlying claim. On the other hand, section 502(b)(2) specifies that unmatured interest, including postpetition interest on a tax liability, is not to be allowed against the bankruptcy estate.
The general rule "disallowing" the payment of unmatured interest out of the assets of the bankruptcy estate is a rule of administrative convenience and fairness to all creditors. The rule makes it possible to calculate the amount of claims easily and assures that creditors at the bottom rungs of the priority ladder are not prejudiced by the delays inherent in liquidation and distribution of the estate. But when concerns for administrative convenience and fairness are not present, postpetition interest will be "allowed." For example, if a creditor is oversecured--the value of his security is Sections 502(b)(2) and 523(a)(1) of the Code, read together, are not entirely clear. The House Report accompanying the Bankruptcy Reform Act of 1978, section 523, states: "If the taxing authority's claim has been disallowed, then it would be barred by the more modern rules of collateral estoppel from reasserting that claim [a]gainst [sic] the debtor after the case was closed." H.R.Rep. No. 595, 95th Cong., 2d Sess. at 363-64 (1978), reprinted in 1978 U.S.Code Cong. and Admin.News 5963, 6319.
sufficient not only to satisfy the principal amount of the claim, but also to satisfy postpetition interest, then such interest is "allowed." 11 U.S.C. Sec. 506(b). See also United States v. Ron Pair Enterprises, Inc., --- U.S. ----, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (section 506(b) entitles holders of non-consensual, as well as consensual, over-secured claims to the unqualified recovery of postpetition interest). Postpetition interest is also payable out of the assets of the bankruptcy estate--if the debtor ultimately proves to be solvent--before any sums are returned to the debtor. To a similar extent, the concerns for administrative inconvenience and fairness are not present when a court makes a determination of whether to discharge a claim
On an initial reading, the language of the House Report appears to support the view that Congress intended that this claim be barred. See H.R.Rep. No. 595, 95th Cong., 2d Sess. at 363-64 (1978), reprinted in 1978 U.S.Code Cong. and Admin.News 5963, 6319. On further investigation, one discovers, however, that the language in the Report was not intended to cover all disallowed claims. The House Report cites to Plumb, The Tax Ramifications of the Commission on the Bankruptcy Laws: Tax Procedure, 88 Harv.L.Rev. 1360, 1388 (1975), which states:
Therefore, unless the disallowance of a claim is based upon nonprovability of the debt or other grounds not going to the merits, the creditor ...
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