In re Breland, Case No.: 09-11139-JCO

• Decision Date: 27 May 2016
• Docket Number: Case No.: 09-11139-JCO
• Parties: In re: CHARLES K. BRELAND, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Alabama

In re: CHARLES K. BRELAND, Debtor.

Case No.: 09-11139-JCO

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION

May 27, 2016

Chapter 11

ORDER

This matter is before the Court on Debtor Charles Breland's Motion to Recover Attorneys' Fees and supporting brief (Docs. 754, 911), and the United States' (hereinafter referred to as "IRS") Objection thereto and supporting brief. (Docs. 774, 912). Debtor's Motion was filed on January 17, 2014. (Doc. 754). On May 2, 2014, the IRS filed its Opposition brief to Debtor's Motion. (Doc. 774). In October of 2015, the undersigned took the bench and this matter was set for status on November 2, 2015. (Doc. 889). The status hearing was held, and the parties were ordered to file a joint stipulation of fact and supporting briefs on the legal elements only of 11 U.S.C. § 7430, which they did on or about December 22, 2015. (Docs. 910, 911, 912). A hearing was held on these matters on January 14, 2016. On behalf of Debtor were attorneys Robin Cheatham and Robert Galloway, and on behalf of the IRS was attorney Lynne Murphy. At the conclusion of the hearing, the parties were ordered to file proposed findings of fact and conclusions of law not later than April 1, 2016, which they did. (Docs. 925, 926). The Court then took this matter under submission.

This case has a tortured history with the Court. It has been presided over by three different bankruptcy judges, Judges Margaret A. Mahoney and William S. Shulman, both of whom have retired from this Court, and it is now before the undersigned. Having considered the motions, briefs, objections and overall record before it, the Court concludes that Debtor's Motion to Recover Attorneys' Fees and Costs or As Offset is due to be DENIED.

In the wake of Stern v. Marshall, 564 U.S. 462 (2011), which left unresolved the question of whether bankruptcy courts had jurisdiction to enter final orders based on the parties express or implied consent in actions that can exist apart from the bankruptcy itself, Wellness Int'l Network, Ltd. v. Sharif, 135 S.Ct. 1932 (2015), sought to resolve that question. The Supreme Court's analysis in Wellness began with the basic principle that "adjudication by consent is nothing new," id. at 1942, and concluded that "[a]djudication based on litigant consent has been a consistent feature of the federal court system since its inception . . . [and] poses no great threat to anyone's birthright, constitutional or otherwise." Id. at 1947. "Congress could choose to rest the full share of the Judiciary's labor on the shoulders of Article III judges, [b]ut doing so would require a substantial increase in the number of district judgeships. Instead, Congress has supplemented the capacity of district courts through the able assistance of bankruptcy judges. So long as those judges are subject to control by the Article III court, their work poses no threat to the separation of powers." Id. at 1946.

Holding that consent need not be express, but may also be implied by the parties' conduct the Supreme Court based this conclusion on 28 U.S.C §§ 157, 636(c), which authorizes bankruptcy and magistrate judges to hear and determine certain proceedings with the consent of the parties. Id. at 1947-48. "Applied in the bankruptcy context, that standard possesses the same pragmatic virtues - increasing judicial efficiency and checking gamesmanship- that motivated [its] adoption of it for consent-based adjudications by magistrate judges." Id. at 1948. However, for implied consent to exist, it must be knowing and voluntary. That is, whether counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case before the non-Article III adjudicator. Id.

This Supreme Court historical analysis is relevant to these proceedings because Debtor's Motion to Compel under § 7430 raises a non-core matter outside this Court's jurisdiction. See In re Rasbury, 24 F.3d 159, 163-64 (11th Cir. 1994). The parties have not expressly consented to a final ruling on Debtor's Motion; however, based on their conduct, and in the interest of judicial economy and the need for a final ruling on this issue so the remainder of the case may proceed, this Court finds that the parties have impliedly consented to this Court's jurisdiction. Debtor has not raised the issue at all, and the IRS, in a footnote, merely noted without objecting that this is a non-core proceeding in which the bankruptcy court may not enter a final order. (Doc. 912 at 1, n. 3). Failing to raise a proper objection to this Court's jurisdiction and actively appearing before the Court at various hearings, the parties have impliedly consented to this Court's jurisdiction. See Matter of Texas Gen. Petroleum Corp., 52 F.3d 1330 (5th Cir. 1995)("[a] party who fails to object to a bankruptcy court's assumption of core jurisdiction consents to that court's entry of final judgment . . . . [such an objection] at th[e appellate] stage more closely resembles an afterthought than a bona fide objection").

As required by Wellness, the Court finds that the parties' implied consent is knowing and voluntary, as they are not unsophisticated players on the bankruptcy field, this case has been ongoing for nearly six years, and, the issue of core versus non-core has been addressed in many substantive orders handed down from this Court. This Court has held at least two hearings on this Motion alone, both of which counsel for the parties participated in without raising jurisdiction. Thus, this Court treats the parties' conduct as implied consent to its jurisdiction and enters the following final order.¹

FINDINGS OF FACT

This case is before the Court on Debtor's Motion to Recover Attorneys' Fees (Doc. 754), which spawned from a favorable ruling entered by now retired Judge Mahoney on December 20, 2011, (Doc. 603), wherein she concluded that the IRS failed to prove compelling circumstances demonstrating that an amendment of its claim post-confirmation should be allowed in light of the consent order it signed with Debtor. The Court bases its analysis of whether Debtor may recover attorneys' fees on the position the IRS took before and after that unfavorable ruling.

Judge Mahoney's Order denying the IRS' request to amend, as well as Judge Shulman's Order on Debtor's Objection to IRS Claim, sets out many of the relevant facts necessary for the present determination, and the undersigned relies on those facts as set out therein. (Docs. 603, 895). On March 11, 2009, Debtor filed for Chapter 11 relief, and in December of 2009, after filing several amendments, he filed the final version of his schedules. The IRS filed its first proof of claim on April 26, 2009, which it also amended several times prior to confirmation. At confirmation on December 10, 2010, the IRS reinstated its third amended claim, filed on October 4, 2010, in the amount of $2,020,697.0lin taxes owed. Of that amount, $671,318.55 comprised an unsecured priority claim for income taxes from 2004-2009. (Doc. 603 at 2). The remaining $1,349,378.46 was a general unsecured claim for penalties to the date of the petition for the failure of Debtor to file his tax returns on a timely basis. (Id.). Debtor objected to the IRS claim (Doc. 287), and the IRS objected to confirmation, but the IRS agreed to withdraw its objection to confirmation when the Debtor agreed to the Consent Order that resolved issues between theparties that were not dealt with in the plan. (Id.). Debtor's objection to claim remained pending, and Debtor was able to confirm his plan, which became final and was not appealed.

The Consent Order was executed by the parties and signed by the Court on December 17, 2010. It provided:

2. The IRS claim totals $2,020,697.01 and consists of unsecured priority tax claims totaling $671,318.55 ("IRS priority tax claims"), and unsecured general claims totaling $1,349,378.46("IRS unsecured general claims").

3. The IRS priority tax claims of $671,318.55 shall be allowed in full and paid in accordance with the terms of §§ 2.2 and 5.2 of the Confirmed Ohana Cabo LLC's Chapter 11 Plan of Reorganization As Amended ("Plan"). See Docs. 462 and 462-1.

4. The debtor shall preserve his existing objection to the IRS unsecured general claims pursuant to § 6.1 of the Plan, and said claims shall be deemed disputed within the meaning of § 3.2.2 of the Plan until resolution of such disputed claims through either settlement or adjudication to a Final Order (as defined in § 1.18 of the Plan). To the extent such disputed claims become Allowed (as defined in § 1.4 of the Plan), payment of said Allowed claims shall be made in accordance with §§ 3.2.2 and 6.2 of the Plan.

7. The Plan shall be modified to read, as follows:

Plan Default Relating to Taxes. Upon any default under the Plan relating to the non-payment of any Administrative Expense, Priority Tax Claims or Unsecured Claim, the administrative collection powers and rights of the United St a t e s shall be reinstated as they existed prior to the filing of the bankruptcy petition, including, but not limited to, the assessment of taxes, the filing of Notice of Federal Tax lien and the powers of levy, seizure and sale under Title 26 of the United States Code. See Plan, at § 11.9 (formerly § 11.8 (prior to amendment)).

The plan designated a specific amount of priority taxes to pay to state and federal agencies, and the IRS portion of that sum was $671,318.55. (Doc. 603 at 3)(citing Plan, § 1.36). On December 27, 2010, the IRS priority tax claim was paid in full, and the sum of $1,349,378.46 was escrowed for the unsecured tax claims according to the IRS final proof of claim oncedetermined. Other creditors were paid millions of dollars at consummation and allowed unsecured claimants, exclusive of the IRS, were paid over $3,000,000. (Id.). All of this was done pursuant to the confirmed Plan and Consent Order.

After confirmation, Debtor's objection to the IRS claim was set for...