In re CNS, Inc.
| Decision Date | 18 September 2000 |
| Docket Number | No. 4:99CV1589. Bankruptcy No. 92-41296.,4:99CV1589. Bankruptcy No. 92-41296. |
| Citation | 255 BR 198 |
| Parties | In re CNS, INC., b/d/a Potters Medical Center, Debtor. United States of America, Appellant, v. Richard G. Zellers, Trustee for Gene Samuelson and Samuelson, and Anne Piero Silagy, Trustee for CNS, Inc., Appellees. |
| Court | U.S. District Court — Northern District of Ohio |
This matter is an Appeal from a collateral order, or in the alternative, an interlocutory order1 of the United States Bankruptcy Court for the Northern District of Ohio entered on May 18, 1999. This Court has jurisdiction pursuant to 28 U.S.C. § 158(a). The Court reviews the Bankruptcy Court's findings of fact using the clearly erroneous standard and its conclusions of law de novo. Industrial Equipment Co. v. Emerson Electric Co., 554 F.2d 276 (6th Cir.1977).
CNS, Inc., d/b/a Potter's Medical Center ("the Debtor"), is a corporate entity, the common stock of which was wholly owned by Drs. Gene and Marta Samuelson, debtors in consolidated Case Number 90-40722 ("the Samuelson proceeding"), for whom Richard G. Zellers is the Trustee. The Appellant filed a request for the payment of administrative expenses incurred by the Debtor, in the amount of $799,897.86 under 11 U.S.C. § 5032 based upon the operation of Potter's Medical Center by an entity under a purchase agreement between that entity, the Debtor and Zellers. The purchase agreement was canceled by order of the Bankruptcy Court upon the purchasing entity's repeated failure to carry out the terms of the purchase agreement or to account to the Court for funds received by it during the operation of Potters Medical Center.
The claim involved payroll taxes of the Debtor for the years 1992, 1993, and 1994 which were assessed by the Internal Revenue Service ("IRS"). More particularly, the claim is for Federal Insurance Contributions Act ("FICA") and income taxes withheld from wages and salaries paid by the Debtor, as well as the employer's portion of the FICA, from the last quarter of 1992, all four quarters of 1993, and the first quarter of 1994, plus Federal Unemployment Tax Act ("FUTA") taxes for the years 1993 and 1994.
On January 28, 1998, Zellers filed a motion for an Order permitting him to file his "Objection To Claim of the United States of America" (Dkt.# 216-1). In support of his motion, Zellers stated that the Debtor is not liable to the Appellant "due to the fact that said tax obligations are those of Potters Medical Center Partnership, Ltd., and its general partners, not the Debtor, pursuant to the Orders of this Court." A one-page Order was filed, bearing a file stamp with the same date and time as the motion, granting Zellers' motion to file his objection (Dkt.# 217-1). On the same date, Zellers' Objection was filed (Dkt.# 218-1).
In response to Zellers' objection, the Appellant filed "Appellant's Motion to Dismiss Zellers' Objection to IRS Claim and Memorandum in Support Thereof." In its motion, the Appellant argued that Zellers lacked standing to object to the claim of the Appellant and that, in any event, there was no bankruptcy purpose since the estate was insolvent.
The Bankruptcy Court held a hearing regarding Zellers' objection and Appellant contends that Zellers' only sought to determine whether he was personally liable for an assessment made pursuant to 26 U.S.C. § 66723 in regard to the wages of the employees of the debtor. On May 18, 1999, the Bankruptcy Court issued the Order upon which this appeal is based.
The Bankruptcy Court ruled, in pertinent part, as follows:
Zellers has been personally assessed for the taxes claimed to be due from the purchasing entity\'s operation of Potters Medical Center. Zellers has objected to the proof of claim filed by the Internal Revenue Service. The Trustee for the Debtor in this case and the Internal Revenue Service contest the standing of Zellers to object to the proof of claim. The assessment of Zellers by the Internal Revenue Service is completely intertwined with this proceeding and it does not appear to this Court that the assessment against Zellers can be fully resolved in any other forum but here. The objections are overruled. The Clerk shall set a status conference at the earliest date to determine what further proceedings should be undertaken. The parties should be prepared to address, inter alia, whether the Court should enter an order of recusal if it appears that the undersigned is or may be called as a witness in the proceeding.
Bankr.No. 92-41296, (Dkt.# 281-1), Order, pp. 1-2 ("the May 18th Order") (Emphasis added).
Appellant states that the Bankruptcy Court lacks subject matter jurisdiction over Zellers' personal liability under § 6672. In his Response Brief, Zellers states, "The objection to the claim filed by the United States, which the Bankruptcy Court determined could, or more appropriately was required to be heard by it, did not, could not, and never contemplated the adjudication of any issue other than the obligation of CNS, Inc., the Chapter 7 debtor against whom the United States had filed its claim." Response Brief (Dkt.# 19) at p. 5.
Zellers acknowledges that Response Brief at p. 5. Zellers then dismissed the references to Zellers' § 6672 tax liability in the May 18th Order as "dicta," because "that liability was not before the Court in any manner, shape, or form." Response Brief at p. 6.
On the contrary, it is the opinion of this Court that the May 18th Order clearly indicates that the Bankruptcy Court intended to rule on the validity of the IRS assessment against Zellers because it was completely intertwined with the Chapter 7 bankruptcy of CNS, Inc. and because "it did not appear that the assessment against Trustee Zellers could be fully resolved4 in any other forum." (Emphasis added) However, as the Appellant avers and the Appellee concedes, the Bankruptcy Court does not have subject matter jurisdiction over Zellers' personal tax liability.
The subject matter jurisdiction of bankruptcy courts over tax proceedings is derived from the jurisdiction of the federal district courts under 28 U.S.C. § 1334, headed "Bankruptcy cases and proceedings." Section 1334(a) provides that the district courts shall have original and exclusive jurisdiction of all cases under Title 11 of the United States Code. Section 1334(b) provides that the district courts shall have original but not exclusive jurisdiction of all civil proceedings "arising under" Title 11, or "arising in" or "related to" cases under Title 11. 28 U.S.C. § 157(a) states that "each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 shall be referred to the bankruptcy judges for the district."
The Sixth Circuit has held that a bankruptcy court's jurisdiction over a proceeding involving a non-debtor, Zellers, in this case, is determined solely by reference to 28 U.S.C. § 1334(b). In re Wolverine Radio Co., 930 F.2d 1132, 1141 (6th Cir. 1991). The test of whether there is jurisdiction under Section 1334(b), and consequently whether there is jurisdiction to determine Zellers' personal tax liability, is whether a matter is "at least `related to' the bankruptcy." A matter is "related to" a case under Title 11 if "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." Id. at 1142 (Quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir.1984)).
The mere fact that there may be some common issues of fact between the tax liability of Zellers and the estate of CNS, Inc., does not bring the matter within the scope of Section 1334. In re Dow Corning Corp., 86 F.3d 482, 489 (6th Cir. 1996). In Quattrone Accountants, Inc. v. IRS, 895 F.2d 921 (3rd Cir.1990), a case analogous to the case sub judice, the Third Circuit found that an assessment under 26 U.S.C. § 6672 was not "related to" a corporate bankruptcy case. Id. at 926. In this case, as in Quattrone, whether or not Zellers' is personally liable for an assessment under 26 U.S.C. § 6672 could not have any effect on the estate. Accordingly, it is the opinion of this Court that the Bankruptcy Court lacks jurisdiction over Zellers' personal liability under § 6672.
Assuming arguendo that the Bankruptcy Court has jurisdiction to determine Zellers' personal liability under § 6672 pursuant to 1334(b), 28 U.S.C. § 1334 does not constitute a waiver of the United States' sovereign immunity.
The United States, as sovereign, may not be sued without its consent, and the terms of its consent define the court's jurisdiction. United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 47 L.Ed.2d 114 (1976). Any waiver of the federal Government's immunity to suit must be explicit and must be strictly construed. Soriano v. United States, 352 U.S. 270, 276, 77 S.Ct. 269, 1 L.Ed.2d 306 (1957).
In response to the argument that Alaska's Eleventh Amendment immunity from suit was abrogated by 28 U.S.C. § 1262, a jurisdictional grant which gives district court jurisdiction over "all civil actions, brought by any Indian tribe . . . arising under the Constitution, laws, or treaties of the United States", the Supreme Court ruled: Blatchford v. Native Village of Noatak, 501 U.S. 775, 786, 111 S.Ct. 2578, 115 L.Ed.2d 686 (1991).
Section 106 of the Bankruptcy Code addresses the waiver of the sovereign immunity in bankruptcy cases by "governmental units," including, federal, state and local governments. See 11...
To continue reading
Request your trial