In re Cohen
| Decision Date | 13 November 2014 |
| Docket Number | No. 2:13–bk–26483–NB.,2:13–bk–26483–NB. |
| Citation | 522 B.R. 232 |
| Court | U.S. Bankruptcy Court — Central District of California |
| Parties | In re Saeed COHEN, Debtor. |
OPINION TEXT STARTS HERE
Ron Bender, Krikor J. Meshefejian, Kurt Ramlo, Beth Ann R. Young, Levene, Neale, Bender, Yoo & Brill L.L.P, Los Angeles, CA, for Debtor.
United States Trustee (LA), Dare Law, Hatty K. Yip, Office of the UST/DOJ, Los Angeles, CA, for Trustee.
Tax debts that arise during marriage are “community claims” in bankruptcy parlance, and they are payable from community property. In this case the debtor's wife argues that her interest in community property somehow ceased to be liable for those tax debts because, after she separated from the debtor, he entered into a settlement with the Internal Revenue Service (“IRS”). She cites no authority that is on point, and this court rejects her arguments. This court also holds that certain entities in which the bankruptcy estate holds an interest are entitled to interpled funds in litigation to which the IRS is a party, and sustains in part and overrules in part various objections to the claims asserted by the IRS.
In 1989 the debtor, Mr. Cohen (“Debtor”), was married to Ms. Fariba Cohen (“Ms.Cohen”). They separated in 2010 (the parties disagree on the precise separation date, but it makes no difference for purposes of this memorandum decision). See Dkt. 60 at 10:10–11; 97; 460 at 5:12. Just before their divorce trial was set to resume, Debtor filed his voluntary chapter 11 bankruptcy petition on June 25, 2013 (the “Petition Date”). Dkt. 60 at 10:16–19. It is undisputed that by this time Debtor and Ms. Cohen had already incurred an astounding total of more than $13 million in legal fees in connection with their divorce.
Ms. Cohen has sought relief from the automatic stay (Section 362(a)) to continue her divorce litigation in State court. She has also argued that the automatic stay does not apply to some of the divorce proceedings, and that this court must or should abstain. She now reiterates many of these arguments. See, e.g., dkt. 242 at 15:18–21:12. The official committee of creditors holding unsecured claims (the “Committee”) and Debtor oppose that relief.
This court has rejected Ms. Cohen's arguments before, and does so again. Those arguments are not properly raised at this time ( see dkt. 256 at 13:1–16:21) (Committee's Brief) and alternatively this court rejects the arguments on the merits, for the same reasons as before. Among other things, the divorce trial would eat up more millions of dollars on litigation that very likely would be irrelevant, such as allocation of assets between Debtor and Ms. Cohen when, in all likelihood, there will be few or no assets left to allocate. See, e.g., dkt. 60, 134, 135, 223, 256 at 16:22–18:14, and Adv. 2:14–ap–01484 dkt. 16 & 17.
On June 3, 2014, this court issued a scheduling order pursuant to a stipulation among Debtor, Ms. Cohen, the Committee, and the IRS. See Dkt. 375, 394, 407, 448. This memorandum decision addresses Issues 1(a), 1(b), and 1(c) in that scheduling order:
Issue # 1(a)—whether any of the claims asserted by the IRS against Debtor's estate are an allowed “community claim” as defined in Section 101(7), or if instead they are the separate debt of Debtor (or of Ms. Cohen) payable from property other than the kind identified in Section 541(a)(2);
Issue # 1(b)—resolution of two adversary proceedings: Lighton Property, LLC v. Cohen, 2:14–ap–01194–NB (“ Lighton ”), and Nazarian v. Cohen, 2:14–ap–01195–NB (“ Nazarian ”); and
Issue # 1(c)—resolution of the Committee's objection to the IRS claims asserted in its amended proof of claim 3–2 (the “IRS Claim”).
In connection with the foregoing issues this court has reviewed the parties' briefs in the bankruptcy case (dkt. 460–467), the documents referenced therein including in the Lighton and Nazarian adversary proceedings, the documents referenced below, and all other documents that this court has deemed relevant. For the reasons set forth below this court is not persuaded that it is necessary to hold an evidentiary hearing on any of these issues.
Some issues have been presented through formal motions for summary judgment, and others are presented as claim objections, all as modified by the scheduling order. The parties are all familiar with the standards for determining if there are genuine issues of material fact ( see, e.g., Lighton Adv. dkt. 10, Ex. 33), and this court will not repeat them here.
The IRS Claim is for over $8 million. The IRS asserts that most of this is a community claim that arises from 2003 through 2008 when Debtor and Ms. Cohen were married.
There is no dispute that Amp Plus, Inc. dba Elco Lighting (“Elco”) and the income from it are community assets and have been at all relevant times. See Lighton Adv. dkt. 10, Ex. 33 (ex. 2 & 3 thereto). During the marriage, multiple foreign bank accounts were used “to hold unreported income from [Elco],” aggregating approximately $35 million by 2008. Dkt. 461 at 6:7–14.
Taxpayers who have foreign bank accounts with over $10,000 at any time during a calendar year are required to disclose the existence of these accounts to the IRS on a foreign bank account report (“FBAR”). 31 U.S.C. § 5314. See dkt. 461 at 7:12–17. For 2003 through 2008, Debtor and Ms. Cohen failed to file FBARs. To the contrary, they filed joint income tax returns verifying—incorrectly—that they did not have any such accounts. According to Debtor, this subjectedthem to possible penalties of $58 million or more. Dkt. 461 at 8:24–25.2
In 2011, after Debtor and Ms. Cohen separated, he participated in a disclosure and settlement program, the Offshore Voluntary Disclosure Initiative (“OVDI”), and entered into a “closing” agreement (settlement) with the IRS for approximately $8.7 million. The IRS characterizes this as a “miscellaneous penalty” pursuant to 26 U.S.C. § 7121. Dkt. 245 at 5:6–12; and see Proof of Claim 3–2.
Ms. Cohen notified the IRS that she was opting out of the OVDI. Instead she has attempted (so far unsuccessfully) to assert an entitlement to an “innocent spouse” defense under 26 U.S.C. § 6015. See Nazarian Adv. dkt. 12 at 3:2–3 (Ms. Cohen's Brief); see also dkt. 465 at 6 n. 8 (Committee Brief) and dkt. 245 at 12:20–13:2 (IRS Brief).
Meanwhile, before this bankruptcy court, Ms. Cohen has argued that the IRS Claim arises not from the 2003 through 2008 failure to file FBARs and false statements on the joint tax returns, but instead from the post-separation OVDI agreement, and therefore, she asserts, the debt was not “incurred” during marriage and the community property of the bankruptcy estate is not liable for it. In support of this argument, she asserts among other things that there is no such thing as the “miscellaneous penalty” claimed by the IRS, so the debt allegedly must have been incurred when the post-separation OVDI contract became effective.
The Lighton and Nazarian interpleader actions have been referred to this bankruptcy court. See Lighton Adv. dkt. 10, Ex. 60; Nazarian Adv. dkt. 10, Ex. 76. In Lighton the issue is who, as between the IRS, Ms. Cohen, and Debtor or his bankruptcy estate is entitled to rents paid by Elco to its landlord and affiliate, Lighton Property, LLC (“Lighton”). In Nazarian the issue is who is entitled to repayment of approximately $1 million that was loaned to plaintiff Nazarian in 2009, either from Elco or from Debtor or both. The IRS has filed motions for summary judgment in both actions. See Lighton Adv. dkt. 10, Ex. 33; Nazarian Adv. dkt. 10, Ex. 28.
The IRS Claim consists of (1) a secured claim for $8,208,469.29 based on the OVDI settlement and (2) certain other unsecured claims relating to Ms. Cohen's tax liabilities for years 2009 through 2011 and Mr. Cohen's tax liability for tax year 2012. The Committee has objected to the IRS Claim on various grounds, the other parties have filed briefs, and some of the issues initially raised by the Committee are no longer contested by the IRS. See dkt. 219, 242, 245, 254, 256.
The Supreme Court has distinguished between (a) bankruptcy courts' broad subject matter jurisdiction and (b) their narrower constitutional and statutory “authority” to issue final judgments or orders. Whenever the bankruptcy court lacks such authority then its determinations constitute only proposed findings of fact and conclusions of law that are subject to de novo review by an Article III court. See Stern v. Marshall, 564 U.S. 2, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011); Law v. Siegel, ––– U.S. ––––, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014); In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 567 (9th Cir.2012), aff'd sub nom Executive Benefits Ins. Agency v. Arkison, ––– U.S. ––––, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014)Executive Benefits Ins. Agency v. Arkison, ––– U.S. ––––, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014). This court has an independent duty to examine these issues. See In re Rosson, 545 F.3d 764, 769 n. 5 (9th Cir.2008) (subject matter jurisdiction); In re Pringle, 495 B.R. 447, 455 (9th Cir. BAP 2013) (authority under Stern).
Bankruptcy courts are “units” of the federal district courts, to which all bankruptcy proceedings have been referred or local rule or standing order in each district. See28 U.S.C. § 151; Cent. Dist. Cal. General Order No. 13–05; LBR 5011–1(a). As such, this court has jurisdiction over all civil proceedings (1) “arising under title 11,” i.e., any proceedings to enforce rights created by the Bankruptcy Code, (2) “arising in” a bankruptcy case, i.e., other proceedings that would not exist outside a bankruptcy case, such as case administration, or (3) “related to” a bankruptcy...
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