In re Cummings
| Decision Date | 28 November 2007 |
| Docket Number | No. 07-80598-CIV-GOLD/TURNOFF.,07-80598-CIV-GOLD/TURNOFF. |
| Citation | 381 B.R. 810 |
| Parties | In re Susan CUMMINGS, Debtor. Patricia Dzikowski, as Disbursing Agent; Dzikowski & Walsh; and Susan Cummings, Appellants, v. United States of America, through the Internal Revenue Service, Appellee. |
| Court | U.S. District Court — Southern District of Florida |
Edward Marod, West Palm Beach, FL, for Susan Cummings.
John Walsh, Ft. Lauderdale, FL, for trustee, Patricia Dzikowski.
Frank Dale, Deborah Morris, United States Dept. of Justice, Tax Division, Washington, DC, for United States/IRS.
ORDER REVERSING BANKRUPTCY COURT'S ORDER DENYING APPELLANT'S ORDER TO COMPEL THE INTERNAL REVENUE SERVICE TO RETURN ESCROWED FUNDS DISBURSEMENT; CLOSING APPEAL; AND RETAINING JURISDICTION ON ISSUES OF ATTORNEYS' FEES, COSTS, AND SANCTIONS
THIS CAUSE comes before the Court upon the consolidated appeals of Disbursing Agent Patricia Dzikowski, Administrator Creditor Dzikowski & Walsh, and Debtor Susan Cummings seeking review of the Bankruptcy Court's Orders: (1) Denying Patricia Dziwoski's Motion to Compel the Internal Revenue Service ("IRS") to Return Escrowed Funds Disbursement (hereinafter, the "Motion to Compel"); and, (2) Denying Motion to Reconsider Order Denying Motion to Compel.
I held a hearing on the appeal on Friday, November 2, 2007. In addition, I have reviewed Appellants Patricia Dzikowski and Dzikowski & Walsh's joint initial brief and Appellant Susan Cummings' initial brief, the answer brief from Appellee IRS, and Appellants' reply briefs, along with the relevant case law, and I have made an independent review of the record. Upon review, I reverse the bankruptcy court's rulings that Appellant Patricia Dzikowski ("P. Dzikowski" or "Disbursing Agent") does not have standing to bring the Motion to Compel and that the doctrine of res judicata precludes the relief sought in the Motion to Compel. I further conclude that there is sufficient evidence in the record to establish, as a matter of law, that Appellants have standing to bring the Motion to Compel and the instant Appeal. Finally, I conclude that Appellants' Motion to Compel must be granted as a matter of law because, as discussed below, the "law of the case" doctrine, judicial estoppel and the proper application of res judicata preclude the IRS from arguing otherwise.
Susan Cummings ("Cummings" or "Debtor") and her former spouse, Lawrence Cummings ("Mr. Cummings"), filed a joint federal income tax return for the 1994 tax year which reflected an unpaid tax obligation. The Debtor filed for divorce from Mr. Cummings in March 1995; the divorce was finalized in May of 1996. An escrow account ) was established as part of the marital settlement agreement and funded with the proceeds from the sale of certain real estate properties. The proceeds generated from the sales were sufficient to satisfy the 1994 tax obligation in its entirety, including interests and penalties. (DE 3-5 at 50).1 The right to the funds on the account were turned over to the IRS to be applied as payment of the joint marital tax obligation.
Subsequent to the divorce, Mr. Cummings filed a Chapter 11 bankruptcy petition with the bankruptcy court. Mr. Cummings then sought authorization to invade the First Escrow Account and use the funds for a purpose other than satisfaction of the 1994 tax obligation. Over the objection of the Debtor, but with the agreement and consent of the IRS, Mr. Cummings was permitted to use One Hundred Thousand ($100,000.00) Dollars to satisfy a delinquent child support obligation.
On October 2, 1996, the IRS received Six Hundred Fourteen Thousand Three Hundred Eighty Nine and 57/100 ($614,389.57) Dollars from the First Escrow. Account. As a result of the monies withdrawn by Mr. Cummings, the First Escrow Account no longer contained sufficient funds to satisfy the IRS's claim. Specifically, the $614,389.57 satisfied the entire 1994 tax liability, but not the penalties and interests which accrued during the pendency of the proceedings.
On November 13, 1996, the United States filed a Notice of Federal Tax Lien with respect to Ms. Cummings' alleged unpaid tax obligation for the 1994 tax year. The lien attached to all of Ms. Cummings' properties and interests in properties, including her homestead residence at 251 Jungle Road, in Palm Beach, Florida (the "Jungle Road Property").
On November 30, 1998, Ms. Cummings filed her own Chapter 11 bankruptcy petition. The bankruptcy court granted Ms. Cummings' request for leave to sell the Jungle Road property free and clear of liens, with liens to attach to the proceeds. The proceeds of the sale were used to fund an escrow account ("Escrow Account Two") to be held by Patricia Dzikowski as Disbursing Agent and be used to satisfy allowed claims under Ms. Cummings' Plan of Reorganization. The bankruptcy court approved Ms. Cummings' First Amended Chapter 11 Plan of Reorganization ("Confirmed Plan") by its Confirmation Order, dated May 16, 2001. (CP 229). The Confirmed Plan named Ms. Cummings as Debtor-in-Possession. (CP 204 § 1.25).
The Confirmed Plan defined allowed claim as follows:
"Allowed" when used with respect to a claim (other than an administrative claim, a disputed claim or a claim which is not allowed) shall mean a claim or that portion of a claim: (i) which has been scheduled (other than claims set forth in the Debtor's schedules as contingent, unliquidated or disputed) or (ii) timely filed with the Court pursuant to Rule 1007(b) as to which no objection to the allowance thereof has been interposed within any applicable period or limitation fixed by the Code, Rule 3001 or a Final Order. Unless otherwise specified in the Plan, Allowed Claim shall not include interest on the amount of such claim from and after the petition claim.
(CP 204 § 1.2).
The IRS and Tim Givens Building & Remodeling, Inc. ("Tim Givens") each asserted claims against the Debtor secured by the Jungle Road property and the sales proceeds. The Confirmed Plan, provided that the Escrow Account Two would be held and to the extent these claimants were found to have valid claims, these funds would be used first to satisfy the IRS claim in the amount allowed; then used to pay the allowed claim of Tim Givens; and to the extent there were funds remaining, the funds would be used to pay allowed administrative expenses, including those of Appellant Dzikowski & Walsh.
The bankruptcy court determined that the amount of the allowed Tim Givens claim was Forty Two Thousand Six Hundred Sixteen and 37/100 ($42,616.37) Dollars. The IRS claimed that Debtor was indebted to the United States for an assessed, unpaid federal tax liability of One Hundred Ninety Thousand Thirty Six and 96/100 ($190,036.96) Dollars for the 1994 tax year. Ms. Cummings disputed the IRS claim on the basis that she had satisfied this claim through the monies deposited in the First Escrow Account.
As to the disputed IRS claim, § 5.1 of the Confirmed Plan provides that:
The Internal Revenue Service's Secured Claim will become an Allowed Claim upon the entry of a Final Order on the Debtor's objections to claims or in any other action brought by the Debtor to determine the amount of the Secured Claim of the Internal Revenue Service.
(CP 204, § 5.1.1). The Confirmed Plan also provided that: "Notwithstanding any other provision of the Plan, no payment or Distribution shall be made with respect to any Claim to the extent it is a Disputed Claim unless and until such Disputed Claim becomes an Allowed Claim." (CP 204, § 7.2).2
On November 1, 1999, Ms. Cummings sought innocent spouse relief from the IRS in accordance with 26 U.S.C. § 6015, claiming that she should not be obligated to pay the taxes arising from the 1994 joint income tax return. On July 11, 2000, the IRS denied Debtor's request. The IRS's Appeals Office affirmed the denial.
After exhausting her administrative remedies, Debtor filed an adversary proceeding in the bankruptcy court seeking a declaration that the IRS's claim was invalid and should not be allowed. See Susan Cummings v. United States, Adv. No. 02-3300-BKC-SHF-A (Bankr.S.D.Fla.) (filed on October 11, 2002). In the Adversary Proceeding, Debtor argued that she should be entitled to relief from the tax obligation for two reasons: (1) Debtor was an innocent spouse under 26 U.S.C. § 6015; and, (2) the IRS was estopped from pursuing the Debtor for payment of these funds both because she had already remitted payment through the funding of the First Escrow Account and because the IRS, through its consent to allow Mr. Cummings to use monies in the First Escrow Account for a purpose other than payment of the tax for which the account was established, in effect made a loan to Mr. Cummings. (Adv. 1; Adv. 23). Ultimately, the bankruptcy court ruled in Ms. Cummings' favor.
During the pendency of the adversary proceeding, the IRS and Tim Givens filed a "Joint Motion of the United States of America and Tim Givens Building & Remodeling, Inc., to Compel Distribution of Funds and to Dismiss or Convert the case to Chapter 7." ("Joint Motion"). In the Joint Motion, the IRS stated that granting the premature "distribution would be without prejudice to Debtor seeking a refund of the amount paid." (CP 258, ¶ 15). At the June 10, 2003 hearing on the Joint Motion, Tim Givens' Attorney also stated: "the distribution would be without prejudice to debtor seeking refund of the amount paid." (CP 287 at 9). The IRS was present at the hearing and did not object or correct the statements. In addition, Mr. Lortie, the attorney for the IRS, stated: ...
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