In re Elstien
| Decision Date | 27 July 1999 |
| Docket Number | Bankruptcy No. 96 B 26589. |
| Citation | 238 BR 747 |
| Parties | In re Morris J. ELSTIEN, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Tom Vaughn, Chicago, IL, trustee.
Kerry M. Lavelle, Chicago, IL, for Debtor.
Two taxing authorities have moved for various forms of relief in this Chapter 13 case because the Debtor did not properly schedule their claims and falsely answered questions on his statement of financial affairs. Before filing his petition, Debtor Morris J. Elstien had been notified that the United States of America, on behalf of the Internal Revenue Service ("IRS"), proposed to assess a "trust fund recovery penalty" of $553,427.50, and the Illinois Department of Revenue ("IDR") had notified him of its claims for sales and trust fund taxes.1 Nevertheless, he did not disclose those facts in his schedules or statement of financial affairs. Disclosure of those claims would have revealed that the amount of unsecured claims against the Debtor rendered him ineligible for chapter 13 relief. Although one of the claimants, the IRS, had actual notice of this case in plenty of time to file a proof of claim and thereby protect its rights, the other, the IDR, did not.
The Debtor's false and misleading filings prejudiced the rights of both moving creditors and led this Court to confirm a plan in a case in which the Debtor was not eligible for relief. These facts constitute cause to dismiss this case under § 1307(c)2, and the Court will do so.
The Debtor filed a petition for relief under chapter 13 on October 7, 1996. As required by § 521 and Fed. R. Bankr.Pro. 1009(b), the Debtor filed schedules of assets and liabilities and a statement of financial affairs, in the official forms required by Rule 1009. The debts included in the Debtor's schedules were an unsecured priority claim of $50,000 owed the IRS and $58,813.91 owed general unsecured creditors.
The Debtor's chapter 13 plan called for payment of creditor claims over a term of 60 months. The Debtor's plan provided that "claims entitled to priority under 11 U.S.C. § 507 shall be paid in full in deferred cash payments as provided in the Petition . . ." In addition, the exhibits to the plan listed priority federal tax claims totaling $120,000. The Debtor would later explain that the total was comprised of a claim in the amount of $50,000 for 1996 estimated federal income taxes, and a claim in the amount of $70,000 for 1994 income taxes. (In fact, the scheduled 1994 tax claim was secured by a lien on the Debtor's residence, which was noted in the schedules, but that omission in the plan does not form the basis of the Court's decision to dismiss this case.) Nothing in the schedules or plan mentions any claim by the IDR.
In his statement of financial affairs, the Debtor answered "None" to question 16, which asked whether he had been a corporate officer or owned more than five percent of the securities of any corporation within the two years before the commencement of the case. The Debtor further stated in his response to question 4(a) that there were no suits or administrative proceedings then pending against him. Neither response was true. The Debtor had been the president and a major shareholder of A.S.A.P. Mail Service, Inc. ("ASAP") within the two-year period. Also, the Debtor was involved in administrative proceedings with both the IRS and the IDR with respect to ASAP's unpaid 1994 trust fund and sales taxes and related penalties at the time of his bankruptcy filing.
The meeting of creditors in the chapter 13 case was held on November 19, 1996. On November 20, 1996, the IRS filed a proof of claim, asserting a secured claim of $60,394.08 for 1994 income taxes. Several days later, the Debtor amended his schedule of unsecured priority claims to reflect three claims for taxes. Amended Schedule E listed the following claims and amounts: (1) "1994 Notice only" — $0.00, (2) "1996 Estimated Taxes" — $50,000.00, and (3) "1994 trust fund recovery penalty" — $10.00. The amended schedule did not name the business entity with primary responsibility for the trust fund taxes, nor is there any reason for listing it at $10.00; the Debtor had long before been told that the claim was for $553,427.50. Again, the IDR claim was not mentioned.
The IRS did not file a claim for the trust fund recovery penalty related to ASAP, and the IDR filed no claim at all. The bar date for filing proofs of claim in the case was February 18, 1997, and an order confirming the Debtor's plan was entered on March 10, 1997. After his plan had been confirmed, the Debtor filed an amended proof of claim on behalf of the IRS for $50,000.00 in 1996 estimated income taxes. Shortly thereafter, in a motion to amend his plan, the Debtor explained that the IRS had failed to file a proof of claim with respect to his 1996 estimated taxes and he wanted to ensure that the 1996 taxes would be included in the plan. This Court entered an order confirming the amended plan on June 2, 1997.
The IRS filed its "Motion for Relief," which includes a request for dismissal of the case, in December 1998. The IDR filed its motion asking for dismissal or relief from the automatic stay in May, 1999. The IDR has since abandoned its request for relief form the stay; it now limits its request to dismissal.
On August 30, 1995, more than a year before the Debtor filed his chapter 13 petition, the IRS informed the Debtor of a proposed assessment against him of $553,427.50, on account of employment taxes owed by ASAP for the third and fourth quarters of 1994. The Debtor protested the assessment in an October 24, 1995, letter, which triggered an IRS appeals process.
Several weeks after the Debtor filed his chapter 13 petition, the IRS employee handling the protest ("Appeals Officer") informed the Debtor's attorney that an appeals conference would be held on November 19, 1996. It is not clear whether the Debtor attended that conference, which would have been held on the same day as the § 341 meeting in his bankruptcy case. In any event, on December 4, 1996, the Appeals Officer sent the following letter (emphasis added) to the attorney representing the Debtor in the tax matter:
Per our telephone conversation, Mr. Elstien has filed a petition for Chapter 13 Bankruptcy. On the advice of the attorney handling the bankruptcy, Mr. Elstien does not want to exercise his appeal rights at this time. I have notified the collection officer who was assigned to this case. I want to make sure that you understand that if Mr. Elstien waives his appeal rights, the collection officer\'s determination that he is liable for the 100% penalty will stand. The tax will be assessed and only the collection process will be suspended until the bankruptcy proceedings are completed. Mr. Elstien must then pay the tax and file a claim.
The IRS Appeals Officer sent that letter more than two months before the last date for filing claims in this bankruptcy case, and three months before the Debtor's plan was confirmed. Therefore, at least one IRS employee with responsibility for and knowledge of the proposed trust fund recovery penalty against the Debtor knew in ample time to file a proof of claim and other pleadings that the Debtor had filed a bankruptcy petition.
The Debtor did not abandon his administrative appeal. Instead, on December 10, 1996, the Debtor's bankruptcy attorney submitted a power of attorney authorizing him to represent the Debtor with respect to the 1994 trust fund recovery penalty. On April 11, 1997, the IRS informed the Debtor of its determination that he was liable for the trust fund recovery penalty. The Debtor's attorney's April 21 letter stated that "we are currently reviewing Mr. Elstien's financial matters very carefully including his liabilities under the Chapter 13 plan and his debt limitations under the Chapter 13 plan to be able to resolve this matter with the Internal Revenue Service." April 21, 1997, was after the claims bar date and plan confirmation, but before confirmation of the amended plan. It was also about 20 months before the IRS filed the present motion, which is the IRS's first action in this case with respect the trust fund recovery penalty.
On June 11, 1997, the Appeals Officer informed counsel of her finding that the Debtor was responsible for payment of ASAP's trust fund taxes, and that she would recommend assessment of the penalty with respect to ASAP's unpaid liabilities for the third and fourth quarters of 1994. Counsel responded by submitting additional evidence and arguments in a letter of June 27, 1997. That letter concluded with the following comments:
This claim accrued prior to Mr. Elstien\'s filing of a Chapter 13 Bankruptcy petition. The Internal Revenue Service failed to timely file its claim for the above taxes on its behalf. Therefore, the Internal Revenue Service is barred from claiming such taxes. However, due to the costs of litigation and his desire to put this behind him, Mr. Elstien offers $15,000 to be paid through his bankruptcy proceedings to resolve the matter completely.
After the IRS notified the Debtor of its intent to assess the penalty, counsel again conveyed his belief that because of the Debtor's bankruptcy filing, the taxes could not be collected. In a letter of July 23, 1997, the Debtor's attorney stated as follows:
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