In re Ford
| Decision Date | 15 May 2020 |
| Docket Number | Case No. 19-05795-5-JNC |
| Citation | 617 B.R. 254 |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
| Parties | IN RE: Larry S. FORD, Crystal A. Ford, Debtors |
Allen C Brown, Allen C. Brown, PA, Winterville, NC, for Debtors.
ORDER DENYING OBJECTION TO CLAIM
The matter before the court is the Objection to Claim (No. 3) of the Internal Revenue Service ("IRS") filed by debtors Larry S. Ford and Crystal A. Ford (the "Debtors") on January 21, 2020 (Dkt. 13; the "Objection"). A response in opposition was filed by the IRS on February 2, 2020 (Dkt. 19; the "Response"). A hearing was held on April 1, 2020. Participating in it were attorneys Allen C. Brown for the Debtors and Dennis M. Duffy for the IRS.
The material facts are undisputed. The Debtors filed an initial petition under chapter 13 of the Bankruptcy Code on November 5, 2014, No. 14-06444-5-JNC ("Case #1") and a chapter 13 in it was confirmed in Case #1 on June 9, 2015 (No. 14-06444-5-JNC; Dkt. 27). Payments were missed and Case #1 was converted to chapter 7 on July 11, 2016 (No. 14-06444-5-JNC; Dkt. 51). In the interim, on November 23, 2015 (the "Assessment Date"), the IRS assessed an unpaid income tax claim against the Debtors for the period ending December 31, 2014 (the "2014 Tax").
The Debtors received a chapter 7 discharge in Case #1 on January 26, 2017 (the "Discharge Date"). The 2014 Tax was not paid in Case # 1 and the parties stipulate that it as a post-petition debt excluded from the Case #1 discharge. The Debtors filed their second and present chapter 13 case ("Case #2") on December 18, 2019, less than three years (1056 days) after the Discharge Date and more than three years (1485 days excluding leap day) after the Assessment Date.
The IRS filed Proof of Claim No. 3 (the "Proof of Claim") on January 6, 2020 in the amount of $24,184.70, comprised of an unsecured priority claim of $19,791.48 and an unsecured general claim of $4,393.22. The claim includes tax liabilities of the Debtors for tax years 2014, 2016, and 2017. The Debtors objected to the Proof of Claim, contending that the 2014 Tax debt1 should be treated as a general unsecured claim under § 507(a)(8)(A)(i) since it became due when assessed on November 23, 2015, more than three years prior to the filing of Case #2. In response, the IRS argues that because its ability to collect the 2014 Tax debt was stayed during the pendency of Case #1, the intervening 430 days between the Assessment Date and the Discharge Date does not enter into the three-year calculation. If correct, the resulting 1055-day period is less than three years (1095 days) and the 2014 Tax would be entitled to priority treatment under § 507(a)(8)(A)(i).
Although the issue has not been raised by either party, this court must first address this case in light of 11 U.S.C. § 1328(f). Section 1328 of the Bankruptcy Code addresses eligibility for discharge in a subsequent chapter 13 case. Its subsection (f) was added to the Bankruptcy Code in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). The new subsection (f) addresses time restrictions in cases where a debtor has recently filed a petition under Title 11 and received a discharge, as is the case here, stating:
11 U.S.C. § 1328(f).
Subsection (f) is clear in some respects but ambiguous in others. Most apparent is that debtors receiving a discharge in a prior chapter 7 case are eligible to receive a discharge in a subsequently filed chapter 13 case only after four years have passed since the filing of the initial chapter 7 case. Similarly, debtors who received a discharge in a prior chapter 13 case are eligible to receive a chapter 13 discharge in a subsequently filed chapter 13 case if two years have elapsed since the filing of the first case. However, the statute does not directly address the question of discharge eligibility when, as is the case here, a debtor files a chapter 13 petition, converts that case to chapter 7, receives a chapter 7 discharge, and subsequently files another chapter 13 case.2
Two interpretations are possible. The first is a literal reading of § 1328(f)(2), where it appears that the chapter under which a case is filed, not the chapter under which the discharged is granted, controls the right to a discharge in the latter case. The second is the so-called "plain meaning" analysis of § 1328(f), which requires that subsection (f) be read in conjunction with § 348(a). That section contemplates the effects of conversion, stating:
(a) Conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subsections (b) and (c) of this section, does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief.
11 U.S.C. § 348(a).
The majority of cases reviewing this issue since the enactment of BAPCPA support a reading that the discharge dates referenced in § 1328(f)(1) pertain to the chapter under which the discharge was entered rather than the case initiating chapter. Applying a literal interpretation of § 1328(f) would ignore § 348 of the Bankruptcy Code and lead to a contrary result.
Instructive on this point is the analysis contained in McDow v. Capers (In re Capers) , 347 B.R. 169, 172 (Bankr. D. S.C. 2006). There, the debtor contended that the two year prohibition on receiving a discharge under § 1328(f)(2) rather than the four year prohibition under § 1328(f)(1), was applicable to her new chapter 13 case because the first case was "filed" under chapter 13 and then converted to chapter 7. Id. The court rejected this purely mechanical recitation, holding that § 348(a) intervenes to require that conversion changes the chapter that it is deemed filed under. Id. See also In re Knighton , 355 B.R. 922, 926 (Bankr. M.D. Ga. 2006) (); and In re Davis , 489 B.R. 478, 481 (Bank. S.D. Ga. 2013). The Capers court reasoned that a reading of § 1328(f) cannot be read alone and must be consistent with § 348(a), under which a converted case is deemed to have been filed at the time the bankruptcy case was initially filed and before it was converted. Id. at 171-172. See also Resendez v. Lindquist , 691 F.2d 397 (8th Cir. 1982) (). The result, the court found, is consistent with the legislative history of § 1328(f). A mechanical reading made in a vacuum "would frustrate the policy that Congress sought to implement through the provisions of that section." Id. at 172.
McDow v. Sours (In re Sours) , 350 B.R. 261 (Bankr. E.D. Va. 2006), reached the same conclusion. In that case, the debtors filed a chapter 13 case that was later converted to chapter 7, where they received a discharge. Id. In the subsequent case, the debtors were denied a second discharge under § 1328(f) because, pursuant to § 348(a), they were deemed to have filed the prior chapter 7 case as of the date of the original chapter 13. Id. at 266. "Words of a statute must be read in their context and with a view to their place in the overall statutory scheme." Id. The court further stated, "Legislative history indicates that the purpose of § 1328(f) was to extend the time periods within which a debtor could receive a subsequent discharge, not to inadvertently create an avenue of avoidance for clever debtors." Id. at 268. Consequently, the Sours second chapter 13 case was not filed more than four years after filing of the prior case. Id. at 269.
Accepting the persuasive reasoning of the Capers and Sours courts, the 4-year waiting period contained in § 1328(f)(1) applies to the present case. Here, the Debtors received their discharge in Case #1 under chapter 7 of the Bankruptcy Code. The fact that they initially filed Case #1 under chapter 13 is irrelevant. Accordingly, the original filing date on November 5, 2014 is the petition date controlling eligibility for discharge, not the conversion date. Because the Debtors filed Case #2 more than four years after Case #1, a discharge in Case #2 is possible.
Section 507 of the Bankruptcy Code identifies certain unsecured claims that receive priority status in bankruptcy. One such claim is an income tax claim "for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition." 11 U.S.C. § 507(a)(8)(A)(i). The time period accruing after the filing of the petition is referred to as the three-year "lookback" period. Unpaid priority tax claims included in the three-year lookback period are generally excepted from discharge pursuant to 11 U.S.C. § 523(a)(1)(A). In a chapter 13 case, priority taxes must be paid in full. Thus, whether the tax claim at issue qualifies for priority status is vital in determining the treatment of tax claims under the ...
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