In re Fowler, 03-16112.

• Decision Date: 12 January 2005
• Docket Number: No. 03-16112.,03-16112.
• Citation: 394 F.3d 1208
• Parties: In re Chelcey R. FOWLER; In re Lynda Fowler, Debtors, United States of America, Plaintiff-Appellee, v. Chelcey R. Fowler; Lynda Fowler, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

394 F.3d 1208

In re Chelcey R. FOWLER;

In re Lynda Fowler, Debtors,

United States of America, Plaintiff-Appellee, v. Chelcey R. Fowler; Lynda Fowler, Defendants-Appellants.

No. 03-16112.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 16, 2004.

Filed January 12, 2005.

Eric Slocum Sparks, Law Offices of Eric Slocum Sparks, P.C., Tucson, AZ, for the appellants.

Thomas J. Clark and Ellen Page Delsole, United States Department of Justice, Tax Division, Washington, D.C., for the appellee.

Appeal from the United States District Court for the District of Arizona Cindy K. Jorgenson, District Judge, Presiding. D.C. No. CV-02-00507-CKJ.

Before: RYMER, TALLMAN, and BEA, Circuit Judges.

TALLMAN, Circuit Judge:

The issue in this case is the effect of a conversion from Chapter 11 to Chapter 13 bankruptcy proceedings on the priority status of a postpetition, preconversion administrative expense claim. The Fowlers appeal the district court's order reversing the bankruptcy court, and determining that 11 U.S.C. § 348(d) requires that federal employment taxes, incurred as administrative expenses in operating their nursing home business after the Fowlers filed for Chapter 11 bankruptcy protection, but before they converted to Chapter 13, retain their priority status as administrative expenses under 11 U.S.C. § 503(b). We affirm the district court and hold that such a claim retains its administrative expense priority upon conversion.

I

In May 1998, Chelcey and Lynda Fowler filed for Chapter 11 bankruptcy protection. While in Chapter 11, the Fowlers continued the operation of their adult long-term care facility, causing the bankruptcy estate to incur additional Federal Insurance Contribution Act and Federal Unemployment Tax Act employment tax liabilities and attendant penalties and interest on those debts. In December 1998, the Internal Revenue Service (IRS) filed a "Request for Payment" of this new debt as administrative expenses of the estate under §§ 503(a)-(b) and 507(a)(1).¹ The Chapter 11 estate continued to accrue employment tax liabilities through the fourth quarter of 1999. During this same period, the IRS amended the Request to reflect increases to the accumulating debt. The Fowlers did not file an objection to these Requests.

In May 2001, the Fowlers moved to convert their bankruptcy estate from Chapter 11 to Chapter 13. They stated that they no longer operated their long-term care facility and were now employed by others, and thus met Chapter 13 eligibility requirements. The bankruptcy court granted their conversion to Chapter 13. In June 2001, after conversion but prior to confirmation of the Chapter 13 plan, the IRS filed an amendment to the December 1998 "Request for Payment" (the "Amended Request"), to reflect additional interest and penalties which had accrued while the estate was still proceeding under Chapter 11. The amendment did not reflect any tax liability accruing after the conversion.

The Fowlers argued that the debt evidenced by the Amended Request should no longer be treated as an administrative claim, but as a prepetition unsecured priority claim under § 1305, a special Chapter 13 provision. The bankruptcy court agreed and held that a tax claim filed during the pendency of a Chapter 13 petition must be prioritized as if the claim had arisen prepetition because § 1305(b) states that claims for taxes filed under § 1305(a) are allowed or disallowed "the same as if such claim had arisen before the date of filing of the petition." The bankruptcy court noted that filing a proof of claim under § 1305 is voluntary, and therefore the IRS could have avoided application of § 1305 by not filing a claim after the conversion.

The district court reversed and held that such a claim continued to be an administrative expense because § 348(d) specifically exempts administrative expenses from prepetition treatment in a conversion. The district court found that § 348(d) is the only section that addresses the issue of administrative expenses in a conversion from one Chapter to another and that § 1305 did not apply. The Fowlers subsequently filed a motion for rehearing under Fed. Bankr.R. 8015, which the district court denied. They now appeal both the reversal of the bankruptcy court ruling on the appropriate priority of the tax liability and the denial of the motion for reconsideration.

II

As a threshold matter, we must establish that jurisdiction over the Fowlers' appeal is proper. Under 28 U.S.C. § 158(a), we have jurisdiction to hear appeals "from final judgments, order, and decrees" entered by a district court on appeal from a bankruptcy court. Because of the unique nature of bankruptcy proceedings, this court applies a pragmatic approach to determining finality. Saxman v. Educational Credit Mgmt. Corp. (In re Saxman), 325 F.3d 1168, 1171 (9th Cir.2003); Dawson v. Wash. Mutual Bank (In re Dawson), 390 F.3d 1139, 1145 (9th Cir. 2004).

Two tests have developed in the Ninth Circuit to address the question of finality for bankruptcy proceedings. See In re Olshan, 356 F.3d 1078, 1082-83 (9th Cir.2004). Under Vylene Enters., Inc. v. Naugles, Inc. (In re Vylene Enters., Inc.), 968 F.2d 887, 895-96 (9th Cir.1992), we apply a four-pronged test that considers: "(1) the need to avoid piecemeal litigation; (2) judicial efficiency; (3) the systemic interest in preserving the bankruptcy court's role as the finder of fact; and (4) whether delaying review would cause either party irreparable harm." In re Olshan, 356 F.3d at 1082 (internal citation omitted). Under Bonner Mall P'ship v. U.S. Bancorp Mortgage Co. (In re Bonner Mall P'ship), 2 F.3d 899, 904 (9th Cir.1993), we consider whether the central issue raised on appeal "is legal in nature and its resolution either (1) could dispose of the case or proceedings and obviate the need for factfinding; or (2) would materially aid the bankruptcy court in reaching its disposition on remand." In re Olshan, 356 F.3d at 1082-83 (quoting In re Bonner Mall P'ship, 2 F.3d at 904).

Under either test, the district court order here is sufficiently final for our jurisdiction over this appeal to be proper. There are no facts in dispute and the remand requires only that the Chapter 13 plan conform to the legal determination on priority. Deciding the legal question now would be judicially efficient, would not interfere with the bankruptcy court's fact finding role, and would avoid additional harm to the Fowlers and their creditors due to the delay in closing the bankruptcy proceedings. See In re Vylene Enters., 968 F.2d at 895-96. The bankruptcy proceedings will be controlled by the question of law before us regarding the priority of the IRS claim and deciding the issue now would materially aid the bankruptcy court. See In re Bonner Mall P'ship, 2 F.3d at 904; see also In re Olshan, 356 F.3d at 1083 (accepting jurisdiction where the appeal concerned primarily a question of law and resolution of the question would materially aid the bankruptcy court's determination of the extent to which a claim should be allowed). We therefore hold that we have jurisdiction over the Fowlers' appeal.

III

We review de novo the district court's decision on appeal from a bankruptcy court. In re Saxman, 325 F.3d at 1172. The bankruptcy court's conclusions of law, including interpretations of the bankruptcy code, are reviewed de novo and its factual findings are reviewed for clear error. See Einstein/Noah Bagel Corp. v. Smith (In re BCE West, L.P.), 319 F.3d 1166, 1170 (9th Cir.2003). There are no factual questions before us. The Fowlers do not challenge classification of the employment tax debt as an administrative expense incurred by the estate prior to the filing for conversion to a Chapter 13 bankruptcy. The question before us is whether the debt lost its administrative expense status upon conversion.

The question of status is important because it affects the priority of the debt in the bankruptcy proceeding. First priority is granted, inter alia, to administrative expenses of the bankruptcy estate. See § 507(a)(1). Postpetition tax debt may constitute an administrative expense if it relates to "any tax incurred by the estate," except certain defined taxes not applicable here. § 503(b)(1)(B)(i). The first priority accorded to administrative expense taxes also extends to interest and penalties that accrue on that debt. See Towers v. United States (In re Pacific-Atlantic Trading Co.), 64 F.3d 1292, 1298 (9th Cir.1995); see also United States v. Ledlin (In re Mark Anthony Constr., Inc.), 886 F.2d 1101, 1104-08 (9th Cir.1989). A Chapter 13 confirmation plan must provide that administrative expenses, including penalties and interest, be paid in full as priority claims. See § 1322(a)(2); see also In re Mark Anthony Constr., Inc., 886 F.2d at 1106, 1108.

In contrast, a tax which is prepetition and unsecured is generally given eighth priority. § 507(a)(8). These eighth priority tax claims are also paid in full over the term of the Chapter 13 plan but without interest. See generally § 1322(a); see also In re Dorf, 219 B.R. 498, 501 n. 3 (Bankr.N.D.Ill.1998) (finding that § 1322(a)(1) does not require payment of interest); In re Smith, 196 B.R. 565, 569 (Bankr.M.D.Fla.1996) (finding that § 1322(a)(2) does not require the payment of postpetition interest). Therefore, the most important distinction between administrative expense tax claims and unsecured priority tax claims in Chapter 13 is that the IRS cannot recover interest on prepetition unsecured priority tax claims.

The district court relied on § 348(d) to hold that postpetition, preconversion administrative expenses retain their status. Section 348(d) provides that:

A claim against the estate or the debtor that arises after the order for relief but before conversion in a case that is converted under section 1112 ..., other than a claim specified in section 503(b) of this title, shall be treated for all purposes as if such...