In re Hilal, Case No: 05-36909 (Bankr. S.D. Tex. 9/24/2007)
| Decision Date | 24 September 2007 |
| Docket Number | Case No: 05-36909. |
| Parties | IN RE: ZOUHAIR HILAL; AKA DANNY HILAL CHAPTER 11, Debtor(s) |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
In 2002, Zouhair Hilal ("Debtor") filed a petition in the United States Tax Court for determination of his federal income tax liability for calendar years 1993 through 1997. The Tax Court dismissed Debtor's petition in 2004. In 2005, Debtor filed a voluntary petition commencing this bankruptcy case, and the United States ("IRS") filed a proof of claim for a number of tax years, including the years 1993 through 1997. Debtor filed an objection to the IRS proof of claim. The United States filed a motion for partial summary judgment arguing that the Court lacks jurisdiction to determine the amount and validity of Debtor's federal income tax liability for calendar years 1993 through 1997. The Court agrees that the determination of Debtor's federal income tax liability for 1993 through 1997 is res judicata and that this Court does not have jurisdiction over the determination of those taxes. Therefore by separate order issued this date the Court grants the IRS motion for partial summary judgment.
After the Court extended the time for Debtor to respond to additional exhibits filed by the IRS, Debtor did not request oral argument. The Court has considered the motion for partial summary judgment, responses, and exhibits. The Court concludes that oral argument is not necessary. The Court will rule from the pleadings.
Except as otherwise indicated, the facts are undisputed.
On February 12, 2002, the IRS issued a statutory notice of deficiency for the Debtor for federal income taxes for calendar years 1993 through 1997. On May 13, 2002, Debtor petitioned the United States Tax Court for a redetermination of the IRS proposed deficiencies. The IRS filed an answer to Debtor's petition.
On April 1, 2004, Debtor's counsel filed a Motion to Withdraw from representing Debtor in the Tax Court. The Tax Court denied the motion. Debtor was represented by counsel throughout the Tax Court proceeding. In his opposition to the motion for partial summary judgment, Debtor asserts that his counsel wanted to withdraw because of inability to contact Debtor or to get Debtor's cooperation in prosecuting the case. Debtor asserts that he was clinically depressed and unable to cooperate with counsel. The IRS contends that Debtor was engaging in a manipulative strategy to avoid a determination of the tax liability. While this disagreement may involve a question of fact, the fact is irrelevant. That issue of fact is an issue for another tribunal. The IRS is entitled to judgment as a matter of law in this Court for reasons set forth below.
The Tax Court case was called to trial on June 7, 2004; trial was continued to June 9, 2004. Debtor's counsel appeared at the June 9, 2004, trial setting and advised the Tax Court that he had not had any contact with Debtor for approximately six months, and that he had nothing to present to the court. On June 17, 2004, the Tax Court entered an Order of Dismissal and Decision dismissing Debtor's case for want of prosecution. The Order determined the tax deficiencies, additions, and penalties.
Debtor filed a pro se Motion to Vacate Order of Dismissal and for New Trial on July 19, 2004. The motion was denied on July 22, 2004.
On February 4, 2005, Debtor filed a petition commencing this bankruptcy case under Chapter 11 of the Bankruptcy Code. On February 25, 2005, the IRS filed a proof of claim totaling about $25 million, part of which related to the tax deficiencies determined by the Tax Court. On motion of the US Trustee, the Court ordered the appointment of a chapter 11 trustee on June 1, 2005. On May 11, 2006, Debtor filed an objection to the IRS proof of claim.
On August 7, 2006, Debtor filed a motion with the Tax Court to vacate its decision and re-open his Tax Court case on the grounds that he was, at the time of the trial before the Tax Court and the years following, mentally incompetent. The Tax Court denied Debtor's motion. Debtor then appealed to the Fifth Circuit. On June 25, 2007, the Fifth Circuit affirmed the Tax Court.
On August 2, 2007, the IRS filed a motion for partial summary judgment with respect to Debtor's objection to the IRS claim for federal income taxes for calendar years 1993 through 1997. The IRS does not seek summary judgment with respect to tax years that were not the subject of the Tax Court case.
Summary judgment is warranted if a party establishes that there is no genuine dispute about any material fact and that the law entitles it to judgment.1 Rule 56(c) mandates "the entry of summary judgment, after adequate time for discovery and upon motion, against any party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial."2 Rule 56(c) is incorporated into the Federal Rules of Bankruptcy Procedure by rule 7056.
All justifiable inferences will be drawn in the nonmovant's favor,3 but conclusory affidavits will not suffice to create or negate a genuine issue of fact.4 Unless there is sufficient evidence to return a verdict in the nonmovant's favor, there is no genuine issue for trial.5 Admissibility of evidence on a motion for summary judgment is subject to the standards and rules that govern evidence at trial.6
Rule 56 of the Federal Rules of Civil Procedure provides:
(c) ... The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
(e) ... When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for the trial.
The Bankruptcy Code vests a bankruptcy court with subject matter jurisdiction to determine the amount and validity of a tax assessment against a debtor unless "such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the case under [title 11.]"7
Comments by both the House and Senate are identical as to what comprises a contested proceeding.
[T]he bankruptcy court will not have jurisdiction to rule on the merits of any tax claim which has been previously adjudicated, in a contested proceeding, before a court of competent jurisdiction. For this purpose, a proceeding [sic] the United States Tax Court is to be considered "contested" if the debtor filed a petition in the Tax Court by the commencement of the case and the Internal Revenue Service had filed an answer to the petition. Therefore, if a petition and answer were filed in the Tax Court before the title II [sic: should be "11"] petition was filed, and if the debtor later defaults in the Tax Court, then, under res judicata principles, the bankruptcy court could not then rule on the debtor's or the estate's liability for the same taxes.8
That legislative history fits almost exactly the facts of this dispute. Debtor filed his petition in the Tax Court, the IRS filed its response, and the Tax Court ruled prior to the date that the Debtor filed his petition commencing this bankruptcy case.
"A matter has been adjudicated when a judgment of a court of competent jurisdiction has been decreed."9 The Tax Court entered its Order of Dismissal and Decision, adjudicating the amount and validity of the taxes, and that judgment became final.
The United States Tax Court is a court of competent jurisdiction.10
The Tax Court decision became final before the bankruptcy case was commenced. On June 17, 2004, the Tax Court entered its decision. Debtor filed his bankruptcy petition on February 4, 2005.
Even if debtor's earlier proceedings before the Tax Court did not deprive this court of jurisdiction, the rule of res judicata precludes relitigation of the matter.11
The federal rules of res judicata apply to this federal issue.12 "Claim preclusion, or res judicata, bars the litigation of claims that either have been litigated or should have been raised in an earlier suit."13
Res judicata has four elements: (1) the parties are identical or in privity; (2) the judgment in the prior action was rendered by a court of competent jurisdiction; (3) the prior action was concluded by a final judgment on the merits; and (4) the same claim or cause of action was involved in both actions.14
The parties now before the Court are identical to those in the Tax Court, the Debtor and the United States.
The Tax Court is a court of competent jurisdiction to determine federal income tax liability.
A dismissal for want of prosecution after a petition and answer are filed is a final judgment on the merits.15 In addition to dismissing the case for want of prosecution, the Tax Court order adjudicated the tax deficiency.16
Debtor seeks to have this Court determine his federal income tax liability for the years 1993-1997, the same years for which the Tax Court proceeding determined liability by its final order.
Debtor argues that § 505 was enacted to protect the debtor and his creditors from tax liability if the debtor did not effectively contest the tax liability. Debtor's emphasis...
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