In Re James T. Szostek

• Decision Date: 29 March 2010
• Docket Number: Bankruptcy No. 09-31623.,Adversary No. 09-03022.
• Citation: 429 B.R. 552
• Parties: In re James T. SZOSTEK, dba Jolly Jim's Pets dba Jolly Jim's Pets Too, and Mary Alice Szostek, Debtors.James T. Szostek, Mary Alice Szostek, Plaintiffsv.Texas State Comptroller Of Public Accounts, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Texas

429 B.R. 552

In re James T. SZOSTEK, dba Jolly Jim's Pets dba Jolly Jim's Pets Too, and Mary Alice Szostek, Debtors.James T. Szostek, Mary Alice Szostek, Plaintiffsv.Texas State Comptroller Of Public Accounts, Defendant.

Bankruptcy No. 09-31623.

Adversary No. 09-03022.

United States Bankruptcy Court,

W.D. Texas,

El Paso Division.

March 29, 2010.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

E.P. Bud Kirk, Terrace Gardens, El Paso, TX, for James T. Szostek, dba Jolly Jim's Pets, dba Jolly Jim's Pets Too, Mary Alice Szostek, Debtors.

William A. Frazell, Austin, TX, for Texas State Comptroller of Public Accounts, Defendant.

MEMORANDUM DECISION AND ORDER GRANTING TEXAS STATE COMPTROLLER OF PUBLIC ACCOUNTS' MOTION TO DISMISS ADVERSARY PROCEEDING PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6)

LEIF M. CLARK, Bankruptcy Judge.

Came on for consideration the foregoing matter. On July 28, 2009, James T. Szostek (“James”) and his wife, Mary Alice Szostek (“Mary,” and, together with James, the “Debtors”), filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. On September 22, 2009, the Debtors filed a complaint (the “Complaint”) against the Texas Comptroller of Public Accounts (the “Defendant” or the “Comptroller”) seeking to determine (i) the Debtors' dischargeability of the Comptroller's claim, (ii) the extent of the Debtors' in rem liability to the Comptroller, and (iii) whether the chapter 11 plan complied with an insolvency plan under the Texas tax laws. As a basis for relief, the Complaint appears ¹ to invoke §§ 523(a)(1) and 507(a)(8). Complaint, ¶¶ 11, 15 at 5-6. More specifically, Form 104, which is attached to the front of the Complaint, has the box checked that refers to §§ 523(a)(1), (14), and (14A). On October 23, 2009, the Comptroller filed a motion to dismiss (the “Motion to Dismiss”) the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), incorporated herein through Federal Rule of Bankruptcy Procedure 7012 [Docket No. 5]. On November 5, 2009, the Debtors filed an objection (the “Objection”) to the Motion to Dismiss [Docket No. 6].

A. The Pleadings

Instead of jumping straight into the Comptroller's arguments in the Motion to Dismiss, the Debtors' background, as alleged in the Complaint, is necessary. The following are the relevant facts as stated in the Complaint. For the past several decades, the Debtors ² have run a pet store with two locations in the El Paso area: Jolly Jim's Pets and Jolly Jim's Pets Too. ³Complaint, ¶ 3 at 2. At some point in time, the Comptroller audited the Debtors' business for the tax period beginning on August 1, 2001 through March 31, 2006 and found that the Debtors owed $168,523.52 (the “Tax Liability”), plus penalties in the amount of $16,152 and interest in the amount of $23,236 as of July 1, 2009. Id., ¶ 4 at 2. The taxes in question were sales taxes and (we learn from the Motion to Dismiss) use taxes.

The procedural posture of the Tax Liability is also relevant. In addition to calculating the Tax Liability against the Debtors, the Comptroller had denied the Debtors the right to submit a proposed “insolvency plan,” a state law remedy contemplated by the Texas Tax Code for taxpayer debtors that are unable to pay their tax liabilities.⁴ The Debtors timely appealed the Comptroller's decision to the State Office of Administrative Hearings. M. to Dismiss, ¶ 2 at 2. The appeal was heard by an Administrative Law Judge (the “ALJ”), who issued an Amended Proposal for Decision (the “PFD”). Id. The ALJ upheld the Tax Liability but also held that the Debtors should be allowed to submit an insolvency plan under the Texas Tax Code. Id., ¶ 4 at 3. Under the Texas Administrative Code, the Comptroller was to issue a decision after receiving the PFD. Id., ¶ 7 at 4-5 (citing 34 Tex. Admin. Code § 1.28). A Comptroller's decision becomes final 20 days after being issued unless a motion for a rehearing is filed by the debtor. Id., ¶ 7 at 5. Additionally, under Texas law, there is a 30-day time limit for initiating judicial review of the Comptroller's decision. Id. (citing Tex. Gov't Code § 2001.176). Here, the ALJ's PFD did not result in a final, non-appealeable decision from the Comptroller because the Debtors filed for chapter 11 before the Comptroller could issue its final decision. Id. As a result, the whole matter was stayed pursuant to 11 U.S.C. § 362. According to the Comptroller, because the Tax Liability is not a final, non-appealeable order from the Comptroller, this court has jurisdiction to hear and determine the Comptroller's claim under § 505(a)(2). Id. (citing Texas Comptroller of Public Accts. v. Trans State Outdoor Advertising Co., Inc. (In re Trans State Outdoor Advertising Co., Inc.), 140 F.3d 618 (5th Cir.1998)). The Complaint, however, does not ask for that relief.

According to the Debtors, as described in both the Complaint and the exhibits attached to the Complaint,⁵ the Comptroller found that the Debtors (i) improperly refunded certain sales taxes in the amount of $91,694 (“Category 1 Taxes”), (ii) under-reported taxable sales (based on sales the Debtors reported to the Comptroller compared to sales the Debtors reported on their federal income tax returns) in the amount of $50,719 (“Category 2 Taxes”); and (iii) did not pay use taxes in the amount of $26,109 (“Category 3 Taxes”).⁶Complaint, ¶¶ 4-5 at 2-3; PFD, at 3-4. The Debtors characterize the Tax Liability as taxes that were uncollected taxes, as opposed to taxes that were collected and not paid to the state. See generally, Complaint. The Debtors go on to cite various provisions of the Texas Tax Code for the proposition that their “penalty for failure to collect is not a personal penalty, but a penalty in rem, closure of the business.” Id., ¶ 17 at 6. The Debtors argue that although the Texas Tax Code does assign “liable capacities, when it comes to taxes actually collected and not remitted to the State ... the Texas Tax Code does not specify a liable capacity for failure to collect.” Id. Therefore, according to the Debtors' legal theory, § 507(a)(8)(C) does not apply to except the Tax Liability from discharge because § 507(a)(8)(C) only applies to the extent the claim is “for a tax required to be collected or withheld and for which the debtor is liable in whatever capacity.” Id., ¶ 15 at 6. Here, say the Debtors, the Texas Tax Code does not assign the Debtors any liable capacity since they merely failed to collect the required taxes. As best as the court could discern, the gravamen of the Debtors Complaint is, in short, that because they owe the Tax Liability for failing to collect taxes, as opposed to collecting taxes and failing to remit them to the Comptroller, § 507(a)(8)(C) does not apply to except the Tax Liability from being discharged. The Debtors then go on to argue their legal theory in the Complaint, in effect converting the Complaint into a legal brief.⁷

In addition to asking the court to find that the Tax Liability is dischargeable, the Debtors seek two other alternative forms of relief in their Complaint. First, the Debtors ask this court to force the Comptroller to accept a Chapter 11 plan as an “insolvency plan” under Tex. Tax Code § 111.102. Complaint, ¶ 11 at 5. Second, they ask for a determination that “if liability is in rem, and not in personam, the Comptroller is entitled to a share of the net value of the business' assets, if the business were to be transferred.” Id. By this device, the Debtors apparently intend to confine the Comptroller's recovery to the net value (if any) of the business enterprise alone (it is not clear whether the businesses in question were separate legal entities). In other words, the Debtors seek a declaratory judgment that the Comptroller's claim be deemed to have been satisfied by its share, of the proceeds recovered from a sale of the Debtors' business.⁸ The Debtors believe that they should be able “either to start a new business by incorporating, or to sell his business to a third party who can get his own sales tax permit.” Complaint, ¶ 26 at 11. The Debtors go on to argue that if there is

no personal liability for uncollected sales tax-only an in rem liability in the form of prohibiting the operation of the business, under Texas Tax Code § 111.010-.011 until the tax is paid-then Szostek [the Debtors] should be able to reorganize by forming a new entity to carry out a Chapter 11 plan. The plan, of course, would have to pay to the creditors of the old business, the value of the assets, so as to clear away problems of both (a) transfer in fraud of existing creditors, and (b) successor liability for debts of the old business.

Id., ¶ 28 at 12.

The Comptroller's Motion to Dismiss

In the Motion to Dismiss, the Comptroller requests that the court dismiss the Debtors' Complaint pursuant to Federal Rule of Bankruptcy Procedure 7012(b)(6) for failure to state a claim upon which relief may be granted. The Comptroller first notes that, based upon the procedural posture of the Tax Liability, this court would have the jurisdiction to re-determine the amount of the Tax Liability under § 505(a)(2). However, that type of relief was not sought by the Debtors in the Complaint; instead, through the Complaint, the Debtors are impermissibly trying to re-characterize the Tax Liability as taxes that they simply failed to collect. M. to Dismiss, ¶ 8 at 5. The Comptroller points out that even the Debtors admit in their Complaint that the Debtors in fact did collect sales taxes, and incurred liability by improperly refunding the taxes back to their customers. But regardless of the Debtors' characterization of the Tax Liability, says the Comptroller, “the Complaint does not challenge the basis for the ALJ's PFD. Instead, Mr. Szostek makes an erroneous argument that under state law and the Bankruptcy Code the seller is only liable for sales taxes actually collected.” Id., ¶ 7 at 5. That assertion, says the Comptroller, is wrong as a matter...