In re Kilen

Citation129 BR 538
Decision Date28 June 1991
Docket NumberBankruptcy No. 87 B 7567,Adv. No. 89 A 1038.
PartiesIn re Arve KILEN, Debtor. Arve KILEN, Plaintiff, v. UNITED STATES of America, Defendant.
CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

Allan G. Sweig, Benjamin D. Schwartz, Michael M. Eidelman, Altheimer & Gray, Chicago, Ill., for plaintiff.

Eugene J. Rossi, U.S. Dept. of Justice, Tax Div., Washington, D.C., Luanne DiMauro, Sp. Asst. U.S. Atty., Chicago, Ill., for defendant.


ROBERT E. GINSBERG, Bankruptcy Judge.

This matter comes before the Court on the United States' motion for partial dismissal of the debtor's complaint seeking a determination of his liability, if any, to the Internal Revenue Service under § 505(a) of the Bankruptcy Code. For the reasons stated below, the United States' motion is denied.


The unusual facts of this Chapter 11 case give rise to a dispute that raises some fundamental questions about the nature and role of the bankruptcy court. Arve Kilen filed an individual Chapter 11 petition on November 25, 1987. Kilen was an owner, director or officer of 31 corporations, each of which filed its own bankruptcy petition. As such Kilen had and may still have a serious problem with potential personal liability under § 6672 of the Internal Revenue Code for trust fund taxes which these corporations may have failed to pay.1 Several of the corporations listed trust fund tax liabilities on their bankruptcy schedules. Others may not have paid the required employment taxes but failed to schedule those debts. The potential for liability for the withholding taxes owed by the corporate debtor arguably became Kilen's most significant financial problem.

Accordingly when Kilen drafted his Chapter 11 plan, he paid close attention to his potential personal liability for trust fund taxes that any of these corporations may have failed to pay. Kilen got a Chapter 11 plan confirmed in his individual case that set aside a large pot of money, some $640,000, to satisfy debts owed to various tax collectors including the IRS. However, for reasons best known to itself, the IRS has shown little interest in pursuing its rights against that fund. With few exceptions, it took no steps to determine the amount of withholding taxes owed by the corporations. It filed a proof of claim in Kilen's case for the unpaid withholding taxes of only one of the corporate debtors. As to the rest, the IRS seems to take the attitude that when it gets around to it, it will determine how much each corporation owes. If the corporation fails to pay (as will likely be the case since almost all of the corporate Chapter 11 cases have failed and will produce little or no dividend to even priority creditors), the IRS will look to Kilen to pay the taxes personally under § 6672 of the Internal Revenue Code (IRC).2 Any obligation that Kilen has in this regard will not be covered by his Chapter 11 discharge. See 11 U.S.C. §§ 523(a)(1), 1141(d). Thus, even if the IRS doesn't pursue its § 6672 claims against the $640,000 fund provided by Kilen's plan, it can still pursue the claims against Kilen personally.3

From Kilen's point of view, the IRS's approach would be a disaster. If the IRS and other tax collectors fail to succeed in asserting priority claims totalling at least $640,000 as provided by the plan, the remaining portion of the fund goes to Kilen's nonpriority unsecured creditors.4 Kilen would wind up with the worst of all results from his perspective: the money to pay the taxes would be gone, and he would still be personally liable for the taxes. To prevent this from happening Kilen filed claims on behalf of the United States in his own case for any and all personal liability he may have for unpaid corporate withholding taxes. See 11 U.S.C. § 501(c), Bankruptcy Rule 3004.

Kilen then filed this adversary complaint objecting to the claims filed by the United States and seeking entry of a declaratory judgment pursuant to § 505(a) of the Bankruptcy Code either declaring the amount of his liability under that provision or declaring that Kilen owes the government nothing under § 6672 because the corporations owe nothing or because Kilen was not a responsible person for any corporation that failed to pay over trust fund money. The premise behind Kilen's complaint is that his "fresh start" from bankruptcy will be jeopardized if his liability for trust fund taxes is not determined by this Court so that the monies due the IRS for § 6672 claims against Kilen can be paid within the context of his Chapter 11 plan.

The United States brought the instant motion pursuant to Fed.R.Civ.P. 12(b), seeking partial dismissal of Kilen's complaint as it relates to twenty-nine of the taxpayer corporations. The United States argues that since the IRS has not assessed nor proposed to assess penalties for tax deficiencies against Kilen for these corporations, there is no existing case or controversy for this Court to resolve. Thus, as the IRS sees it this Court lacks subject matter jurisdiction over any dispute Kilen might think he has with the IRS relating to any unpaid withholding taxes that the twenty-nine corporations might owe.5


The Court has jurisdiction over this motion to dismiss under 28 U.S.C. § 1334 as a proceeding arising under §§ 501(c), 502(b), and 505(a) of the Bankruptcy Code. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (C) and is before the Court pursuant to Local Rule 2.33 of the United States District Court for the Northern District of Illinois referring bankruptcy cases and proceedings to this Court for hearing and determination.


Section 505 of the Bankruptcy Code provides:

(1) Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

11 U.S.C. § 505(a).

Despite this broad language, the IRS objects to the bankruptcy court's jurisdiction to determine the total amount of Kilen's employment tax liability on the grounds that no withholding tax deficiency has been assessed nor is proposed to be assessed against Kilen for twenty-nine of the taxpayer corporations. The IRS argues that it has not assessed any withholding tax liability against the corporations, and it may never do so. Accordingly, it may never seek to collect any § 6672 taxes from Kilen personally (beyond those it is already seeking). Art. III, § 2 of the Constitution limits the use of federal judicial power to the adjudication of "cases" or "controversies."6 Without an assessment, the IRS contends, there is no actual case or controversy between the parties that is ripe for hearing and determination by this Court. As the IRS bluntly states, its position is that if § 505 permits this Court to resolve its potential § 6672 claims against Kilen, § 505 is unconstitutional.7

In response, Kilen makes three alternative arguments. First, the case or controversy requirement doesn't apply to bankruptcy courts which are Article I courts. Second, even if bankruptcy courts are not Article I courts, they are not bound by the case or controversy limitation when adjudicating a core proceeding such as the determination of a debtor's tax liability pursuant to § 505. Third, if the case or controversy requirement applies, an actual controversy exists on the facts of this case.

A. Does the "case or controversy" requirement apply to bankruptcy courts?

Kilen's first argument, that the case or controversy requirement does not apply to bankruptcy courts because they are Article I courts, is without merit.

28 U.S.C. § 1334 gives original jurisdiction over all bankruptcy cases and all civil proceedings arising under the Bankruptcy Code or arising in or related to a bankruptcy case to the United States District Court.

(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.
(b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.

28 U.S.C. § 157 provides that all cases and proceedings arising under the Bankruptcy Code may be referred by the district court to the bankruptcy court.

(a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.

Under this section the district court has the discretion to refer or not to refer title 11 cases and proceedings to the bankruptcy judges as it sees fit. In the Northern District of Illinois, Local Rule 2.33 provides for the automatic referral of bankruptcy cases to bankruptcy judges. However, 28 U.S.C. § 157(d) gives the district court the power to withdraw the reference of any bankruptcy case or proceeding.8 Therefore, while referrals of cases and proceedings in this District are automatic, they can be revoked by a district judge. In addition, although bankruptcy judges, are not Article III judges, See Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 61, 102 S.Ct. 2858, 2866, 73 L.Ed.2d 598 (1982); Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), bankruptcy courts are statutorily deemed to be "units of the district court" and bankruptcy judges "judicial officers of the district court." See 28 U.S.C. § 151.

By virtue of this structure bankruptcy courts are adjuncts of the district courtthey have no subject matter jurisdiction over title 11 ...

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