In re Kowalczyk

Decision Date17 April 2019
Docket NumberBankruptcy No. 15-30149
Citation600 B.R. 806
Parties IN RE: Peter Paul KOWALCZYK, Debtor.
CourtU.S. Bankruptcy Court — District of North Dakota

Sara Diaz, Bulie Diaz Law Office, Fargo, ND, for Debtor.

Gene W. Doeling, Kaler Doeling Law Office, Fargo, ND, for Trustee.

ORDER OVERRULING CENTRAL TRENCHING'S OBJECTION TO IRS PROOF OF CLAIM

SHON HASTINGS, JUDGE

I. Background

On April 18, 2015, Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Doc. 1. The Internal Revenue Service and Creditor Central Trenching, Inc. were among five creditors that filed proofs of claim. The IRS's amended claim identifies total tax liabilities of $ 130,247.45 for tax years 2011-2014, with a priority claim of $ 119,534.10. Claim No. 1-3. Central Trenching filed a general unsecured claim in the sum of $ 276,699.29 arising from a 2014 judgment against Debtor and in favor of Central Trenching. Claim No. 6-1.

In October 2015, Bankruptcy Trustee Gene Doeling initiated a lawsuit under 11 U.S.C. § 547, alleging that Central Trenching's levy against $ 347,743.18 on deposit in Debtor's bank account and the subsequent transfer of funds to Central Trenching was an avoidable preference. See Adv. No. 15-7022. In its answer, Central Trenching admitted receiving the funds, but it claimed the funds related solely to work it performed for Debtor and were impressed with an equitable lien in Central Trenching's favor. Adv. No. 15-7022, Doc. 4.

The day before the scheduled trial on the preference action, the Trustee and Central Trenching settled the adversary proceeding. See Adv. No. 15-7022, Doc. 54. Pursuant to the settlement agreement, Central Trenching paid the bankruptcy estate $ 115,000, withdrew its proof of claim and waived the right to share in any distribution to creditors based on prepetition claims or claims arising from payment under the settlement agreement. Id. As part of the settlement agreement, the Trustee agreed to dismiss the adversary proceeding against Central Trenching. Id. at ¶ 4. The Trustee also stipulated:

If the priority claim of the IRS as presently filed, is "finally allowed" in an amount less than the present claim amount, the bankruptcy trustee shall refund to Central Trenching, Inc. from Central Trenching's settlement payment the difference between the original amount of said claim and the finally allowed amount of said priority claim. If any other claims are finally allowed in amounts less than filed and the result is that the estate has funds in excess of the amount necessary to pay creditor claims in full, such excess will be remitted to Central Trenching, Inc.

Id. at ¶ 3.1 The Court approved the settlement agreement on October 4, 2017. See Adv. No. 15-7022, Doc. 56.

On October 9, 2018, Central Trenching filed an Objection to the Proof of Claim of the United States of America, By and Through the Department of Treasury, Internal Revenue Service. Doc. 121. In its objection, Central Trenching asserts that the IRS's priority claim in the sum of $ 119,534.10 is "overstated as a consequence of the failure of the [IRS] to acknowledge and accept the amended 2013 tax return filed by Debtor." Id. More specifically, Central Trenching argues that Debtor's tax liability for 2013 should be amended to reduce the IRS's claim from $ 119,534.10 to an amount not greater than $ 52,955.89.2 Doc. 121. Central Trenching submitted the amended return to the IRS, but the IRS has not yet revised Debtor's tax assessment.3 Consequently, Central Trenching requests that the Court decide the propriety of the IRS's claim by determining Debtor's 2013 tax liability under Code section 505. See Doc. 144 at 4.

The United States filed a Response to Central Trenching Inc.'s Objection to Proof of Claim. Doc. 136. In its response, the United States argues that the Court should overrule Central Trenching's objection for three reasons: first, Central Trenching has not met its burden to come forward with sufficient evidence to rebut the validity of the IRS's claim; second, Central Trenching lacks standing to object; and third, the objection serves no bankruptcy purpose, and therefore, the Court should abstain from considering it. Id. In the alternative, the United States requests the Court require Central Trenching to state with particularity the basis of its objection and provide the IRS a discovery period to evaluate the objection. Id.

The Court held a hearing on the objection on December 4, 2018. At the hearing, the Court raised its concern that Central Trenching does not have standing to contest Debtor's tax liability. The Court provided the parties an opportunity to brief this issue.4

Central Trenching filed its post-hearing brief on January 11, 2019. Doc. 144. In its brief, Central Trenching argues that it has standing to object to the IRS's proof of claim because it is a "party in interest" under section 502. It requests the Court sustain its objection and "determine the propriety of the IRS's claim" under Bankruptcy Code section 505(a), which empowers a bankruptcy court to determine a debtor's tax liability. Doc. 144 at 3-4.

In its post-hearing brief filed on February 1, 2019, the United States argues that Central Trenching does not have standing to bring a section 505 claim and has not sought derivative standing to bring its objection on behalf of the estate. Doc. 145. It also reasserts its request that this Court abstain from hearing Central Trenching's challenge to Debtor's tax liability. For the reasons that follow, Central Trenching's objection to Claim No. 1-3 is overruled because it does not have standing to challenge Debtor's tax liability under section 505. Even if Central Trenching had standing, the Court would abstain from determining Debtor's tax liability under section 505(a).

II. Discussion
A. Legal Standard

Sections 501 and 502 of the Bankruptcy Code govern filing and allowance of proofs of claim. When a creditor files a proof of claim in accordance with section 501, the claim is deemed allowed unless a party in interest objects. 11 U.S.C. §§ 501(a), 502(a). A properly-filed proof of claim constitutes prima facie evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f). If a party in interest objects, section 502 outlines the procedure for addressing the objection. Section 502(b) provides:

[T]he court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that—
(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured[.]

11 U.S.C. § 502(b). When tax liability is at issue, section 505 allows a bankruptcy court to:

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.

Id. at § 505(a). Bankruptcy courts may also determine whether the debtor is entitled to a tax refund. Id. at § 505(a)(2)(B).

B. Analysis
1. Standing

Before a court may exercise jurisdiction over a case or controversy, it must determine whether the matter is justiciable. Lujan v. Defs. of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). This analysis requires a court to consider whether the party asserting the claim has standing. Id."Standing includes both a constitutional and a prudential component." Jewell v. U.S., 548 F.3d 1168, 1172 (8th Cir. 2008) (quoting Am. Ass'n of Orthodontists v. Yellow Book USA, Inc., 434 F.3d 1100, 1103 (8th Cir. 2006) ). The party invoking federal jurisdiction bears the burden of proving three elements to satisfy constitutional standing: "First, a party must have suffered an ‘injury in fact,’ an actual or imminent concrete and particularized invasion to a legally protected interest; second, the injury must be fairly traceable to the challenged action of the defendant; and third, the injury must be redressable by a favorable decision." Id. (citing Lujan, 504 U.S. at 560, 112 S.Ct. 2130 ). Principles of prudential standing also limit a court's exercise of jurisdiction. Jewell, 548 F.3d at 1172. The Supreme Court has listed at least three such principles: "the general prohibition on a litigant's raising another person's legal rights, the rule barring adjudication of generalized grievances more appropriately addressed in the representative branches, and the requirement that a plaintiff's complaint fall within the zone of interests protected by the law invoked." Lexmark Int'l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 126, 134 S.Ct. 1377, 188 L.Ed.2d 392 (2014) (citations and quotations omitted).

Central Trenching argues its status as a party in interest is "undisputed."5 It maintains that, as a party in interest, it has standing to object to the IRS's proof of claim because standing is "controlled by the plain language of Section 502(a)." See Doc. 144 at 1, 3.

The Bankruptcy Code does not define the term "party in interest." While some courts have ruled that standing as a "party in interest" under section 502 is coextensive with Article III standing, those courts applied the constitutional standing requirements as well as the "party in interest" standards to the litigant who asserted a claim objection. See e.g., Whiteley v. Slobodian (In re Mechanicsburg Fitness, Inc. ), 592 B.R. 798, 803-04 (Bankr. M.D. Pa. 2018) (observing that "[b]ankruptcy standing is governed by both Article III of the Constitution and the Bankruptcy Code"); see generally, In re Global Indus. Tech., Inc., 645 F.3d 201, 210-11 (3rd Cir. 2011) ("To object to the confirmation of a reorganization plan in bankruptcy court, a party must, in the first instance, meet the requirements for standing that litigants in all...

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  • United States v. Morris (In re Zimmer), Bankruptcy No. 17-20543-JAD
    • United States
    • United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Pennsylvania
    • September 8, 2020
    ..."it is a well established principle of law that third parties lack standing to challenge another's tax liability." In re Kowalczyk, 600 B.R. 806, 814 (Bankr. D.N.D. 2019) (collecting cases). Conversely, courts have also held that general unsecured creditors have standing to object to claims......

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