In re McConahey, Bankruptcy No. BK 89-50058. Adv. No. 95-5093.
| Citation | 192 BR 187 |
| Decision Date | 16 February 1996 |
| Docket Number | Bankruptcy No. BK 89-50058. Adv. No. 95-5093. |
| Parties | In re Vanette McCONAHEY, Debtor. Vanette McCONAHEY, Plaintiff, v. UNITED STATES of America (INTERNAL REVENUE SERVICE) and State of Illinois (Illinois Department of Revenue), Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Southern District of Illinois |
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Steven N. Mottaz, Alton, IL, for Plaintiff.
Gerald M. Burke, Asst. U.S. Attorney, Fairview Hts., IL, for I.R.S.
In this action, debtor Vanette McConahey seeks a determination that prepetition tax liabilities owing to the United States of America and the State of Illinois were satisfied by her completion of payments under a confirmed Chapter 11 plan of reorganization. Both the United States and the State of Illinois filed proofs of claim in the debtor's Chapter 11 case, and the debtor's plan provided for full payment of these tax claims. However, following completion of the debtor's plan payments and the closing of her Chapter 11 case, the United States and the State of Illinois filed notices of tax liens to enforce additional prepetition tax claims against the debtor. The debtor asserts that the defendants, having filed proofs of claim in this case, are bound by the order of confirmation providing for payment of such claims and cannot now seek to recover additional prepetition taxes.
The tax liabilities at issue are the debtor's 1988 unemployment taxes imposed under the Federal Unemployment Tax Act ("FUTA"), 26 U.S.C. § 3301 et seq., and the Illinois Unemployment Insurance Act, 820 ILCS 405/100 et seq. The federal FUTA tax, also known as Form 940 tax or unemployment tax, is determined in conjunction with the state tax, with an employer obtaining credit against the FUTA tax based on payment of the state unemployment tax. See 26 U.S.C. §§ 3301, 3302.
The facts are not in dispute. On January 31, 1989, the debtor filed a Chapter 11 bankruptcy petition. In her schedules, she listed a priority tax claim of $319.96 for 4th Quarter 1988, "Form 940 — FUTA" taxes owing to the Internal Revenue Service. In addition, she listed priority tax claims totaling $4,105.76 for 2nd, 3rd, and 4th Quarter 1988, Illinois "unemployment taxes" owing to the Illinois Department of Employment Security.
On April 6, 1989, the Internal Revenue Service filed a proof of claim for taxes totaling $18,343.56, which included $319.96 for 1988 Form 940 taxes. On June 1, 1989, the Illinois Department of Revenue filed a proof of claim for various taxes totaling $23,700.55, but did not include a claim for 1988 unemployment taxes owing to the Illinois Department of Employment Security. No claim was filed for state unemployment taxes until after confirmation of the debtor's plan when, on March 25, 1991, the Illinois Department of Employment Security filed a proof of claim in the amount of $4,105.76, for the 1988 unemployment taxes listed in the debtor's schedules.
On June 25, 1990, the Court confirmed the debtor's Chapter 11 plan without objection by the United States or the State of Illinois. The debtor's plan provided for payment of priority tax claims as follows:
The debtor subsequently paid the United States and the State of Illinois the full amount of their claims as provided in the plan. On March 1, 1993, a final decree was entered closing the debtor's Chapter 11 case.
On December 16, 1993, following entry of the final decree, the Internal Revenue Service filed a notice of federal tax lien seeking to collect, inter alia, 1988 Form 940 taxes in the amount of $4,641.02. Likewise, on March 15, 1995, the Illinois Department of Employment Security filed a notice of tax lien seeking to collect 1988 Illinois unemployment taxes in the amount of $4,833.49.
The debtor filed the present action against the United States and the State of Illinois to enjoin their collection of prepetition taxes.1 The debtor does not dispute, for purposes of this proceeding, the defendants' computation of the amount due for 1988 unemployment taxes. The debtor maintains, however, that the United States and the State of Illinois are bound by the order of confirmation which, based on the proofs of claim filed by these defendants, adjudicated the debtor's prepetition tax liability at the dollar amount provided in her plan. In response, the United States asserts that the FUTA tax at issue is a priority tax excepted from discharge under § 523 and that, as such, it may be collected notwithstanding the confirmation order and the debtor's completion of payments under the plan.
Section 1141 of the Bankruptcy Code provides generally that a confirmed Chapter 11 plan binds a creditor whether or not the creditor has accepted the plan, see 11 U.S.C. § 1141(a), and, further, that confirmation of a plan discharges the debtor from preconfirmation debts. See 11 U.S.C. § 1141(d)(1). These general provisions, however, are subject to the exception of § 1141(d)(2),2 which provides:
(2) The confirmation of a plan does not discharge an individual debtor from any debt excepted from discharge under section 523 of this title.
11 U.S.C. § 1141(d)(2). Section 523(a)(1), in turn, provides that a discharge under § 1141 does not discharge an individual debtor from a tax debt:
(A) of the kind and for the periods specified in section . . . 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed.
11 U.S.C. § 523(a)(1)(A) (emphasis added). This section, when read in conjunction with § 507(a)(8) to which it refers, excepts from discharge "an employment tax on wages earned from the debtor before bankruptcy . . . for which a return was last due within three years of the date of filing of the petition." 11 U.S.C. § 507(a)(8)(D).
The debtor here does not deny that the taxes at issue, which came due in the year preceding the debtor's bankruptcy filing, constitute priority employment taxes under § 507(a)(8)(D). See Matter of Pierce, 935 F.2d 709, 711-13 (5th Cir.1991); In re Continental Minerals Corp., 132 B.R. 757, 759 (Bankr.D.Nev.1991); In re Skjonsby Truck Line, Inc., 39 B.R. 971, 973-74 (Bankr. D.N.D.1984).3 As such, these taxes were excepted from discharge under § 523(a)(1)(A), and they retained this status regardless of the government's filing of a proof of claim. Because the United States and the State of Illinois held nondischargeable claims that could be enforced outside of bankruptcy, confirmation of the debtor's plan in this case did not fix the amount of the debtor's tax liability to these creditors. See In re DePaolo, 45 F.3d 373, 375-76 (10th Cir.1995); In re Gurwitch, 794 F.2d 584, 585 (11th Cir.1986).
While principles of res judicata apply generally to bankruptcy proceedings, the plain language of §§ 1141(d)(2) and 523(a)(1)(A) forbids the application of those principles here. See DePaolo, 45 F.3d at 376. By expressly providing that the described taxes are not discharged "whether or not a claim for such taxes was filed or allowed," 11 U.S.C. § 523(a)(1)(A) (emphasis added), Congress has determined that the government may make a claim for taxes for a particular year in a bankruptcy proceeding, accept the judgment of the bankruptcy court, and then make additional claims for that same year even though such conduct may seem inequitable or may impair the debtor's fresh start. DePaolo, at 376. As noted by courts interpreting §§ 1141(d)(2) and 523(a)(1), allowing the government to pursue its claim after confirmation and consummation of a Chapter 11 plan admittedly conflicts with the "fresh start" policy animating the discharge provisions. However, it is apparent that Congress has made a choice between the collection of revenue and rehabilitation of the debtor by making it extremely difficult for a debtor to avoid payment of taxes under the Bankruptcy Code. This is an express congressional policy judgment that courts are bound to follow. Id.; see Matter of Fein, 22 F.3d 631, 633 (5th Cir.1994); In re Grynberg, 986 F.2d 367, 371 (10th Cir.1993); In re Gurwitch, 794 F.2d at 585-86.
The debtor, citing In re Martin, 150 B.R. 43 (Bankr.S.D.Cal.1993), argues that the defendants here should nonetheless be barred on estoppel principles from seeking the full amount of the subject taxes since they, not the debtor, were responsible for the incorrect amount of their claims provided for in the debtor's plan. The Court notes, initially, that Martin is distinguishable on its facts from the present case. The government there had entered into a detailed agreement for the determination of additional prepetition taxes but, following confirmation, failed to follow that agreement. The Martin court ruled that the government was bound by the procedures incorporated into the debtors' plan — even though the plan could not fix the amount of the government's nondischargeable claim — and, accordingly, exercised its equitable powers to hold the government to the previously acceptable agreement. See Martin, 150 B.R. at 47.4
In this case, by contrast, the governmental defendants took no action in the Chapter 11 plan process beyond filing a proof of claim. The express language of § 523(a)(1)(A) makes filing a proof of claim immaterial in determining the nondischargeability of a debt. It would, therefore, be inconsistent with the policy embodied in § 523(a)(1)(A) if such an action were found to justify estoppel. It is generally accepted, moreover, that estoppel may not be invoked against the government in the absence of a showing of affirmative misconduct. Thus, a party seeking to estop the...
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