In re Miller, Bankruptcy No. 3-89-04281-TC
| Decision Date | 03 October 2000 |
| Docket Number | Bankruptcy No. 3-89-04281-TC,Adversary No. 00-3-077-TC. |
| Parties | In re William M. MILLER, Debtor. William M. Miller, Plaintiff, v. United States of America, through its Department of Treasury Internal Revenue Service; and State of California, through its State Board of Equalization, Defendants. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Northern District of California |
Iain A. Macdonald, Kaipo K.B. Young, Macdonald & Associates, San Francisco, CA, for Plaintiff William M. Miller.
Bill Lockyer, Attorney General, Julian O. Standen, Deputy Attorney General, California State Board of Equalization, San Francisco, CA, for Defendant California State Board of Equalization.
Robert S. Mueller, III, United States Attorney, Jay R. Weill, Assistant United States Attorney, Thomas R. Mackinson, Special Assistant U.S. Attorney Internal Revenue Service, San Francisco, CA, for Defendant The United States of America, Department of Treasury, Internal Revenue Service.
Debtor seeks to bar taxing authorities from collecting otherwise nondischargeable debts on the basis that his chapter 11 plan provides for their discharge and that principles of res judicata require all plan terms to be fully enforced. The requested relief is denied because the plan did not provide clearly enough for the discharge of nondischargeable debts.
Debtor filed a petition under chapter 11 of the Bankruptcy Code on December 20, 1989. In January 1994, he filed a chapter 11 plan that provided for full payment of allowed priority tax claims over five years with interest from the date of confirmation. The amount of the allowed claims of the Internal Revenue Service (IRS) and California State Board of Equalization (SBE) were fixed by stipulation.
Article XI of the plan, entitled "DISCHARGE AND INJUNCTION," provides:
Neither the IRS nor the SBE objected to confirmation. The plan was confirmed on April 4, 1994. Neither the IRS nor the SBE appealed the Confirmation Order.
After Debtor made all payments required under the plan, the IRS and the SBE attempted to collect penalties and interest for the four-year gap period between the petition date and the confirmation date, which was not part of their allowed claims. Debtor filed this action to obtain a determination that the gap period obligations were discharged under the plan. Presently before the court is Debtor's motion for summary judgment in that action.
An individual chapter 11 debtor is generally liable for post-petition, preconfirmation interest on a priority tax claim even after the allowed claim is paid in full through the chapter 11 plan. A chapter 11 plan must pay the allowed amount of all priority tax claims with interest from the date of confirmation. 11 U.S.C. § 1129(a)(9)(C). The allowed amount of the claim does not include postpetition, preconfirmation interest. 11 U.S.C. § 502(b)(2). In a case involving an individual, the confirmation of a chapter 11 plan does not discharge debts excepted from discharge under section 523(a). 11 U.S.C. § 1141(d)(2). Priority tax claims are excepted from discharge under section 523(a). 11 U.S.C. § 523(a)(1). The Ninth Circuit has held that postpetition, preconfirmation interest is part of the nondischargeable debt even though it is not part of the allowed claim against the bankruptcy estate. In re Artisan Woodworkers, 204 F.3d 888 (9th Cir.2000) (citing Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964)).
The Ninth Circuit has also held, however, that a plan providing for the discharge of debts that the Bankruptcy Code excepts from discharge must be enforced if no appeal is taken from the confirmation order. In re Pardee, 193 F.3d 1083 (9th Cir.1999); accord Trulis v. Barton, 107 F.3d 685, 691 (9th Cir.1995). In Pardee, the debtor's chapter 13 plan provided for payment of a fixed sum to a student loan creditor. The plan also provided "any remaining unpaid amounts, if any, including any claims for interest, shall be discharged by the Plan." Pardee, 193 F.3d at 1085 n. 5. The affected creditor did not object to confirmation or appeal the confirmation order. When the affected creditor later attempted to collect postpetition interest on the claim, the bankruptcy court granted the debtor's motion to enjoin further collection efforts. The Ninth Circuit affirmed. The court acknowledged that the claim for postpetition interest was probably nondischargeable by statute. Id. at 1085 n. 4. Nonetheless, the court held that the plan provision discharging the debt was enforceable under principles of res judicata, because the affected creditor had not appealed the order confirming the plan. Id. at 1086-87.
In the present case, Debtor contends that the plain language of Article XI of the plan provides for discharge of the gap period obligations to the IRS and the SBE. He acknowledges that those obligations were not part of the allowed claims of the IRS and the SBE, and were therefore not paid through the plan. He further acknowledges that the Bankruptcy Code provides that confirmation of a plan does not discharge such claims. Relying upon Pardee, however, Debtor argues that the provision of the confirmed plan discharging the gap period claims is enforceable under principles of res judicata.
The IRS and the SBE do not dispute that the provisions of the plan are res judicata, but contend that Article XI does not provide for the discharge of their gap period claims. They contend that Article XI is ambiguous and that this ambiguity should be construed against Debtor.
It is well established that a chapter 11 plan is a contract between the debtor and its creditors that is subject to the general rules governing the interpretation of contracts under the law of the state in which the plan was confirmed. Hillis Motors, Inc. v. Hawaii Auto. Dealers' Ass'n, 997 F.2d 581, 588 (9th Cir.1993); In re Bartleson, 253 B.R. 75, 78-79 (9th Cir. BAP 2000); In re Affordable Housing Development Corporation, 175 B.R. 324, 329 (9th Cir. BAP 1994). Whether a contract is ambiguous is a question of law. In re Stratford of Texas, Inc., 635 F.2d 365, 368 (5th Cir.1981); Jones-Hamilton Co. v. Beazer Materials & Services, Inc., 973 F.2d 688 (9th Cir.1992).
The plan is ambiguous as to whether it discharges claims for postpetition interest that would ordinarily be nondischargeable. On the one hand, the first paragraph of Article XI states that confirmation of the plan acts as a discharge of all preconfirmation claims, including claims for postpetition interest. This paragraph clearly covers the gap claims of the IRS and the SBE. Moreover, by referring to all debts, rather than all dischargeable debts, this paragraph can be read to extend the discharge to debts that would be nondischargeable under sections 523(a) and 1141(d)(2). On the other hand, the second paragraph of Article XI states all debts arising before confirmation shall be discharged "as provided in 11 U.S.C. 524 and 1141. . . ." This language can easily be read to limit the scope of discharge to that provided by section 1141(d)(2). Thus, the entire discharge provision can be interpreted as merely restating the law regarding the effect of discharge, a type of provision included in many chapter 11 plans.
The ambiguity in Debtor's plan cannot be resolved through the doctrine that a contract must be construed as a whole to give effect to all parts. Cal. Civil Code § 1641. If the language providing for the discharge of postpetition interest would be deprived of all meaning if it were not applied to the debts owed the IRS and the SBE, this court might be compelled to resolve the ambiguity in favor of Debtor. Such is not the case. The language in question is contained in a general provision regarding discharge, not in the provisions defining the treatment of the IRS and the SBE claims. Thus, the language will still operate to discharge claims for postpetition interest on dischargeable debts, even if it is construed not to apply to debts excepted from discharge.
The language in Debtor's plan is very different from the plan provision at issue in Pardee. In that case, the language providing for the discharge of all claims for postpetition interest was in the provision defining the treatment of the student loan creditor who later attempted to collect postpetition interest. In Pardee, the plan provided in relevant part:
Greater Lakes Higher Education, 2401 International Way, Madison WI 53704 in the amount of $26,235.00. This obligation was incurred by Robert McKnight Pardee and is in default. Great Lakes Education shall be paid through the Plan and Great Lakes Higher Education shall receive the...
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