In re Otto

• Decision Date: 06 May 2004
• Docket Number: No. 01-31994F.,01-31994F.
• Citation: 311 B.R. 43
• Parties: In re Nancy Kushmider OTTO, Randall Ernest Otto, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

311 B.R. 43

In re Nancy Kushmider OTTO, Randall Ernest Otto, Debtors.

No. 01-31994F.

United States Bankruptcy Court, E.D. Pennsylvania.

May 6, 2004.

John R. Crayton, Crayton & Belknap, Bensalem, PA, Patricia M. Mayer, Belknap & Mayer, PC, Levittown, PA, Steven Lewis Mutart, Crawford, Wilson & Ryan, LLC, West Chester, PA, for Debtors.

Gloria M. Satriale, Chester Springs, PA, trustee.

Dashiell C. Shapiro, U.S. Department of Justice, Washington, D.C., U.S. Trustee.

MEMORANDUM

BRUCE I. FOX, Bankruptcy Judge.

On December 17, 2003, the movants, Mrs. Nancy Kushmider Otto and Reverend Randall Ernest Otto filed a motion to reopen their chapter 7 bankruptcy case so that they may commence an adversary proceeding to determine the dischargeability of certain federal income tax obligations under 11 U.S.C. § 523(a)(1), (7). By order dated January 30, 2004, I requested that the Ottos address certain issues implicated by their motion to reopen. They have done so, by way of argument and memoranda. The United States (on behalf of its agency, the Internal Revenue Service) opposes the motion.

At bottom, the Ottos maintain that this bankruptcy court is the most convenient, efficient and economical forum in which to raise their dischargeability claims. Although they acknowledge that an alternative forum exists in the United States Tax Court, they argue that requiring them to take such a route would be overly burdensome and uncertain.

The United States contends that the Tax Court forum (preceded by an administrative hearing before an appeals officer) would be the appropriate process to determine the dischargeability of the Ottos' tax obligation. Indeed, the respondent asserts that this process has already commenced by Reverend Otto's request for an administrative collection due process hearing.

Upon consideration of the arguments of the parties as well as the totality of the circumstances, I conclude that the Ottos have not demonstrated that reopening this case in order to litigate against the United States in this court is the better exercise of discretion. Given that their bankruptcy case was closed almost two years ago, given that they failed to commence a dischargeability proceeding in this court while the case was open, given that a reasonable — albeit not identical — alternative forum exists in the Tax Court, and given the congressional decision to provide non-bankruptcy fora concurrent jurisdiction over this dischargeability issue, denial of this motion is appropriate.

I.

There is no dispute that Reverend and Mrs. Otto filed a voluntary petition in bankruptcy under chapter 7 on August 22, 2001. The debtors were represented by counsel, Steven Mutart, Esquire. From the docket entries in the case, it is apparent that the Ottos filed their bankruptcy schedules and statement of affairs and attended the requisite meeting of creditors under sections 341 and 343. Upon examination of their schedules, and after meeting with the Ottos, the chapter 7 trustee determined that there were no non-exempt assets for her to administer. As no creditor objected, the Ottos received their chapter 7 discharge and their case was closed on December 28, 2001.

The bankruptcy discharge order issued in favor of the Ottos was consistent with Official Bankruptcy Form 18. The front page simply stated that the debtors received a discharge under 11 U.S.C. § 727. The back page contained an "Explanation of Bankruptcy Discharge in a Chapter 7 Case." The purpose of this explanation was to inform the debtors and their creditors that certain obligations fell within the scope of the chapter 7 discharge and other obligations did not. Under the heading "Debts that are Not Discharged," the explanation included: "Debts for most taxes."

Thus, the Ottos were forewarned that certain federal tax obligations might not be discharged. (Presumably, their counsel echoed this concern.) Indeed, the United States attached to its opposition to the instant motion a copy of a letter sent by Reverend Otto to the IRS — dated February 12, 2002, shortly after closure of the bankruptcy case — that refers to discussions between his bankruptcy counsel and the IRS concerning "tax issues," including the scope of the bankruptcy discharge.¹

In general, some tax obligations are made nondischargeable by 11 U.S.C. § 523(a)(1) or (7). In enacting the Bankruptcy Reform Act of 1978, Congress decided that certain nondischargeability disputes — those arising under subsections 523(a)(2), (a)(4), (a)(6), and (a)(15) — would fall within the exclusive jurisdiction of the Bankruptcy Court. 11 U.S.C. § 523(c). To effectuate this grant of exclusivity, the procedural rules establish a deadline for a creditor to commence litigation under those subsections only, with the deadline preceding the closing of the case. See Fed. R. Bankr.P. 4007(c). The other nondischargeability disputes, including the dischargeability of a tax obligation under section 523(a)(1) and (7), are not within the exclusive subject matter jurisdiction of the bankruptcy court under subsection 523(c), and therefore may be determined by non-bankruptcy courts. See generally Cassidy v. Commissioner, 814 F.2d 477, 480-81 (7th Cir.1987); United States v. Hoffman, 643 F.Supp. 346, 348 (E.D.Wis.1986); In re Fucilo, 2002 WL 1008935, at *7 (Bankr.S.D.N.Y.2002); Swanson v. Commissioner, 121 T.C. 111, 126-28, 2003 WL 22020782 (2003); Thomas v. Commissioner, 2003 WL 21781151 (Tax Ct.2003); Abuteir v. State of Texas, 2000 WL 1784352 (Tex.Ct.App.2000). As to those dischargeability challenges, there is no deadline for commencing litigation that will raise the issue. Fed. R. Bankr.P. 4007(b).²

For those dischargeability disputes outside the exclusive jurisdiction of bankruptcy court, when neither debtor nor creditor seeks a determination in the bankruptcy court, typically the issue will arise when a creditor commences a collection action on a pre-bankruptcy debt after the bankruptcy case is closed (and the automatic stay is ended by virtue of section 362(c)(2)(A)). The former debtor will then assert the discharge injunction found in 11 U.S.C. § 524(a). See generally, e.g., Matis v. Delasho, 191 Misc.2d 338, 741 N.Y.S.2d 849 (N.Y.Sup.2002); Ephraim v. Allvest, Inc., 108 Wash.App. 1046, 2001 WL 1262212 (2001). The creditor may counter that its claim should be held nondischargeable, and the non-bankruptcy forum will adjudicate the creditor's assertion. See Beyer v. Beyer, 2000 WL 1022753, at *3 (Conn.Super.Ct.2000), supplemented by 2001 WL 100362 (Conn.Super.Ct.2001).

Apparently, neither the Ottos nor the United States opted to seek a determination of the dischargeability of the purported tax obligation during the Ottos' bankruptcy case. Rather, the IRS commenced a collection action against the Ottos on October 17, 2002, after their bankruptcy case was closed. Respondent's Memorandum, Ex. A. On November 4, 2002, the IRS received a "request for a collection due process hearing" from Reverend Otto. In this request, Reverend Otto asserted, inter alia, that the amount of the tax obligation asserted by the IRS "does not reflect discharge of penalties and interest from bankruptcy." Id. The parties informed me that this administrative hearing has not yet taken place.

II.

Pursuant to section 350(b), "a [closed bankruptcy] case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor or for other cause." Whether to reopen a closed bankruptcy case is committed to the discretion of the bankruptcy court. See, e.g., Donaldson v. Bernstein, 104 F.3d 547, 551 (3d Cir.1997); Judd v. Wolfe, 78 F.3d 110, 116 (3d Cir.1996); Matter of Case, 937 F.2d 1014, 1018 (5th Cir.1991) ("This discretion depends upon the circumstances of the individual case and accords with the equitable nature of all bankruptcy proceedings."); Hawkins v. Landmark Finance Co., 727 F.2d 324 (4th Cir.1984); Matter of Becker's Motor Transportation, Inc., 632 F.2d 242, 245 (3d Cir.1980), cert. denied, 450 U.S. 916, 101 S.Ct. 1358, 67 L.Ed.2d 341 (1981); Urbanco Inc. v. Urban Systems Streetscape, Inc., 111 B.R. 134 (W.D.Mich.1990). The burden of demonstrating circumstances sufficient to justify the reopening is on the moving party. E.g., In re Cloninger, 209 B.R. 125, 126 (Bankr.E.D.Ark.1997); In re Nelson, 100 B.R. 905 (Bankr.N.D.Ohio 1989).

In seeking to reopen their chapter 7 case, the former debtors assert that reopening is appropriate because it would benefit them. In general, when a former debtor seeks to reopen a closed bankruptcy case, the court should consider a variety of factors including: the length of time that the case was closed, see Matter of Case, 937 F.2d at 1018; whether a non-bankruptcy forum, such as state court, has the ability to determine the issue sought to be posed by the debtor, see, e.g. In re Tinsley, 98 B.R. 791 (Bankr.S.D.Ohio 1989); In re E.A. Adams, Inc., 29 B.R. 227 (Bankr.D.R.I.1983); In re Hepburn, 27 B.R. 135 (Bankr.E.D.N.Y.1983); whether prior litigation in bankruptcy court implicitly determined that the state court would be the appropriate forum to determine the rights, post-bankruptcy, of the parties; whether any parties would be prejudiced were the case reopened or not reopened; the extent of the benefit which the debtor seeks to achieve by reopening; and whether it is clear at the outset that the debtor would not be entitled to any relief after the case were reopened. See generally Arleaux v. Arleaux, 210 B.R. 148, 149 (8th Cir. BAP 1997), aff'd, 149 F.3d 1186 (8th Cir.1998) (Table).

As noted above, in a number of instances, courts have exercised their discretion not to reopen a bankruptcy case where there is non-bankruptcy forum that may hear the dispute which serves as the basis for the request to reopen. See, e.g., In re Tinsley, 98 B.R. at 791; In re E.A. Adams, Inc., 29 B.R. at 227; In re Hepburn, 27 B.R. at 135. In part, this denial recognizes the practical concern, noted by the Third Circuit...