In re Pan, Civil Action No. 96-11201-PBS.

• Decision Date: 05 March 1997
• Docket Number: Civil Action No. 96-11201-PBS.
• Citation: 209 BR 152
• Parties: In re George S. PAN, Debtor. UNITED STATES of America, Appellant, v. Joseph BRAUNSTEIN, Trustee, Appellee.
• Court: U.S. District Court — District of Massachusetts

209 B.R. 152 (1997)

In re George S. PAN, Debtor UNITED STATES of America, Appellant, v. Joseph BRAUNSTEIN, Trustee, Appellee.

Civil Action No. 96-11201-PBS.

United States District Court, D. Massachusetts.

March 5, 1997.

Susan M. Poswistillo, U.S. Attorney's Office, Boston, MA, Henry J. Riordan, U.S. Department of Justice, Tax Division, Washington, DC, for appellant.

Alan L. Braunstein, Riemer & Braunstein, Boston, MA, for appellee.

MEMORANDUM AND ORDER

SARIS, District Judge.

I. Introduction

In this appeal pursuant to 28 U.S.C. § 158(a), the United States of America challenges a bankruptcy court's decision to disallow a proof of claim filed by the Internal Revenue Service ("IRS"). During the Chapter 7 proceeding, the bankruptcy court rejected the government's argument that the proof of claim for a federal tax penalty in the amount of $123,371.49 was itself prima facie evidence of the claim's validity. Sustaining the objection raised by Joseph Braunstein, appointed Trustee for the estate of debtor George S. Pan, the bankruptcy court held that the proof of claim did not document adequately the alleged tax obligation and that, as a result, the government failed to meet its burden of establishing the trust fund's liability.

For the following reasons, the bankruptcy court's order denying the proof of claim is VACATED and the case is REMANDED to the bankruptcy court for further proceedings.

II. Facts

On September 8, 1992, the debtor, George S. Pan ("Pan"), filed a voluntary bankruptcy petition under Chapter 11 of the United States Bankruptcy Code. On December 16, 1992, the bankruptcy court converted the case to a case under Chapter 7 of the Code, and Joseph Braunstein ("Braunstein") was appointed as trustee for the debtor.

On June 2, 1995, the United States filed a proof of claim, classified as an "unsecured priority claim," for pre-petition federal taxes in the amount of $166,916.43.¹ The proof of claim was filed on an official bankruptcy Form 10 and included an attachment entitled "Proof of Claim for Internal Revenue Taxes." The attachment stated that the total claim amount was based upon civil penalties for three separate tax periods — the period ending Dec. 31, 1988; the period ending December 31, 1991; and the period ending June 30, 1992. The attachment also indicated that the tax assessment for the period ending December 31, 1988, which is the sole penalty still at issue in this case,² amounted to $123,371.49, with interest.

On December 15, 1995, Braunstein filed an objection to the proofs of claim of ten creditors, including the IRS. The gravamen of Braunstein's opposition to the IRS proof of claim was that the claim was "not supported by any documentation establishing the source of such taxes." Objection of Chapter 7 Trustee to Proofs of Claim, at 6 hereinafter Objection. On January 16, 1996, the United States filed an opposition to the Trustee's objection which stated, in relevant part:

5. The liabilities listed on the Service\'s proof of claim dated June 2, 1995, consists of debtor\'s liability as a responsible officer under I.R.C. § 6672, as follows:

(a) The trust fund recovery penalty for the period ended December 31, 1988, was assessed on July 27, 1992, against the debtor as a responsible officer of Boston Monthly, Inc. (a corporation located in Randolph, Massachusetts), in the amount of $131,908.53. The periods involved are the first, third, and fourth quarters of 1987, and the first, second, third and fourth quarters of 1988.

United States of America's Response to Objection of Chapter 7 Trustee to Proofs of Claim, at 2 hereinafter Response.³

On January 24, 1996, the bankruptcy court held a hearing on the Trustee's objections. During the hearing, the Trustee requested that the IRS supply documentation to support its claim. The government responded: "That's fine with us, Your Honor, and we have requested the files in these cases. The debtor is found to be a responsible officer of three corporations, two of which are located in Portland, Oregon. It's going to take the Service about two or three weeks to obtain all those files." (Transcript at 11, 11. 24-25, at 12, 11. 1-4.) The bankruptcy court then continued the hearing.⁴

On April 11, 1996, during the next hearing on this matter, the parties informed the court that a dispute still existed concerning the IRS proof of claim, and the Court inquired as to whether either side desired a continuance. In response, the government stated that it "would not be asking for a continuance per se, but we disagree with Mr. Braunstein's position on disallowing our proof of claim . . . So, I don't know if you maybe want to — maybe put on evidentiary hearing at some later time." The Court responded, "Well, there's no reason we can't do it today."

After a short recess, during which the Court heard other matters, the hearing resumed. The Trustee withdrew his objection as to the tax assessments for the periods ending December 31, 1991 and June 30, 1992 — the two claims for which the IRS had provided documentation. As to the period ending December 31, 1988, the Trustee maintained his objection. The IRS offered Form 4340, entitled "Certificate of Assessments and Payments," which indicates that a "trust fund recovery penalty" was assessed on July 27, 1992. After argument, the Bankruptcy Court made the following ruling:

I\'m going to sustain the Trustee\'s objection with respect to the — that portion of the claim which is listed as having — as relating to the tax period December 31, 1988. Although it is true that the proof of claim has prima facie validity, it is also the case that each claimant must provide sufficient documentation from which a Chapter 7 Trustee can determine the validity of the claim; and in this case, the Government hasn\'t provided that.

The document which is Claimant\'s Exhibit 1 Form 4340 is the only evidence, and it doesn\'t provide sufficient information for the Court — and as a threshold matter, of course, for the Trustee — to determine what is the basis for the trust fund liability. It merely states that certain payments were made, penalties were incurred, but no statement of what corporation they address, what corporation they are attributable to, what Mr. Pan\'s involvement with that corporation is or was, or any of the supporting facts on which the claim is based.

The Court further stated that:

The problem is, you know, if you were dealing with Chapter 11 debtor\'s counsel objecting that would be one thing. Mr. Braunstein is an independent fiduciary. If he — all he can do is look at the books and records and look at the claims to try to determine whether they\'re valid or not . . . the problem is he can\'t assess the validity of that 12/31/88 claim without assistance, and you haven\'t even provided him that threshold of help. . . . There is no basis on which I could even — there\'s no way I could rule in favor of the IRS on this factual record if I wanted to.

III. Discussion

A. Standard of Review

A federal district court must accept a bankruptcy court's findings of fact unless those findings are clearly erroneous. See Fed R. Bank. P. 8013; In Re DN Associates, 3 F.3d 512, 515 (1st Cir.1993). However, conclusions of law, such as the legal sufficiency of a proof of claim, are reviewed de novo. See In re Circle J Dairy, Inc., 112 B.R. 297, 299 (W.D.Ark.1989) (stating that whether the presumption of prima facie validity applies to a proof of claim "presents a legal question" that is to be reviewed de novo).

B. The Legal Landscape

The United States Code requires a creditor who is seeking to assert a claim against a bankrupt debtor's estate to file a "proof of claim." 11 U.S.C. § 501(a). Section 502(a) provides that a proof of claim is deemed allowed unless a party in interest objects. See 11 U.S.C. § 502(a). The statute also sets forth the grounds upon which a bankruptcy court may disallow a proof of claim "after notice and hearing." Id.

At such a hearing, according to the Federal Bankruptcy Rules, "a proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim." Fed. R. Bank. Proc. 3001(f); accord In re Hemingway, 993 F.2d 915, 925 (1st Cir.1993), cert. denied, 510 U.S. 914, 114 S.Ct. 303, 126 L.Ed.2d 251 (1993); United States v. Kiester, 182 B.R. 52, 53 (M.D.Fla.1995); cf. United States v. Kontaratos, 36 B.R. 928, 931 (D.Me.1984)(finding proof of claim filed by IRS not entitled to presumptive validity because no formal assessment had been completed). "To be legally sufficient and, therefore, to be prima facie valid under the Bankruptcy Rules," a proof of claim must: "be in writing"; "make a demand on the debtor's estate"; "express an intent to hold the debtor liable for the debt"; "be properly filed"; and "be based upon facts which would allow, as a matter of equity, the document to be accepted as a proof of claim." Circle J Dairy, 112 B.R. at 299-300 (citing In re Scholz, 57 B.R. 259 (Bankr.N.D.Ohio 1986)). "A claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant's initial obligation to go forward." In re Allegheny Intern., Inc., 954 F.2d 167, 173 (3rd Cir.1992).

Of course, the prima facie validity of a proof of claim can be overcome by an objection that is "supported by substantial evidence." Hemingway, 993 F.2d at 925 (emphasis in original); accord Matter of Placid Oil Co., 988 F.2d 554, 557 (5th Cir.1993), reh'g den., 4 F.3d 992 (5th Cir.1993); Allegheny, 954 F.2d at 173-74 ("The objector must produce evidence equal in force to the prima facie case."). In the ordinary Chapter 7 bankruptcy proceeding, "once the Trustee manages the initial burden of producing substantial evidence . . . the ultimate risk of nonpersuasion as to the allowability of the claim resides with the party asserting the claim." Hemingway, 993 F.2d at 925; see also In re Bourque, 153 B.R. 87, 91 (Bankr. D.Mass.1993) (ho...