In re Pottorff
| Decision Date | 10 July 2020 |
| Docket Number | Bankruptcy Case No. 17-41005-JMM |
| Parties | In Re: Steven Max Pottorff, Debtor. |
| Court | U.S. Bankruptcy Court — District of Idaho |
In Re: Steven Max Pottorff, Debtor.
Bankruptcy Case No. 17-41005-JMM
UNITED STATES BANKRUPTCY COURT DISTRICT OF IDAHO
July 10, 2020
MEMORANDUM OF DECISION
Appearances:
Thomas D. Smith, SPINNER, WOOD & SMITH, Pocatello, Idaho, Attorney for chapter 7 trustee.
Amber Kauffman, Boise, Idaho, Attorney for Idaho State Tax Commission.
Jed W. Manwaring, EVANS KEANE LLP, Boise, Idaho, Attorney for creditors Linan Inc. d/b/a Dura-Bilt Transmissions; Dura-Bilt Transmission Exchange, Inc.; and A & D Investments LLC.
Before the Court is creditors Linan Inc. d/b/a Dura-Bilt Transmissions, Dura-Bilt Transmission Exchange, Inc., and A & D Investments LLC ("Creditors") objection to the Stipulation to Vacate the Withdrawal, Dkt. No. 219, as well as Creditors' objection to second amended Claim No. 8, Dkt. No. 232. The Court conducted an evidentiary hearing on February 25, 2020, after which the parties requested the opportunity to file
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supplemental briefs. Following the completion of the briefing, see Dkt. Nos. 243-245, the objections were deemed under advisement. The Court has now considered the briefs, exhibits, and argument presented, as well as the applicable law, and issues the following decision which resolves the two objections. Fed. R. Bankr. P. 7052; 9014.
On November 15, 2017, the Debtor filed his Chapter 71 Petition. Dkt. No. 1. That same day, Debtor's ex-wife, Charlotte Pottorff, also filed a bankruptcy petition. In re Pottorff, 17-41006-JMM. Based on the petition date, the deadline for a governmental unit to file a proof of claim was set for May 14, 2018. Dkt. No. 3. On April 18, 2018, the Idaho State Tax Commission ("ISTC") filed Claim No. 5 in Debtor's case, claiming the amount of $91,872.00 as a "priority" claim for tax years 2011-2016. Claims Reg. 5-1. The underlying basis for Claim No. 5 was tax liability imposed on unreported income stemming from $2.3 million in funds embezzled by Debtor's ex-wife from Creditors, her former employer.
On June 11, 2018, ISTC filed a new claim based on its determination of deficiency in the amount of $104,570 for tax years 2007-2010 ("Claim No. 7"). Claims Reg. at 7-1. The basis for that claim was the unreported income derived from Debtor's ex-wife's embezzlement, the same as for Claim No. 5.
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On February 15, 2019, R. Sam Hopkins, the chapter 7 trustee ("Trustee"), filed objections to both Claim Nos. 5 and 7. Dkt. Nos. 132; 134. ISTC did not respond to the objection to Claim No. 5, and on March 22, 2019, the Court entered an order disallowing that claim, Dkt. No. 142. ISTC did not appeal or move for reconsideration of that order. However, ISTC did respond to Debtor's objection to Claim No. 7, Dkt. No. 140, but that response was overlooked by both the Trustee and the Court, and the Trustee sought an order disallowing the claim, Dkt. No. 153, and the next day, May 24, 2019, the Court ordered that Claim No. 7 be disallowed, Dkt. No. 154.2
On July 9, 2019, ISTC filed a Motion to Reconsider the disallowance of Claim No. 5 ("Reconsideration Motion"). Dkt. No. 158. In that motion, ISTC also sought a ruling that Claim No. 5 could be amended to add interest, penalties, and a claim for taxes owed for additional tax years. Id. However, in the alternative, it sought reconsideration and vacation of the order disallowing Claim No. 7. Debtor objected to the motion, and it was set for hearing, but was continued for several months so an evidentiary hearing could be conducted. Dkt. Nos. 160, 161, 164. In the interim, before the hearing, on July 23, 2019, ISTC filed a new claim, Claim No. 8, in which it claimed a priority amount of $174,278.30 for tax years 2007-2016, and general claims representing the penalties on the priority amounts due for tax years 2007-2016 in the amount of $88,472. Claims Reg. 8-1. That new claim was based upon the same facts as Claim Nos. 5 and 7—the
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unreported income from Debtor's ex-wife's embezzlement. On August 29, 2019, Debtor objected to Claim No. 8, Dkt. No. 168, but later withdrew its objection on October 17, 2019, Dkt. No. 213.
That same day, October 17, 2019, ISTC filed a Withdrawal of Reconsideration Motion "with prejudice" ("Withdrawal"). Dkt. No. 212. The backstory behind the Withdrawal is that ISTC and Debtor had entered into a Settlement Agreement and Mutual Release ("Settlement Agreement").3 Ex. A. That Settlement Agreement, admitted under seal, required Debtor to pay a specified sum to ISTC towards the tax liability, and provided that such payment would be "final and conclusive as to any income tax liability owed by Pottorff." Id. It also contained a mutual release of tax claims arising out of the embezzled funds.
A few days later, ISTC filed an amended Claim No. 8, but Creditors objected to the claim. Dkt. No. 215. ISTC filed a response to the objection on December 4, 2019. Dkt. No. 218. However, following the objection and response, ISTC filed a second amended Claim No. 8, in which ISTC reduced its priority claim to $109,357 for tax years 2008-2013, and asserted general claims totaling $86,948 for penalties incurred for tax years 2008-2016. Claims Reg. 8-3. Thereafter, Creditors filed an amended objection to Claim No. 8. Dkt. No. 232.
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On December 4, 2019, ISTC filed a notice that the Withdrawal contained an error, in that it was intended to be with prejudice "as to the Debtor" only. Dkt. No. 216. That same day, ISTC and Debtor filed a stipulation to set aside and vacate the Withdrawal ("Stipulation to Vacate"). Dkt. No. 217. Creditors objected on December 10, 2019. Dkt. No. 219.
Accordingly, at the hearing date set on February 25, 2020, the following remained pending:4 1) Creditors' objection to the Stipulation to Vacate the Withdrawal (Dkt. No. 219); and 2) Creditors' objection to second amended Claim No. 8 (Dkt. No. 232).5 Dkt. No. 228.
Due to the convoluted record in this case, the Court will begin by examining the status of each of the proofs of claim filed by ISTC in this case.
A. Claim No. 5
As noted above, following ISTC's filing of Claim No. 5, the Trustee filed an objection, to which ISTC never responded. As a result, the objection was granted and Claim No. 5 was disallowed. Three and a half months later, ISTC filed the Reconsideration Motion seeking to have the Court reconsider the disallowance of that
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claim. On October 17, 2019, ISTC filed its Withdrawal of the Reconsideration Motion, doing so "with prejudice" after Debtor and ISTC entered into a Settlement Agreement to resolve their differences. Later, after things unraveled, ISTC and Debtor stipulated to vacate the Withdrawal of the Reconsideration Motion, and Creditors filed the objection at issue.
In support of their objection, Creditors contend that the order disallowing Claim No. 5 is a final judgment and is entitled to claim preclusion, thus preventing further consideration of that order. However, their post-hearing brief centers more on the elements of issue preclusion. Due to the confusion, the Court will consider both doctrines.
1. Issue Preclusion
The doctrine of issue preclusion is directed at parties taking inconsistent positions on the same issue in different actions. Issue preclusion bars "successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment," even if the issue recurs in the context of a different claim. Taylor v. Sturgell, 553 U.S. 880, 892, 128 S. Ct. 2161, 2171 (2008). It "bars the relitigation of issues actually adjudicated in previous litigation between the same parties." Beauchamp v. Anaheim Union High Sch. Dist., 816 F.3d 1216, 1225 (9th Cir. 2016) (quoting Clark v. Bear Stearns & Co., Inc., 966 F.2d 1318, 1320 (9th Cir. 1992)). It is intended to protect parties from multiple lawsuits and the possibility of inconsistent decisions, and to conserve judicial resources. Lytle v. Household Mfg., Inc., 494 U.S. 545, 553, 110 S. Ct.
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1331, 1337 (1990); Montana v. United States, 440 U.S. 147, 153-54, 99 S. Ct. 970, 973-74 (1979). Thus, "once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation." Berr v. Federal Deposit Ins. Corp. (In re Berr), 172 B.R. 299, 306 (9th Cir. BAP 1994) (citing Montana, 440 U.S. at 153, 99 S. Ct. at 973.)
In this case, Creditors contend ISTC is precluded from seeking a priority tax claim in Debtor's case based on the unreported embezzlement income because the issue of its priority tax claim for the same income was decided and paid in full in Ms. Pottorff's bankruptcy case.
a. Elements of Issue Preclusion
When a party seeks to invoke the doctrine of issue preclusion and a federal court has decided the earlier case, federal law controls the analysis. McQuillion v. Schwarzenegger, 369 F.3d 1091, 1096 (9th Cir. 2004) (citing Trevino v. Gates, 99 F.3d 911, 923 (9th Cir. 1996)); Fireman's Fund Ins. Co. v. Int'l Mkt. Place, 773 F.2d 1068, 1069 (9th Cir. 1985) (citing Blonder-Tongue Laboratories v. University of Illinois Found., 402 U.S. 313, 324 n. 12, 91 S. Ct. 1434, 1440 n. 12 (1971). Before issue preclusion may be employed, the Court must consider three factors: "(1) the issue at stake must be identical to the one alleged in the prior litigation; (2) the issue must have been actually litigated [by the party against whom preclusion is asserted] in the prior litigation; and (3) the determination of the issue in the prior litigation must have been a
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critical and necessary part of the judgment in the earlier action." Trevino v. Gates, 99 F.3d at 923 (quoting Town of N. Bonneville v. Callaway, 10 F.3d 1505, 1508 (9th Cir. 1993)).
b. Application of Issue Preclusion to Facts Presented
Creditors contend that ISTC took the position in Ms. Pottorff's case that its entire priority claim for the unreported income from her embezzlement was the...
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