In re Quick
| Decision Date | 23 October 1992 |
| Docket Number | Bankruptcy No. 87-01186. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Virginia |
| Parties | In re Robert B. QUICK, Jr. & Linda L. Quick, Debtors. |
Laurence P. Morin, Lynchburg, VA, for debtors.
Stephen U. Baer, Asst. U.S. Atty., Roanoke, VA, Helen P. Parrish, Trustee, and Angelo A. Frattarelli, Trial Atty., Washington, DC.
Before the court is a motion filed by the debtors, Robert B. and Linda L. Quick, to determine the amount and dischargeability of the claim filed in their chapter 7 case by the Internal Revenue Service.
The debtors filed a joint petition under chapter 13 of the Bankruptcy Code on October 30, 1987. Their chapter 13 plan was confirmed on December 10, 1987 and subsequently, on May 11, 1989, a modified plan was confirmed.
The Internal Revenue Service filed a timely proof of claim on February 17, 1988 in the amount of $30,859.68, and amended it on April 27, 1988 to reduce the amount to $6,675.89. Of that amount, $6,146.29 represented unpaid tax for the year ended 12/31/86, $314.47 was for interest that had accrued through the date the chapter 13 petition was filed, and $215.13 represented a penalty. On January 18, 1989 the chapter 13 trustee classified $6,460.76 of the Internal Revenue Service claim as an unsecured priority claim and $215.13 as an unsecured claim without priority.
On August 9, 1991 the debtors converted their case to chapter 7 and on November 19, 1991 they were granted a discharge. The events leading to the conversion are described by debtors' counsel as follows:
During July, 1991, it became apparent that the debtors could no longer maintain their plan payments, and that it would be necessary that they convert their case to chapter 7. However, prior to converting their case, they contacted the Trustee to determine the balance needed to pay the claim of the IRS in full. The debtors tendered a payment through counsel of $900.00 on July 31, 1991; then, on August 5, 1991, an additional $47.88 was paid to the trustee to "cover the balance due on Commissions and Priority claims in the above-captioned matter". It was the debtors\' uncontradicted intention to pay the IRS claim in full prior to converting their case to chapter 7.
Between June 22, 1989 and August 23, 1991, the chapter 13 trustee distributed a total of $6,424.07 to the Internal Revenue Service, leaving a balance due of $36.69 on the $6,460.76 unsecured priority portion of its claim. No payments were made on the $215.13 portion which had been designated a general unsecured claim prior to the conversion to chapter 7. And apparently no payments were made to unsecured creditors after the debtors converted their case.
On or about April 7, 1992, the IRS served a "Notice of Levy" on the debtors asserting tax liability as follows:
Type of tax Tax period Tax due "Statutory additions" Total
1040 12/31/86 $326.78 $3,520.38 $3,847.16
Debtors' counsel points out that the amount of "tax due" listed on the Notice appears to represent the alleged unpaid balance of the Internal Revenue Service's amended claim, although that amount exceeds the total of the unpaid $36.69 priority part of the Internal Revenue Service's claim and the $215.13 general unsecured portion. The "statutory additions" figure of $3,520.38 may represent the amount of interest and penalty which would have accrued since the debtors filed their chapter 13 petition on the original amount of the Internal Revenue Service's amended claim.
On April 15, 1992, the Internal Revenue Service applied the debtors' 1991 income tax overpayment of $404.07 to the $3,847.16 claimed as owing on the Notice, thereby reducing the unpaid tax liability for 1986 to zero, but leaving a balance of $3,438.92 owing.
In response to the Internal Revenue Service's action, the debtors filed a motion to reopen their chapter 7 case. The motion was granted on April 16, 1992, and the Internal Revenue Service has taken no further collection action. On April 20, 1992 the debtors filed their motion requesting this court to determine the balance due on the Internal Revenue Service claim and whether it is dischargeable.
Because the debtors' 1986 tax return was due within three years of the filing of their bankruptcy petition, and because the liability was assessed within 240 days of the filing of the petition, the tax and interest portions of the amended Internal Revenue Service claim which was filed in the chapter 13 proceeding (totalling $6,460.76) were correctly classified as an unsecured priority claim under 11 U.S.C. § 507(a)(7). Pursuant to 11 U.S.C. § 1322(a)(2), in order to be confirmed, a chapter 13 plan must provide for the full payment of all claims entitled to priority under section 507. Because a discharge is not issued in a chapter 13 proceeding until all payments called for under the plan have been made,1 this debt would have had to have been paid in full before the debtors could have received a discharge of the obligation.
The penalty portion of the amended IRS claim (which totalled $215.13) was classified in the chapter 13 proceeding as an unsecured claim without priority. Pursuant to 11 U.S.C. § 1328(a), any part of this obligation which the plan did not provide to be paid was dischargeable in the chapter 13 proceeding, if all of the payments required by the chapter 13 plan were made. In this case, the debtors' chapter 13 plan originally proposed paying 30 percent of the amount owed on nonpriority unsecured claims, including the $215.13 penalty portion of the IRS claim.
In general, many kinds of debts that are dischargeable in a chapter 13 proceeding are not dischargeable in proceedings under chapters 7, 11 and 12.2 11 U.S.C. § 727 sets out which debts can be discharged in a chapter 7 proceeding, and contains a long list of nondischargeable obligations. Section 727(b) excepts from discharge debts that are specified in section 523; section 523(a)(1) excepts from discharge taxes "of the kind and for the periods specified in section 507(a)(7);" and subparts (A) and (G) of section 507(a)(7) include taxes on income and penalties thereon "that are in compensation for actual pecuniary loss." Prepetition interest on income tax liability is considered a nondischargeable penalty for purposes of section 507(a)(7)(G).3 In addition, section 523(a)(7) makes other tax penalties, including those that are not in compensation for a pecuniary loss, nondischargeable if the underlying tax with respect to which the penalty is imposed is nondischargeable.4
When the debtors in this case converted from a chapter 13 proceeding to one under chapter 7, one effect was to make the $36.69 portion of the Internal Revenue Service's priority unsecured claim which was not paid prior to conversion a nondischargeable obligation pursuant to section 523(a)(1). Similarly, upon conversion, the unpaid $215.13 penalty portion of the IRS claim became nondischargeable pursuant to section 523(a)(7). And the debtors do not seriously dispute this. The more difficult question before the court is whether the Internal Revenue Service can recover postpetition interest and penalties on those nondischargeable debts.
Pursuant to 11 U.S.C. § 502(b)(2), unmatured interest is generally not allowed against the bankruptcy estate.5 The disallowance of the payment of unmatured interest out of the assets of a bankruptcy estate has been called a "rule of administrative convenience and fairness to all creditors" that makes it possible to calculate the amount of claims easily and assures that creditors at the bottom rungs of the priority ladder are not prejudiced.6 The "rule" is not absolute, however. For example, section 506(b) allows a secured creditor to recover postpetition interest when the value of the collateral is sufficient not only to satisfy the principal amount of the claim, but also to satisfy postpetition interest. Postpetition interest is also payable out of the assets of the bankruptcy estate if a debtor ultimately proves to be solvent.7
No provision of the Bankruptcy Code expressly states whether interest on tax claims is to be treated differently under section 502(b)(2).8 Instead, two cases decided by the United States Supreme Court prior to the enactment of the Code in 1978 provide the basis for resolving this question.
In City of New York v. Saper, 336 U.S. 328, 69 S.Ct. 554, 93 L.Ed. 710 (1949), the Supreme Court held that under the Bankruptcy Act, unsecured tax claims against a debtor bear interest only until the date the bankruptcy petition was filed. Because "there is nothing in the Code to suggest a rule contrary to that announced by the Supreme Court in Saper, it follows that the mere fact that it is a tax claim which is involved does not presuppose that such claim will be allowable to the extent it is for unmatured interest, nor that the rule is altered that interest stops running as of the date of the filing of the petition." 3 Collier on Bankruptcy ¶ 502.022a, at pp. 502-37 (15th ed. 1992). For example, when the prepetition amount of a tax claim is paid in full in a chapter 13 proceeding, the trustee does not pay interest that would have accrued subsequent to the date the bankruptcy petition was filed.
The Supreme Court subsequently held in Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964), however, that the Saper holding applied only to tax claims against the trustee in bankruptcy. Bruning involved a personal bankruptcy in which the funds realized from the liquidation of a debtor's estate were not sufficient to pay the prepetition tax liability in full. After his discharge, the Internal Revenue Service sought to collect not only the balance of the unpaid tax obligation and prepetition interest, but also interest which accrued postpetition. In Bruning, the Court expressly held that the "traditional rule which denies postpetition interest...
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