In re Rago
| Decision Date | 23 November 1992 |
| Docket Number | Bankruptcy No. 90 B 2284. |
| Parties | In re Michael A. RAGO, Debtor. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Mayer Y. Silber, Special Asst. U.S. Atty., M. Scott Michel, U.S. Trustee, Patricia Marshall, Special Asst. Atty. Gen., Revenue Litigation Div., State of Illinois Center, and Dist. Director, I.R.S., Chicago, IL, D. Patrick Mullarkey, Chief, Civil Trial Section, Northern Region, Dept. of Justice, Tax Div., Washington, D.C., for U.S.
Allan J. DeMars, Chicago, IL, trustee.
This Chapter 7 case is before the court on the motion of the United States of America to allow a claim of the Internal Revenue Service as timely filed. The trustee has responded in opposition to the motion, and both parties have briefed the matter. For the reasons stated below, the motion is denied, but the trustee is instructed that the late filing of the IRS's claim does not deprive the claim of its priority under 11 U.S.C. § 726(a)(1).1
The relevant facts are undisputed. The debtor began this case as a voluntary case under Chapter 11 of the Bankruptcy Code (Title 11, U.S.C., the "Code"), but converted it to one under Chapter 7 of the Code. Notice was given to all scheduled creditors of this conversion, and of the date set for a meeting of creditors pursuant to Section 341(a) of the Code. The initial notice also informed creditors that there appeared to be insufficient assets in the estate to pay a dividend. However, on January 7, 1991, a notice of possible dividend was issued to the creditors: this second notice informed the creditors that the last date for filing claims was April 8, 1991. The IRS did not receive either of the notices to creditors, because it was not listed as a creditor in the debtor's schedules. The failure of the debtor to list the IRS was, in turn, due to the debtor's lack of knowledge that the IRS had any claim against him. It was not until May 20, 1991, that the IRS began the audit of the debtor's 1988 tax liability that ultimately resulted in claims for unpaid taxes.
On January 2, 1992, the debtor filed a proof of claim on behalf of the IRS, stating the amount as "$5,000 Estimated (to be liquidated)." On January 31, 1992, the IRS filed its own proof of claim, in the amount of $18,836 for 1988 individual income taxes, $2,427.32 for interest on the taxes, and $942 for penalties on the taxes. The IRS asserted that the taxes and interest were unsecured priority claims under Section 507(a)(7) of the Code, and that the penalties were an unsecured general claim.
The trustee has not objected to the IRS claim, but the debtor has done so, by way of a "Complaint to Determine Liability for Taxes," filed on May 22, 1992. This claim objection remains pending. On July 28, 1992, the trustee gave notice that he intended to commence distribution of the estate to claimants who had filed timely proofs of claim. The IRS responded with the present motion, and the trustee has withheld distribution pending the court's ruling.
This court has jurisdiction over the pending motion pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(a) and (b)(1), and Rule 2.33 of the General Rules of the United States District Court for the Northern District of Illinois. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), and (O).
The pending motion of United States seeks a declaration from the court that the IRS's claim in this matter was timely filed. However, the ultimate relief sought by the motion is a determination that the IRS claim should not be barred from payment. In ruling on the motion, it is necessary to consider three issues: the timeliness of the claim, its potential to be allowed, and its relative priority.
Timeliness. The IRS claim was not timely filed, and this court cannot grant the IRS a retroactive extension of the time to file. This is plain from the applicable rules. Fed.R.Bankr.P. 3002(c) requires creditors to file proofs of claim against the estate within 90 days after the date set for the meeting of creditors, unless one of six exceptions applies. In the present case, the only applicable exception is the fifth, which governs cases in which "notice of insufficient assets to pay a dividend was given . . . and subsequently the trustee notifies the court that payment of a dividend appears possible." In such circumstances, the rule directs the clerk to notify creditors (1) of the possibility of a dividend, and (2) "that they may file proofs of claim within 90 days after the mailing of the notice." Such a notice was mailed to creditors in this case on January 7, 1991, properly setting April 8, 1991 as the last date for filing proofs of claims. Another exception, the first, allows a court to extend the period for the United States to file a claim, but only on motion made "before the expiration of such period." Fed.R.Bankr.P. 3002(c)(1). The United States did not make such a motion. Finally, Fed.R.Bankr.P. 9006(b)(3) provides that the time limits of Rule 3002(c) may be enlarged by the court "only to the extent and under the conditions stated" in the rule. Thus, the court has no discretion to deem the claim of the IRS in this case timely filed. In re Coastal Alaska Lines, Inc., 920 F.2d 1428, 1431-33 (9th Cir.1990); In re Global Precious Metals, Inc., 143 B.R. 204, 205 (Bankr.N.D.Ill.1992); In re Chirillo, 84 B.R. 120, 121-122 (Bankr. N.D.Ill.1988).
In arguing that the court does possess discretion to retroactively extend claim filing deadlines, the United States relies primarily on In re Unroe, 937 F.2d 346 (7th Cir.1991). This reliance is misplaced. Unroe did not involve a late filed original claim, but rather an amendment to a timely filed claim. The Seventh Circuit held in Unroe only that a bankruptcy court might use its discretion to allow the amended claim to relate back to the timely filed one, even if such relation back would not have been allowed under Fed.R.Civ.P. 15(c). "We leave for another case the question whether a judge in equity could permit an entirely new claim filed out of time." 937 F.2d at 350. Thus, Unroe had no occasion to consider the impact of Rule 9006(b)(3) in limiting the discretion of the court.
Allowance. However, the fact that the IRS's claim is irretrievably untimely does not resolve the question of whether that claim is entitled to payment from the estate. In re Unroe, 937 F.2d 346 (7th Cir.1991), like many decisions, including the opinion of this court in In re Chirillo, 84 B.R. 120, 122 (Bankr.N.D.Ill.1988), assumes that a late filed claim is disallowed.2 This assumption is mistaken. As pointed out by both the trustee in this case and the bankruptcy judges of Minnesota, in In re Hausladen, 146 B.R. 557 (Bankr.D.Minn.1992), disallowance of claims is governed by Section 502 of the Code. Section 502(a) provides that a claim is deemed allowed unless an objection is made, and Section 502(b) states that if an objection is made, the court shall allow the claim except to the extent that it fits into eight specific categories, none of which includes untimeliness in filing proof of the claim. Furthermore, as discussed below, Section 726(a)(3) of the Code makes specific provision for payment of an "allowed unsecured claim proof of which is tardily filed." See In re Coastal Alaska Lines, Inc., 920 F.2d 1428, 1430 (9th Cir.1990) (). It is plain, then, that the untimeliness of the filing of a proof of claim does not in itself cause disallowance of the claim. Rule 3002, which governs the timeliness of creditor claims in Chapter 7, states in section (a) that "an unsecured creditor . . . must file a proof of claim . . . in accordance with this rule for the claim . . . to be allowed." This rule, insofar as it purports to require disallowance of late filed creditor claims, contravenes Sections 502 and 726 of the Code, and thus cannot be enforced. See Hausladen, 146 B.R. at 560 n. 5, and the cases cited therein. To the extent that the IRS claim is not disallowed on the basis of the debtor's objection (made pursuant to Section 502(b)(1)), the IRS has an allowed claim. 11 U.S.C. § 502(a).
Priority. Because the IRS claim may be allowed, it is necessary to determine its potential priority, in order that the trustee can determine to what extent to distribute assets of the estate. This presents a difficult question of the interpretation of Section 726(a) of the Code, which governs priority of distribution in Chapter 7 cases.3 In re Virtual Network Services Corp., 98 B.R. 343, 344-45 (N.D.Ill.1989), aff'd, 902 F.2d 1246 (7th Cir.1990) (). Section 726(a) determines priority based on two factors. The first factor is the nature of the claim. The highest priority of distribution is accorded by Section 726(a)(1) to the "priority" claims designated by Section 507 of the Code, among which are the tax liabilities that make up the bulk of the IRS claim in this case. Next, are "general" unsecured claims — that is, claims which are not accorded special priority by Section 507.4 General unsecured claims are dealt with by subsections (a)(2) and (a)(3) of Section 726. Finally, Section 726(a)(4) accords the lowest claim priority to noncompensatory fines, penalties, forfeitures, and damage awards, including the relatively small penalty that is part of the IRS claim here.5
In addition to distinguishing claims by their nature, Section 726 also defines priority of distribution according to a second factor: the timeliness of claim filing. Section 726(a)(2) accords the higher priority to two classes of claims: (a) claims that are filed on time, regardless of whether the claim is filed by the creditor holding the claim or by another party on behalf of the creditor; and (b) claims filed by creditors who did not receive notice or have knowledge of...
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