In re Richmond

• Decision Date: 01 March 1972
• Docket Number: No. 71-1021.,71-1021.
• Citation: 456 F.2d 458
• Parties: In the Matter of Theodore J. RICHMOND, Debtor. Jean RICHMOND, Appellant, v. UNITED STATES of America et al, Appellees.
• Court: U.S. Court of Appeals — Third Circuit

456 F.2d 458 (1972)

In the Matter of Theodore J. RICHMOND, Debtor.

Jean RICHMOND, Appellant, v. UNITED STATES of America et al, Appellees.

No. 71-1021.

United States Court of Appeals, Third Circuit.

Argued December 16, 1971.

Decided March 1, 1972.

Reuben P. Goldstein, Jersey City, N. J., for appellant.

Bernard L. Belsky, Cole, Berman & Belsky, Paterson, N. J., for appellee Bernard L. Belsky, Receiver.

Janet R. Spragens, Asst. Atty. Gen., Dept. of Justice, Tax Div., Washington, D. C. (Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks, Richard W. Perkins, Attys., Tax Div., Dept. of Justice, Washington, D. C., Herbert J. Stern, U. S. Atty., on the brief), for the United States.

Joseph R. Purcell, Crummy, O'Neill, DelDeo & Dolan, Newark, N. J., for appellee Donald A. Robinson, Trustee of Manufacturers Credit Corp.

Before BIGGS, VAN DUSEN and HUNTER, Circuit Judges.

OPINION OF THE COURT

JAMES HUNTER, III, Circuit Judge.

This appeal questions the jurisdiction of a Referee in Bankruptcy to determine the income tax liability of a Chapter XI debtor's spouse who had filed joint returns with the debtor. The District Court has held that such jurisdiction does not exist in this case. In re Richmond, 322 F.Supp. 888 (D.N.J.1970). We affirm.

I. THE FACTS

The debtor in this case is Theodore J. Richmond, who between 1932 and 1967 built up a complex of twenty-six corporations engaged chiefly in public bus transportation. In August 1967, a joint petition for arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq., was filed by twenty of these corporations. The Chapter XI proceedings were eventually extended to the other six. In November 1967, the Securities and Exchange Commission was allowed to intervene, and in January 1968, the District Court granted the motion of the S.E.C. to dismiss the Chapter XI proceedings unless the petition was amended to bring the proceedings within the provisions of Chapter X of the Bankruptcy Act, 11 U.S.C. § 501 et seq. In re Manufacturers Credit Corporation, 278 F.Supp. 384 (D.N.J.1968). Because "the protective provisions of Chapter X would better serve `the public and private interests concerned including those of the debtor,'" we affirmed the District Court's order. Manufacturers Credit Corporation v. Securities and Exchange Commission, 395 F.2d 833, 843 (3d Cir. 1968).

In addition to the proceedings involving the debtor's corporations, the debtor also filed on September 7, 1967, a personal petition for arrangement under Chapter XI. It is in the matter of the personal Chapter XI proceeding that this appeal arises.

After we affirmed the District Court's order requiring Chapter X proceedings, nineteen of the corporations refiled under Chapter X. Seven refused. Appellee Donald A. Robinson, the Chapter X Trustee, subsequently petitioned to extend the Chapter X proceeding to the other seven corporations. The petition was opposed by the debtor's wife (appellant Jean Richmond) and daughters, who owned stock in several of the non-filing corporations.

Further controversy surrounded several savings accounts, totalling some $135,000, held in the name of Jean Richmond. Leonard I. Garth,¹ the Chapter XI Receiver for Theodore Richmond, asserted ownership to the bank accounts and other assets held by Jean Richmond, and the Referee ordered that no transfer or other disposition of the funds or assets be made until after determination of their ownership.

After negotiation among the parties, a compromise settlement was reached whereby Jean Richmond and the daughters agreed to assign their stock to the Chapter X Trustee and Jean Richmond agreed to convey $35,000 to the Chapter XI Receiver. In addition, Jean Richmond and the daughters would withdraw their opposition to the Chapter X Trustee's petition to extend the Chapter X proceedings to the seven corporations which had not refiled. The Chapter XI Receiver agreed to surrender any claim to the balance of the funds and assets held in the name of Jean Richmond. After notice to all creditors and a hearing, the Referee indicated his approval of the compromise on March 20, 1969.² The terms of the compromise have not been effected, however, because of circumstances to be discussed below.

Early in the course of the debtor's Chapter XI proceeding, the Government filed its claim for income taxes and interest for the years 1965 and 1966, for which years the debtor and his wife had filed joint returns. As finally amended on May 26, 1969, the Government's claim was in the amount of $418,869.73.

Within a few days after the above mentioned compromise had been approved by the Referee, the Government made a jeopardy assessment against Jean Richmond which had the effect of freezing the funds in the savings accounts in her name.³ Because the funds were unavailable, Jean Richmond was unable to convey to the Chapter XI Receiver the $35,000 required by the compromise settlement.

The Government's claim was far greater than Jean Richmond's total assets. The Referee therefore adopted the following procedure: he would first determine the tax liability of the debtor, while holding in abeyance the question of ownership of the savings accounts as between Jean Richmond and the Chapter XI Receiver. The latter question would be avoided if the tax liability of the debtor were found to be less than the funds on deposit.⁴

Hearings on the tax claim began on May 15, 1969. During the course of the hearings, the Government objected to the participation therein of counsel for Jean Richmond, but the objection was overruled by the Referee. By opinion dated August 4, 1969, the Referee determined that the Government had not proved its tax claims. The Referee did, however, reject certain interest deductions taken on the joint returns which totalled approximately $140,000 for the two tax years. After further controversy related to income averaging, the Referee by order dated October 15, 1969, allowed the tax claim to the extent of $62,083.10. A careful reading of the order shows that it did not purport to apply to Jean Richmond, although the Government and Jean Richmond were the only parties appearing before the Referee with respect to the income-averaging controversy.⁵ Since it was not reviewed, this order became final ten days after its entry. Bankruptcy Act § 39(c), 11 U.S.C. § 67(c).

Jean Richmond through her attorney tendered $62,083.10 to the Government, which was refused. Thereupon Jean Richmond filed a motion to compel the Government to accept the tendered $62,083.10 in full settlement of its tax claim and to discharge the jeopardy assessment and thus release her assets. By order dated December 31, 1969, Jean Richmond's motion was granted, over Government arguments that the Referee had no jurisdiction to decide Jean Richmond's tax liability since she was not in bankruptcy. The order was corrected on January 8, 1970, to specify that the jeopardy assessment was to be discharged as to all assets upon which it had been made, and not merely the savings accounts. The Government filed a timely petition for review in the District Court.

By opinion filed June 19, 1970, the District Court upheld the Referee's jurisdiction to decide the tax liability of Jean Richmond, but struck down the order compelling the Government to dissolve its jeopardy assessment upon receipt of the tax found to be due. After reargument the District Court filed a supplemental opinion on August 24, 1970, reversing its earlier opinion and holding that the Referee had no jurisdiction to determine the tax liability of Jean Richmond. All orders of the Referee were set aside insofar as they purported to apply to Jean Richmond or her separate property. Jean Richmond filed a timely notice of appeal to this Court. Rule 4(a), Federal Rules of Appellate Procedure. We have jurisdiction over the appeal under Sections 316 and 24(a) of the Bankruptcy Act, 11 U.S.C. §§ 716, 47(a).

II. THE REFEREE'S JURISDICTION

It is undisputed here that the Referee had jurisdiction under the Bankruptcy Act, 11 U.S.C., to determine the tax liability of the Chapter XI debtor Theodore Richmond. See Abel v. Campbell, 334 F.2d 339 (5th Cir. 1964); Cohen v. Gross, 316 F.2d 521 (3rd Cir. 1963).⁶ What is disputed is the Referee's jurisdiction to determine the tax liability of the debtor's wife Jean Richmond.

Since Theodore and Jean Richmond filed joint income tax returns for 1965 and 1966, their liability for the taxes owed for those years is joint and several. Internal Revenue Code (26 U. S.C.) § 6013(d) (3); Lustman v. Commissioner of Internal Revenue, 322 F.2d 253 (3rd Cir. 1963). As a consequence of this joint and several liability, the Government could proceed against either of the Richmonds or both of them to collect a deficiency for those years, without regard to their relative contributions to the total income. Furnish v. Commissioner of Internal Revenue, 262 F.2d 727 (9th Cir. 1958); Martin v. United States, 411 F.2d 1164 (8th Cir. 1969); see 8A Mertens Law of Federal Income Taxation § 47.10 (rev. 1971); cf. Cirillo v. Commissioner of Internal Revenue, 314 F.2d 478 (3rd Cir. 1963); Spanos v. United States, 323 F.2d 108 (4th Cir. 1963). Thus Jean Richmond's tax liability may be seen as separate and distinct from the tax liability of her husband, even though both liabilities result from filing the same joint return.

As a general rule, a bankruptcy court has no jurisdiction to decide controversies between third parties that do not involve the debtor or his property. Henrie v. Henderson, 145 F. 316 (4th Cir. 1906), cert. denied, 206 U.S. 563, 27 S. Ct. 795, 51 L.Ed. 1190 (1907); Nixon v. Michaels, 38 F.2d 420 (8th Cir. 1930); Evarts v. Eloy Gin Corp., 204 F.2d 712 (9th Cir.), cert. denied, 346 U. S. 876, 74 S.Ct. 129, 98 L.Ed. 384 (1953); see 8 Collier on Bankruptcy ¶ 3.02 n. 2 (14th ed. 1963). Jean Richmond's tax liability is a controversy between herself and the Government, and under the general rule stated above...