In re Spenlinhauer
| Decision Date | 05 April 2018 |
| Docket Number | Case No. 13-17191-JNF |
| Parties | In re ROBERT J. SPENLINHAUER, Debtor |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Three Emergency Motions are before the Court: 1) the Motion of Chapter 11 Trustee for Reconsideration of, or to Vacate the Court's Order Dismissing the Case (the "Motion to Reconsider"); 2) the Chapter 11 Trustee's Emergency Motion For Stay Pending Reconsideration or Appeal (the "Motion for Stay Pending Appeal"); and 3) the "United States' Own Emergency Motion For Stay Pending Reconsideration and/or Determination of 11 U.S.C. § 349(b) Distribution and Pending Appeal If Necessary." As noted below, the Court granted the Chapter 11 Trustee's Motion for Stay Pending Reconsideration on March 14, 2018, but did not grant her Motion for Stay Pending Appeal, thus rendering the United States' Motion for Stay Pending Reconsideration moot. If the Court reconsiders and vacates its order of dismissal, the Motion for Stay Pending Appeal and the United States' alternative request to enter a distribution order pursuant to 11 U.S.C. § 349(b) will be moot.
The Debtor filed a Chapter 11 petition on December 16, 2013.1 On January 10, 2014, the Debtor filed, among other things, his schedules of assets and liabilities and Statement of Financial Affairs. On Schedule D-Creditors Holding Secured Claims, he listed the IRS as the holder of a claim, identified as 2006-2010 Tax Lien, in the sum of $294,000 secured by property located at 13 Industrial Drive, Mashpee, Massachusetts valued at $474,000. On February 14, 2014, the Debtor filed amended Schedules A, B, C, D, E, and F and an amended Statement of Financial Affairs, but did not list the IRS as the holder of any claims other than the one previously listed on Schedule D. On March 27, 2014, the Debtor amended his schedules again but did not alter the way he listed the IRS's claim. On April 11, 2014, the Debtor filed an amended Schedule E, adding the IRS as the holder of an unsecured priority claim for 2011 income taxes in the sum of $40,299.00.
Approximately 20 months after the Debtor commenced his Chapter 11 case, on September 3, 2015, the Court entered an order authorizing the Debtor to sell real property located at 90-90A Industrial Park Road in Hingham, Massachusetts (the "Hingham Property"). On September 14, 2015, the sale of the Hingham Property closed, generating,according to the Debtor in a Status Report filed on September 17, 2015, net proceeds of $1,029,459.29 for the bankruptcy estate.
On December 8, 2015, the U. S. trustee filed a Motion to Convert Debtor's Chapter 11 case to Chapter 7, or, in the Alternative, to Appoint a Chapter 11 Trustee asserting numerous grounds, including the Debtor's failure to timely file his federal and state tax returns. On December 15, 2015, this Court granted the U. S. trustee's alternative Motion to Appoint a Chapter 11 Trustee in lieu of converting the Debtor's Chapter 11 case to a case under Chapter 7 and subsequently entered an order authorizing the appointment of Lynne F. Riley as Chapter 11 Trustee (the "Trustee" or the "Chapter 11 Trustee") in this case. Four months after her appointment, on April 12, 2016, the Trustee filed a Motion to Convert Case to Chapter 7.2
The Court conducted evidentiary hearings on the Motion to Convert on May 4, 2016, July 26, 2016, and August 19, 2016. Following the May 4, 2016 hearing, the Court directed the filing of memoranda regarding the Debtor's tax liabilities, including anypotential tax liability arising from his failure to file an estate tax returns with the Internal Revenue Service ("IRS") or the Massachusetts Department of Revenue ("MDOR") in 2005 as executor of his deceased mother's estate.
On July 26, 2016, the Trustee filed a "Memorandum of Law Regarding the Debtor's Tax Liabilities in Support of the Trustee's Motion to Convert These Proceedings to Chapter 7." In her Memorandum, the Trustee argued that "because the Hingham Property was included in Georgia Spenlinhauer's taxable estate, but the required estate tax return was not filed and the estate tax due has never been paid, Robert Spenlinhauer, as his mother's executor and beneficiary, remains liable for the estate tax due." The Trustee estimated that the Debtor's personal liability for estate tax arising from his late mother's estate exceeds $11 million, given that the Hingham Property alone was worth between $9.8 million and $9.65 million at the time of Georgia Spenlinhauer's death in 2005.3 Thereafter, on August 5, 2016, the Trustee filed an Amended Motion to ConvertCase to Chapter 7 for the purposes of incorporating "as grounds for conversion substantial new information disclosed by the Debtor and his advisors and other witnesses, in testimony and otherwise, since the filing of her Initial Motion to Convert."4
At the conclusion of the August 19, 2016 evidentiary hearing, and upon consideration of the Trustee's Amended Motion to Convert, the Court directed the IRS and the MDOR to file statements with respect to the amended motion within 30 days.The IRS filed its Statement on September 19, 2016 acknowledging that its proof of claim "does not contain any estate or income tax claims related to his late mother's estate."
On October 13, 2016, the Court denied both the Trustee's Motion and Amended Motion to Convert.
Until such time as the Trustee addressed the Debtor's tax obligations as part of her fiduciary duties in 2016 following the sale of the Hingham Property and the Court conducted an evidentiary hearing with respect to her Motion to Convert, neither the IRS nor the MDOR were aware of issues relating to the Debtor's failure to file an estate tax return for his late mother's estate or any potential liability for estate taxes. On March 15, 2017, the United States filed a Motion to Determine Tax Liability Pursuant to § 505(a)(1) (the "§ 505 Motion") in which it represented the following:
Pursuant to 11 U.S.C. § 505(a)(1), the United States seeks an order from this Court determining the estate tax liability of the Debtor, but in the interim will not oppose a request by the Debtor to have this Court stay this contested matter so that the Debtor may pursue his examination-related rights and remedies with the IRS, with the following two caveats. First, under 26 U.S.C. § 7122, this matter has been referred to the Department of Justice to establish the liability and collect the tax and therefore, the IRS is not authorized to agree to any reduction in the amount of the Debtor's liability unless a duly-authorized delegate of the Attorney General approves of the reduction. And second, discovery shall not expire until well after any administrative proceedings are concluded.
Four days later, the United States also filed a Motion to Convert the Debtor's Chapter 11 case to a case under Chapter 7. The Debtor opposed both motions, indicating, among other things, that "the executor intends to pursue the examination-related rights and remedies with the IRS." The Debtor also filed an objection to the amended proof of claim filed by the IRS in which it included the Debtor's alleged personal liability as a transfereeof the probate estate of the Debtor's deceased mother, Georgia M. Spenlinhauer, for its federal estate tax liability as the Debtor was the executor of his late mother's probate estate. The Debtor also filed an objection to a new proof of claim filed by the MDOR in which it also included estate tax claims. At a hearing on March 22, 2017, the Court deemed the § 505 Motion to be a contested matter to which the Part VII of the Federal Rules of Bankruptcy Procedure applied and consolidated determination of the § 505 Motion with the Debtor's Objection to IRS's proof of claim relating to the estate tax of his deceased mother and his transferee liability.
On May 24, 2017, the Debtor filed a Motion for Summary Judgment Relative to Estate Tax Claim of the United States seeking a determination that the proof of claim bar date prevented the United States from filing a new or amended proof of claim. He filed a similar motion with respect to the new proof of claim filed by the MDOR.
With respect to the Motion to Convert, the United States supplemented its motion on May 15, 2017. In its supplement, it included "(1) an additional substantial income tax liability of the Debtor, and (2) the attached pro forma tax computations, which confirm the Trustee's recently indicated view that this is a no-surplus case with post-petition estate income (under § 1115) insufficient to make up any shortfall in satisfying secured, administrative, and priority claims from a plan of liquidation so as to make any other plan feasible." The Trustee filed a response in support of conversion in which she observed:
In the Conversion Motion, the IRS asserts (1) that the Debtor acted in bad faith in asserting a value of the Hingham Property for estate tax purposes that is a fraction of the value he asserted for capital gain income taxpurposes; and (2) that the Debtor cannot confirm a Chapter 11 plan which pays the IRS claim in full. The Court need not await discovery or determine the precise amount of the Debtor's liability (as beneficiary or executor) for the estate tax due from his late mother's estate in order to rule on either of these issues. Both constitute grounds for conversion of this case to Chapter 7, supported by a factual record that is already properly before this Court. See 11 U.S.C. § 1112(b)(4)(A) ().
(footnote omitted). On May 30, 2017, the Court continued the United States' Motion to Convert generally.
On September 8, 2017, this Court issued a Memorandum and Order denying the Motion by Respondent, Robert J. Spenlinhauer for Summary Judgment Relative to Estate Tax Claim of the United States of America. The Court granted the Cross-Motion for Partial Summary Judgment filed by the IRS as well as its Motion to Permit Late-Filed Tax Claim and...
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