In re Starling
| Decision Date | 19 June 2020 |
| Docket Number | Case No. 13-36564 (CGM) |
| Citation | 617 B.R. 208 |
| Parties | IN RE: Bryan STARLING, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Brian C. Fetzko, Fetzko Law Offices, P.C., 12 Evergreen Drive, Suite 102, Middletown, NY 10940, Attorney for the Debtor
Alexander J. Hogan, Assistant United States Attorney, Office of U.S. Attorney Geoffrey S. Berman for the Southern District of New York, 86 Chambers Street, 3rd Floor, New York, New York 10007, Attorney for the Internal Revenue Service (IRS)
Thomas J. Gaffney, Brendan H. Little, 50 Fountain Plaza, Suite 1700, Lippes Mathias Wexler Friedman LLP, Buffalo, NY 14202, Attorneys for Continental Service Group, Inc. (ConServe)
In 2016, Bryan Starling ("Debtor") was granted a discharge of his personal liability on all of his non-excepted debt, including debts owed to the Internal Revenue Service ("IRS"). Years following the entry of the discharge order, the IRS through its servicer, Continental Service Group, Inc. d/b/a ConServe ("ConServe"), served two notices on the Debtor in an attempt to collect tax debt from the 2002 tax year. Now pending before the Court is Debtor's Motion for Contempt for Violation of Discharge Injunction (the "Motion for Contempt," ECF No. 44) seeking to impose sanctions against the IRS and ConServe for attempting to collect Debtor's tax debt from the 2002 tax year. For the reasons set forth in this Memorandum Decision, the Debtor's motion for contempt is granted.
Prior to filing, Debtor owed the IRS monies for unpaid taxes. Motion for Contempt at 13. After providing Debtor with a series of notices, on June 5, 2005, the IRS assessed a tax against Debtor for the 2002 tax year. See Declaration of Karen Burke ¶ 12, ECF No. 47-1. On August 28, 2007, the Debtor filed a Form 1040 individual tax return for the 2002 tax year. Id. ¶ 13. Approximately six years later, on July 3, 2013, Debtor filed a petition for relief under chapter 13 of the Bankruptcy Code. Vol. Pet., No. 13-36564-cgm, (Bankr. S.D.N.Y. July 3, 2018), ECF No. 1.
On July 15, 2013, after receiving notice of Debtor's petition for relief, the IRS filed a proof of claim against Debtor for unpaid taxes totaling $44,581.59. See Claim No. 1-1. On December 11, 2013, the IRS filed a second amended proof of claim reducing the amount of its claim from $44,581.59 to $22,604.03 for the tax periods ending in 2002, 2003, 2005, 2006, 2007, and 2008 ("Second Amended Claim"). See Claim No. 1-3 at 3. Of the $22,604.03 owed in the Second Amended Claim, $21,312.05 was designated by the IRS as general, unsecured debt for the tax periods ending in 2002, 2003, 2005, 2006, and 2007, while the remaining $1,291.98 was designated as priority, unsecured debt for the tax period ending in 2008. Id.
On February 11, 2014, the Court entered an "Order Confirming Chapter 13 Plan" which ordered the Debtor to make thirty-six (36) payments of $62.00 each month, from August 3, 2013 through July 3, 2016. ECF No. 30 at 1. On May 19, 2016, after Debtor completed plan payments, a discharge order was entered by the Court ("Discharge Order"). ECF No. 36. On May 21, 2016, the notice of the discharge was sent to all interested parties, including the IRS. ECF No. 37.
The Chapter 13 Standing Trustee's Final Report and Account provides that the IRS' priority claim of $1,291.98 was paid in full by the Debtor's estate; and the IRS' non-priority, unsecured claims were paid their pro-rata share, in the amount of $386.70. ECF No. 39 at 2-3.
Debtor received a notice, dated November 6, 2017, from the IRS stating that his debt from the tax year ending in 2002 was assigned to ConServe, a private collection agency. Mot., Ex. H, ECF No. 34-13. Immediately thereafter, Debtor mailed a letter to the IRS dated November 8, 2017 explaining the automatic stay and a demand that "[a]ll attempts to collect monies from the debtor must cease immediately." Mot., Ex. I at 1, ECF No. 34-14.
Thereafter, the IRS, through its servicer ConServe, sent the Debtor an "Annual Tax Delinquency" two additional notices seeking payment for Debtor's 2002 tax debt on November 7, 2018 and November 7, 2019. See Mot., Ex. J, ECF No. 44-14.
The IRS ceased its collection activity of this 2002 tax debt on November 22, 2019, pursuant to 26 U.S.C. § 6502, which sets forth the length of time during which the IRS may collect on an assessment. Burke Decl. ¶ 14, Opp., Ex., ECF No. 47-1.
Before the Court is Debtor's Motion for Contempt seeking to hold the IRS and Conserve in contempt for violating the discharge injunction. Debtor asks the Court to enter an order finding that the IRS and ConServe willfully violated the Debtor's Discharge Injunction, pursuant to 11 U.S.C. § 524, an award of compensatory damages, reasonable attorney's fees, and punitive damages in the sum of $10,000.00. Mot. at 3, ECF No. 44.
The IRS opposes the motion and argues: 1) that this Court lacks subject matter jurisdiction to hear this dispute because the Debtor has failed to exhaust his administrative remedies; and 2) that, even if there is subject matter jurisdiction to hear this dispute, the tax debt was not discharged in Debtor's bankruptcy case. Opp., ECF No. 47.
Debtor filed a response arguing that sovereign immunity does not apply to actions brought to enforce the discharge injunction and that the Debtor's 2002 Form 1040 qualifies as a "return" under 11 U.S.C. § 523(a), entitling the Debtor to discharge the debt. Resp., ECF No. 48.
ConServe filed its own opposition incorporating the IRS' arguments that ConServe did not violate this Court's Discharge Order. See ConServe Opp., ECF No. 50.
This dispute between Debtor and the IRS raises a multitude of legal issues. Ultimately, the Court must determine whether the IRS and ConServe violated the discharge injunction. The Court will first address the IRS' argument that this Court does not have subject matter jurisdiction to hear and determine this motion and whether sovereign immunity prevents the Debtor from bringing this motion against IRS and ConServe.
The doctrine of sovereign immunity bars lawsuits against the United States, or its agencies, in the absence of consent as expressly manifested by Congress. United States v. Nordic Village, Inc. , 503 U.S. 30, 33-36, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992) (). "Any limitations imposed by the waiver statute, whether they be substantive, procedural, or temporal, are to be strictly applied against the claimant." Millares Guiraldes de Tineo v. United States , 137 F.3d 715, 719 (2d Cir. 1998).
The IRS argues that § 7433 of the Internal Revenue Code ("IRC") limits this Court's subject matter jurisdiction. It does not. This Court's federal subject matter jurisdiction is governed by 28 U.S.C. § 1334, which provides district courts exclusive jurisdiction over "all cases under title 11" and non-exclusive jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." This Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(b), and the Standing Order of Reference signed by Chief Judge Loretta A. Preska dated January 31, 2012. This is a "core proceeding" under 28 U.S.C. § 157(b)(2) (A) () and (I) ("determinations as to the dischargeability of particular debts").
The power of the Bankruptcy Court to hear and determine such actions is codified in the IRC. See 26 U.S.C. § 7433(e) () (emphasis added). Section 7433(e)(2)(A) goes on to state that a petition made to the bankruptcy court is the "exclusive remedy " for a violation of the bankruptcy discharge. See 26 U.S.C. § 7433(e)(2)(A) (emphasis added).
Nothing in IRC § 7433 deprives this Court of its subject matter jurisdiction to hear and determine whether a discharge violation occurred. Kuhl v. United States (In re Kuhl) , 467 F.3d 145, 147 (2d Cir. 2006). Section 7433 specifically states that the Bankruptcy Court is the forum for bringing actions such as this. See 26 U.S.C. § 7433(e)(1). This is consistent with § 106(a)1 of the Bankruptcy Code, which provides "notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a government unit to the extent set forth in this section with respect to ... [s]ections ... 505 ... 523, 524 ... of this title." 11 U.S.C. § 106(a)(1). Notably, among them are the sections provided in section 106 of the Bankruptcy Code, §§ 505 ("Determination of Tax Liability"); 523 ("Exceptions to discharge") and 524 ("Effect of discharge"). Section 106(a)(2) goes on to state that "[t]he court may hear and determine any issue arising with respect to the application of such sections to governmental units." 11 U.S.C. § 106(a)(2) (emphasis added).
Section 106(b) lends further support for Debtor's argument that the IRS may be sued in this Court. 11 U.S.C. § 106(b). The IRS filed a proof of claim against the Debtor. See Claim No. 1 (). Section 106(b) states: "[a] governmental unit...
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