Intern. Horizons, Inc., In re, 84-8068

Citation751 F.2d 1213
Decision Date31 January 1985
Docket NumberNo. 84-8068,84-8068
Parties-1038, 85-1 USTC P 9212, 12 Collier Bankr.Cas.2d 91, 12 Bankr.Ct.Dec. 1022, Bankr. L. Rep. P 70,245 In re INTERNATIONAL HORIZONS, INC., et al., Debtors, UNITED STATES of America, Plaintiff-Appellant, v. INTERNATIONAL HORIZONS, INC., et al., Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)

Glenn L. Archer, Asst. Atty. Gen., Michael L. Paup, Wynette J. Hewett, Gayle P. Miller, Tax Div., Dept. of Justice, Washington, D.C., for plaintiff-appellant.

David G. Bisbee, Robert A. Parker, Jr., Atlanta, Ga., for defendants-appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before HENDERSON and HATCHETT, Circuit Judges, and NICHOLS, * Senior Circuit Judge.

NICHOLS, Senior Circuit Judge:

This is an appeal from the judgment of the United States District Court for the Northern District of Georgia affirming the decision of the United States Bankruptcy Court for the Northern District of Georgia which held untimely the United States' amended proofs of claim for certain federal corporate income taxes. This court has jurisdiction under 28 U.S.C. Sec. 1293(b). Appellant contends that the bankruptcy court abused its discretion in holding that the amended claims for corporate income taxes were untimely under the circumstances which shall be presented below. Finding there was no abuse of discretion, we affirm.


Appellees International Horizons, Inc. (IHI); International Horizons (Curacao), N.V.; North American Exports, Inc. (NAE); and International Horizons, N.V., on March 20, 1981, filed petitions for reorganization pursuant to Chapter 11 of the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq. World of English, N.V. and Communication and Studies International, Ltd., affiliates of the above-mentioned debtors, filed similarly on June 17, 1981, as did Financial Resources, K.K., on February 1, 1982. The proceedings involving these debtors were handled in consolidated form, with the debtors continuing to operate the businesses as debtors-in-possession.

On June 17, 1981, the bankruptcy court set a bar date by order, filed pursuant to Rule 3001(b)(2)(B) of the Interim Bankruptcy Rules (adopted by the bankruptcy court and the District Court for the Northern District of Georgia as applicable to cases under Chapter 11 of 11 U.S.C.) and notwithstanding the provisions of Secs. 502 and 1111(a) of Title 11, in which it ordered that creditors desiring to assert claims against debtors were to file proofs of claim on or before August 31, 1981. It is undisputed that the United States Internal Revenue Service (Service) was sent timely notice of the bar date order.

On May 18, 1981, and June 29, 1981, the Service filed proofs of claim against NAE asserting claims for withholding taxes and Federal Unemployment Tax Act (FUTA) taxes for three quarterly tax periods of 1980 and 1981 in the amount of approximately $33,000. On May 18, 1981, the Service also filed a proof of claim against IHI asserting claims for withholding taxes for two quarterly tax periods of 1980 and 1981 for approximately $36,000.

Subsequent to the bar date, on December 28, 1981, the Service served upon NAE a notice of deficiency for corporate income taxes in the amounts of $385,539 and $14,886,908 for the 1974 and 1975 tax years respectively. Prior to the bar date, indeed prior to debtors filing their petitions, the Service and NAE had discussed whether taxpayer NAE's tax returns were correct at a closing conference for an audit on October 15, 1980. There was no resolution of the controversy at this October 15 meeting, and NAE was not contacted about the Service's concerns again until the notice of deficiency, more than a year after the closing conference and four months after the bar date. No corresponding proof of claim for corporate income taxes was filed, nor was an extension for time to file ever requested.

Following receipt of the notice of deficiency, on January 22, 1983, debtors filed a disclosure statement indicating that they had received a notice of deficiency and intended to "vigorously" contest. The disclosure statement also described the plan's provision that unfiled claims be cancelled without any payment whatsoever. Payment of corporate income taxes was never scheduled in the reorganization plan, as the only listing of payment to the government was in the amount of $71,360, the aggregate of the FUTA and withholding taxes.

November 5 was set by the bankruptcy court as the deadline for filing objections to the disclosure statement; ballots and objections to confirmation of the reorganization plan were to be filed by December 6, 1982. The government filed no objections. Rather, on November 2, prior to the deadline for objections to the disclosure statement and the plan, the Service filed an amended proof of claim asserting a claim against NAE for the withholding and FUTA taxes (stated in the original proof of claim) and a claim for corporate income taxes in the amount of $385,539 and $14,886,908 and interest in the amount of $160,019 and $5,074,124 for the tax years 1974 and 1975 respectively. On November 18, 1982, the Service filed an amended proof of claim against IHI, asserting the previous claims against IHI and a claim for corporate income tax of $1,719,649 and interest of $81,412 for 1980. Taken together, the two amended proofs asserted claims of well over $20,000,000, amended on to the original $70,000 claimed.

Finally, ending the long saga of reorganization negotiations, a hearing on confirmation was held on December 15, 1982. During this hearing an exchange occurred among the judge, debtors' counsel, and the Service's counsel concerning tax claims. Of course, appellant and appellees each interpret the meaning of this exchange differently. The record does show, however, at least that debtors' counsel indicated that the plan would allow for payment of actual tax liability as found by the bankruptcy court, and that the government, which had not actively participated in the almost incessant hearings and conferences which occurred in the 21 months of negotiations leading to the confirmation hearing, was aware that debtors felt they would have to pay no corporate income taxes and that it was unlikely that the debtors could pay those tax claims and other creditors' claims as well. Still, the government stated that the plan should be confirmed, as it ultimately was. The debtors filed an objection to the government corporate income tax claims and moved for summary judgment in March 1983; the government filed a cross-motion. The bankruptcy court granted debtors' motion in June 1983.

Dispositions Below

We consider briefly the bankruptcy court's decision here so that we may provide an ample foundation for consideration of any abuse of discretion.

The bankruptcy court determined that Rule 715 of the Rules of Bankruptcy Procedure, which incorporate Rule 15 of the Federal Rules of Civil Procedure, controls consideration of allowance of pleading amendment, and noted that while amendments should be freely allowed, they are not to be used to assert an entirely new claim.

The court first considered amendment under the traditional view that amendment was allowed only where a new claim was not being asserted and an original timely proof of claim had been filed. Distinguishing the case principally relied upon by the Service, Menick v. Hoffman, 205 F.2d 365 (9th Cir.1953), as of precedential value only in its factual setting in which notice to the individual's business of a claim for withholding taxes also constituted notice to the individual of his income tax liability, the court found that:

[T]he Service's amendment asserts a new claim--i.e. a claim not arising out of the same occurrence or transaction as the timely filed proofs of claims filed by the Service in these cases. To the extent that the Court could find [the Service's prebankruptcy tax actions] constituted notice to the debtors of the Service's claims for corporate income taxes, the Court would hold that notice of the existence of a claim is not sufficient to establish that claim in a bankruptcy proceeding and that a creditor has an affirmative duty to [file] timely a proof of claim.

The court then undertook a detailed analysis of equitable factors following the analysis of In re Miss Glamour Coat Co., 80-2 U.S.T.C. p 9737 (S.D.N.Y. Oct. 8, 1980), and held that--

This Court [refuses] to allow the Service to amend its proof of claim. While the debtor and its creditors acted with knowledge of the potential of the IRS's asserting a claim for corporate income taxes in these cases, when balanced against the Service's behaviour, it would not be appropriate to grant the Service leave to amend. The Service has disregarded its internal procedures concerning the filing of proofs of claim for unliquidated or disputed claims and has offered no justification for its failure to act timely. While amendments are to be freely allowed where justice so requires, * * * the Service's unexplained negligence does not present an instance under which justice or fairness requires the allowance of an amendment.

The district court, after a de novo review of the record, adopted in full and affirmed the findings of fact and conclusions of law set forth by the bankruptcy court.


This court reviews the decision of the district court and the bankruptcy court and will reverse only upon finding an abuse of discretion. Carnegia v. Georgia Higher Education Assistance Corp., 691 F.2d 482, 483 (11th Cir.1982). (Since the district court adopted the decision of the bankruptcy court, we will address ourselves only to the bankruptcy court decision.) Appellant asserts the court's decision below disallowing amendment constitutes an abuse of discretion because the debtors and creditors were aware of the tax liabilities, the amended proof of claim was filed prior to plan confirmation, the plan arguably...

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