Internal Revenue Serv. v. Wallace

• Docket Number: 23-cv-1331-JES
• Decision Date: 07 November 2023
• Parties: INTERNAL REVENUE SERVICE, Appellant, v. ANTHONY J. WALLACE, Appellee.
• Court: U.S. District Court — Central District of Illinois

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INTERNAL REVENUE SERVICE, Appellant, v. ANTHONY J. WALLACE, Appellee.

No. 23-cv-1331-JES

United States District Court, C.D. Illinois

November 7, 2023

ORDER AND OPINION

JAMES E. SHADID, UNITED STATES DISTRICT JUDGE

This matter is before the Court on Appellant Internal Revenue Service's (“IRS”) Motion for Leave to Take Interlocutory Appeal. Doc. 3 (the “Motion”). Appellee Anthony J. Wallace filed a Response. Doc. 6. For the following reasons, the Motion is DENIED. However, the Court upon sua sponte addressing the issue of subject matter jurisdiction, finds that the Bankruptcy Judge erred and so VACATES the Bankruptcy Court's Opinion and Order Wallace v. Internal Revenue Service (In re Wallace) PWH-23-8005, Docs. 27, 28 (Bankr. C.D. Ill. Aug. 18, 2023) and REMANDS the case back to the Bankruptcy Court to proceed in a manner consistent with Opinion and Order.^[1]

Background^[2]

On December 19, 2022, Mr. Wallace filed a petition in the Bankruptcy Court to initiate a voluntary Chapter 7 bankruptcy case. BK Doc. 1. In the petition, Mr. Wallace listed his income tax, from 2012 to 2019, as debts owed to the IRS. See id. at 29, 31-33. The amount of debt owed on a per-year basis ranges from $8,667 to $53,061. Id.

The case then proceeded in standard fashion: Mr. Wallace filed his certification of credit counseling (BK Doc. 3), and a creditors meeting was held on February 1, 2023. BK Doc. 8. Approximately one month after the meeting, the events giving rise to the district court's involvement in the case began to unfold.

On March 8, 2023, Mr. Wallace filed an adversarial complaint (the “Complaint”) against the IRS to determine the dischargeability of his income tax debt for years 2012 through 2018, pursuant to 11 U.S.C. § 523(a)(1). AP Doc. 1 at 1-2.^[3]Section 523 encompasses a list of debts, including the taxes at issue here, that are excepted from a bankruptcy court's discharge order. The Complaint does not indicate that the IRS had threatened to collect those debts, or that it had otherwise indicated that it was entitled to do so. See id. Additionally, Mr. Wallace sought relief in the form of a finding that his income tax debts for those years are satisfied under § 523(a)(1), as well as an order enjoining the IRS from attempting to collect those debts. Id. at 3.^[4]

On April 14, 2023, the Bankruptcy Court issued a notice of adversary deficiency, as the IRS had failed to respond to the Complaint in a timely manner. AP Doc. 6. Ten days later, the parties filed an agreed motion extending the IRS's time to respond to May 24, 2023. AP Doc. 10. The Bankruptcy Court granted that motion and ordered that Mr. Wallace may file a motion for default on or before May 24, 2023. AP Doc. 11.

On May 24, 2023, both parties filed motions with the Bankruptcy Court. Mr. Wallace filed a motion for default judgment (AP Doc. 13) and the IRS filed a motion (AP Doc. 15) requesting that the court abstain from hearing the adversary complaint, supported by a memorandum. AP Doc. 16. On that same day, the IRS also filed a motion to extend the time for it to file an answer to the Complaint (AP Doc. 17), which was granted. AP Doc. 18.

After a telephonic hearing on the outstanding motions (AP Doc. 22), the Bankruptcy Court denied the motion for default judgment. AP Doc. 23. Six days later, on June 26, 2023, Mr. Wallace filed a response to the IRS's motion to abstain. AP DOC. 25. And, the IRS filed a Reply. AP Doc. 26. Then, on August 18, 2023, the Bankruptcy Court issued its Opinion (AP Doc. 27) and Order (AP Doc. 28) denying the IRS's motion to abstain. Shortly thereafter, on August 25, 2023, the Bankruptcy Court entered an Order of Discharge under 11 U.S.C. § 727 in connection with Mr. Wallace's bankruptcy petition. BK Doc. 22.

On September 6, 2023, the IRS filed its notice of appeal (Doc. 1) from the Bankruptcy Court's Opinion (AP Doc. 27) and Order. AP Doc. 28. Also on September 6, 2023, the IRS filed the Motion. Doc. 3.^[5]In the Motion, the IRS raises three questions as providing grounds for the Court to grant leave to appeal. While these questions are discussed in greater detail infra, they mainly pertain to the Bankruptcy Court's alleged mistake in determining it had subject matter jurisdiction over the Complaint, as well as its erroneous decision to deny the IRS's motion to abstain.

The Court pauses to note that Mr. Wallace's response to the Motion is of limited value. Doc. 6. Mr. Wallace's single-page response is comprised, entirely, of the following arguments:

1. Debtor respectfully asserts that the granting of an interlocutory appeal will not materially advance the underlying adversary proceeding, as the issues involved are bankruptcy issues that the bankruptcy court is competent and able to decide.

2. Debtor further asserts that the bankruptcy court did not abuse is discretion in denying the request for abstention.

3. Debtor further asserts that his financial resources to litigate these matters is limited, as evidenced by the property and income schedules in his bankruptcy filing.

The Court now turns to the issues raised in the Motion.

Subject Matter Jurisdiction

Two of the three questions presented by the IRS in its Motion have “sounded alarm bells” for the Court, as they concern the Bankruptcy Court's determination of its subject matter jurisdiction over the case. Ind. Right to Life Victory Fund v. Morales, 66 F. 4th 625, 629 (7th Cir. 2023). These questions are (Doc. 3 at 7):

1. Whether the Bankruptcy Court erred in determining that a justiciable case or controversy within the meaning of Article III existed at the time Mr. Wallace filed the adversary complaint even though (a) the discharge had not yet been entered because the time to object had not expired; (b) the IRS had not yet determined whether tax debts would be excepted from the scope of any subsequent discharge; and (c) the IRS had not resumed or threatened to resume collection activity with regard to those tax debts?

2. Whether, if there was no Article III case or controversy at the time the adversary complaint was filed, post-complaint events (i.e., the Department of Justice's subsequent determination regarding the merits of the dischargeability issue with which the IRS then agreed) cured the lack of jurisdiction?

When reviewing the decision of a bankruptcy court, a district court “acts as an appellate court and applies the same standards of review that are appropriate in other appellate decisions.” In re Resource Technology, Corp. MFK-08-2425, 2008 WL 4876846, at *3 (N.D. Ill. Nov. 7, 2008) (citing Green v. Mass. Cas. Ins. Co., 269 B.R. 782, 787 (N.D. Ill. 2001)).^[6] In line with acting as an appellate court, the Court is “‘bound to evaluate, the jurisdiction of the court below, sua sponte if necessary.'” Buchel-Ruegsegger v. Buchel, 576 F.3d 451, 453 (7th Cir. 2009) (quoting Int'l Union of Operating Eng'rs, Local 150 v. Ward, 563 F.3d 276, 282 (7th Cir. 2009)). Because of the Court's independent duty to evaluate subject matter jurisdiction, it is appropriate at this juncture to directly resolve the troubling jurisdictional issues raised in the Motion. See Butler v. Google, LLC., No. 22-2113, 2023 WL 2759050, at *2 (7th Cir. Apr. 3, 2023).^[7]

As a threshold matter, the Bankruptcy Court cited Sprout v. Internal Revenue Service (In re Sprout), CKP-19-02113, 2020 WL 2527376, at *3-5 (Bankr. S.D. Ohio May 15, 2020), to support its statement that “[s]ubject-matter jurisdiction is secure.” Wallace, 653 B.R at 259.

However, the bankruptcy court in Sprout, 2020 WL 2527376, determined that it had “subject matter jurisdiction over the Adversary Proceeding” based on it being “related to” the underlying bankruptcy case. Id. at 4. The Bankruptcy Court here cited Sprout to support that it has jurisdiction “arising under title 11.” Wallace, 653 B.R at 259. “Arising under” and “related to” jurisdiction are two distinct subcategories of dispute and “related to” jurisdiction may not be exercised at this juncture. See Bush v. United States, 939 F.3d 839 (7th Cir. 2019). A bankruptcy court must be mindful of its source of jurisdiction under 28 U.S.C. § 1334. As the parties do not dispute the Bankruptcy Court's jurisdiction as arising under Title 11, this Court shall operate as though the Bankruptcy Court either incorrectly cited Sprout or only cited Sprout to highlight a general discussion of subject matter jurisdiction.^[8]

Yet regardless of whether the Bankruptcy Court holds “arising under” or “related to” jurisdiction over the case, that alone is insufficient for it to exercise subject matter jurisdiction because Article III's Case or Controversy restrictions “apply to proceedings in bankruptcy courts just as they do to proceedings in district courts.” Allied Waste Industries, Inc. v. Steinberg (In re Resource Technology Corp.), 624 F.3d 376, 382 (7th Cir. 2010) (citing In re FedPak Sys., Inc., 80 F.3d 207, 213 (7th Cir.1996)).^[9] Article III's Case or Controversy requirement “prevents federal courts from answering legal questions, however important, before those questions have ripened into actual controversies between someone who has experienced (or imminently faces) an injury and another whose action or inaction caused (or risks causing) that injury.” Prosser v. Becerra, 2 F.4th 708, 713 (7th Cir. 2021) (internal quotation omitted). “These limitations, requirements, and prohibitions are embodied in the so-called justiciability doctrines-standing, mootness, ripeness, and the prohibitions on providing advisory opinions and answering political questions.” Sweeney v. Raoul, 990 F.3d 555, 559 (7th Cir. 2021) (citing 13 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3529 (3d ed. 2020)). A justiciable “controversy must be extant at all stages of...