Johnston v. City of Middletown (In re Johnston)

Decision Date21 December 2012
Docket NumberBankruptcy No. 11–34480.,Adversary No. 11–3368.
Citation484 B.R. 698
PartiesIn re Daniel J. JOHNSTON, Debtor. Daniel J. Johnston, Plaintiff v. City of Middletown, et al., Defendants.
CourtU.S. Bankruptcy Court — Southern District of Ohio

OPINION TEXT STARTS HERE

Gene E. Schaefer, Middletown, OH, for the Plaintiff.

Leslie S. Landen, Attorney for City of Middletown, Middletown, OH, for Defendant City of Middletown.

Bethany Hamilton, Columbus, OH, for Defendant Department of Treasury.

Decision Dismissing Counts I & II on the Basis of Lack of Jurisdiction Over the Responsible Person Determination, and in the Alternative, Abstaining from Counts I & II, and Dismissing Count III on the Basis of Standing

GUY R. HUMPHREY, Bankruptcy Judge.

I. Introduction

The issues before the court in this no asset Chapter 7 case are whether the court has the jurisdiction to make determinations as to whether the debtor was the person responsible under applicable tax law for the payment of income taxes withheld from employees' wages to the United States Internal Revenue Service (“IRS”) and the City of Middletown (Middletown) for entities which he solely owned; if the court has the jurisdiction to make those determinations, whether the court should abstain from making those determinations; and whether the debtor has standing to assert a preference claim under 11 U.S.C. § 5471 arising from the IRS's post-petition setoff of the debtor's tax refund for asserted prepetition taxes or penalties owed.2 Following a pretrial conference, the court sua sponte ordered the parties to brief those issues. The briefing of those issues is now concluded and the court is prepared to render its decision.

II. Statement of Facts, Procedural Background, and Positions of the Parties

Daniel J. Johnston (Johnston), the debtor in the underlying Chapter 7 case, commenced this adversary proceeding by filing a complaint (the “Complaint”) against defendants Department of the Treasury Internal Revenue Service (“United States”) and Middletown. Both the United States and Middletown have assessed trust fund taxes and civil penalties against Johnston as the “responsible person” for payment of the trust fund taxes incurred by three corporate entities—JMI, Inc., IMJ, Inc., and Spectrum Site Services (the “Companies”). Johnston is the sole owner of the Companies.3

Johnston filed his petition initiating this case under Chapter 7 of the Bankruptcy Code on August 16, 2011 (the “Estate Case”). He scheduled priority tax debts owed to the IRS and Middletown, in addition to various other unsecured debts including further amounts owed to taxing authorities and state agencies. Much of this debt appears to be related to the Companies. See est. doc. 1 (Schedule E—Creditors Holding Unsecured Priority Claims and Schedule F—Creditors Holding Unsecured Nonpriority Claims). The meeting of creditors was held on October 13, 2011 and on that same date the Chapter 7 trustee entered his Report of No Distribution on the docket in which he concluded that this was a no asset case and that creditors would not receive a distribution from the bankruptcy estate. This adversary proceeding was filed on October 27, 2011. On January 19, 2012 Johnston received his discharge. This adversary proceeding and the separate adversary filed against the State of Ohio are the only items pending in Johnston's bankruptcy case.

Count I of the Complaint seeks a declaratory judgment that Johnston is not responsible under applicable state law for the employment taxes owed to Middletown for the tax years 2007, 2008, 2009 and 2010. Count II seeks a declaratory judgment that the employment taxes owing to the United States for those same tax years are likewise not the debt of Johnston under applicable federal law. Count III avers that the United States violated the automatic stay, § 362, by seizing post-petition Johnston's individual 2010 tax refund and that such seizure constitutes a preference to the United States pursuant to § 547.

The court asked the parties to brief the issues of whether this court has subject matter jurisdiction over Counts I and II of the Complaint and if subject matter jurisdiction exists as to Counts I and II, whether this court should abstain from determining those claims pursuant to 28 U.S.C. § 1334(c).4 The court also asked Johnston and the United States to address Johnston's standing as a Chapter 7 debtor to assert the preference claim included in Count III. However, having reviewed the briefs submitted by Johnston and the United States, the court notes that neither addressed that question. Nevertheless, the court will address all of the issues which the court requested the parties to brief.

Johnston maintains that § 1334(c)(1), § 157(b) and § 505(a)(1) all grant subject matter jurisdiction to decide the question of whether he is a person responsible for payment of the trust fund taxes owed to the United States and Middletown. Johnston argues this matter is a core proceeding under § 157(b)(2)(A) because his potential liability for payment of the trust fund taxes directly impacts the administration of his Chapter 7 case. Alternatively, he contends that the matter is core under § 157(b)(2)(I) because it involves the dischargeability of trust fund taxes owed to the United States and Middletown. Johnston also reasons that should the court determine this is not a core proceeding under either of those bases, § 1334(c)(1) nevertheless confers jurisdiction because this matter is related to his Chapter 7 case.5 Johnston further contends that § 505(a)(1) allows this court to determine his liability for the taxes in question. Lastly, Johnston urges this court not to abstain from hearing this proceeding because the relevant factors which must be considered do not favor abstention under § 1334(c).

The United States denies that this matter is a core proceeding since it does not invoke a substantial right created by federal bankruptcy law and can exist outside of bankruptcy. The United States likewise disputes that this adversary is related to the Estate Case because the outcome of this proceeding can have no conceivable impact on this estate in light of the fact that the Chapter 7 trustee has filed a no-asset report. The United States also points out that even if § 505 is an independent source of jurisdiction (which it disputes), the statutory language purports only to permit a court to render a determination of tax liability. The United States argues that the purpose of § 505 would not be served by this court's determination of whether Johnston is responsible for payment of the trust fund taxes. The United States further contends that, assuming subject matter jurisdiction exists to make this determination, the court should nevertheless abstain from doing so.

Middletown maintains that jurisdiction does not exist given that the real issue in this case is not the dischargeability of the taxes (which the parties agree are not dischargeable), but rather Johnston's claim that he is not the responsible party. Middletown also takes issue with Johnston's assertion that there are no questions of state law. Middletown argues that the determination of responsibility for municipal taxes is a matter of state law, rather than federal law. Consequently, Middletown asserts that this court should abstain even if jurisdiction exists.

In addressing this matter, it is important to remember that while the responsible person determination would be based upon similar considerations for each taxing authority, three separate determinations are involved: one for federal income tax purposes; one for Ohio income tax purposes; and one for Middletown income tax purposes.6 Thus, while this decision may refer to the “making of the responsible person determination,” three separate determinations will need to be made using the same or substantially the same facts.

III. Legal Standard and AnalysisA. Subject Matter Jurisdiction

1. General Jurisdictional Framework

The first and fundamental question presented by every case brought to the federal courts is whether the court has subject matter jurisdiction to hear the case before it, even when the parties concede or do not raise the issue. Bender v. Williamsport Area School Dist., 475 U.S. 534, 541, 106 S.Ct. 1326, 89 L.Ed.2d 501 (1986); Harker v. Wells Fargo (In re Krause), 414 B.R. 243, 252 (Bankr.S.D.Ohio 2009). Regardless of whether the parties raise jurisdictional issues themselves—or even attempt to consent to federal jurisdiction—federal courts have an independent obligation to investigate and police the constitutional and statutory limits of their own jurisdiction and counsel, as officers of the court, have an obligation to aid the courts with that duty. Douglas v. E.G. Baldwin & Assocs., 150 F.3d 604, 607 (6th Cir.1998) (overruled in part on other grounds); Minority Police Officers Assoc. v. City Of South Bend, 721 F.2d 197, 199 (7th Cir.1983). The party alleging federal court jurisdiction bears the burden of proof. Nuveen Mun. Trust v. WithumSmith Brown, P.C., 692 F.3d 283, 293 (3rd Cir.2012); Perry v. EMC Mortg. Corp. (In re Perry), 388 B.R. 330, 337 (Bankr.E.D.Tenn.2008); Kmart Creditor Trust v. Conaway (In re Kmart Corp.), 307 B.R. 586, 590 (Bankr.E.D.Mich.2004).

Federal courts are courts of limited jurisdiction. Michigan Employment Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1137 (6th Cir.1991); Robinson v. Michigan Consolidated Gas Co. Inc., 918 F.2d 579, 582 (6th Cir.1990); Uber v. Nelnet, Inc. (In re Uber), 443 B.R. 500, 504 (Bankr.S.D.Ohio 2011). Bankruptcy courts have specific statutory limits on the cases, proceedings and matters which they may hear. Bankruptcy courts do not have broad general jurisdiction over cases or controversies, but only jurisdiction over a particular matter if Congress has provided such jurisdiction. As stated by the Supreme Court in Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995): “The...

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