Kathy B. Enterprises, Inc. v. U.S.
| Decision Date | 06 January 1986 |
| Docket Number | No. 84-2593,84-2593 |
| Citation | 779 F.2d 1413 |
| Parties | -498, 86-1 USTC P 9153 KATHY B. ENTERPRISES, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Donald O'Neil Heck, Owens, Rybarsky & Nussbaum, Scottsdale, Ariz., for plaintiff-appellant.
Michael L. Paup, Wynette J. Hewett, William P. Wang, Dept. of Justice, Washington, D.C., for defendant-appellee.
Appeal from the United States District Court for the District of Arizona.
Before BROWNING, SNEED, and HUG, Circuit Judges.
This case involves the Internal Revenue Service's attempts to collect taxes from the recipient of a delinquent taxpayer's fraudulent conveyance. The district court found for the Service, and we affirm.
Jerome Swanson (the taxpayer) operated a bookkeeping and tax preparation business in Illinois from 1965 to 1979. On August 31, 1979, the taxpayer transferred his bookkeeping practice and the bulk of its assets to Kathy B. Enterprises, Inc. (Kathy B.), the appellant. Kathy B. sells medical equipment and appliances. Until this transaction, Kathy B. had never engaged in the accounting business. The district court found, and appellant does not contest, that the transfer left the taxpayer insolvent and defrauded his creditors. The day after the initial transfer, Kathy B. sold the business to an accounting firm in Davenport, Iowa. The sale provided for installment payments to Kathy B. The sole stockholder of Kathy B., Kathy Brooke, now lives in Arizona with the taxpayer, who conducts his accounting business through Kathy B.
On May 12, 1980, the IRS assessed back taxes for 1976 and 1977 against the taxpayer in the amount of $20,277.02. On June 11, 1982, the taxpayer filed bankruptcy. On November 26, 1984, the bankruptcy court granted him a discharge from the taxes.
While the bankruptcy was proceeding, the IRS tried to satisfy the tax debt by seizing the proceeds Kathy B. was receiving for the sale of the taxpayer's business. To do this, the IRS levied against Kathy B.'s Arizona bank and against the accounting firm that purchased the business. The IRS argued that it could collect the taxes in this manner because the transfer had been fraudulent under Illinois law. Kathy B. filed suit in federal district court to enjoin the IRS's collection efforts. Strangely enough, no party suggested that these collection proceedings be consolidated with the bankruptcy proceeding. Nor does it appear that Kathy B. invoked the automatic stay in its attempts to evade the IRS's collection efforts.
The district court found for the IRS. Kathy B. appeals on two grounds. First, it argues that the bankruptcy court's discharge of the taxpayer's liability for the taxes also discharges the liability that fraudulent transferees of the taxpayer had for that debt under state law. Second, it argues that the IRS's collection efforts violate the automatic stay, 11 U.S.C. Sec. 362(a).
Section 524(e) of the Bankruptcy Code provides:
Except as provided in subsection (a)(3) of this section [dealing with claims against community property], discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for such debt.
11 U.S.C. Sec. 524(e).
The language of this section is clear and appears to dispose of Kathy B.'s claim. But Kathy B. claims that this section applies only to cases in which "the other entity" had a direct contractual relationship with the creditor, such as guarantor of the discharged debt. It points out that there is no reference in the legislative history to a situation such as this one, where no link between the third party and the "other entity" exists other than that based on a state law invalidating fraudulent conveyances.
The government's position is more persuasive. Section 16 of the old Bankruptcy Act provided:
The liability of a person who is a co-debtor with or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of a bankrupt.
Ch. 541, 30 Stat. 544, 550 (1898).
When Congress passed the comprehensive Bankruptcy Code in 1978, it replaced this provision--which listed three specific exemptions from discharge--with expansive language denying "any other entity" a discharge of the debt. It is hard to view this change as anything but a legislative mandate further to constrict the effect of a discharge....
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