Layher v. Mo. Dep't of Revenue (In re Layher)
| Decision Date | 28 June 2016 |
| Docket Number | No. 09-52822 MPP,Adv. Pro. 16-5001 MPP,09-52822 MPP |
| Parties | In re RONALD E. LAYHER, Debtor. RONALD E. LAYHER, Plaintiff, v. MISSOURI DEPARTMENT OF REVENUE, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
[This opinion is not intended for publication as the precedential effect is deemed limited.]
Appearances:
Edward Shultz, Esq.
Post Office Box 23380
Knoxville, Tennessee 37933
Jeffery W. Hunt, Esq.
Post Office Box 475
Attorney for Defendant Marcia Phillips Parsons, Chief United States Bankruptcy Judge. In this adversary proceeding, Ronald E. Layher seeks a determination under 11 U.S.C. § 505 that he is not liable for sales/use taxes assessed against him by the Missouri Department of Revenue in connection with a company of which Mr. Layher was the responsible officer. Mr. Layher also seeks sanctions against the Department, based on his assertion that its collection actions violate 11 U.S.C. § 524(a)'s discharge injunction. Presently before the court is the Department's motion for abstention under 28 U.S.C. § 1334(c)(1) and dismissal. For the reasons discussed below, the court will deny the motion. This is a core proceeding, as recognized by parties in their pleadings. See 28 U.S.C. § 157(b)(2)(A), (B) and (O).
Ronald Layher filed a voluntary bankruptcy petition for relief under chapter 11 on October 14, 2009. The case was subsequently converted to chapter 7 on January 7, 2011, with Mr. Layher receiving a discharge on May 3, 2011. During the pendency of the bankruptcy case, the Department filed claims for unpaid withholding taxes in the amount of $66,591.55. The bankruptcy case was closed on May 16, 2012.
On January 8, 2016, the bankruptcy case was reopened at Mr. Layher's request so that he could file a complaint initiating this adversary proceeding against the Department, as he did four days later. The Department timely filed an answer, and has now filed a motion for abstention, along with a memorandum in support of the motion. Mr. Layher has filed a response in opposition to the motion, to which the Department has replied.
According to the pleadings, Mr. Layher was the sole member of Starlite Entertainment LLC, a Missouri limited liability company that Mr. Layher alleges was administratively dissolved by the state of Missouri on November 23, 2009. The Department responds instead that the state on that date canceled the company's limited liability certificate for failure to maintain a registered agent. In any event, the parties agree that the company is no longer operating. According to the Department's memorandum, in December 2010 it began auditing the sales/use taxes of the company for the years 2004 through 2007, ultimately determining that the company's and Mr. Layher's liability as the responsible officer was $615,115.06 and filing a tax lien in this amount against Mr.Layher in Taney County, Missouri. After the commencement of this adversary proceeding, the Department advised Mr. Layher through counsel that it had adjusted the balance allegedly owed by Mr. Layher based on legal precedent such that his total liability for sales/use taxes for the audited periods is $253,261.34.
The parties agree that neither the amount nor the legality of the sales/use taxes sought by the Department has ever been contested before any judicial or administrative tribunal. Mr. Layher contends that he was never afforded an opportunity to oppose the assessment in Missouri and that after the tax lien was recorded, he made numerous unsuccessful attempts through counsel to communicate with the Department. The Department disputes this characterization, contending that its notice of assessment was given to the appropriate parties by mail to the most recent and updated mailing address and that Mr. Layher failed to contest the assessment and his liability before the Missouri Administrative Hearing Commission as required under Missouri law.
In his prayer for relief, Mr. Layher requests that the court determine that he has no liability for the sales/use taxes that the Department seeks to collect. In addition, Mr. Layher seeks an award of sanctions against the Department, asserting that the Department's assessment of taxes against him and its filing of the tax lien against his property on November 1, 2013, constitute violations by the Department of the May 3, 2011 discharge injunction.
The Department denies that it has violated the discharge injunction, asserting that sales/use taxes and the accompanying penalties and interest are nondischargeable under 11 U.S.C. § 523(a)(1) and § 507(a)(8)(c). The Department states in its reply that it is not pursuing "any portions of the taxpayer's liability assessed during the 2013 audit that are attributable to the 25% additions to tax that were properly discharged as general unsecured debt in [Mr. Layher's] Chapter 7 bankruptcy," and that the Department is holding Mr. Layher "liable for only those portions of the audit results attributable to principle [sic] and interest on the taxpayer's non dischargeable trust fund tax liabilities."
The Department moves the court to abstain from exercising jurisdiction over the claims asserted by Mr. Layher. According to the Department, Mr. Layher is using a stale bankruptcy case to contest a liability that he could have contested in the appropriate jurisdiction within the state ofMissouri. The Department maintains that if Mr. Layher had insufficient notice of the assessment, the state of Missouri's Administrative Hearing Commission is the appropriate venue for him to seek and obtain recourse on this issue. Moreover, the Department asserts that abstention is appropriate because the outcome of this adversary will have no effect on Mr. Layher's bankruptcy case or his creditors because there were no assets available in the estate for distribution.
Citing his alleged lack of notice, Mr. Layher opposes the Department's abstention motion. He argues that abstention would not promote the interest of judicial economy, since abstention would effectively bifurcate this matter into two proceedings as his claim for violation of the permanent discharge injunction must be heard in bankruptcy court.
Section 505(a) of the Bankruptcy Code provides in pertinent part:
11 U.S.C. § 505(a)(1). This provision permits courts to "redetermine the amount of a debtor's tax liability even when a debtor has failed to comply with state law procedures for challenging such liabilities, including applicable state law statutes of limitations." In re New Haven Projects Ltd. Liability Co., 225 F.3d 283, 286 (2d Cir. 2000); see also In re Home and Housing of Dade County, Inc., 220 B.R. 492, 494-95 (Bankr. S.D. Fla. 1998) ().
In this case, the Department admits that the amount or legality of the sales tax that it seeks to collect from Mr. Layher has not been contested before any judicial or administrative tribunal andthat this court is authorized by statute to hear the parties' dispute as requested by Mr. Layher. The Department asserts, nonetheless, that abstention is appropriate. As authority, the Department references first the general abstention statute, 28 U.S.C. § 1334(c), which in paragraph (1) permits a court to abstain from hearing either core or non-core matters "in the interest of justice, or in the interest of comity with State courts or respect for State law." See Kirk v. Hendon (In re Heinsohn), 231 B.R. 48, 60 (Bankr. E.D. Tenn. 1999) (). Second, the Department asserts that a court has the discretion under § 505(a)(1) by its own terms to abstain from making an otherwise proper tax determination, because of the statute's use of the word "may." See 11 U.S.C. § 505(a)(1) () (emphasis supplied); see also, e.g, In re New Haven Projects Ltd. Liability Co., 225 F.3d 283, 288 (2d Cir. 2000) ().
As to the latter basis, a number of courts, including the Second Circuit Court of Appeals, has observed that the exercise of such discretion must be informed by the purpose underlying the statute, "to protect the interests of both debtors and creditors." Id. Two examples of creditors' interests that the court recognized § 505(a) could protect were: (1) preventing the dissipation of an estate's assets in the event that the debtor failed to contest the legality and amount of taxes assessed against it; and (2) the speedy resolution of disputed tax claims so that the orderly administration of the case and distribution to the debtor's creditors would not be delayed. Id. Consistent with these goals, courts have looked to a number of factors when deciding whether to exercise their authority under § 505, specifically the following:
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