Miller v. U.S.
| Decision Date | 13 April 2004 |
| Docket Number | No. 02-17073.,02-17073. |
| Citation | 363 F.3d 999 |
| Parties | William M. MILLER, Reorganized Debtor, Plaintiff-Appellant, v. UNITED STATES of America, through its Department of Treasury, Internal Revenue Service; State of California, through its State Board of Equalization, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Diane H. Kutzko, Shuttleworth & Ingersoll, P.L.C., Cedar Rapids, IA, for the appellant.
Joel McElvain, Tax Division, Department of Justice, Washington, DC, for the appellees.
Appeal from the United States District Court for the Northern District of California; Samuel Conti, District Judge, Presiding. D.C. No. CV-02-00521-SC.
Before HALL, T.G. NELSON, and GRABER, Circuit Judges.
Petitioner William Miller appeals the district court's affirmance of a bankruptcy court ruling which concluded that his Chapter 11 plan did not discharge his obligation to pay post-petition, pre-confirmation ("gap period") interest on taxes owed to the Internal Revenue Service ("IRS").1 Miller contends that the IRS must be precluded from challenging the Chapter 11 plan, which he deems to have unambiguously indicated its intent to discharge any liability for gap period interest, on res judicata grounds. In the alternative, Miller urges the panel to construe the language of the Chapter 11 plan and the applicable provisions of the Bankruptcy Code as excepting from discharge the interest which accrues on a tax debt only when the government's claim to that debt is unsecured.
We have jurisdiction over the district court's order affirming the decision of the bankruptcy court pursuant to 28 U.S.C. §§ 158(d), 1291. We now affirm.
William Miller was the sole shareholder of Rosalie's Restaurant Associates, an incorporated entity which failed to pay the requisite employment taxes for the first quarter of 1989. On October 3, 1989, Miller was assessed a trust fund recovery penalty by the IRS, which subsequently recorded Notices of Federal Tax Liens in California and Iowa. Miller filed for Chapter 11 bankruptcy on December 20, 1989.
On December 28, 1992, the IRS was granted an allowed secured claim against Miller's bankruptcy estate in the amount of $268,079.64, and an allowed unsecured priority claim in the amount of $509,265.48. Miller filed a Chapter 11 Plan of Reorganization on January 24, 1994. Miller's proposed plan, with several modifications, was confirmed on April 4, 1994.
Article XI of Miller's confirmed plan, titled "Discharge and Injunction," is the primary basis of contention between the parties. In pertinent part, it provided:
Except as otherwise provided in the Confirmation Order or this Plan, the Confirmation Order will act as a discharge and termination, as of the Effective Date, of any and all liabilities and debts of, and claims against the Debtor that arose at any time before the Confirmation Order, including any interest accrued on such claims from and after the Petition Date....
... [A]ll ... debts and interests shall be conclusively deemed released and discharged, as provided in 11 U.S.C. 524 and 1141....
Prior to confirmation, the IRS sent a letter to Miller's counsel on February 19, 1994, in which the IRS explained that "a debtor is ineligible to receive a discharge from certain types of federal taxes in a Chapter 11 case." Specifically, the letter noted that the post-petition, gap period interest accruing on Miller's tax debt "constitute[d] a nondischargeable claim" that the IRS was not willing to concede. In response, Miller's counsel assured the IRS, in a letter dated March 7, 1994, that any "post-petition interest obligations" were "outside the scope of this plan, ... and therefore cannot be done as part of the plan."
On April 13, 2000, following the transmission of a final payment to the IRS, Miller filed an adversary complaint in the Bankruptcy Court for the Eastern District of California, seeking a declaration that his tax obligations to the IRS under the plan had been satisfied. On August 11, 2000, Miller moved for summary judgment in his declaratory action.
On October 3, 2000, the bankruptcy court denied Miller's motion for summary judgment. The bankruptcy court concluded that, while confirmation orders generally constitute res judicata against subsequent appeals from parties who did not contest the order, the general rule was inapposite to the present case. Specifically, the court noted that the contract language was ambiguous with regard to the issue of the dischargeability of gap period interest, and res judicata could not bind the parties until that ambiguity was clarified.
Since res judicata did not operate to bar the IRS from pursuing its appeal, the court proceeded to consider the merits of the underlying claim. The court decreed that any ambiguities in the plan language must be construed against Miller both because he was the drafter of the plan, and because the IRS could not be deemed to have waived a statutory right in the absence of an unmistakably clear statement indicating its intention to do so. Applying that construction to Article XI, the court substantively concluded that Miller's tax debts were nondischargeable under 11 U.S.C. §§ 523 and 1141, and that the gap period interest which accrued on those debts was, by extension, excepted from discharge as well.
On March 8, 2001, Miller filed a second motion for summary judgment. He urged the bankruptcy court to heed the reasoning posited by the Tenth Circuit in United States v. Victor, 121 F.3d 1383 (10th Cir. 1997), which concluded that a secured IRS claim for a trust fund recovery debt was dischargeable under 11 U.S.C. §§ 507(a)(7) (now (a)(8))2 and 523(a)(1). The IRS opposed Miller's motion, and filed a cross-motion for summary judgment, urging the court to follow the rationale employed by the Eleventh Circuit in Gust v. United States (In re Gust), 197 F.3d 1112 (11th Cir.1999) (per curiam), which rejected Victor in concluding that an IRS claim does not become dischargeable by virtue of being secured by a lien.
On May 2, 2001, the bankruptcy court awarded partial summary judgment to the IRS. The court was persuaded to follow the reasoning of Gust, and reject the holding of Victor, in support of its conclusion that the exception to discharge for tax debts articulated in 11 U.S.C. § 523(a)(1) was not limited to unsecured claims. However, the court scheduled a trial to determine several outstanding issues, including whether parol evidence was admissible to aid in the interpretation of Article XI. On December 5, 2001, the court announced its holding that parol evidence was admissible to ascertain the meaning of the ambiguous language of Article XI. Further, the court declared that the evidence considered, namely the letters exchanged between the IRS and Miller's counsel, confirmed its earlier ruling that Article XI could not be interpreted as rendering Miller's liability for gap period interest dischargeable.
On December 28, 2001, Miller appealed the bankruptcy court's decision, and the IRS elected to have the appeal considered by the district court. On October 2, 2002, the district court filed an opinion in which it confirmed the judgment of the bankruptcy court. The district court considered the interplay of 11 U.S.C. §§ 523(a)(clarifying that certain types of debts of the kind listed in § 507(a) are nondischargeable whether or not a claim is filed) and 507(a)(8)(referring to tax debts of the type incurred by Miller). In addition, the court adopted the reasoning of Gust, concluding that § 523(a)(1) excepts from discharge tax debts such as the one involved in the instant case. Since the language of Article XI could be read to support the conclusion that debts were only discharged to the extent permissible under § 1141(d)(2)(cross-referring to § 523(a)), the district court concluded that the bankruptcy court had correctly resolved the ambiguity of Article XI in the IRS's favor.
A bankruptcy court's conclusions of law are reviewed de novo. In re Reaves, 285 F.3d 1152, 1155 (9th Cir.2002). Whether a contract is ambiguous is a question of law. Stratosphere Litig., LLC v. Grand Casinos, Inc., 298 F.3d 1137, 1143-44 (9th Cir.2002); Roden v. Bergen Brunswig Corp., 107 Cal.App.4th 620, 132 Cal. Rptr.2d 549, 552 (Ct.App.2003).
The bankruptcy court's findings of fact are reviewed for clear error. Reaves, 285 F.3d at 1155. The issue of dischargeability of a debt is a mixed question of fact and law that is reviewed de novo. Diamond v. Kolcum (In re Diamond), 285 F.3d 822, 826 (9th Cir.2002).
Miller implores the panel to refuse to consider the government's arguments regarding the interpretation of Article XI of his Chapter 11 plan on the grounds of res judicata. In order to facilitate the Bankruptcy Code's aim of providing a rehabilitating debtor with a "fresh start," an order confirming a bankruptcy plan is "binding on all parties and all questions that could have been raised pertaining to the plan are entitled to res judicata effect." Trulis v. Barton, 107 F.3d 685, 691 (9th Cir.1995). "If a creditor fails to protect its interests by timely objecting to a plan or appealing the confirmation order," the creditor is foreclosed from challenging any of the plan's provisions, "even if such a provision is inconsistent with the Code." Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083, 1086 (9th Cir.1999) (internal quotation marks omitted). Miller contends that the failure of the IRS to object to the confirmation of the plan should preclude it from challenging Miller's obligations under the plan.
Although confirmation of a plan generally acts as a final order which binds all parties, regardless of whether they assented to the plan, a plan which is ambiguous as to a material term is subject to interpretation by a...
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