Tanaka Bros. Farms, Inc., In re

• Decision Date: 03 October 1994
• Docket Number: No. 93-1211,93-1211
• Citation: 36 F.3d 996
• Parties: -6634, 63 USLW 2291, 26 Bankr.Ct.Dec. 132, Bankr. L. Rep. P 76,120 In re TANAKA BROTHERS FARMS, INC., Debtor, UNITED STATES of America, and its agency the Internal Revenue Service, Appellant, v. Andrea S. BERGER, Trustee; Boulder Creek Farms, Inc., Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 996

36 F.3d 996

74 A.F.T.R.2d 94-6634, 63 USLW 2291,

26 Bankr.Ct.Dec. 132,

Bankr. L. Rep. P 76,120

In re TANAKA BROTHERS FARMS, INC., Debtor,

UNITED STATES of America, and its agency the Internal

Revenue Service, Appellant, v. Andrea S. BERGER, Trustee; Boulder Creek Farms, Inc., Appellees.

No. 93-1211.

United States Court of Appeals, Tenth Circuit.

Oct. 3, 1994.

Christine A. Grant, Atty., U.S. Dept. of Justice, Tax Div., Washington, DC, (Loretta C. Argrett, Asst. Atty. Gen., Washington, DC, Gary D. Gray, Atty., U.S. Dept. of Justice, Tax Div., Washington, DC, Henry Lawrence

Solano, U.S. Atty., Denver, CO, with her on the briefs), for appellant.

Paul G. Quinn, Denver, CO, for appellee Andrea S. Berger.

Cynthia T. Kennedy, Boulder, CO, for appellee Boulder Creek Farms, Inc.

Before EBEL, HOLLOWAY, and KELLY, Circuit Judges.

EBEL, Circuit Judge.

This case is before us on appeal from a decision by the United States District Court for the District of Colorado, affirming a decision by the United States Bankruptcy Court for the District of Colorado. The bankruptcy court disallowed an amended proof of claim by the Internal Revenue Service ("IRS") in this bankruptcy proceeding, 150 B.R. 55. The district court affirmed the bankruptcy court's ruling, and the government appealed, arguing that the bankruptcy court abused its discretion in refusing to allow the IRS to amend its earlier estimated proof of claim based upon its subsequent receipt of the debtor's delinquent tax returns. We agree with the government that the IRS should have been allowed to amend its proof of claim to reflect the information in the subsequently filed returns and that the bankruptcy court abused its discretion in refusing such amendment. Accordingly, we reverse the decision of the district court and remand with instructions to send the case back to the bankruptcy court for further proceedings in accordance with this opinion.

I. BACKGROUND

The debtor in this matter, Tanaka Brothers Farms, Inc. ("debtor"), originally filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court of Colorado on January 7, 1991. On March 12, the IRS filed a timely proof of claim for debtor's unpaid 1990 employment and unemployment taxes. This initial proof of claim by the IRS specified the exact amounts of withheld taxes and FICA due for the first three calendar quarters of 1990: periods for which the debtor had filed timely quarterly employment tax returns (Forms 941) for its nonagricultural employees. However, the IRS could only list estimates for fourth quarter withheld taxes and FICA, annual FUTA (based on Form 940), and annual agricultural employment tax (based on Form 943), as the debtor had failed to make a timely filing of these forms for the year 1990. The IRS estimates were based on debtor's previous returns and were clearly designated as "Estimated" on the IRS proof of claim. During May 1991, debtor's Chapter 11 proceeding was converted to a Chapter 7 liquidation, a trustee was appointed, and a bar date of September 3, 1991 was set.

At some time in the second half of 1991, an IRS agent received information that debtor's payroll for 1990 would be substantially higher than the amount used to arrive at the earlier estimated proof of claim. However, the IRS decided not to revise its claim at that time, as a revision would simply constitute another estimate until debtor's tax returns were actually filed. While the IRS did not formally amend its proof of claim at that time, the IRS agent did notify counsel for the trustee of the new payroll information possessed by the IRS.

After the bar date had passed, the trustee began negotiations to settle claims against the estate. The most substantial were claims by Boulder Creek Farms, Inc. ("Boulder Creek") and Mobile Payroll Services ("Mobile"). The settlement agreement with Boulder Creek entitled it to retain the proceeds of liquidation of debtor's onion crop and allowed it a general unsecured claim against the estate of $1,225,000. The bankruptcy court approved this agreement on April 1, 1992. Mobile's claim against the estate was based on having cashed payroll checks for debtor's employees that were subsequently dishonored by debtor's bank due to insufficient funds. Mobile agreed to surrender its total claims of $364,224.20 in exchange for an allowed claim of $125,000 with a priority under 11 U.S.C. Sec. 507(a)(3). On June 13, 1992, the bankruptcy court approved the Mobile settlement.

On May 8, 1992, the trustee filed debtor's delinquent employment tax returns for 1990, reflecting taxes due of $471,142.48 (instead of the previously "estimated" $115,000.00). The IRS then filed an amended proof of claim, on June 11, 1992, which included the higher corrected figure. The trustee objected to the amended proof of claim on the basis that the increased amount was so substantial as to constitute a new and untimely claim rather than a mere amendment. The trustee requested the bankruptcy court to disallow the amended claim and, instead, to allow the original estimated claim as filed. Boulder Creek, as a major creditor, intervened, alleging it had relied on the original estimate in its settlement with the trustee and requesting that the amended IRS claim be disallowed. The bankruptcy court conducted a hearing and disallowed the IRS's amended claim as constituting "unfair surprise" to other creditors and the trustee. The government appealed and the district court affirmed. Before us is the government's timely appeal from the district court's order.

II. ALLOWANCE OF THE IRS'S AMENDED PROOF OF CLAIM

In reviewing a district court's decision affirming the decision of a bankruptcy court, the court of appeals is governed by the same standards of review as those that governed the district court. Robinson v. Tenantry (In re Robinson), 987 F.2d 665, 667 (10th Cir.1993). The decision of the bankruptcy judge to disallow the amended proof of claim is reviewable under an abuse of discretion standard. Unioil v. Elledge (In re Unioil, Inc.), 962 F.2d 988, 992 (10th Cir.1992). Under this standard, we will not disturb a bankruptcy court's decision unless we have a definite and firm conviction that the bankruptcy court made a clear error of judgment or exceeded the bounds of permissible choice under the circumstances. Cf. United States v. Talamante, 981 F.2d 1153, 1155 (10th Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 1876, 123 L.Ed.2d 494 (1993) (applying an abuse of discretion standard to evidentiary rulings).

In a bankruptcy proceeding, "amendment of a proof of claim is freely permitted so long as the claim initially provided adequate notice of the existence, nature, and amount of the claim as well as the creditor's intent to hold the estate liable." In re Unioil, Inc., 962 F.2d at 992. A creditor's "[l]ate-filed amendments to proofs of claim should be treated with liberality, as '[l]eave to amend in a straight bankruptcy proceeding is freely allowed where the purpose is to cure a defect in the claim as originally filed,' " id. at 992-93 (quoting LeaseAmerica Corp. v. Eckel, 710 F.2d 1470, 1473 (10th Cir.1983) (citation to original quotation omitted)), and where the party opposing the amended proof of claim fails to demonstrate actual prejudice. Id. at 993.

When the IRS filed its original estimated proof of claim in the instant case, it provided timely and adequate notice of the existence and nature of its claim for unpaid 1990 employment taxes. However, the issue we must decide in this case is whether the IRS's original proof of claim provided adequate notice as to the amount of the claim, or whether the increase in the amount of the amended proof of claim constitutes unfair surprise and prejudice to the estate or its creditors.

Various equitable factors that could help guide a decision whether to allow a claim to be amended were set forth in In re Oasis Petroleum Corp., 130 B.R. 89, 91-92 (Bankr.C.D.Cal.1991) (applying equitable factors from In re Miss Glamour Coat Co., No. 79 Civ. 2605, 1980 WL 1668, * 4-5 (S.D.N.Y. Oct. 8, 1980)). Those equitable factors, which specifically address amended claims by the IRS, are as follows:

(1) Whether the parties or creditors relied on the IRS initial claim, or whether they had reason to know subsequent proofs of claim would follow pending the completion of the audit.

(2) Whether other creditors would receive a windfall to which they are not entitled on the merits by the Court not allowing this amendment to the IRS proof of claim.

(3) Whether the IRS intentionally or negligently delayed in filing its amended claim.

(4) The justification, if any, for the failure to request the timely extension of the bar date.

(5) Any other general equitable considerations.

Id. at 92.

Here, the IRS's original claim was clearly denoted as an "estimate." In this case, without the benefit of fourth quarter or annual returns for 1990, the IRS based its estimate on the information it had at the time: debtor's previous tax returns. The IRS's designation of its original claim as an estimate, combined with the knowledge on the part of the trustee and Boulder Creek that the complete returns had not yet been filed, ¹ should have served as clear notice that an amendment from the IRS would be forthcoming upon receipt of debtor's returns. When the IRS did receive the debtor's delinquent returns, it acted promptly to amend its proof of claim to reflect the information contained therein.

Appellees assert that the IRS received new information subsequent to filing its original proof of claim that indicated its original estimate was too low and that the IRS should have acted at that time to amend its estimated proof of claim instead of waiting for the completed returns. However, the trustee also possessed this same new information and could have made the same calculations to assess the likely effect on the original estimated proof of claim. ² There is no indication in the...