U.S. v. Cardinal Mine Supply, Inc.

• Decision Date: 22 October 1990
• Docket Number: No. 89-6475,89-6475
• Parties: -5723, 90-2 USTC P 50,592, 24 Collier Bankr.Cas.2d 26, 20 Bankr.Ct.Dec. 1864, Bankr. L. Rep. P 73,675 UNITED STATES of America, Plaintiff-Appellant, v. CARDINAL MINE SUPPLY, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1087

916 F.2d 1087

66 A.F.T.R.2d 90-5723, 90-2 USTC P 50,592,

24 Collier Bankr.Cas.2d 26, 20 Bankr.Ct.Dec. 1864,

Bankr. L. Rep. P 73,675

UNITED STATES of America, Plaintiff-Appellant, v. CARDINAL MINE SUPPLY, INC., Defendant-Appellee.

No. 89-6475.

United States Court of Appeals Sixth Circuit.

Argued July 30, 1990.

Decided Oct. 22, 1990.

Louis DeFalaise, U.S. Atty., David Middleton, Asst. U.S. Atty., Lexington, Ky., Robert K. Coulter, U.S. Dept. of Justice, Tax Div., Washington, D.C., Gary R. Allen, Acting Chief, Gary D. Gray, Joel A. Rabinovitz (argued), U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., for plaintiff-appellant.

Louis DeFalaise, U.S. Atty., David Middleton, Asst. U.S. Atty., Robert K. Coulter, U.S. Dept. of Justice, Tax Div., Washington, D.C., for plaintiff.

Randy G. Clark, Pikeville, Ky., for defendant-appellee.

Before KENNEDY, BOGGS, and SUHRHEINRICH, Circuit Judges.

KENNEDY, Circuit Judge.

The United States appeals the decision of the Bankruptcy Court affirmed by the District Court that both general unsecured creditors who filed timely claims and those who did not file timely claims because they received no notice of the bankruptcy are to be paid ahead of priority claimants who also filed late claims because they received no notice and had no knowledge of the bankruptcy. Because we do not believe that the Bankruptcy Code (11 U.S.C.) directs this result, we shall REVERSE.

On October 25, 1983, debtor, Cardinal Mine Supply, Inc., filed a petition for relief under Chapter 7 of the Bankruptcy Code. A notice mailed to creditors on November 25, 1983 set December 19, 1983 as the date of the meeting of creditors pursuant to 11 U.S.C. Sec. 341(a), and set 90 days from December 19, 1983 as the time within which claims must be filed in order to be allowed, except as otherwise provided by law.

The IRS was not listed as a creditor in the case and did not receive notice of the meeting. The IRS learned of the bankruptcy on September 27, 1985. On October 7, 1985, the IRS filed its claim as a priority claim in the amount of $18,892.35. The claim is primarily for employment taxes for the second and third quarters of 1983 as reported on returns delinquently filed by the debtor.

The United States Bankruptcy Court for the Eastern District of Kentucky determined that the fact that the IRS did not receive notice of the corporate debtor's bankruptcy case in time to permit timely filing of a proof of claim does not affect the result dictated by applicable provisions of the Bankruptcy Rules. It held that the Rules do not permit it to enlarge the time to file this tardy claim.

The Bankruptcy Court stated that Bankruptcy Rule 3002 requires that in a Chapter 7 liquidation case, an unsecured creditor, such as the IRS in this case, must file a claim within 90 days after the first date set for the meeting of creditors called pursuant to section 341 of the Bankruptcy Code in order for the claim to be allowed. The court noted that Bankruptcy Rule 3002(c)(1) permits a governmental entity to obtain an extension of time to file a proof of claim but only for cause shown on motion made before expiration of the 90 day period for filing claims; the court further noted that no such motion was filed in this case. The court also noted that Bankruptcy Rule 9006(b)(3) permits the court to enlarge the time for filing a proof of claim only under the conditions stated in Rule 3002(c) and that none of these conditions applies to the facts of this case. Finally, the Bankruptcy Court noted that although 11 U.S.C. Sec. 726(a)(2)(C) authorizes pari passu distribution on a tardily filed unsecured claim if the creditor did not have notice or actual knowledge of the case in time to file a timely proof of claim, this provision excludes unsecured claims entitled to priority in distribution under 11 U.S.C. Sec. 507, such as the claim of the IRS in this case. Thus the court sustained the trustee's objection to the tardily filed claim of the IRS and found that the order of distribution on the claim is that provided for by 11 U.S.C. Sec. 726(a)(3), that is after the distribution on non-priority unsecured claims.

The IRS appealed, and the District Court affirmed the decision of the Bankruptcy Court. The District Court stated that "[s]ection 726(a)(2)(C) of Title 11 allows distribution for a late general unsecured claim if the creditor did not have notice or actual knowledge of the case in time for filing a proof of claim. However, this provision specifically excludes unsecured claims entitled to priority, such as the IRS' claim here." We do not agree that the Bankruptcy Code requires that exclusion.

Section 501(a) of the Bankruptcy Code provides that a creditor may file a proof of claim. 11 U.S.C. Sec. 501(a). The Code requires that appropriate notice be given (11 U.S.C. Sec. 342) but does not specify what notice shall be given to creditors or when it shall be given. That was left to the Bankruptcy Rules. Bankruptcy Rule 3002(c) provides that a proof of claim in a Chapter 7 or 13 case shall be filed within 90 days after the first date set for the meetings of creditors. ¹ Rule 9006 provides that the court may enlarge the time under Rule 3002(c) only to the extent and under the conditions stated by that rule. It is clear that the IRS did not file its claim within the time period permitted by Rule 3002(c). The IRS argues, however, that a federal tax claim, filed late because the IRS was not notified and had no knowledge of the debtor's bankruptcy case or of the bar date, may not be subordinated to non-priority unsecured claims.

Section 507 sets forth the types of claims that are to be given priority treatment, and sets forth the order that the priority is to take. 11 U.S.C. Sec. 507. There is no question that the employment taxes claimed by the IRS would receive priority under section 507 had a claim for them been timely filed, for such a claim would fall within the sixth priority group set forth in that section. See 11 U.S.C. Sec. 507(a)(6)(D). ²

Distribution of property of the estate is controlled by 11 U.S.C. Sec. 726, which provides in part:

(a) Except as provided in section 510 of this title, property of the estate shall be distributed--

(1) first, in payment of claims of the kind specified in, and in the order specified in, section 507 of this title;

(2) second, in payment of any allowed unsecured claim, other than a claim of a kind specified in paragraph (1), (3), or (4) of this subsection, proof of which is--

(A) timely filed under section 501(a) of this title;

(B) timely filed under section 501(b) or 501(c) of this title; or

(C) tardily filed under section 501(a) of this title, if--

(i) the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under section 501(a) of this title; and

(ii) proof of such claim is filed in time to permit payment of such claim;

(3) third, in payment of any allowed unsecured claim proof of which is tardily filed under section 501(a) of this title, other than a claim of the kind specified in paragraph (2)(C) of this subsection;

(4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages ...;

. . . . .

(b) Payments on claims of a kind specified in paragraph (1), (2), (3), (4), (5), or (6) of section 507(a) of this title, or in paragraph (2), (3), (4), or (5) of subsection (a) of this section, shall be made pro rata among claims of the kind specified in a particular paragraph....

In placing the IRS claim in section 726(a)(3), the Bankruptcy Court reasoned that although 11 U.S.C. Sec. 726(a)(2)(C) authorizes pari passa distribution on a tardily filed nonpriority unsecured claim where the creditor did not have notice or actual knowledge of the bankruptcy to file a timely proof of claim, section 726(a)(2)(C) specifically excludes unsecured claims entitled to priority in distribution under section 507.

We note that although the Bankruptcy Court said that the Rules did not allow it to permit the IRS's claim to be tardily filed, the court in fact treated the claim as filed and allowed in holding that it was entitled to distribution after payment of all the unsecured claims. Certainly section 726(a)(3) contemplates that some tardily filed claims can and will be filed and allowed. We cannot have a statute that specifically allows payment of tardily filed claims and rules that prohibit their filing. Accordingly, to the extent that Rule 9006 contradicts the statute, it cannot stand.

Due process and equitable concerns require that when a creditor does not have notice or actual knowledge of a bankruptcy, the creditor must be permitted to file tardily when the creditor does so promptly after learning of the bankruptcy. Although the United States appropriately concedes that it has no right to due process, ³ construing the Bankruptcy Rules and section 726(a)(2)(C) to exclude the IRS's claim in the present case would cause all section 507 priority claims, including those of private parties, to be excluded from the tardily filed claims provision of section 726, thereby implicating due process rights. See Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 313, 70 S.Ct. 652, 656, 94 L.Ed. 865 (1950) (stating that "[m]any controversies have raged about the cryptic and abstract words of the Due Process Clause but there can be no doubt that at a minimum they require that deprivation of ... property by adjudication be preceded by notice and opportunity for hearing appropriate to the nature of the case").

In a case involving a tax lien under the old Bankruptcy Act, the United States Supreme Court determined that notice and an opportunity to be heard were necessary before a party could be deprived of property. City of New York v. New York, New Haven & Hartford R.R. Co., 344 U.S. 293, 73 S.Ct. 299, ...