Opinion
Case No. 06-33124
10-12-2018
In re: CLADDAGH DEVELOPMENT GROUP, LLC, Debtor
Chapter 7 Decision Granting Chapter 7 Trustee's Objection to the Ohio Department of Taxation's Proof of Claim 160-2 and Denying the Ohio Department of Taxation Objection to the Chapter 7 Trustee's April 23, 2018 Second Amended Final Report
This decision concerns whether the Chapter 7 Trustee correctly classified the priority status of a proof of claim of the State of Ohio in the second amended final report of the Chapter 7 estate and relatedly, whether the State of Ohio Department of Taxation may amend its proof of claim to assert a "gap" claim pursuant to 11 U.S.C. § 507(a)(3).
References to "§___" are to the Bankruptcy Code of 1978, as amended, 11 U.S.C. §§ 101-1532.
Facts and Procedural Background
The parties stipulated to all the relevant facts. doc. 803 ("Stipulations"). This Chapter 7 case began as an involuntary Chapter 11 on October 25, 2006. Stipulations, ¶ 1. Richard D. Nelson was appointed as Chapter 11 Trustee on December 21, 2006 and an order for relief was entered on December 28, 2006. Stipulations, ¶ 3. Affiliate debtors filed for Chapter 11 relief on January 10 and 11, 2007. Stipulations, ¶ 5. The court entered an order for joint administration of these cases on January 26, 2007. Id. The sale of substantially all the assets of the jointly administered debtors was approved through an order entered on March 11, 2008. Stipulations, ¶ 6. The cases were converted to Chapter 7 by an order entered on June 28, 2010 and, on July 1, 2010, Nelson became the Chapter 7 Trustee. Stipulations, ¶¶ 7 and 8. Upon Judge Walter's retirement, this case was transferred to Judge Humphrey on October 20, 2017.
The bar date in the Chapter 11 was July 31, 2007. Stipulations, ¶ 9. After conversion, the bar date in the Chapter 7 was established at November 4, 2010. Stipulations, ¶ 10. On January 30, 2007, the Ohio Department of Taxation filed a proof of claim, claim 17, in the amount of $550,892.69. Stipulations, ¶ 11; Claim 17-1. The claim was amended on April 2, 2007, Claim 17-2, in the amount of $4,563,242.59. The claim sought priority as a tax claim under 11 U.S.C. § 507(a)(8). On March 6, 2007, the Ohio Department of Taxation ("Taxation") filed another § 507(a)(8) priority claim, claim 38, for $5,783.36. Stipulations, ¶ 12. On February 15, 2008, Taxation filed an additional claim, claim 160-1, for $6,639,972.68, as a § 507(a)(8) claim. The claim included $126,425.41 for the year 2016, but did not claim any portion of the claim as a § 507(a)(3) "gap" claim - the time period between the involuntary petition and the order appointing Mr. Nelson as trustee.
Section 502(f) treats ordinary course of business claims in an involuntary case that arise post-petition but prior to the earlier of the appointment of a trustee or an order for relief as pre-petition claims. By cross reference, § 507(a)(3) gives such claims priority status after domestic support obligations and certain administrative expenses.
The three claims, 17, 38 and 160, all contained the same language:
The tax and interest claims listed above are entitled to priority in accordance with 11 U.S.C. Section 507(a)(8) except as specifically set forth as a Non-Priority, general unsecured claim. Any penalty is a general unsecured claim not
otherwise entitled to priority, except to the extent provided by 11 U.S.C. § 507(a)(8)(g).Stipulations, ¶ 14. On December 12, 2014 Taxation and the Trustee entered into an agreed order, which deemed claims 17 and 38 withdrawn, and reserved rights of the Trustee to object to claim 160-1. Taxation did not reserve any rights in that agreed order. Stipulations, ¶ 17. While the agreed order specified that Taxation's claim was entitled to priority, it did not specify the degree of priority.
Section 507(a) designates priority claims from levels 1-10, with some of those levels having subclasses. Claims under § 507(a)(1) are the highest priority of priority claims with claims under § 507(a)(10) being the lowest priority of priority claims.
On September 22, 2017 the Trustee filed a final report and provided that Taxation's claim, 160-1, would be treated as a priority claim and all such claims would be paid pro rata. Stipulations, ¶¶ 27-28. In addition, a portion of the proof of claim of Gordon Food Services, Inc., Claim 89-1, in the amount of $129,126.94, and the U.S. Department of Labor, claim 111-1, in the amount of $84,738.73, were to be paid priority status. The Claim of the IRS, 10-3, was to be paid $108,421.38 as an administrative claim, and an additional $1,658,197.29 as a priority tax claim. The priority claim section of this final report did not specify what level of priority these claims held. Under this report Taxation was to be distributed $429,481.11 on a claim of $6,639,972.88. This initial report listed the claims of Duke Energy, as successor to Cinergy (34-1 and 35-1), and Toledo Edison, Claim 54-1, as non-priority unsecured claims.
The Ohio Bureau of Workers Compensation ("OBWC") filed the only objection to the initial Trustee report. Stipulations, ¶ 30. The Trustee amended the final report and OBWC withdrew its objection. Stipulations, ¶ 31. The status of the claims of Taxation, as well as Gordon Food Services, Inc., the U.S. Department of Labor, the IRS, Duke Energy, and Toledo Edison, was unchanged in the Trustee's First Amended Final Report. The First Amended Report provided that Taxation would receive $375,522.34 as a § 507(a)(8) priority tax claim. No party objected to the First Amended Final Report.
On April 23, 2018 the Trustee filed a Second Amended Final Report. Stipulations, ¶ 35. The report listed IRS Claim 145-1 to be paid in full as a § 507(a)(2) administrative claim. This claim would also be paid in full if characterized as a § 507(a)(3) gap claim. Stipulations, ¶ 36. Gordon Food Services also remained a priority claim. In addition, the Duke Energy and Toledo Edison claims were now listed to be paid in full as priority claims. Stipulations, ¶ 37. This report listed Taxation as being paid pro rata with priority claims, after the aforementioned priority claims, were paid in full. Taxation was to be paid $7,331.86 under the Second Amended Final Report, significantly less than it was to be paid under the original Final Report and the First Amended Final Report.
On May 23, 2018 Taxation filed a proof of claim which it identified as an amended claim, 160-2, by checking the box "amended." This proof of claim sought to have $126,425.41 of Taxation's claim paid as a § 507(a)(3) gap claim and the remaining portion of the claim, $5,306,560.83, paid as a § 507(a)(8) priority tax claim. Stipulations, ¶ 19. This was the first time that $126,425.41, or any other amount, was separated out and identified by Taxation as a gap claim. The original of this proof of claim, 160-1, filed on February 15, 2008, sought priority under § 507(a)(8) for all of the sums requested by Taxation. Taxation also objected to the Second Amended Final Report that same day. doc. 789. The Trustee objected to claim 160-2 on June 1, 2018. doc. 795.
Analysis
A. Is Claim 160-2 filed by Taxation an Amended Claim or a New Claim?
The Bankruptcy Code and Bankruptcy Rules do not specifically discuss an amendment of a proof of claim. In re Channakhon, 465 B.R. 132, 141 (Bankr. S.D. Ohio 2012) (citing In re Enron Corp., 298 B.R. 513, 521-22 (Bankr. S.D.N.Y. 2003)). Multiple decisions have applied Federal Rule of Civil Procedure 15(c) on whether to allow an amendment after the bar date to a timely filed claim. Channakhon, 465 B.R. at 141 (collecting cases). A claim is not a new claim, but rather an amendment, if it "arose out of the conduct, transaction, or occurrence set out — or attempted to be set out — in the original [claim]." Fed. R. Civ. P. 15(c)(1)(B).
In this instance, the gap claim is not from the same conduct or transaction. The prior claims were strictly for priority taxes owed. Proof of claim 160-1 filed in 2008 only identified these taxes as being entitled to § 507(a)(8) priority, not § 507(a)(3) gap priority. The gap claim is based on an event or occurrence entirely separate from the specific status of the claim, whether it is taxes, trade debt, or anything else. Gap claims are based on a specific event and a bankruptcy policy that protects creditors in involuntary bankruptcy cases, regardless of the basis for the claim under applicable non-bankruptcy law. 4 Collier on Bankruptcy, ¶ 502.07[1] (Richard Levin & Henry J. Sommer eds., 16th ed., 502-66) ("Both the House and Senate Judiciary Committees in their recitation of legislative history recognized that, under the authority granted to debtors to operate pending trial on an involuntary petition, 'creditors must be permitted to deal with the debtor and be assured that their claims will be paid.'") (citations omitted). This priority covers the uncertain time from the petition date to the order for relief. Taxation never sought that particular status for any portion of its claim until long after the claims bar date expired and after the Trustee filed his Second Amended Final Report in 2018. Taxation's claim was for taxes only and divided by calendar year. It never separately listed the specific amount owed that would be covered by the gap period.
Taxation notes that the taxes during the gap period are trust fund taxes and the court agrees with the policy concerns of Taxation when such taxes are not withheld and properly turned over to the state. doc. 805 at 3. But Congress has addressed these concerns in giving these taxes the priority it deemed appropriate. 11 U.S.C. § 507(a)(8)(C). --------
Case law establishes that "amendments" to proofs of claim seeking different priority treatment for the sums claimed are new and not amended claims and, therefore, such amendments must be disallowed if they are made after the proof of claim bar date. Thus, in discussing an attempt of a creditor to increase its dividend in a case by amending its claim to seek priority status, a court stated:
... [W]here a claimant attempts to change the nature of a proof of claim, such as when a taxing authority attempts to increase its proof of claim by adding different types of taxes or different tax years than that stated in the original proof of claim, such amendments have generally been disallowed. [citations omitted] This is what the Fund seeks to do in urging us to classify its Claim as entitled to priority status.
* * *
However, the nature of a priority claim is much different from that of a general unsecured claim. Reclassifying the claim as a priority claim impacts the Debtor's
Plan and the distributions to be paid to the other creditors under the Plan. This situation is therefore different from those in which amendments have been permitted to increase the amount of a claim when post-bar date events have resulted in a larger, but otherwise unchanged debt.In re Metro Transp. Co., 117 B.R. 143, 148 (Bankr. E.D. Pa. 1990). See also In re Crane Rental Co., Inc., 341 B.R. 118 (Bankr. D. Mass. 2006) (amendment disallowed when it sought to add an additional non-priority unsecured claim to a priority claim). Taxation very late in this case has tried to change the nature of a part of its claim from a priority tax claim accorded eighth priority under § 507(a)(8) to third priority under § 507(a)(3). Like in Metro, changing the nature of that portion of its claim impacts the distribution scheme.
In Highlands Ins. Co., Inc. v. Alliance Operating Corp. (In re Alliance Operating Corp.), 60 F.3d 1174 (5th Cir. 1995), Highlands Insurance Company filed an unsecured claim in the amount of $157,008 for workers compensation premiums and voted its claim on the debtor's Chapter 11 plan as an unsecured claim. About two and one-half years after the proof of claims bar date, Highlands filed an "application for recognition and payment" of its claim as a priority claim. Then about another six months later, it amended its proof of claim setting forth an administrative expense claim of $28,678 for post-petition insurance coverage provided to the debtor, a priority claim of $97,505, and a non-priority unsecured claim of $71,595. The bankruptcy court and the district court denied its application, finding the amendment to Highland's proof of claim was a new claim, rather than an amendment to its original proof of claim. In rejecting Highland's arguments on further appeal, the Court of Appeals stated:
[T]the one key factor behind allowing amendments is that the bankruptcy court already have notice of the existence, nature, and amount of the claim from the filing of the original claim.... Here, it is clear that the bankruptcy court did not have notice of the nature of the priority claim from the filing of an unsecured claim. Although Highlands argues that it is widely known that workmen's compensation insurance premiums are accorded priority status and thus everyone involved should have known of the true nature of the claim, we do not believe that others should be charged with this knowledge when Highlands itself did not properly characterize it on its proof of claim and ballot.Id. at 1176. The same is true here. While Taxation argues that the Trustee should have known that the taxes accrued during the gap period were entitled to third priority, rather than eighth priority, that is not how Taxation characterized it on its proof of claim.
As stated by this court in previous cases, amendments to claims filed after the claims bar date "must be scrutinized to assure that there [is] no attempt to file a new claim under the guise of an amendment." In re Lee Way Holding Co., 178 B.R. 976, 979 (Bankr. S.D. Ohio 1995) (citing Int'l Horizons, 751 F.2d at 1216; Chavis, 160 B.R. at 805; In re Parsons, 135 B.R. 283, 284 (Bankr. S.D. Ohio 1991)). To treat Claim 160-2 as an amendment renders the bar date superfluous.
For these reasons, the court determines Claim 160-2 is not an amendment but a new claim for § 507(a)(3) gap claim status filed out of time.
B. Should Taxation Be Permitted to Amend its Claim After the Filing of the Trustee's Second Amended Final Report?
Assuming for argument that Taxation's claim 160-2 may be properly characterized as an amendment, rather than a new claim filed after the bar date, do the equities favor allowing the amendment?
The second part of the test is whether it is equitable to permit the amendment. Factors under Rule 15(c) include "[u]ndue delay in filing, lack of notice to the opposing party, bad faith by the [filing] party, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party, and the futility of amendment[.]" Channakhon, 465 B.R. at 143 (quoting Moross Ltd. P'ship v. Fleckenstein Capital, Inc., 466 F.3d 508, 518-19 (6th Cir. 2006)). Those factors have been applied in the context of an amended proof of claim. Channakhon, 465 B.R. at 143; In re Parsons, 135 BR. at 284-86.
Taxation's proof of claim 160-1 filed on February 15, 2008 in the amount of $6,639,972.88 only claimed priority under § 507(a)(8). There was no breakout for taxes accrued during the gap period. Then on December 12, 2014 it entered into an agreed order with the Trustee which provided that "Claim #160 (the "Surviving Claim") shall be treated as a priority claim in the amount of $6,639,972.88." Throughout the 12 years this case has been ongoing, Taxation, until its very recent objection to the Second Amended Final Report and filing of claim 160-2, has consistently asserted a priority tax claim under § 507(a)(8) and never sought to classify part of its claim as a gap claim under § 507(a)(3). Taxation filed four separate proofs of claim prior to claim 160-2, and they all asserted priority under § 507(a)(8) only.
In defending its position, Taxation focuses on how the Trustee has treated other claims filed in this case. Although it is not ideal that three different final reports were required in this case, the record does not show that Taxation is somehow being held to a different standard than other claims. The priority claim of Gordon Food Services, 89-1, was timely filed and specifically listed the gap claim of $129,126.94. In the Trustee's original Final Report, he failed to apportion gap treatment to the portion of the claim entitled to gap status. Regardless, this claim, unlike the claim of Taxation, has a clear and separate gap portion. Similarly, the claim of the U.S. Department of Labor, 111-1, was timely filed and is for pre-petition wages entitled to a higher priority under § 507(a)(4) than tax claims under § 507(a)(8). The Duke Energy claims, 34-1 and 35-1, did not list specific priority, but the invoice attachments showed that the claims were clearly within the gap period. This is unlike Taxation that specifically claimed priority under § 507(a)(8) and entered into an agreed order with the Trustee. In the instance of Toledo Edison, the claim clearly explained it was for gap period services, but was originally misclassified by the Trustee. IRS claim 145-1 was listed in the Second Amended Final Report as an administrative expense in that amount. The claim was filed as an administrative expense, but has hand-written language stating that it is for the gap period. Although it appears to be better characterized as filed as a gap claim, the Trustee, knowing the claim would be paid 100% in either event, did not object to the claim. While the court can understand Taxation's frustration at the multiple final reports filed by the Trustee, conceded errors in the earlier reports, and the resulting drastic reduction in the amount Taxation is receiving in this case, the reality remains that all of these claims were timely filed and ultimately characterized properly, and simply have a higher priority under § 507 than tax claims filed under § 507(a)(8). None of these claims were given an opportunity to file an eleventh hour amendment. It was not the Trustee's obligation to interpret Taxation's priority status at a higher level than Taxation voluntarily sought.
Allowing Taxation to proceed with claim 160-2 would invite every claimant in this case that may have erred in filing its claim to amend it after the final report has been filed. See In re Durango Ga. Paper Co., 314 B.R. 885, 888 (Bankr. S.D. Ga. 2004) (court determining that "it is not equitable to allow [claimant] to amend its proof of claim more than one year after the bar date."). While the agreed order entered into between Taxation and the Trustee simply provided for "priority" treatment of Taxation's claim, it references "in the amount of $6,639,972.88" with no identification of what priority and no breakout of gap claim taxes. Given that the order provided for claim 160 being the "Surviving Claim" and that proof of claim only sought § 507(a)(8) priority and that § 507(a)(8) provides a priority for taxes owed to governmental units, the order can only be reasonably construed to provide for priority under § 507(a)(8). The order refers to the claim that, without equivocation or reservation, asserts a priority status based on being a tax claim. No new evidence has been presented that was hidden from Taxation, nor any circumstance that Taxation should not have been aware of for the many years since the gap period ended. Taxation is a sophisticated party by any definition and must be charged with full knowledge of the intricacies of the Bankruptcy Code and the consequences of its legal positions. While Taxation focuses on the final report amendments, had the Trustee classified all the claims properly in the initial final report, Taxation would be receiving the same amount, and would have no fair explanation for the agreed order or the failure to amend its claim earlier. None of the other claimants is receiving an opportunity to amend its claim. Instead, all the other claimants Taxation mentions are receiving what they are entitled to in considering all the timely filed claims.
This case has taken 12 long years to complete. The court is unwilling to allow a claim filed ten years ago which is further supported by an agreed order between Taxation and the Trustee to be revisited upon the closing of the case. The court finds the balances of the equities do not weigh in favor of an amended claim.
Conclusion
For all these reasons, the Chapter 7 Trustee's objection to claim 160-2 of the Ohio Department of Taxation is sustained and the Ohio Department of Taxation's objection to the Chapter 7 Trustee's Second Amended Final Report is denied. The court will enter an order consistent with this decision.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Guy R. Humphrey
United States Bankruptcy Judge Dated: October 12, 2018 Copies to: Default List, Plus Bradley C. Smith (Counsel for the State of Ohio Department of Taxation)