Opinion
No. 1-89-01297
September 21, 1991
Liquidation — Claims — Proofs of Claim — Priorities — Distribution — Late-Filing. — A late-filed priority claim is nonetheless entitled to priority distribution in Chapter 7. This result holds regardless of when the claim was filed and regardless of whether the claimant had timely notice.
See Sec. 726(a) at ¶ 10,112 and Rule 3002 at ¶ 21,102.
Claims — Proofs of Claim — Objections — Late-Filing. — Lateness is not a ground under Section 502(b) (as opposed to under the Rules) for granting an objection to a late-filed claim. Thus, a late-filed priority claim in a Chapter 7 case is still entitled to priority based on the strength of Section 726(a)(1).
See Sec. 502(b) at ¶ 9006.
Powers of the Court — Equity — Consistency with Code. — The Section 105 equity powers can only be used consistent with other Code provisions. Thus, in this Chapter 7 case, a late-filed priority claim was entitled to priority in distribution based on the clear dictate of Section 726(a)(1).
See Sec. 105 at ¶ 7045.
This Chapter 7 case was originally noticed to creditors as a no-asset case, so that there was no need to file proofs of claim. Subsequently, assets were sold and an estate was created. The court sent a notice to all creditors, as well as the debtors and their counsel, informing them that April 19, 1990, was established as the claims bar date.
At all times before and during the bankruptcy proceedings, the debtors knew that they were liable to the Internal Revenue Service for a nondischargeable priority tax debt. However, the debtors did not file a proof of claim on behalf of the IRS, as they had a right to do pursuant to section 501(b) of the Bankruptcy Code and FRBC 3004. Instead, the debtors called the IRS and insisted that it file a proof of claim even though the bar date had passed. The IRS filed a claim on August 7, 1990. The Trustee objected, and the court sustained the objection on December 17, 1990, finding that the IRS had received due notice of the bar date.
The debtors have now moved the court for reconsideration. They raise no new facts, but argue that recent case authority permits the late claim to be allowed. Pursuant to FRBC 3008, the court may revisit the issue.
Contrary to the assertions of the debtor, this is not a case where the rules have broken down so that the court must intervene equitably. The taxes in question were employment taxes owed by the debtors' corporation, for which the debtors were personally liable. This is the sort of claim the IRS is very likely to miss, since the primary obligor was the corporation. This is exactly the situation anticipated by section 501(b). The debtors knew about the debt; they scheduled it. As soon as they received the dividend notice, they should have filed a proof of claim on behalf of the IRS. Pursuant to Rule 3004, they had until 30 days after the bar date to do so. This motion is before the court not because the rules have broken down, but only becuase the debtors did not avail themselves of them.
Moreover, the court believes one case relied upon by the debtors, In re Unroe, 937 F.2d 346 (7th Cir. 1991) is improperly decided. The Federal Rules of Bankruptcy Procedure are binding on this court, and have the effect of law unless they clearly conflict with the Bankruptcy Code. In re Morrissey, 717 F.2d 100, 104 (3rd Cir. 1983). The court is not free to use section 105 of the Code to alter the terms of applicable law. In re Morristown Erie R. Co., 885 F.2d 98, 100(3rd Cir. 1989).
To the extent that U.S. v. Cardinal Mine Supply, Inc., 916 F.2d 1087 (6th Cir. 1990) stands for the proposition that a late tax claim may be allowed as a priority claim where no notice of the bar date was given, it is inapplicable because in this case notice was given. However, the case says also says something very different. Interpreting the language of section 726(a)(1) of the Code, it holds that all priority claims are entitled to first payment in Chapter 7 cases, regardless of when they were filed and regardless of whether they had notice. 916 F.2d at 1091. The court in Cardinal Mine pointed out that section 726(a)(1) does not limit itself to timely claims. Timeliness is discussed only in relation to other unsecured claims, in section 726(a)(2). Moreover, lateness is not a ground for disallowance under section 502 of the Code.
After considerable reflection, the court can see no basis for declining to follow Cardinal Mine's holding that under the terms of the Code itself priority claims in Chapter 7 are entitled to first payment even if filed late. Thus, while the court rejects all of the debtors' equitable arguments as meritless because the debtors slept on their rights, the court is compelled to find that as a matter of law the priority claim of the IRS is entitled to first payment even though it was filed after the bar date.
Accordingly, IT IS ORDERED that unless the court disallows the claim of the IRS for some reason other than timeliness the Trustee shall pay it pursuant to section 726(a)(1) of the Code along with other priority claims.