Opinion
No. 87-10447-JAB
December 20, 1993
Opinion
On October 21, 1993, the following matters came before the court: (1) the trustee's objection to Claim #114 of the Internal Revenue Service ("IRS") for $150,000.00, (Pl. 570); and (2) the motion filed by the IRS to permit filing and allowance of late-filed proof of claim. (Pl. 577). The court took the matter under advisement following oral argument. Considering the memoranda filed, the applicable law, and the record, the court will enter an order denying the trustee's objection and granting the IRS's motion to permit the filing and allowance of the proof of claim.
I. Factual and Procedural Background
The debtors filed for protection under Chapter 11 of the Bankruptcy Code on January 30, 1987. On November 23, 1988, the matter was converted to a Chapter 7 case. A bar date of May 1, 1990 was set for the filing of proofs of claim. The IRS filed timely the following claims:
C-41, $174.29 (amended by C-99)
C-99, $2,862.44 (amended by C-102)
C-102, $4,571.58.
On February 16, 1993, Claim #114 was filed by the debtor on behalf of the IRS in the amount of $150,000.00.
The trustee objects to Claim #114 on the grounds that: (1) the claim fails to provide in adequate detail a description of the liability; (2) if Claim #114 is a new claim, it was not timely filed before the bar date; and (3) if Claim #114 is an amended claim, it was not timely filed because under B.R. 3004, a debtor who files a proof of claim on behalf of a creditor must do so within thirty days after expiration of the bar date. (PI. 570).
On August 30, 1993, the IRS, represented by and appearing through the debtor, filed a motion to permit filing and allowance of late-filed claim which avers: (a) the IRS was not given proper notice of the bar date because the address on the mailing matrix was wrong; (b) at the time of the bar date, debtor had not yet filed his 1986 income tax return; (c) a timely proof of claim was filed by the IRS on one claim against debtor arising out of taxes owed by the debtor as a member of one law firm. Therefore, the IRS contends that Claim #114 which is against the debtor for taxes owed by the debtor as a member of a subsequent law firm is really an amendment of the timely filed proof of claim because under applicable tax law, both claims are united claims against the debtor personally and are subject to the 100% penalty provision.
The debtor argues that the failure to address the notice to a particular section, in this case the Special Procedure Section, is legally insufficient because the IRS is such a vast federal agency. Debtor's final argument is that the 1986 tax return was not filed until after the May 1, 1990 bar date and that not permitting the late-filing of the IRS claim in this case will severely prejudice him because all the IRS debt is a consolidated claim against him personally that is nondischargeable.
The United States of America, appearing through Department of Justice, filed a response to the trustee's objection to Claim #114 which asserted in brief fashion that (a) the United States saw the trustee's objection only one day before the hearing on the objection, and (b) while not having enough time or information to state its position properly, the U.S. requested that the objection be overruled.
The Federal Deposit Insurance Corporation ("FDIC") filed a memorandum in opposition to the motion to permit the filing of and allowance of the late-filed proof of claim in which the FDIC argues: (a) the IRS had notice of the bar date; (b) Claim #114 is not an amendment of the prior claims that were timely filed by IRS.
II. Analysis
Due process requires that adequate formal notice be given to known creditors. Reliable Electric Co. v. Olson Constr. Co., 726 F.2d 620, 623 (10th Cir. 1984). Therefore, the first and overriding issue is whether the IRS received adequate notice of the bar date.
The debtor claims, and evidently the IRS agrees, that the address of the IRS on the mailing matrix was incorrect. The notice to file proofs of claim was directed to the IRS at 500 Camp Street, New Orleans, Louisiana. At the time in question, the IRS occupied the Hale Boggs Building that fronted on Magazine Street and bore the address 501 Magazine Street. The Hale Boggs Building is a part of and is connected to the federal complex that houses the United States District Court for the Eastern District of Louisiana and other federal agencies and fronts on Camp Street, bearing the number 500 Camp Street. According to the affidavit of the debtor, the IRS had difficulty receiving mail addressed to it at 500 Camp Street; the address of the IRS in 1989 was actually 501 Magazine Street; and in early 1990, the IRS began making physical preparations to move to its current address at 600 S. Maestri Place. (Pl. 602, Debtor's Response Memoranda, Ex. A). The 1990 edition of the South Central Bell Yellow Pages, attached to the affidavit, lists the IRS's address as 501 Magazine Street. (Id., Ex. B). The Court concludes that the notice sent to the IRS to file a claim was sent to the wrong address. There is no evidence to suggest that the IRS received actual notice of the bar date prior to the expiration of the bar date.
In In re Daniel, 107 B.R. 798 (Bankr.N.D.Ga. 1989), the bankruptcy court stated that because the Bankruptcy Rules do not contain any provision dealing with where to send notice to the IRS in a Chapter 13 case, the Court's inquiry is limited to whether the specific notice given in the case was fair and reasonable under the circumstances. Id. at 801. Citing Mullane v. Central Hanover Bank Trust Co., 339 U.S. 306, 70 S.Ct. 652, 94 L.Ed.2d 865 (1950), the Daniel court held that notice sent to an IRS collection office, instead of to the district director's office, was reasonable and, therefore, the pre-petition debt of the IRS was discharged and the IRS could not continue its efforts to collect the taxes. The court noted that "this is not a case where the IRS was not sent official notice of the bankruptcy filing. This is simply a case where the debtors listed the IRS at the best address they had, the address in a collection notice." Id. at 802.
In In re Johnson, 95 B.R. 197, 203 (Bankr.D.Colo. 1989), the court held that notice to the IRS was inadequate and defective in a Chapter 13 case where the Debtors failed to mail an amended plan, motion to confirm plan, and notice of hearing to the IRS at either: "(a) a specific, appropriate IRS office address, preferably to the attention of (i) a designated department, or (ii) an authorized Revenue Officer's attention, or (b) in accordance with local Court requirements." Instead the plan, motion, and notice was sent to the "Internal Revenue Service, Ogden, Utah 84201." The court concluded that notice to the IRS was deficient, the IRS was entitled to consideration of its late filed claim, and the claim would be allowed by the court. The court reasoned that "[l]ack of timely and meaningful notice, i.e., due process, fulfills the requisite stated above that upon a showing of extraordinary and compelling reasons, the period of time might be extended within which a creditor may file a proof of claim." 95 B.R. at 203.
In In re Cole, 146 B.R. 837 (D.Colo. 1992), the court considered whether notice provided to the IRS was effective where the notice was mailed to one of its service centers. The court reversed the bankruptcy court's denial of the late-filed proof of claim, holding instead that strict limits on extensions of time for filing proofs of claim do not apply where the creditor lacks effective notice of the proceedings or the bar date. The case was remanded to the bankruptcy court for a determination of whether the notice to the IRS was fair and reasonable under the circumstances.
While the Daniel, Johnson and Cole cases involved petitions filed under Chapter 13, and this case involves a Chapter 11 case converted to Chapter 7, the cases are instructive on the issue of whether or not the IRS has received adequate notice in the instant proceeding to satisfy due process requirements. A creditors claim can be barred for untimeliness only upon a showing that it received reasonable notice. In re Robintech, Inc., 863 F.2d 393, 396 (5th Cir. 1989), cert. denied 493 U.S. 811 (1989) (in Chapter 11 case, due process satisfied where creditor received 13 days notice of bar date). Whether adequate notice has been provided depends upon the facts and circumstances of a given case. Id. Due process requires that a creditor be given "notice reasonably calculated, under all the circumstances, to apprise [him] of the pendency of the action and afford [him] an opportunity to present [his] objections." In re Sam, 894 F.2d 778, 781 (5th Cir. 1990), quoting Mullane v. Central Hanover Bank Trust Co., supra.
Here, the FDIC argues that the IRS is chargeable with notice of the bar date for the following reasons: (1) Notice was sent to the IRS at 500 Camp Street and this was sufficient as a matter of law. To support this argument, the FDIC cites In re Ray Brooks Machinery, Inc., 113 B.R. 56, 61 (Bankr.N.D.Ala. 1989); and In re Worthing, 24 B.R. 774 (Bankr.D.Conn. 1982), as authority that notice of a bar date to one division of a large entity is sufficient notice even though the division receiving the notice was not the same one dealing with the debtor; and (2) Knowledge of the bankruptcy case, even without specific notice of a bar date, is sufficient notice that a proof of claim must be filed by the bar date, In re Glow, 111 B.R. 209, 218-19 (Bankr.N.D.Ind. 1990), and here the IRS clearly had notice of this case as evidenced by the three timely filed proofs of claims. The FDIC adds that IRS also knew of the tax obligation reflected in the late-filed claim well prior to the bar date. The FDIC further asserts that the debtor's own exhibits and the affidavit of John A. Mmahat show the IRS filed a federal tax lien relating to the obligation on January 10, 1989, and that this lien was signed by the same IRS official who signed the last two timely filed claims. (Pl. 599, FDIC memoranda, Ex. A and B). The FDIC concludes on this point that under very similar facts, the court in In re Byrd, 94 B.R. 458, 460 (Bankr.S.D.Ohio 1988), refused to permit a late-filed claim by the IRS.
The court does not accept the FDIC's argument that notice to one division of a large entity is sufficient, at least not as it is sought to be applied to the IRS here because it is based on two cases, Ray Brooks Machinery andWorthing, not involving a large governmental agency of the United States such as the IRS but instead involving the construction division of an engineering company (Ray Brooks Machinery), and the commercial loan department of a national bank (Worthing). In addition, it is contrary to a Fifth Circuit case which did not involve the IRS but did involve notice to a governmental agency. In United States, Small Business Admin. v. Bridges, 894 F.2d 108 (5th Cir. 1990), the Small Business Administration maintained that a debt to it which had not been scheduled in the debtor's individual Chapter 11 case was not discharged. In discussing whether the SBA received adequate notice and whether due process concerns were satisfied, the court noted that notice was not received because the SBA was not scheduled and that the SBA lacked actual knowledge of the filing. The Court stated:
One case has held that the notice or actual knowledge of one portion of an agency cannot be imputed to another portion of the same agency. U.S. Metal Products Co. v. United States, 302 F. Supp. 1263, 1270 (E.D.N.Y. 1969). . . .
The rationale of these cases relating to the "actual knowledge" of a government agency is that the government must have a meaningful opportunity to protect its rights in a bankruptcy proceeding. When a debtor is at fault by failing to comply with the Bankruptcy Code's requirements to properly list creditors and schedule debts, the United States government should not, and as a practical matter cannot, be charged with knowledge of the implications contained in each piece of paper — among the stream of documents entering its various offices each day — unless the agency particularly responsible for and familiar with the claims against the debtor has notice or actual knowledge of the debtor's bankruptcy case. Even within an individual agency, given the formidable infrastructure of many of these government entities, automatic imputation of notice or actual knowledge from one branch office to another is seldom a viable concept.
After considering all the facts and circumstances in this case, the court concludes that the IRS did not get adequate notice prior to the bar date. It is thus within the court's power to allow the late-filing of the IRS claim by the debtor. The United States Supreme Court has held that ". . . courts of bankruptcy are essentially courts of equity, and their proceedings inherently proceedings in equity." Local Loan Co. v. Hunt, 292 U.S. 234, 240, 54 S.Ct. 695, 697, 78 L.Ed. 1230 (1934). In reaffirming this principle, the Supreme Court stated in Pepper v. Litton, 308 U.S. 295, 304-305, 60 S.Ct 238, 244, 84 L.Ed. 281, 288 (1939):
The bankruptcy courts have exercised these equitable powers in passing on a wide range of problems arising out of the administration of bankrupt estates. They have been invoked to the end that . . . substance will not give way to form, that technical consideration will not prevent substantial justice from being done.
In the recent case of Pioneer Investment Services Company v. Brunswick Assocs. Ltd. Partnership, ___ U.S. ___, 113 S.Ct. 1489, 1499, 123 L.Ed.2d 74 (1993), the Supreme Court implicitly recognized that ". . . good faith and the absence of any danger of prejudice to the debtor or of disruption to efficient judicial administration . . ." are important in late filings.
Even the case put forth by the FDIC as its bedrock case, In re Byrd, supra, at 7, rejects outright the contention that the bankruptcy court does not have the power to grant relief because of a missed bar date. "We find such a position to be inappropriate for this court of equity." 94 B.R. at 460. In the Byrd case, the court did not allow the IRS to file a late proof of claim because on all the facts and circumstances in that case the IRS knew or should have known of the bankruptcy case and should have filed its proof of claim before the bar date. The trustee showed inByrd that failure of the IRS to make known its claim earlier prejudiced him because he had obtained the funds for distribution to the creditors by settlement of an adversary proceeding as to which he might well have taken a different position had he known the IRS was going to assert a substantial claim.
In this case, there is no showing of prejudice by the trustee or disruption to efficient judicial administration. To the contrary, the most strenuous objection to the late-filed claim is that of the FDIC. Here the prejudice from disallowance of the late-filed claim will be to the debtor, somewhat similar to that involved in the case of In re MacLochlan, 134 B.R. 2 (Bankr.N.D.Ohio 1991), where the bankruptcy court recognized that various equitable reasons existed for allowing the debtor to file a proof of claim on behalf of the IRS beyond the bar date for filing claims. The court in MacLochlan stated:
Usually a creditor is left to suffer the consequences where it had notice of a bankruptcy proceeding but failed to file its claim on time. In the present case, however, Debtors will suffer adverse consequences due to the IRS's failure to act in a prompt manner, because the claim of the IRS is not dischargeable. 11 U.S.C. § 523(a)(1)(A). If Debtor's Motion is overruled, nothing will be distributed on the IRS claim. If the IRS had filed its claim on time or if Debtors had been notified of the IRS claim on time, a substantial portion of the IRS claim would be paid as an administrative expense. The different treatment of the claim which usually penalizes the creditor will be passed on to Debtors in this case, despite the fact that Debtors did everything they could to notify the IRS of the bankruptcy.
Id. at 3-4. The MacLochlan court concluded:
Title 11 was enacted to provide a fresh start to debtors. Overruling these Debtors' Motion deprives them of the fresh start. Furthermore, it would deprive the IRS of its congressionally recognized preferred position in Debtors' distributable assets.
Id. at 4.
On the basis of the foregoing reasons, an order will be entered denying the trustee's objection and granting the motion of the United States of America to permit filing and allowance of Claim #114 in the amount of $150,000.00.