Opinion
No. 99-1175. Bk. No. 95-13051
October 20, 1999
Order and Reasons
The Internal Revenue Service appeals an order of the bankruptcy court holding that 11 U.S.C. § 108(c) does not toll priority periods for the collection of taxes during a prior bankruptcy and declining to exercise its equitable powers under Section 105(a) of the Bankruptcy Code to toll the applicable three-year time limit during the debtor's prior bankruptcy. For the reasons stated below, the Court affirms the bankruptcy court's decision on both grounds.
I. Factual Background
Offshore Diving Salvaging filed two bankruptcy proceedings. It filed the first case on April 15, 1991, seeking Chapter 11 bankruptcy protection from the bankruptcy court for the Southern District of Texas. The court confirmed a plan of reorganization on May 20, 1993. Offshore continued to encounter financial difficulties and filed a second bankruptcy on August 15, 1995 as a Chapter 11 in the bankruptcy court for the Eastern District of Louisiana. The bankruptcy court converted the case to a Chapter 7 liquidation on April 10, 1996.
The IRS filed a proof of claim in the first bankruptcy for delinquent taxes. The court confirmed a plan of reorganization that provided for payment of 100% of the IRS's priority tax claims. The IRS and the debtor thereafter entered an agreed order allowing the IRS's claims, with $372,739 classified as an unsecured priority claim. The debtor made post-confirmation payments on its tax liabilities of $137,749.63 between June 29, 1993 and December 17, 1994. The debtor made sufficient post-confirmation payments to its creditors to be deemed as having substantially consummated the confirmed plan. Two years and four months after filing the first bankruptcy, Offshore filed the second Chapter 11 in bankruptcy court in New Orleans. Between the confirmation of the first plan of reorganization and the second bankruptcy filing, the IRS filed no liens to secure its uncollected taxes.
The IRS filed a claim in the second bankruptcy asserting priority status for taxes assessed in 1990 and 1991, more than three years before the filing of the August 18, 1995 bankruptcy petition. The IRS relied on precedent from outside the Fifth Circuit to assert that the three-year "look back" period for determining the priority of tax claims in Section 507(a)(8)(D) is suspended during periods when the taxing authority is prevented from collecting taxes because of a prior bankruptcy. Alternatively, the IRS argued that equitable tolling was per se warranted under Section 105(a) of the Bankruptcy Code. The bankruptcy court found the IRS's first argument foreclosed by the Fifth Circuit's decision in In re Quenzer, 19 F.3d 163 (5th Cir. 1993). As to equitable tolling, the bankruptcy court found that it had equitable power under Section 105(a) of the Bankruptcy Code to toll the three-year period of Section 507(a)(8) but that the facts did not justify invoking its equitable powers in favor of the IRS. The IRS filed a timely appeal.
II. Standard of Review
This Court reviews the bankruptcy court's conclusions of law de novo. See In re United States Abatement Corp., 79 F.3d 393, 397 (5th Cir. 1996); In re Young, 995 F.2d 547, 548 (5th Cir. 1993). It reviews the bankruptcy court's findings of fact for clear error. See Young, 995 F.2d at 548. The bankruptcy court's decision whether it has equitable power under Section 105(a) to grant the relief requested here is a question of law which is reviewed de novo. See Federal Deposit Insurance Corp. v. Dawson, 4 F.3d 1303, 1308 (5th Cir. 1993) (decision that equitable tolling unavailable as a matter of law reviewed de novo). The bankruptcy court's decision whether to exercise the equitable powers granted under Section 105(a) is reviewed for abuse of discretion. See Sadkin v. Sadkin, 36 F.3d 473, 478-79 (5th Cir. 1994) (Section 105(a) provides equitable powers for the bankruptcy court to use at its discretion).
III. Applicability of Quenzer
The bankruptcy court was correct that it was obligated to follow the Fifth Circuit's decision in In re Quenzer, 19 F.3d 163 (5th Cir. 1993). In Quenzer, the Fifth Circuit squarely addressed the issue of whether Section 108(c) of the Bankruptcy Code tolls the priority period for the collection of taxes during a prior bankruptcy proceeding. Absent a provision for tolling, Section 507(a) limits the time period for determining the priority status of tax claims to three years before the filing of the bankruptcy petition. See 11 U.S.C. § 507. The Fifth Circuit concluded that "[u]nder the plain language of section 108(c), . . . suspension applies only to nonbankruptcy law and nonbankruptcy proceedings." Quenzer, 19 F.3d at 165. Hence, the Court found that the IRS could not rely on Section 108(c) to toll the time limit set in Section 507 during a prior bankruptcy. Whether this Court believes that contrary reasoning of other circuits is more persuasive on the issue is irrelevant. This Court, like the bankruptcy court, has no authority to ignore a binding decision of the Fifth Circuit. Accordingly, the bankruptcy court's decision that under Quenzer, Section 108(c) does not authorize tolling of the time period in Section 507(a)(8)(D) is affirmed.
Section 108(c) provides:
Except as provided in Section 524 of this title, if applicable non-bankruptcy law, an order entered in a non-bankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, . . . and such period is not expired before the date of the filing of petition, then such period does not expire until the later of —
(1) the end of such period . . .; or
(2) thirty days after notice of the termination or expiration of the stay under Section 362 . . . with respect to such claim.
A number of cases from other circuits recognize that Section 108(c) permits tolling under similar circumstances because to read it literally would produce results at odds with the intent of the Bankruptcy Code. See In re Waugh [97-1 USTC ¶ 50,304], 109 F.3d 489, 493 (8th Cir. 1997) (literal application of Section 108(c) would frustrate Congressional intent to afford IRS a three-year priority period to collect taxes); In re Taylor [96-1 USTC ¶ 50,181], 81 F.3d 20, 23 (3d Cir. 1996) ("To limit § 507(a) in this regard would lead to absurd results, as the government would lose its priority claim to back taxes as a result of the taxpayer's abuse of the bankruptcy process."); In re West [93-2 USTC ¶ 50,634], 5 F.3d 423, 425 (9th Cir. 1993) ("literal interpretation of § 108(c) would frustrate the Bankruptcy Code's intricate scheme for the payment of tax claims."); In re Montoya [92-2 USTC ¶ 50,435], 965 F.2d 554, 557 (7th Cir. 1992).
IV. Tolling Under Section 105(a)
The bankruptcy court was also correct that it has equitable power under Section 105(a) of the Bankruptcy Code to toll the priority period of Section 507. Under 11 U.S.C. § 105(a), a bankruptcy court may "issue any order, process or judgment necessary or appropriate to carry out the provisions [of the Bankruptcy Code] and may take "any action or make any determination necessary to enforce or implement court orders or rules to prevent the abuse of process." 11 U.S.C. § 105(a). In United States v. Energy Resources Co. [90-1 USTC ¶ 50,281], 495 U.S. 545, 549, 110 S.Ct. 2139, 2142 (1990), the United States Supreme Court reiterated the "traditional understanding" that bankruptcy courts are courts of equity, which have "broad authority to modify creditor-debtor relationships." The bankruptcy court must exercise its equitable power in a manner consistent with the Bankruptcy Code, however, and it may not use equity to contradict statutory or common law in order to reach what the court feels is a fairer result. See In re Oxford Management, Inc., 4 F.3d 1329, 1333-34 (5th Cir. 1993) (power exercised under Section 105(a) must be "exercised in a manner that is consistent with the Bankruptcy Code"); In re Texas Consumer Finance Corp., 480 F.2d 1261, 1265 (5th Cir. 1973); United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986) (Section 105(a) does not authorize bankruptcy court to create substantive rights that are otherwise unavailable under applicable law or constitute a roving commission to do equity). Cf. United States v. Noland [96-1 USTC ¶ 50,252], 517 U.S. 535, 541, 116 S.Ct. 1524, 1528 (1996) (bankruptcy court could not equitably subordinate IRS's post-petition, noncompensatory tax claims on categorical basis in derogation of Congress's scheme of priorities).
Most courts have reached the conclusion that Section 105(a) is broad enough to permit equitable tolling of the time period in Section 507. See In re Richards [93-1 USTC ¶ 50,344], 994 F.2d 763, 765 (10th Cir. 1993); In re Morgan, [99-2 USTC ¶ 50,712], 182 F.3d 775, 779 (11th Cir. 1999) (Section 108(c) is insufficient to toll Section 507(a), but Section 105(a) is broad enough to permit a bankruptcy court exercising equitable powers to toll three-year priority period when appropriate); In re Hollowell, 222 B.R. 790 (N.D.Miss. 1998); In re Ramos, 208 B.R. 655 (W.D.Tex. 1996); In re Miller, 199 B.R. 631 (Bankr.S.D.Tex. 1996); In re Clark, 184 B.R. 728 (Bankr.N.D.Tex. 1995). These courts generally conclude that finding discretion under Section 105(a) to toll the § 507 "look back" period does not offend any provision or policy of the Bankruptcy Code. See, e.g., Richards [93-1 USTC ¶ 50,344], 994 F.2d. at 765 (use of § 105(a) equitable authority "is not inconsistent with any specific provision of the Bankruptcy Code, and . . . is consistent with the underlying philosophy of the . . . Code."); Miller, 199 B.R. at 634 (invoking § 105(a) and stating that Bankruptcy Code was not designed to permit debtors to thwart creditors by filing successive petitions). The cases reason that Congress intended to allow the government a certain time to collect taxes, and use of § 105(a) to permit tolling prevents the debtor from abusing the bankruptcy process by filing successive bankruptcy cases to avoid paying taxes. See, e.g., Morgan [99-2 USTC ¶ 50,712], 182 F.3d at 779-80; Richards [93-1 USTC ¶ 50,344], 994 F.2d at 765-66. This Court agrees that recognizing equitable power to toll Section 507 under § 105(a) does not violate any Bankruptcy Code provision or policy and is in fact consistent with Congressional policy. Accordingly, the Court affirms the bankruptcy court's determination that Section 105(a) is broad enough to provide for equitable tolling of the priority period in 507(a).
The IRS next argues that there should be a per se rule of equitable tolling under Section 105(a), which does not require proof of debtor misconduct or an examination of the equities in each case. The bankruptcy court rejected this argument by relying on dicta in Quenzer. In Quenzer, the 105(a) argument was raised for the first time on appeal, and the court refused to consider it. In so doing, the court noted that "[e]quitable considerations are largely fact-driven." 19 F.3d at 165. The court further stated that "[f]ull development and examination of the facts and the relative positions of the parties are imperative in the exercise of the court's equitable powers." Id. This Court likewise rejects the IRS's argument that it is entitled to a rule that tolling of the § 507 "look back" period is required as a matter of law in any case in which there is a successive bankruptcy filing. The IRS's argument would amount to a tacit rejection of Quenzer, since it would require the court to toll § 507 whenever there is a successive bankruptcy petition. This is precisely what the Quenzer court said Section 108(a) did not envision. Neither the bankruptcy court, nor this Court can use its equitable power to impose a per se tolling rule if it would violate another section of the Bankruptcy Code as interpreted by the highest court in the circuit.
The Court nevertheless agrees that there will generally be equities favoring the IRS in these cases and that the absence of debtor misconduct will not always foreclose tolling. The IRS does not choose its debtors, it cannot secure itself prior to delinquency, it takes time to collect delinquent taxes, and the automatic bankruptcy stay prevents the IRS from having the three years envisioned by Congress for collection for reasons beyond its control. In cases considering the issue of equitable tolling of the statutes of limitations governing other federal causes of action, the courts have looked not only to whether the debtor was guilty in preventing the plaintiff from discovering his cause of action, but also to whether the plaintiff was prevented from acting for reasons beyond its control or simply slept on his rights. See, e.g., Rashidi v. American President Lines, 96 F.3d 124, 128 (5th Cir. 1996) ("Equitable tolling applies principally where the plaintiff is actively misled by the defendant . . . or is prevented in some extraordinary way from asserting his rights"). For this reason, the Court finds that the absence of affirmative misconduct by the debtor will not always prevent tolling of Section 507's three-year period. See Morgan [99-2 USTC ¶ 50,712], 182 F.3d at 780 n. 8 ("we reject the notion espoused in In re Gore . . . that a finding of dilatory conduct or bad faith is necessary to find the equities in favor of the government"). This is a factor to consider in the overall process of balancing the equities, but this factor alone is not determinative. That does not mean, however, that the IRS is entitled to a per se rule which spares it from making a record on the equities in order to prevail on the tolling issue.
Finally, the Court finds that the bankruptcy court did not abuse its discretion in refusing to exercise its acknowledged equitable power in favor of the IRS. The IRS made no record of the relative equities of the parties' positions. The debtor, on the other hand, made a showing that in the first bankruptcy, virtually all of its assets were encumbered by creditors superior in rank to the IRS so that collection activities by the IRS would have produced negligible results, even if there had been no automatic stay by virtue of its bankruptcy filing. The debtor also pointed out that the first bankruptcy actually benefitted the IRS by requiring the debtor to operate under supervision of the bankruptcy court and preventing it from alienating assets which could be used post-confirmation to satisfy the IRS's priority claims. The confirmed plan provided for 100% payment of the IRS's priority claims. The debtor waited two years and four months after confirmation to file the second bankruptcy. There was no evidence of fraud or efforts to stymie the collection of the tax debt. The IRS has made no showing that despite its due diligence, it had insufficient time to collect these taxes. The IRS had the burden to establish that the balance of the equities was in its favor. The bankruptcy court did not abuse its discretion in finding that it failed to do so. Accordingly, the decision of the bankruptcy court is affirmed.
Judgment
Considering the order and reasons of the Court on file herein,
It is Ordered, Adjudged and Decreed that Bankruptcy Court's decision is hereby Affirmed.