Opinion
Case No. 88-B-12245
December 13, 1991
Discharge of Debts — Taxes — Reopening Cases. — A Chapter 7 debtor's case was reopened more than two years after the debtor's discharge to determine the dischargeability of the debtor's Federal income tax debt under Section 523(a)(1). Bankruptcy Rule 4007(b) expressly allows cases to be reopened at any time for complaints to determine dischargeability of non-Section 523(c) debts. Moreover, the debtor was not prejudiced by the case's reopening in view of the bankruptcy court's concurrent jurisdiction over such determinations.
See Sec. 523(a) at ¶ 9227 and Bankruptcy Rule 4007 at ¶ 21,157.
This matter is before the Court on the Motion of the United States Internal Revenue Service ("IRS") to Reopen the Case of David W. Rundle, Cases No. 88 B 12245, to determine the dischargeability of income tax liability and David W. Rundle's ("Debtor") Motion for a Rule to Show Cause against the IRS. For the reasons set forth below the IRS' Motion to Reopen is granted and a ruling on the Debtor's Motion for a Rule to Show Cause is deferred until the issue of dischargeability of the taxes is decided.
BACKGROUND
The Debtor filed a petition under Chapter 7 of the Bankruptcy Code on August 11, 1988. The IRS was listed as a creditor on the schedules accompanying the petition for debts totalling $263,308.91. The debts arose from the Debtor's non-payment of 1976 through 1983 income taxes. On September 29, 1988 the Debtor filed an adversary proceeding to determine the dischargeability of the taxes. The IRS answered, alleging that the taxes were not dischargeable pursuant to section 523(a)(1)(C). On October 17, 1988 the adversary proceeding was dismissed on the Debtor's motion. On December 21, 1988 an order of discharge was entered and on April 14, 1989 the case was closed.
In 1991 a dispute arose between the IRS and the Debtor over the Debtor's income tax refund from the Debtor's 1989 tax payments. The IRS was holding the refund and intended to apply it against the pre-petition tax liabilities. Attempts by Debtor's counsel to convince the IRS that the taxes had been discharged and the IRS was wrongfully withholding the Debtor's tax refund were unsuccessful. On June 13, 1991, the IRS filed this Motion to Reopen and attached its adversary complaint to determine the dischargeability of the taxes. On June 18, 1991 the Debtor brought a Motion for a Rule to Show Cause why the IRS should not be held in contempt for violating the permanent injunction of § 524(a)(2) by withholding the income tax refund.
The Debtor's principal argument against reopening the case is that the IRS is barred by laches in seeking a determination of dischargeability nearly two and one-half years after the order of discharge. The IRS contends that it waited two and one-half years to litigate the issue because prior to this time no funds were available. In response to the Debtor's Motion for Rule to Show Cause the IRS claims that it is justified in holding the overpayment since there has not been a determination of dischargeability. In a post-hearing brief filed July 23, 1991, the IRS also asserts that this Court does not have jurisdiction to decide the Debtor's motion unless the case is reopened.
The case was a "no-asset" case.
DISCUSSION
A case may be reopened to "administer assets, to accord relief to the debtor, or for other cause." 11 U.S.C. § 350(b). Federal Rule of Bankruptcy Procedure 5010 authorizes cases to be reopened on the motion of the debtor or other party in interest. The decision to reopen a case is within the discretion of the bankruptcy court and the moving party has the burden of proving circumstances justifying reopening the case. In re Nelson, 100 B.R. 905, 906 (Bankr.N.D.OH. 1989).
The Debtor alleges that there are several cases which have held that time is an important consideration in a decision to reopen and laches is a defense. In re Frontier, 70 B.R. 356 (Bankr.C.D.Ill. 1987). Only one of the cases cited by the Debtor involved a motion to reopen to determine the dischargeability of a debt, In re McQueary, 43 B.R. 948 (Bankr.W.D.Ky. 1984). Contrary to the Debtor's argument, McQueary is not analogous because it involved a claim that a debt was non-dischargeable under § 523(a)(2). Pursuant to § 523(c) and F.R.Bankr.P. 4007(c) complaints to determine dischargeability of debts under section 523(a)(2), (4) and (6) must be brought within a specific time or they are automatically discharged.
The Court never specifically stated what section under section 523 the creditor relied on in arguing that the debt was non-dischargeable. The court did state that the creditor was aware of its claim of "fraudulent conversion" against the debtor. McQueary at 949. Money obtained by false pretenses or fraud is non-dischargeable pursuant to § 523(a)(2).
In this case the claim of non-dischargeability is raised under § 523(a)(1). There is no time limit in the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure on complaints to determine dischargeability of debts other than § 523(c) debts. On the contrary, F.R.Bankr.P. 4007(b) expressly provides that complaints to determine dischargeability of debts other than debts under § 523(c) may be brought at any time and cases may, be reopened for such a determination.
Few cases have addressed the issue whether time or laches is a consideration in reopening a case to determine dischargeability of debts. In re Rediker 25 B.R. 71 (Bankr.M.D.Tenn. 1982) reopened a case to determine dischargeability of a debt under § 523(a)(3) or (5) one year after the case had been closed. The issue of laches was not raised. In In the Matter of Gratrix, 72 B.R. 163 (D.Ala. 1984) a motion to reopen was granted three years after the case had been closed. The debtor sought to amend the schedules and then determine the dischargeability of the debts. The creditor argued that the motion should be denied due to unreasonable delay and laches. The bankruptcy court determined that the creditor was not prejudiced by the mere reopening of the case. Gratrix at 164. This determination was upheld by the district court.
Furthermore the bankruptcy court has con-current jurisdiction to decide the issue of dischargeability of debts other than § 523(c) debts. In re McNeil, 13 B.R. 743, 747 (Bankr.S.D.N.Y. 1981). Several courts have denied motions to reopen to determine dischargeability of debts where another forum has previously decided the issue. See In re Davenport, 18 B.R. 491 (Bankr.D.Vermont 1982), debtor sought a determination of dischargeability 7 months after state court had decided issue; In the Matter of Barber Industries, Inc., 30 B.R. 382 (Bankr. M.D. Flor. 1983). If this Court denies the IRS' Motion to Reopen the IRS could pursue the issue of dischargeability in another forum.
This Court concludes that although time may be an important consideration in a motion to reopen, the express provision of the F.R.Bankr.P. 4007(b) allowing cases to be reopened at any time to determine dischargeability out-weighs this consideration. This Court also rejects the Debtor's claim that the Motion to Reopen is barred by laches. Laches requires both undue delay and prejudice by the delay. Smith v. City of Chicago, 769 F.2d 408, 410 (7th Cir. 1985). The Debtor is not prejudiced by this Court reopening the case in light of the concurrent jurisdiction over determinations of dischargeability. Dischargeability of debts is a core proceeding under 28 U.S.C. § 157(b)(2)(I), and the bankruptcy court has particular expertise in determining dischargeability. Thus the issue can be resolved more efficiently in the bankruptcy court than in the state court. Accordingly, this Court will grant the IRS' Motion to Reopen in order to resolve the issue of the dischargeability of the taxes pursuant to F.R.Bankr.P. 4007(b) which allows cases to be reopened for such purpose.
In reaching this decision this Court is not deciding whether the claim of dischargeability is barred by laches. This issue, and any other defenses, may still be raised by the Debtor.
The Debtor has asked this Court to issue a Rule to Show Cause why the IRS should not be held in contempt for violating the discharge order and the permanent injunction of § 524(a)(2) by withholding the Debtor's income tax refund. The IRS responds that it has not violated the discharge order or § 524(a)(2) because there has not been a determination of dischargeability.
In a post-hearing brief the IRS argued that this Court is without jurisdiction to hear the Doctor's motion unless this Court reopens the case. Since the Court has granted the IRS' Motion to Reopen the case this issue is moot.
As this Opinion indicates, whether the taxes were discharged has not yet been decided. Accordingly, this Court will defer ruling on the Debtor's Motion for a Rule to Show Cause until the issue of dischargeability has been decided.
IT IS HEREBY ORDERED that the IRS' Motion to Reopen is granted and a ruling on the Debtor's Motion for a Rule to Show Cause is deferred until the issue of the dischargeability of taxes is decided.