Opinion
No. 89-1139C(3)
January 3, 1990
Appeal from the United States Bankruptcy Court for the Eastern District of Missouri.
Hearings — Confirmation of Plan — Notice. — A finding that a confirmation notice was mailed and likely reached a creditor was reasonable and was not clearly erroneous inasmuch as the same method for mailing notices was used to prepare other mailings which the creditor received. The attorney had enough knowledge and control over the mailing procedure to ensure that the mailing was proper. That the creditor's records did not reflect receipt of the notice only presented a question of fact. Since the debtor proved there was a proper mailing, the record was sufficient to invoke the rebuttable presumption that notice was received.
See Sec. 1128(a) at ¶ 12,135.
Reorganization — Modification of Plan — Objections — Mootness. — Where a creditor receives notice of a confirmation hearing but does not attend or otherwise contest a reorganization plan, objections made by the creditor after plan confirmation will be moot. The debtor moved for plan modification and for the sale of the its assets, which the creditor contested. However, the creditor had lost its right to object to these motions.
See Sec. 1141(a) at ¶ 12,201.
Reorganization — Confirmation of Plan — Effect — Discharge. — Because the IRS failed to contest the confirmation of a Chapter 11 plan, it was barred from later challenging the validity of the plan. Once the confirmation order became final, the creditor could no longer assert rights and liabilities which it had not raised during the proceeding. Even if the objections here were deemed to be a request to revoke the confirmation, the creditor could not make such a request since the period for revocation had already expired.
See Sec. 1141(d) at ¶ 12,204 and Sec. 1144 at ¶ 12,208.
Reorganization — Confirmation of Plan — Omissions — Administrative Expenses — Validity. — Even though a confirmed reorganization plan failed to include administrative expenses payments to the IRS, the plan was valid since the exclusion was not an error which required reversal. Section 507(a)(1) does not raise a presumption that first priority administrative expenses will be paid unless otherwise provided for in the plan. Once a corporate reorganization is complete, the debtor will be discharged of its obligations owed to creditors, as here. Accordingly, the discharge of the IRS's claim for postpetition administrative expenses was proper. Hence, the IRS was barred from pursuing that claim.
See Sec. 507(a) at ¶ 9027.
St. Louis Contracting Company ("debtor") filed a petition for bankruptcy on April 20, 1987. On March 31, 1988, debtor filed a Disclosure Statement and Plan for Reorganization, which called for a new investor to acquire debtor and to guarantee payments to the creditors as called for by the plan. The plan contained no provision for treatment of post-petition, pre-confirmation tax liabilities, and further provided that confirmation of the plan would bar all creditors except to the extent provided therein.
The United States received a copy of the Disclosure Statement and Plan for Reorganization on April 8, 1988.
The United States Bankruptcy Court for the Eastern District of Missouri set a hearing on the Disclosure Statement and Plan for May 23, 1988. Although the United States also received notice of this hearing, it did not attend the hearing or otherwise object to the disclosure statement or plan. On June 6, 1988, the bankruptcy court entered an order setting a confirmation hearing on the plan for July 18, 1988, and directing debtor to serve notice of the hearing by June 19, 1988. Apparently, it is the custom and practice of the Bankruptcy Court for the Eastern District of Missouri to order debtor to serve notice at various stages of the bankruptcy proceedings. Debtor's attorney filed a certificate of service with the bankruptcy court on June 21, 1988, stating that debtor had complied with the order. The certificate of service did not list the names or addresses of those served.
The United States did not appear at the confirmation hearing. On August 2, 1988, the bankruptcy court entered an order confirming the reorganization plan, even though the plan did not explicitly provide for payment of administrative expenses. In January 1989 debtor filed two motions seeking to modify the reorganization plan and to sell the assets of the reorganized debtor. On February 13, 1989, the United Stated made its first appearance in the case by filing objections to debtor's motions, and a tax claim for payment of administrative expenses of $295,476.66 in unpaid post-petition federal withholding taxes.
The bankruptcy court held a hearing on the matter at which the Internal Revenue Service ("IRS") asserted, inter alia, that it had not received notice of the confirmation hearing. At the hearing, debtor's attorney, Robert Hille, testified about his customary method of preparing mailings in the course of this bankruptcy case. He testified he compiled a list of debtor's creditors, including the IRS, in his computer data base from which address labels were printed out.
When I was handling it, whatever the mailing was, the addresses were prepared in my office, either on mailing labels or on the envelopes themselves. The envelopes were then, the appropriate documents were then inserted in the envelopes and an employee of the debtor picked them up for mailing. . .
Hille further testified the financial statements, Disclosure Statements, Plan for Reorganization, Notices of the Hearing on the Disclosure Statement, Notice of the Hearing on Confirmation, and notice and ballots for confirmation of the reorganization plan were sent pursuant to this practice. Hille also testified he created a shorter list from the larger list of debtor's creditors, for the purpose of sending documents specifically required to be mailed to the IRS such as debtor's monthly financial statements. He testified the IRS's name and address had never been removed from either list maintained in the computer.
The IRS admitted that it received the monthly financial statements, the Disclosure Statement, the Plan for Reorganization, and the notice of the hearing to consider the accuracy of the Disclosure Statement, all of which had been mailed pursuant to Hille's customary procedures. The IRS did not admit receiving the notice of the confirmation hearing, and testified that their specific file folder did not contain such notice. The IRS witness testified that receipt of the notice had not been noted on the history maintained in the file, but that not every document received is noted in the history section of every file. The IRS did not present any evidence that the ordinary procedures followed by the debtor were not employed in the mailing of the notice of the confirmation hearing.
The bankruptcy court found, inter alia, that the United States had been properly notified of the bankruptcy proceedings, including the July 18, 1989 confirmation hearing; and that not having responded or objected to the Plan, the United States' preconfirmation tax claims were barred and the objections based thereon were moot.
A. Notice
The United States argues the bankruptcy court erred in determining that the IRS received notice of the July 18, 1989 confirmation hearing. The Unites States also argues that the failure to provide actual notice deprived the IRS of its constitutional due process rights.
Due process requires that "within the limits of practicability notice must be such as is reasonably calculated to reach interested parties." Mullane v. Central Hanover Bank Trust Co., 339 U.S. 306, 318 (1950). The rule does not require actual receipt of the notice. In re Longardner Assoc., Inc., 855 F.2d 455, 459 (7th Cir. 1988); In re Park Nursing Center, Inc., 766 F.2d 261, 263 (6th Cir. 1985). A rebuttable presumption of receipt arises upon proof of proper mailing of a notice. Longardner, 855 F.2d at 459. A proper mailing requires (1) a proper address; (2) proper postage; and (3) proper placement in the United States mail. See Hagner v. United States, 285 U.S. 427, 430 (1932).
The United States argues the record is insufficient as a matter of law to support invocation of the above presumption. Specifically, the United States argues that, although the person who actually mails the notice need not testify, the individual who testifies must have knowledge and control of the procedure sufficient to ensure that it is properly carried out.
In this case, Mr. Hille had knowledge of and testified as to the customary practice of preparing and mailing materials to the IRS in particular, and to the creditor's in general. Although the individual who affixed postage and mailed the notices was a regular employee of the debtor, the employee was acting under the control of and subject to the direction of Hille for the purposes of mailing the notices. Moreover, the testimony as to the custom and practice of mailing notices is bolstered by the undisputed testimony that this method was used to prepare the other mailings, which the IRS received.
Although the United States argues the testimony that the notice was not in the IRS file raises a presumption that it was not mailed, evidence tending to show non-receipt merely creates a question of fact. See Longardner, 855 F.2d at 459. The bankruptcy court's findings that the notice was mailed and that it was reasonably calculated to reach interested parties are not clearly erroneous.
Finally, the procedural process due a person should be determined by evaluating the entire procedural system, including the corrective process available for remedying any defects or limitations in the procedure. See Hudson v. Palmer, 104 S.Ct. 3194. The Court notes the IRS admitted it maintained a file on debtor since June of 1987, and were aware that certain withholding tax returns had not been filed in April of 1987. Because the IRS had an opportunity to file its claim, numerous opportunities to review the reorganization plan and make objections thereto, and an opportunity to be heard at the hearing to consider the Disclosure Statement, and at the confirmation hearing, the Court finds it has received the procedural process due under the constitution.
B. Validity of Reorganization Plan
The United States argues the bankruptcy court erred as a matter of law in confirming a reorganization plan which did not provide for payment of administrative expenses, and otherwise failed to comply with certain requirements of sections 1129 and 1123. Debtor argues that by not responding or objecting to the reorganization plan, the United States is now barred from challenging the validity of the plan.
Once the confirmation order becomes final, the provisions of a reorganization plan are res judicata as to all rights and liabilities that could have been raised. See In re Blanton Smith Corp., 81 B.R. 440, 44243 (M.D. Tenn. 1987); In re Jartran, Inc., 76 B.R. 123, 125 (Bankr. N.D. Ill. 1987); In re Bock Laundry Machine Co., 56 B.R. 84, 86 (Bankr. N.D. Ohio 1985); In re St. Louis Freight Lines, Inc., 45 B.R. 546, 552 (Bankr. E.D. Mich. 1984). The order confirming reorganization is res judicata even if based on an error of law. Blanton Smith, 81 Bankr. at 442.
Providing for finality is particularly important in corporate reorganizations which depend on the restructuring of debt, the infusion of new capital and execution of new contracts, and loan agreements. See In re Astroglass Boat Co., 32 B.R. 538, 543 (Bankr. M.D. Tenn. 1983). As the bankruptcy court noted, the reorganization plan in this case called for Parnell Enterprises, Inc., and its principal officer and shareholder, Denis Hackett, and his wife, to acquire debtor's stock, and guarantee the payments to the creditors as called for by the plan. Allowing the IRS to look to the assets of the debtor to pay for an alleged claim which was never filed would work a great injustice to the reorganized debtor and the creditors who participated in the reorganization.
By not providing for payment of administrative expenses, debtor's plan may not comply with the applicable provisions of title 11, and therefore perhaps should not have been confirmed over timely objection on this ground. Thus, if the Court were today deciding an objection to the confirmation on the ground that it omits reference to tax liabilities it might be constrained to agree and deny confirmation. That day, however, has long since passed. The Court agrees with the bankruptcy court that any issues the United States might have raised in objection to the reorganization plan are res judicata. The Court's task now is to interpret and enforce the terms of the confirmed plan.
The most difficult issue is whether the bankruptcy court's failure to provide for the payment of administrative expenses was such "clear error" as to require reversal, even though the issue was not raised by the parties. This Court does not find it to be such a "clear error" in this case, although repeating such an oversight in future cases could require a different determination.
The Court further notes that although it could revoke a confirmation order procured by fraud if requested by a party in interest before 180 days after the entry of the order, the United States did not request revocation of the confirmation order. Even if the Court were to construe the objections as a request to revoke confirmation, these were not filed until February 13, 1989, 182 days after the confirmation order was entered.
C. Priority Payments under 11 U.S.C. § 507(a)(1)
Finally, the United States argues that the first priority given administrative expenses under 11 U.S.C. § 507(a)(1) raises a presumption that they will be paid unless the plan explicitly provides otherwise. Because debtor's plan is silent as to payment of administrative expenses, as a matter of law, the IRS is entitled to a full cash payment of the post-petition withholding taxes. The Court does not agree.
Title II, section 1141(d)(1) specifically states:
Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan — (a) discharges the debtor from any debt that arose before the date of such confirmation whether or not . . . (iii) the holder of such claim has accepted the plan. . .
The only instances where a confirmation plan does not discharge a claim are set forth in sections 1142(d)(2) and (3), and are clearly not applicable in this case.
Although in Chapter 7 and individual Chapter 11 cases federal taxes are not discharged, see 11 U.S.C. § 523, 1141(d)(2), corporate reorganization matters are governed by different principles of law. Once reorganization is complete, the corporate Chapter 11 debtor is discharged from income tax liabilities as well as claims of creditors. In Re Flanigan's Enters, Inc., 75 B.R. 446, 449 (Bankr. S.D. Fla. 1987) (after confirmation of Chapter 11 corporate reorganization, all creditors, including government, permanently enjoined from seeking recoveries of prefiled as well as pre-confirmation obligations). Moreover, as the legislative history of the Bankruptcy Reform Act of 1978 reveals, a Senate version of section 1141(d) which would have excepted certain tax liabilities from the corporate discharge provisions, was rejected precisely because of the perceived need to minimize uncertainty surrounding reorganizations. See In re A.H. Robins Co., 59 B.R. 99 (Bankr. E.D. Va. 1986), and legislative history cited therein.