Opinion
Civil No. 1:99-CV-629
June 28, 2000
MEMORANDUM OPINION
This is an appeal from an order of the United States Bankruptcy Court in a Chapter 13 proceeding. The bankruptcy court disallowed the proof of claim filed by the Internal Revenue Service (IRS) because it was filed late and did not constitute an amendment to the debtors' claim earlier filed on behalf of the IRS. As a result, the IRS was deemed an unsecured creditor, subject to payment only as provided for in the plan, which was confirmed. The bankruptcy court further held that res judicata barred the IRS from arguing the plan does not bind it. The IRS contends the bankruptcy court erred in holding its claim did not constitute an amendment. The IRS also contends its tax lien was not discharged because the plan failed to provide for payment of the entire amount of taxes owed. After reviewing the parties' briefs, this Court concludes appellant's claims are without merit and affirms the bankruptcy court's ruling.
I
The relevant facts are largely undisputed. Appellees Thomas Allen Jones and Meri Anne Stowe ("debtors") filed a voluntary petition under Chapter 13 of the Bankruptcy Code on May 13, 1998. One of the debts listed in the petition was indebtedness to the IRS. An order of relief was issued on May 13, 1998, which gave the IRS notice. In accordance with 11 U.S.C. § 502(b)(9), the IRS was required to file a claim by November 9, 1998. The first creditors' meeting was held on July 8, 1998. After four adjournments, the final confirmation hearing was held on December 3, 1998. At the final confirmation hearing, the Chapter 13 Trustee refused to pay the IRS through the plan without a proof of claim on file. On December 4, 1998, debtors filed a protective claim on behalf of the IRS in the amount of $87,543 (the secured portion of the debt). On December 7, 1998, the IRS filed its own proof of claim, dated December 1, 1998. It claimed a total indebtedness of $152,622.75, consisting of $143,088.13 secured; $9114.76 unsecured, priority; and $459.86 unsecured, general.
It is undisputed that the IRS filed its proof of tax claim late. The IRS had 180 days after the date of the order of relief to file a proof of claim. 11 U.S.C. § 502(b)(9). An extension may be granted if cause is shown before the end of the 180 days. Fed.R.Bankr.P. 3002(c)(1). Here, the IRS had until November 9, 1998 to either file a proof of claim or request an extension. The IRS did neither. Nor has the IRS even argued that good cause for an extension of time existed. Because the IRS proof of claim was not timely filed, it was disallowed by the bankruptcy court.
This Court reviews the bankruptcy court's findings of fact for clear error and reviews its conclusions of law de novo. In re Caldwell, 851 F.2d 852 (6th Cir. 1988). Since this appeal presents no disputed findings of fact, review is de novo.
II
The filing of a timely claim is necessary for finality in the bankruptcy process. In re Hamilton, 179 B.R. 749, 753 (Bankr. S.D.Ga. 1995). Prior to 1994, the proper treatment of a late filed claim was not explicitly stated in the Bankruptcy Code. In 1994, however, 11 U.S.C. § 502(b) was amended to include paragraph (9). Under § 502(b), if an objection to a claim is made, the court shall determine the amount of the claim and allow the claim unless:
proof of such claims is not timely filed, except to the extent filed as permitted under paragraph (1), (2), or (3) of section 726(a) of this title or under the Federal Rules of Bankruptcy Procedure, except that a claim of a governmental unit shall be timely filed if it is filed before 180 days after the date of the order for relief or such later time as the Federal Bankruptcy Procedure may provide.11 U.S.C. § 502(b)(9). The purpose of this amendment was to disallow late-filed claims unless permitted under § 726(a) or the Federal Rules of Bankruptcy Procedure. Section 11 U.S.C. § 726(a) applies only to Chapter 7 cases. The Bankruptcy Rules allow late-filed claims under Rule 3002(c)(2), (3), or (4). These sections allow late-filed claims for creditors who are infants or incompetent, unsecured claims arising as a result of a judgment, and rejection of an executory contract or unexpired lease. None of these sections is applicable in this case.
The 1994 amendment specifically overruled In re Hausladen, 146 B.R. 557 (Bankr.D.Minn. 1992). In Hausladen, the court held that because the Bankruptcy Code did not expressly disallow late-filed claims, Congress intended to allow late-filed claims.
The Sixth Circuit has held that claims in Chapter 13 actions must be timely filed. In re Chavis, 47 F.3d 818 (6th Cir. 1995). In Chavis, the court concluded that timeliness is prerequisite to allowance under § 502. Id. at 823. A claim is allowed if it satisfies § 502, which requires compliance with § 501 and Rule 3002. Id. Section 501 incorporates the requirements listed in Rule 3002, which requires timely filed claims. Id.
The proof of claim filed by the IRS was not timely filed. It does not meet the exceptions in Rule 3002. Therefore, it was properly disallowed by the bankruptcy court.
III
The IRS argues its late-filed claim is an amendment. The IRS points out that amendments to claims in bankruptcy are freely allowed where the purpose is to cure defects in the claim originally filed. Szatkowski v. Meade Tool Die Co., 164 F.2d 228, 229 (6th Cir. 1947). If the IRS's claim were deemed an amendment, it would not be subject to the 180-day limit and the claim would be allowed. The bankruptcy court held the IRS claim was not an amendment for two reasons. First, the IRS had not filed any original claim. Therefore, its claim did not amend an original claim. Second, even if its claim did serve to amend the debtors' claim filed on behalf of the IRS, the IRS claim does not indicate this. In fact, it was dated December 1, 1998, three days before the debtors' claim was filed. The IRS can hardly have amended a claim that had not yet been filed.
The IRS argues that equity allows it to amend the debtors' claim to correct the amount of taxes owed. In 1991, the Fifth Circuit held that this type of amendment is within the discretion of the bankruptcy court. In re Kolstad, 928 F.2d 171(5th Cir. 1991), cert. denied, 502 U.S. 958 (1991). In Kolstad, the bankruptcy court allowed the IRS to file an amendment to the debtor's claim to correct the tax amount. The debtor's plan identified the IRS as a creditor, but listed the amount as "disputed." The Kolstad court reasoned the purpose of the "bar date" is to determine the participants in the case, not to determine the amount of the claims. Determining the amount of the claim is the purpose of the claims adjudication process. The court saw a "serious potential for abuse" if a creditor was unable to correct a low claim filed by the debtor. Id. at 174. The Kolstad court held that the bankruptcy court did not abuse its discretion in allowing the IRS's amendment. The holding in Kolstad does not automatically require amendments be allowed. It left the decision to the sound discretion of the bankruptcy judge, reversing only for abuse of discretion.
Abuse of discretion is defined as a definite and firm conviction that the bankruptcy court committed a clear error of judgment. Logan v. Dayton Hudson Corp., 865 F.2d 789, 790 (6th Cir. 1989). It is more than the substitution of the judgment of the reviewing court for that of the bankruptcy court. Balani v. INS, 669 F.2d 1157, 1160 (6th Cir. 1982). It is arbitrary action not justifiable under the circumstances. Id.
Throughout the case until December 7, 1998, the IRS did nothing. The IRS never filed a motion for an extension of time to file a proof of claim. The IRS never offered an excuse or justification for its inactivity . See In the Matter of Stavriotis, 977 F.2d 1202, 1204 (7th Cir. 1992) (holding that one reason the IRS's amended claim was disallowed was its failure to offer any excuse or justification). The IRS received a copy of the proposed plan. Because the IRS's proof of claim was filed after the plan was approved, the debtors' had no reason to know the IRS would amend the plan. See In re Limited Gambling of America, Inc., 213 B.R. 369, 373 (Bankr.N.D.Okla. 1995) (holding that one reason the IRS's amended claim was disallowed was the IRS did not give notice that it intended to amend the amount). If the IRS's claim were allowed, it might disrupt the debtors' approved plan.
Under these circumstances, the bankruptcy court's analysis cannot be deemed "arbitrary" and "not justifiable." This Court accepts the reasoning of the bankruptcy court and finds no abuse of discretion in its holding that the IRS's claim was not an amendment.
IV
The IRS argues the bankruptcy court erred by holding the limed property could revest free and clear in the debtors. Limed property can revest if (1) there was notice to the creditor, (2) the lien was "provided for" in the plan, and (3) the lien was not exempt from discharge. 11 U.S.C. § 507, 523, 1327.
The IRS had notice. A meeting of the creditors was scheduled for July 8, 1998. The plan confirmation was originally scheduled for August 6, 1998. After several adjournments, the plan confirmation took place on December 3, 1998. The IRS does not contend that it did not receive notice of these dates.
Payment of alien is "provided for" if the plan "`makes a provision' for, `deals with,' or even `refers, to' a claim." Rake v. Wade, 508 U.S. 464, 474 (1993). The bankruptcy court held that because the IRS filed its proof of claim late, its lien rights are only preserved to the extent that the plan provides. The plan provided the IRS would be paid $89,800. The plan may not have allocated the tax debt as the IRS would have preferred. The IRS's recourse was to have filed a timely claim. Since the IRS failed to do so, it is subject to the rights given it by the plan.
The IRS's lien was not exempt from discharge because the lien did not achieve priority status. See 11 U.S.C. § 507. Only tax liens that have achieved priority status are nondischargable. In re Sorge, 149 B.R. 197 (Bankr.W.D.Okla. 1993). The bankruptcy court relied on the analysis in In re Tomlan, 102 B.R. 790 (E.D.Wash. 1989), aff'd, 907 F.2d 114 (9th Cir. 1990). In In re Tomlan, the IRS failed to timely file a claim and argued that the debt should not be discharged. The Tomlan court looked at the stages necessary to achieve priority status. The first stage is "potential entitlement." The second stage is satisfaction of the conditions necessary to obtain priority status. The final stage is confirmation of having obtained priority status.
Tax claims are "potentially entitled" to priority status under 11 U.S.C. § 507(a)(8). One of the conditions necessary to obtain priority status is that the claim must be timely filed. Here, as in Tomlan, the IRS failed to file a timely claim. Because the IRS did not meet the conditions necessary to achieve priority status, it never reached the final stage in obtaining priority status. Again, the Court finds no error in the bankruptcy court's analysis. The IRS's liens are, therefore, not exempt from discharge.
V
The IRS argues that res judicata does not bind it to the determination of the confirmation plan. Res judicata precludes relitigation of issues previously decided. Stoll v. Gottlieb, 305 U.S. 165 (1938). It also binds a secured creditor's claims if they are "provided for" in the plan. Rake v. Wade, 508 U.S. 464 (1993). As discussed above, the debtors' confirmation plan did "provide for" the IRS claim. Thus, res judicata prevents relitigation by the IRS.
In summary, the IRS failed to file a timely claim. As a result, it was bound by the terms of the plan. Nothing presented indicates the bankruptcy court erred.
VI
For the reasons stated above, the Court finds appellant's claims to be without merit. The bankruptcy court's ruling will be affirmed. A judgment order consistent with this opinion shall be issued.