Opinion
Case No.: 89-01021-BKC-PGH; Adv. No.: 95-0081-BKC-PGH-A
September 21, 1995
FINDINGS OF FACT AND CONCLUSIONS OF LAW DENYING DISCHARGEABILITY OF DEBT AND PENALTIES
THIS MATTER came before the Court pursuant to Plaintiff, Alfred L. Palladino's (the "Debtor"), Complaint to Determine the Dischargeability of a Debt (the "Complaint") owed to the Internal Revenue Service ("I.R.S.") for the 1985 taxable year. On December 5, 1994, a hearing was conducted, whereby this Court ordered the parties to file a joint stipulation of facts and memoranda of law concerning the applicability of Bankruptcy Code § 348(a) to this case. The Court, having reviewed and considered the Debtor's Complaint, the I.R.S.'s Response and the Joint Stipulation of Facts and Memoranda of Law and otherwise being fully advised in the premises hereby makes the following findings of fact and conclusions of law.
STIPULATION OF FACTS
Based on the Joint Stipulation of Facts filed by the parties on May 26, 1995, the following facts are undisputed. On March 6, 1989, the Debtor filed a Chapter 7 bankruptcy petition. The Debtor's Chapter 7 case was subsequently converted to a Chapter 11 proceeding on June 27, 1989 and on November 15, 1989, was reconverted to a Chapter 7 proceeding.
On November 26, 1986, the I.R.S. filed a Notice of Federal Tax Lien in the amount of $39,523.86, which was refiled on June 14, 1986, for the same amount (the "November Lien"). Both liens pertain to Federal Income Tax liabilities, including penalties and interest from the June 9, 1986 assessment date, due for the 1985 taxable year. On August 29, 1989, the I.R.S. filed its Proof of Claim in the amount of $177,795.81. The Debtor obtained his Chapter 7 discharge on June 21, 1990.
On December 13, 1994, the Debtor received a $385,000.00 judgment (the "Judgment") due to a personal injury action which occurred subsequent to the Debtor's discharge. The I.R.S. served a Notice of Levy dated January 3, 1994 in the amount of $87,386.10 on Allstate Insurance Company ("Allstate"). Approximately $107,386.10 of the Judgment proceeds have been placed in Debtor's Counsel's trust account pending the outcome of the adversary proceeding.
The Joint Stipulation of Facts does not set forth against whom the Debtor received the Judgment nor the basis of Allstate's indebtedness to the Debtor. However, this Court finds the identification of these parties to be irrelevant as to its determination of the issues in this adversary proceeding.
The I.R.S. asserts that as of May 15, 1995, the Debtor is indebted to the I.R.S. in the total amount of $98,675.07 for the 1985 taxable year. This amount includes (1) $9,105.76 for failure to pay penalty, (2) $51,895.71 in interest due on the November Lien and (3) $39,523.86 in tax, interest and penalty for the 1985 taxable year, which was assessed on June 9, 1986.
CONCLUSIONS OF LAW
There is no dispute that this Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157 (b)(2)(1). This adversary proceeding represents a core proceeding pursuant to 28 U.S.C. § 157 (b)(2). Since this is a core proceeding, this Court has jurisdiction to determine the amount of the I.R.S.'s tax claim against the Debtor, as well as that claims dischargeability.
The parties have presented two issues to this Court. The first issue is whether March 6, 1989, which is the date the original involuntary petition was filed, or November 15, 1989, which is the reconversion date of Debtor's case from a Chapter 11 to a Chapter 7 proceeding, is the appropriate date to consider for the "filing of the petition" under 11 U.S.C. § 348 (a) and for the calculation of the three year period for dischargeability of tax debts under 11 U.S.C. § 507 (a)(8). The second issue is if March 6, 1989 is the appropriate date, whether the I.R.S.'s claim for post-petition interest on the pre-petition tax liability is also excepted from discharge.
ANALYSIS OF THE FIRST ISSUE
Section 11 U.S.C. § 348, entitled "Effect of Conversion," governs the effect of the conversion of a case from one chapter of the Bankruptcy code to another chapter. According to the plain language of 11 U.S.C. § 348(a), arguably the date of filing the petition, the commencement of the case, or order for relief are unaffected by a debtor's subsequent conversion of a case, with some limited exceptions set forth in 11 U.S.C. § 348(b) and (c). In pertinent part, 11 U.S.C. § 348 states:
(a) Conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subsections (b) and (c) of this section, does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief. (emphasis added)
(b) Unless the court for cause orders otherwise, in sections 701(a), 727(a)(10), 727(b), 728(a), 727(b), 1102(a), 1110(a)(1), 1121(b), 1121(c), 1141(d)(4), 1146(a), 1146(b), 1301(a), 1305(a), 1201(a), 1221, and 1228(a) of this title, the "order for relief under this chapter" to which a case has been converted under section 706, 1112, 1307, or 1208 of this title means the conversion of such case to such chapter.
It is well established that the conversion of a Bankruptcy case does not change the filing date of the petition nor the commencement of the case, unless the exceptions listed in 11 U.S.C. § (b) and (c) are applicable. British Aviation Insur. Co. Ltd. et al. v. Susan Menut et al. (In re State Airlines, Inc.), 873 F.2d 264, 268 (11th Cir. 1989); Irving E. Gennet v. Oriental Rug Agency, Inc. (In re Fla. Consumer's Furniture Warehouse, Inc.), 9 B.R. 7, 8-9 (Bankr. S.D. Fla. 1981) (Judge T.C. Britton); Fernando Magallanes v. Ardelle Williams (In re Fernando Magallanes), 96 B.R. 253, 254 (B.A.P. 9th Cir. 1988) citing Glen A. Stinson et al. v. Clyde E. Williamson (In the Matter of Clyde Williamson), 804 F.2d 1355, 1359-62 (5th Cir. 1986). Based on the stipulated facts, the Debtor filed his original Chapter 7 petition on March 6, 1989. This Court finds that March 6, 1989 is the date that this Court should refer in determining the "date of filing."
According to the Eleventh Circuit Court of Appeals in British Aviation, "section 348(a) makes clear that a conversion . . . does not affect a change in the date of the filing . . ." The Court held that such a backdating provision, which results in applying the filing date of the petition as opposed to the subsequent date of conversion, is necessary. Furthermore, the Court held in footnote ten that "this is also the effect of Bankruptcy Rule 1019, which clarifies that the conversion does not undo everything that happened before."
This Court finds that such an interpretation comports with the "fundamental canon that statutory interpretation begins with the language of the statute, itself." Pennsylvania Dep't of Pub. Welfare v. davenport, 495 U.S. 552, 557-58, 110 S.Ct. 2126, 2130 (1990), citing Landreth Timber Co. v. Landreth, 471 U.S. 681, 68, 105 S.Ct. 2297, 2301 (1985). Additionally, as stated by the United States Supreme Court in Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 254, 112 S.Ct. 1146, 1149 (1992), Courts must presume that the "legislature says in a statute what it means and means in a statute what it says there."
Since the Debtor's case was reconverted from a Chapter 11 to a Chapter 7 proceeding, the provisions of Chapter 7 govern the rights of the parties. See In re Tucker 133 B.R. 819 (Bankr. W.D. Tex. 1991). In pertinent part, 11 U.S.C. § 727, entitled "Discharge," states:
(b) Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter.
Pursuant to 11 U.S.C. § 727(b), those debts listed in 11 U.S.C. § 523 are expressly excepted from discharge. With respect to exceptions to dischargeability, 11 U.S.C. § 523 states in relevant part:
(a) A discharge under section 727 . . . of this title does not discharge an individual a debtor from any debt . . . (1) for a tax or customs duty . . . (A) of the kind and for the periods specified in section . . . 507(a)(8).
According to 11 U.S.C. § 523(a), taxes, which are accorded a preference under 11 U.S.C. § 507(a)(8), are nondischargeable. Pursuant to 11 U.S.C. § 507(a)(8), the following expenses and claims shall have priority in the following order:
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for (A) a tax on or measured by income or gross receipts (i) for a taxable year ending on or before the date of filing of the petition for which a return, if required, is last due, including extensions, after three years before the date of filing the petition. (emphasis added)
Since 11 U.S.C. § 507(a)(8)(A)(i) affords priority status to certain taxes defined therein, this Court finds that the phrase "filing of the petition" in 11 U.S.C. § 507(8)(a) refers to March 6, 1989, which is the filing date of the initial Chapter 7 petition.
The Debtor argues that the I.R.S. tax claim dating back to 1985 is dischargeable. The Debtor argues that the I.R.S.'s claim is a general unsecured claim based on the following: (1) the claim was assessed for more than 240 days prior to the date of conversion; (2) the claim is for a tax return filed more than two years prior to the date of conversion; and (3) the claim refers to a period more than three years prior to the date of conversion. The Debtor argues that the "filing date," referred to in 11 U.S.C. § 507 should be the date of reconversion, which is November 15, 1989.
The Debtor argues that Bankruptcy Rule 1019 permits creditors, whose claims arise after commencement of the case, to file claims within sixty days of the conversion. Additionally, the Debtor claims that under Bankruptcy Rule 1019 he is afforded an opportunity to file amended schedules and to add creditors. The Debtor claims that such an opportunity reveals that "the status of a creditor can change during the pendency of a bankruptcy proceeding." Debtor's Memorandum, page 5. Furthermore, the Debtor argues at page 5 of his memorandum:
The claim of the Internal Revenue Service changed during the bankruptcy proceeding from a secured claim to an unsecured claim. If the date of conversion becomes the date of filing, then it is clear that the debt becomes a general unsecured claim which is dischargeable. Utilizing the date of the filing of the petition only in determining the status of claims would prevent the addition of any creditors incurred during the Chapter 11 proceeding.
However, the I.R.S. argues that its tax claim should not be discharged based on the interrelation of 11 U.S.C. § 523(a)(1), 597(a)(8) and 348(a). The I.R.S. claims that the 1985 Federal Income Tax liabilities are "excepted from discharge because the March 6, 1989 Chapter 7 Bankruptcy petition date is less than three from April 15, 1986 tax return." I.R.S.'s Memorandum, page 4.
In addition to the case law supra discussing the interplay between the original "filing date" and "conversion date", the Bankruptcy Court for the Central District of Illinois has clearly held that the date of filing the petition is also the date to be applied to the three year period for dischargeability of tax debts. U.S.A. v. Timothy J. Rassi (In re Timothy J. Rassi), 140 B.R. 490, 491 (Bankr. C.D. Ill. 1992). Based on an analysis discussing the interplay of 11 U.S.C. § 348, 727, 523, and 507, the Rassi Court stated that the statutes are susceptible to only one interpretation and are unambiguous. Id. at 491-92.
The Rassi Court reasoned that since 11 U.S.C. § 348(a) leaves no doubt that the meaning of the term "filing of the petition" refers to the initial filing and such period is carried over to 11 U.S.C. § 507, such integration preserves the priority status of taxes incurred within three years of the initial filing of the case. Id. The Rassi court concluded that since the Debtor's initial filing of his petition was less than three years after the due date of the return, the I.R.S.'s claim was nondischargeable. See also In re Harbaugh, 153 B.R. 54 (Bankr. Id. 1993).
The Rassi court also noted that since 11 U.S.C. § 348 (b) does not expressly refer to 11 U.S.C. § 507 or 523, it is inapplicable in the analysis addressing dischargeability of such tax claims.
This Court agrees with the reasoning of the Rassi Court and finds that based on the plain language of the Bankruptcy Code and the interrelation of 11 U.S.C. § 348, 727, 523, and 507, March 6, 1989 is the "date of filing the petition." Applying such date to 11 U.S.C. § 507 (a)(8)(A)(i), this Court finds that the I.R.S.'s prepetition tax claim is a priority unsecured claim and is nondischargeable.
ANALYSIS OF THE SECOND ISSUE
As stated in the Joint Stipulation of Facts, the I.R.S. asserts that as of May 15, 1995, the Debtor in indebted to the IRS in the total amount of $98,675.07 for the 1985 taxable year. The Debtor claims, however, that if this Court determines that the I.R.S. has a priority unsecured claim, then such claim should only be limited to $46,434.81.
That amount includes $9,105.76 for failure to pay penalty, $51,895.71 in interest and $39,523.86, which includes tax, interest and penalty for the 1985 taxable year assessed on June 9, 1986.
Although the Debtor cites a series of cases from other circuits, which hold that post-petition interest on a pre-petition debt is not allowed, the Eleventh Circuit Court of Appeals in Joanne G. Burns v. U.S.A. (In re Joanne G. Burns), 887 F.2d 1541, 1543 (11th Cir. 1989) has clearly held that post-petition interest on a nondischargeable tax debt is also nondischargeable. Citing to Bruning v. United States, 376 U.S. 358, 360, 84 S.Ct. 906, 907-908 (1964), the Eleventh Circuit stated that "the nondischargeability of interest accruing after a prior bankruptcy filing on nondischargeable tax liabilities was firmly established prior to the enactment of the Bankruptcy Code." Burns, 887 F.2d at 1543. Furthermore, the Eleventh Circuit held that the plain language of 11 U.S.C. § 523 (a)(7) provides that tax penalties are not excepted from discharge if the underlying tax is also nondischargeable. Id. at 1544-45.
As established by the Eleventh Circuit, if a tax liability is deemed nondischargeable under the Bankruptcy Code, then postpetition interest assessed on those nondischargeable liabilities is also a nondischargeable tax liability pursuant to 11 U.S.C. § 523(a)(7). Based on the Eleventh Circuit's holding in Burns, this Court finds that the I.R.S. is entitled to any taxes due as of the filing date and any prepetition and postpetition penalties accruing thereafter.
Therefore, the Court ORDERS AND ADJUDGES that:
1. The Debtor's Federal Income Tax Liability assessed on June 9, 1986 for $39,523.86, which includes tax, interest and penalty for the 1985 taxable year, is nondischargeable.
2. The I.R.S.'s claim for $9,105.76, which represents the amount due pertinent to the failure to pay penalty, is nondischargeable.
3. The I.R.S.'s claim for interest, which accrued after November 26, 1986, is nondischargeable.
4. A separate and final judgment shall be entered in accordance with these findings on even date.
DONE AND ORDERED