In re Aero-Fab, Inc.

IN RE: AERO-FAB, INC., Debtor.

CASE NO. 3:10-bk-30836

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF WEST VIRGINIA IN HUNTINGTON

March 12, 2021

CHAPTER 11

JUDGE B. MCKAY MIGNAULT

MEMORANDUM OPINION AND ORDER

Pending are two motions: (1) the Motion to Reopen Case ("Motion to Reopen") filed by AFI, LLC ("AFI") and Jeffrey Scott Maynard ("Jeff Maynard") [dckt. 233]; and (2) the Motion to Enforce Corrected Amended Order Approving Sale of Assets ("Motion to Enforce") filed by Jeff Maynard [dckt. 244]. The United States Trustee ("UST") and the movants in the Motion to Reopen have engaged in much motion practice, with each filing a Response/Reply and supplements to those filings.

The Motion to Reopen came before the Court for hearing on August 28, 2020, at which time the Court requested further, more in-depth briefing on the issues, specifically addressing potential tension with the Tax Anti-Injunction Act. The Motion to Enforce came before the Court for hearing on October 21, 2020, at which time the Court took both motions under advisement.

All briefing having been received, the matters are ripe for adjudication.

I.

A. Procedural and Factual History

The Debtor, Aero-Fab, Inc., ("Aero-Fab") filed a Small Business Chapter 11 Petition on October 8, 2010. Aero-Fab's owner was Ronald Maynard. Instead of confirming a Chapter 11 Plan of Reorganization, Aero-Fab used the Chapter 11 process to sell all its assets.

One of the above-referenced sales was to AFI. Aero-Fab agreed to sell both real and personal property to AFI. The final sale order [dckt. 213], was entered on December 4, 2013, and it acknowledged the insider status of the purchaser; the owner of AFI, Jeff Maynard, was the son of Aero-Fab's owner. The property sold was subject to two liens: the first in favor of First Sentry Bank ($215,000) and the second in favor of the Internal Revenue Service ("IRS") ($256,042). The sale proceeds were to first be distributed to First Sentry Bank, then to CPA Jeff Porter to satisfy his administrative claim, then the balance to the IRS. According to the sale order, AFI took title to the assets free and clear of liens pursuant to 11 U.S.C. § 360(f). Furthermore, the sale was to be exempt from transfer tax by virtue of 11 U.S.C. § 1146.

According to the Report of Sale [dckt. 217] filed on January 7, 2014, AFI paid consideration for the assets in the amount of $400,000. Aero-Fab retained the net sum of $159,462 following the payoff to First Sentry Bank, payment to Aero-Fab's accountant, and a holdback for UST quarterly fees. Aero-Fab moved to dismiss its case on January 31, 2014, because there were no further assets to administer. The Court granted the motion and subsequently closed the case on June 4, 2014.

On August 3, 2020, AFI and Jeff Maynard (together, the "Reopen Movants") filed the Motion to Reopen. The Reopen Movants allege that the IRS "sandbagged" them by assessing a Trust Fund Recovery Penalty for unpaid, post-petition taxes owed by Aero-Fab just after closingof the sale. Specifically, on February 28, 2014, the IRS assessed the penalty and subsequently asserted a lien against Jeff Maynard.

Jeff Maynard asserts that he has exhausted his administrative remedies against the IRS and now asks this Court to exercise its jurisdiction to reopen the case, "enforce" the final sale order entered in 2014, and order the IRS to "appear and justify its position before the Court."

B. Arguments of the Parties

The Reopen Movants' arguments are largely the same in both motions, so the Court need only discuss them once. To provide context to the parties' contentions, the basis of the IRS's assessment against Jeff Maynard is 26 U.S.C. § 6672, which states that,

[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for any pay over such tax, or willfully attempts in any matter to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

26 U.S.C. § 6672(a). An individual may be liable under § 6672 only if "(1) he is a 'responsible person' under a duty to collect, account for, and pay over trust fund taxes," and "(2) he willfully fails to discharge his duties as a responsible person." Turpin v. United States, 970 F.2d 1344, 1347 (4th Cir. 1992) (citing Slodov v. United States, 436 U.S. 238, 246 n.7 (1978)).

The Reopen Movants assert that the trust fund tax assessment against Jeff Maynard is inappropriate and that the IRS should not be allowed to collect the trust fund tax. They rely on the following language in the final sale order: (1) that the Court will "retain jurisdiction of this transaction for the purposes of enforcing provisions of this order and the amended purchase agreement"; (2) that the "sale of property shall be free and clear of liens, claims, encumbrances,and interests with the liens to attach to the proceeds"; (3) that AFI took "title to and possession of the assets free and clear of any and all liens, claims, liabilities, interests, and encumbrances"; and (4) "all persons and entities are hereby prohibited and enjoined from taking action that would adversely affect [or] interfere with the ability of the Debtor to sell and transfer the assets." This language forms the basis of the Reopen Movants' claim that the IRS has "blatantly disregarded" the terms of the final sale order by assessing the trust fund tax against Jeff Maynard. The Reopen Movants assert that Jeff Maynard was indeed a purchaser (in addition to AFI), not a "responsible person," and, thus, the IRS cannot assess this penalty against him. The majority of the Reopen Movants' arguments address the legality of the trust fund tax assessed against Jeff Maynard and mostly address whether he has been improperly deemed a "responsible person." They go so far as to file and discuss the transcript of the 2013 hearing approving the final sale order and point to sections they believe would absolve Jeff Maynard from the trust fund obligation.

Furthermore, the Reopen Movants assert that the Anti-Injunction Act does not apply to this matter because they are asking the Court to enforce its prior order (the final sale order), not enjoin the IRS from collecting a tax. The Reopen Movants frame the legal question herein as "whether the Bankruptcy Court has authority to enforce the terms of the agreement with the IRS." The Reopen Movants contend that this Court's previous decision in the Thaxton case supports these assertions.¹

The IRS argues that the Anti-Injunction Act prevents this Court from even reopening the case to adjudicate the issues. It asserts that the Court lacks jurisdiction because the motions pending before it are simply attempts at preventing the assessment and collection of tax liabilities. The IRS also points out that the correct channel for Jeff Maynard's relief is an action for a refundin the District Court or Court of Federal Claims and not the instant venue. Going into further detail on the merits of the disagreement, the IRS contends that Jeff Maynard was not a purchaser of Aero-Fab's assets. It argues that he is a "responsible person" under applicable law and can therefore be held liable for employment tax liabilities assessed against him personally under the Tax Code.

II.

A. Governing Authority

a. Reopening a Case

Reopening a bankruptcy case is made possible by 11 U.S.C. § 350(b), which states that "[a] case may be reopened in the court in which such case was closed to . . . accord relief to the debtor, or for other cause." 11 U.S.C. § 350(b). Reopening is also governed by Federal Rule of Bankruptcy Procedure 5010, which permits a case to be reopened "on motion of the debtor or another party in interest." Fed. R. Bank. P. 5010. The term "party in interest" has been defined in the Code as "the debtor, the trustee, a creditor's committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee." 11 U.S.C. § 1109(b). The Fourth Circuit considers a "party in interest" to be anyone "whose pecuniary interests are directly affected by the bankruptcy proceedings." Yadkin Valley Bank & Trust Co. v. McGee (In re Hutchison), 5 F.3d 750, 756 (4th Cir. 1993).

The party seeking to reopen the case has the burden of proof. In re Lee, 356 B.R. 177, 180 (Bankr. N.D. W. Va. 2006). The Fourth Circuit has instructed courts to take a discretionary approach which allows consideration of "the totality of the circumstances in each case." In re Rollison, 579 B.R. 67, 70 (Bankr. W.D. Va. 2018); see also Hawkins v. Landmark Finance Co. (In re Hawkins), 727 F.2d 324, 326 (4th Cir. 1984). With respect to the action of reopening, "abankruptcy judge, far from a mechanistic referee, is a guardian of the bankruptcy process and should take into consideration the equitable factors present . . . ." Steel of West Virginia, Inc. v. McMellon (In re McMellon), 448 B.R. 887, 894 (S.D. W. Va. 2011).

"[B]efore reopening a case, the court should make the threshold determination that one of the three grounds articulated in § 350(b) exists." Lee, 356 B.R. at 180. Section 350(b) states that a case may be reopened "to administer assets, to accord relief to the debtor, or for other cause." 11 U.S.C, § 350(b). Courts in the Fourth Circuit have held that cases should be reopened "only upon a showing of compelling circumstances." Rollison, 579 B.R. at 70 (quoting In re Mutts, 131 B.R. 306, 307 (Bankr. E.D. Va. 1991)) (internal quotation marks omitted). As far as timing goes, "[t]he longer the time between the closing of the estate and the motion to reopen, . . . the more compelling the reason for reopening an estate or proceeding should be." Citizens Bank & Trust Co. v. Case (In re Case), 937 F.2d 1014 (5th Cir. 1991) (citing Reid v. Richardson, 304 F.2d 351 (4th Cir. 1962)).

Importantly, "a c...