In Re Joseph Francis Swain

437 B.R. 549

In re Joseph Francis SWAIN and Edith Mae Swain, Debtors.Edith Mae Swain, Plaintiff,

v.United States Department of Treasury, Internal Revenue Service, Defendant.

Bankruptcy No. 09-55942.

Adversary No. 09-4996.

United States Bankruptcy Court,E.D. Michigan,Southern Division.

Sept. 27, 2010.

Christina Bixby, Washington, DC, John W. Stevens, Detroit, MI, for Defendant.

Stephen Thomas Padgett, Farmington Hills, MI, for Debtors/Plaintiff.

AMENDED OPINION REGARDING DEFENDANT'S MOTION TO DISMISS ^*

THOMAS J. TUCKER, Bankruptcy Judge.

This case presents an issue of subject matter jurisdiction. A Chapter 7 bankruptcy debtor filed this adversary proceeding seeking a declaration that she does not owe the Internal Revenue Service (“IRS”) any debt for approximately $18,000 in unpaid withholding taxes. The withholding taxes are owed by a restaurant business that the debtor and her husband operated, and the debtor fears that the IRS will assess her for such taxes, under the 100% penalty provisions of 26 U.S.C. § 6672. The debtor states that she is not a responsible person who can be held liable for such tax penalty under § 6672. The IRS does not concede that, but it has not yet assessed the debtor for any such penalty. And the debtor and the IRS agree that if and to the extent the debtor owes any such tax penalty, that debt is nondischargeable in the debtor's Chapter 7 bankruptcy, under Bankruptcy Code § 523(a)(1)(A).

The debtor tries to couch her action as one to determine the dischargeability of a debt. But the IRS disputes that characterization, and argues that the bankruptcy court has no subject matter jurisdiction over the dispute, at least not where (as here) the debtor's Chapter 7 case is a “no asset” case, in which there will be no distribution to creditors.

For the reasons stated below, the Court agrees with the IRS, and will dismiss this adversary proceeding for lack of subject matter jurisdiction.

I. BackgroundA. The Swain bankruptcy case

Plaintiff Edith Swain and her husband Joseph Swain filed a joint voluntary Chapter 7 petition on May 20, 2009. ¹ The Swains' Schedule E listed the IRS as a creditor holding disputed, unsecured claims totaling $17,809.55 for the “trust fund portion of payroll taxes due” from the restaurant business jointly operated by the Swains. ² The Chapter 7 Trustee filed a no-distribution report, also known as “no asset” report, on July 14, 2009. The report stated that the Trustee found no non-exempt property that was available for distribution to creditors. As a result of this, the IRS was not required to file any proof of claim, and it has not done so. The Swains each received a discharge under 11 U.S.C. § 727(a) on August 25, 2009. ³

B. Edith Swain's possible debt to the IRS under 26 U.S.C. § 6672

The disputed claim of the IRS listed in the Swains' Schedule E, totaling $17,809.55, refers to Edith Swain's possible liability for a 100% penalty, in the amount of payroll taxes withheld but not paid to the IRS. Such possible liability is based on 26 U.S.C. § 6672(a). Under that statute,

[a]ny person required to collect, truthfully account for, and pay over any tax imposed by [the Internal Revenue Code] who willfully fails [to do so] ... shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

The parties agree that the IRS has not yet assessed a § 6672 penalty against Ms. Swain, in any amount. Rather, the IRS has only “propose[d] to assess a penalty” against Ms. Swain, and she has protested the proposed assessment. The IRS has forwarded Ms. Swain's protest to its appeals office for consideration. ⁴

C. This adversary proceeding

Edith Swain filed this adversary proceeding, seeking a determination that she is not a responsible person under § 6672 and therefore is not liable for any penalty under that section. ⁵ The IRS filed a motion to dismiss, arguing that this Court lacks subject matter jurisdiction, and, in the alternative, that the Court should abstain from ruling on Ms. Swain's § 6672 liability, under 28 U.S.C. § 1334(c)(1). ⁶ The Court held two hearings on the motion, and allowed the parties to file supplemental briefs.

II. DiscussionA. Standards applicable to motions to dismiss under Fed.R.Civ.P. 12(b)(1)

The IRS brings its motion to dismiss under Fed.R.Civ.P. 12(b)(1) and 12(h)(3), applicable to this adversary proceeding through Fed. R. Bankr.P. 7012(b). Rule 12(b)(1) permits the defense of “lack of subject-matter jurisdiction” to be asserted by motion. Rule 12(h)(3) provides that “[i]f the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action.”

“A Rule 12(b)(1) motion can either attack the claim of jurisdiction on its face, in which case all allegations of the plaintiff must be considered as true, or it can attack the factual basis for jurisdiction, in which case the trial court must weigh the evidence and the plaintiff bears the burden of proving that jurisdiction exists.” DLX, Inc. v. Kentucky, 381 F.3d 511, 516 (6th Cir.2004). In this case, the parties do not dispute any of the facts relevant to the question of subject matter jurisdiction. Therefore, the Court will accept those facts as true for purposes of deciding the motion.

In so doing, however, the Court is not bound to accept conclusions of law contained in the plaintiff's complaint, or to accept as true any “allegations or conclusions of law masquerading as factual allegations.” Roper v. Ford Motor Co., No. 1:09-cv-427, 2010 WL 2670827, at *1 (S.D.Ohio April 6, 2010) (citing O'Bryan v. Holy See, 556 F.3d 361, 376 (6th Cir.2009)).

B. Basic principles of bankruptcy court subject matter jurisdiction

“The bankruptcy court is a court of limited jurisdiction.... The subject matter jurisdiction of the bankruptcy court is limited to that which [C]ongress specifically grants.” Wasserman v. Immormino (In re Granger Garage, Inc.), 921 F.2d 74, 77 (6th Cir.1990) (citations omitted). With a reference from the district court, the bankruptcy court has subject matter jurisdiction over “all cases under title 11,” and over “all civil proceedings” (1) “arising under title 11” or (2) “arising in” a case under title 11 or (3) “related to” a case under title 11. See 28 U.S.C. §§ 1334(b), 157(a), 157(b)(1); L.R. 83.50(a)(E.D.Mich.).

This Court discussed the meaning of these jurisdictional concepts, in Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27-28 (Bankr.E.D.Mich.2009):

A “case under title 11” refers “merely to the bankruptcy petition itself, filed pursuant to 11 U.S.C. §§ 301, 302, or 303.” Michigan Employment Sec. Comm'n v. Wolverine Radio Co., Inc., 930 F.2d 1132, 1140 (6th Cir.1991).

...

“The phrase ‘arising under title 11’ describes those proceedings that involve a cause of action created or determined by a statutory provision of title 11, and ‘arising in’ proceedings are those that, by their very nature, could arise only in bankruptcy cases.” Bliss Technologies, Inc. v. HMI Indus., Inc. (In re Bliss Technologies, Inc.), 307 B.R. 598, 602 (Bankr.E.D.Mich.2004)(quoting Wolverine Radio, 930 F.2d at 1144). These two categories of civil proceedings are “core”

proceedings within the meaning of 28 U.S.C. §§ 157(b)(1) and 157(b)(2). Id. ...

Civil proceedings that fall only within the third category of the bankruptcy court's subject matter jurisdiction-its “related to” jurisdiction-are non-core....

The Sixth Circuit has adopted the test articulated in Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d Cir.1984), for determining “related to” jurisdiction:

“The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. Thus, the proceeding need not necessarily be against the debtor or against the debtor's property. An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.”

Wolverine Radio, 930 F.2d at 1142 (emphasis in original) (quoting Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d Cir.1984) (emphasis in original)); see also Lindsey v. O'Brien, Tanski, Tanzer and Young Health Care Providers of Connecticut (In re Dow Corning Corp.), 86 F.3d 482, 489, 490 (6th Cir.1996). In enacting § 1334(b), “Congressional intent was ‘to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate.’ ” Id. (quoting Celotex Corp. v. Edwards, 514 U.S. 300, 308, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995)). Proceedings “related to” the bankruptcy case include “more than simple proceedings involving the property of the debtor or the estate.” Celotex Corp. v. Edwards, 514 U.S. at 308, 115 S.Ct. 1493. And such “related to” proceedings include even “suits between third parties which have an effect on the bankruptcy estate.” Id. at 308 n. 5, 115 S.Ct. 1493. But the Sixth Circuit has cautioned against finding “related to” jurisdiction in “situations ... where [there is] an extremely tenuous connection to the estate [.]” See Wolverine Radio, 930 F.2d at 1142.

419 B.R. at 27-28.

This adversary proceeding is not a “case under title 11.” Rather, it is a “civil proceeding” within the meaning of 28 U.S.C. § 1334(b), so that, in order for the Court to have jurisdiction, this adversary proceeding must fit one of the three categories of civil proceedings listed in § 1334(b).

C. Discussion of the parties' jurisdictional arguments

1. The earlier admission of jurisdiction by the United States

Ms. Swain argues that the IRS's motion to dismiss should be denied because the IRS...