In re Walls, 12–15499–NPO.

496 B.R. 818

In re Johnnie E. WALLS, Jr., Debtor.

No. 12–15499–NPO.

United States Bankruptcy Court, N.D. Mississippi.

July 9, 2013.

Gwendolyn Baptist–Hewlett, Southaven, MS, for Debtor.

MEMORANDUM OPINION AND ORDER ON THE OBJECTION TO PROOF OF CLAIM OF INTERNAL REVENUE SERVICE

NEIL P. OLACK, Bankruptcy Judge.

On March 21, 2013, there came on for hearing (the “Hearing”) the Motion to Dismiss Chapter 13 Case (the “IRS Motion to Dismiss”) (Dkt. 18) filed by the United States of America—Internal Revenue Service (the “IRS”); the Response to Motion to Dismiss (the “Response to IRS Motion to Dismiss”) (Dkt. 23) filed by Johnnie E. Walls, Jr. (the “Debtor”); the Trustee's Objection to Confirmation (the “Trustee Objection to Confirmation”) (Dkt. 31) filed by Locke D. Barkley (“Trustee”), the duly appointed chapter 13 trustee assigned to the above-referenced bankruptcy case; the Response to Trustee's Objection to Confirmation (the “Response to Trustee Objection to Confirmation”) (Dkt. 37) filed by the Debtor; the Trustee's Motion to Dismiss (the “Trustee Motion to Dismiss”) (Dkt. 32) filed by the Trustee; the Response to Motion to Dismiss (the “Responseto Trustee Motion to Dismiss”) (Dkt. 38) filed by the Debtor; the Objection to Proof of Claim of Internal Revenue Service (the “Objection to Proof of Claim”) (Dkt. 36) filed by the Debtor; the Response to Objection to Proof of Claim (Dk. 36) (the “Response to Objection to Proof of Claim”) (Dkt. 51) filed by the IRS; the Objection to Confirmation (the “IRS Objection to Confirmation”) (Dkt. 45) filed by the IRS; and the Response to Objection to Confirmation (the “Response to IRS Objection to Confirmation”) (Dkt. 50) filed by the Debtor in the above-referenced bankruptcy case (the “Current Bankruptcy Case”). At the Hearing, Gwendolyn Baptist–Hewlett represented the Debtor, Ralph M. Dean, III represented the IRS, and G. Adam Sanford represented the Trustee.

Under 11 U.S.C. § 109(e),¹inter alia, “[o]nly an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $360,475 ... may be a debtor under chapter 13 of this title.” ² The Trustee and the IRS filed motions to dismiss the Current Bankruptcy Case arguing that the Debtor is ineligible to be a chapter 13 debtor because his unsecured debts far exceed $360,475.00. (Dkts. 18, 32). In fact, the IRS filed an amended proof of claim in the Current Bankruptcy Case asserting an unsecured nonpriority claim in the amount of $776,675.88 against the Debtor.³ (Cl. No. 5–3). The Debtor filed the Objection to Proof of Claim arguing that the IRS's $776,675.88 unsecured nonpriority claim was discharged in his prior chapter 7 case. (Dkt. 36).

At the Hearing, the parties disputed whether this Court could decide if the IRS's $776,675.88 unsecured nonpriority claim was discharged in the Debtor's previous bankruptcy in an objection to proof of claim that was filed as a contested matter. The IRS insisted that an adversary proceeding must be filed to determine whether this debt previously was discharged. The Court's determination of whether the IRS's unsecured nonpriority claim was discharged in the Prior Bankruptcy Case ⁴ will directly affect whether the debtor is eligible to be a chapter 13 debtor. Therefore, the parties asked this Court to determine first whether it may decide if the IRS's $776,675.88 unsecured nonpriority claim was discharged in the Prior Bankruptcy Case as a contested matter. Second, assuming that the Court can decide the issue as a contested matter, the parties asked this Court to determine whether the IRS's unsecured nonpriority claim was discharged in the Prior Bankruptcy Case. Until these two preliminary issues are addressed, the parties agreed to hold all other issues raised at the Hearing in abeyance. (Dkt. 58).

After the Hearing, on April 22, 2013, the Memorandum Brief Re: Debtor's Objection to Proof of Claim of Internal Revenue

Service (the “Trustee Brief”) (Dkt. 53) was filed by the Trustee; the Letter Brief (the “IRS Brief”) (Dkt. 54) was filed by the IRS; and the Memorandum in Support of Debtor's Objection to Proof of Claim and Response to Motions (the “Debtor Brief”) (Dkt. 55) was filed by the Debtor. On May 6, 2013, the Rebuttal (the “IRS Reply Brief”) (Dkt. 56) was filed by the IRS.

The Court, having considered the arguments of counsel in the pleadings and at the Hearing, finds that the issue of whether the IRS's $776,675.88 unsecured nonpriority claim was discharged in the Prior Bankruptcy Case is not properly before this Court as a contested matter governed by Federal Rule of Bankruptcy Procedure 9014 (“Rule 9014”). Instead, for the reasons set forth below, the issue may be raised by either the IRS or the Debtor by filing an adversary proceeding in the Current Bankruptcy Case.

Jurisdiction

This Court has jurisdiction over the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(A),(B),(I), & (O). Notice of the Hearing was proper under the circumstances.

Facts

Prior Bankruptcy Case

1. On March 21, 2011, the Prior Bankruptcy Case was filed.

2. On June 14, 2011, the Debtor filed his bankruptcy schedules in the Prior Bankruptcy Case. (11–11313–NPO, Dkt. 16). The Debtor scheduled the IRS as one of his unsecured creditors in Schedule E—Creditors Holding Unsecured Priority Claims (“Schedule E”) and in Schedule F—Creditors Holding Unsecured Nonpriority Claims (“Schedule F”). ( Id. at 11, 15).

3. In Schedule E, the Debtor listed the IRS as holding an unsecured priority claim of $20,657.12 for 2008–2010 taxes. (11–11313–NPO, Dkt. 16 at 11). The Debtor checked the box next to the IRS's claim in Schedule E indicating that it was “unliquidated.” ( Id.). At the same time, the Debtor indicated that none of IRS's claim in Schedule E was entitled to a priority. ( Id.).

4. In Schedule F, the Debtor listed the IRS as holding two additional unsecured nonpriority claims totaling $915,102.81. (11–11313–NPO, Dkt. 16 at 15). The first IRS claim in Schedule F was listed for the Debtor's 1994, 1995, 1997, 1998, 1999, 2000, 2003, 2004, 2006, and 2007 taxes in the amount of $904,553.05. ( Id.). The second IRS claim in Schedule F was listed for the Debtor's “941” payroll taxes in the amount of $10,549.76. ( Id.). Again, the Debtor checked the boxes beside the IRS's claims in Schedule F indicating that the claims were “unliquidated.” ( Id.).

5. On June 15, 2011, the Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines (the “Notice”) was filed by the chapter 7 trustee. (11–11313–NPO, Dkt. 18). The Notice advised creditors that the Prior Bankruptcy Case was a “no asset case,” and, as a result, creditors should not file a proof of claim. ( Id. at 2).⁵ The Notice also provided that the deadline to file an objection to discharge under §§ 523(a)(2), (a)(4) or (a)(6) was September 26, 2011. ( Id. at 1–2).

6. The IRS filed a proof of claim in the Prior Bankruptcy Case for income taxes and civil penalties in the amount of $936,324.30, of which $915,102.81 was identifiedas secured and $21,221.49 was identified as unsecured priority (the “Prior Proof of Claim”) (11–11313–NPO, Cl. No. 1–1). ⁶

7. The first amendment to the Proof of Claim in the Prior Bankruptcy Case was filed on July 11, 2011, prior to the Debtor receiving his chapter 7 discharge. (11–11313–NPO, Cl. No. 1–2). The first amendment to the Prior Proof of Claim, also in the amount of $936,324.30, identified $30,929.73 of the claim as secured, $303,641.83 of the claim as unsecured priority, and $601,752.74 of the claim as unsecured nonpriority. ( Id.).

8. On November 23, 2011, an order discharging the Debtor's debts was entered (the “Discharge Order”) (11–11313–NPO, Dkt. 60) in the Prior Bankruptcy Case.

9. After the Discharge Order was entered, on January 20, 2012, the IRS filed a second amendment to the Prior Proof of Claim. (11–11313–NPO, Cl. No. 1–3). This amendment, in the amount of $915,102.81, identified $30,929.73 of the claim as secured, $282,420.34 of the claim as unsecured priority, and $601,752.74 of the claim as unsecured nonpriority. ( Id.).

10. The Prior Bankruptcy Case was closed on March 8, 2012. (11–11313–NPO, Dkt. 79).

11. On April 9, 2012, the Debtor filed a Motion to Reopen Debtor's Chapter 7 Case in order to add the Mississippi Department of Revenue to his list of creditors. (11–11313–NPO, Dkt. 81).

12. On April 10, 2012, an order reopening the Prior Bankruptcy Case was entered. (11–11313–NPO, Dkt. 82).

13. After the Prior Bankruptcy Case was reopened, on August 22, 2012, the IRS filed a third amendment to the Prior Proof of Claim asserting a claim against the Debtor in the amount of $971,947.34, of which $30,929.73 was identified as secured, $332,118.12 was identified as unsecured priority, and $608,899.49 was identified as unsecured nonpriority. (11–11313–NPO, Cl. No. 1–4).

14. On October 22, 2012, the Debtor filed a motion to convert the Prior Bankruptcy Case from a chapter 7 case to a chapter 13 case (11–11313–NPO, Dkt. 84) and, on November 20, 2012, an Order Converting a Chapter 7 Case to a Chapter 13 Case (11–11313–NPO, Dkt. 88) was entered.

15. On December 13, 2012, the Trustee filed the Trustee's Motion to Dismiss (11–11313–NPO, Dkt. 114) and the Trustee's Amended Motion to Dismiss (11–11313–NPO, Dkt. 116) contending, inter alia, that the Debtor was ineligible to be a chapter 13 debtor because his unsecured debts exceeded the unsecured debt limit set forth in § 109(e).

16. The IRS filed a Motion to Dismiss Chapter 13 Case in the Prior Bankruptcy Case also alleging, based upon the amount of its unsecured claim as listed in the third amendment to the Prior Proof of Claim, that the Debtor's unsecured debts exceeded the unsecured debt limit in § 109(e). (11–11313–NPO, Dkt. 124).

17. The Debtor responded to the Trustee's Amended Motion to Dismiss. (...