Wallace v. Internal Revenue Serv. (In re Wallace)

653 B.R. 256

IN RE: Anthony J. WALLACE, Debtor.

Anthony J. Wallace, Plaintiff, v. Internal Revenue Service, Defendant.

Case No. 22-80765

Adv. No. 23-8005

United States Bankruptcy Court, C.D. Illinois

Signed August 18, 2023

Sumner A. Bourne, Rafool & Bourne P.C., Peoria, IL, for Plaintiff.

Noah Daniel Glover-Ettrich, DOJ-Tax, Washington, DC, David H. Hoff., U.S. Attorney's Office, Urbana, IL, for Defendant.

OPINION

Peter W. Henderson, United States Chief Bankruptcy Judge

The Defendant, the United States of America, on behalf of the Internal Revenue Service, has moved the Court to abstain under 28 U.S.C. § 1334(c)(1) from hearing this adversary complaint, in which the Debtor-Plaintiff seeks a determination that prior tax debts are dischargeable notwithstanding 11 U.S.C. § 523(a)(1)(C). The IRS wishes instead to file a suit against the Debtor in the District Court to seek a collectible judgment. For the following reasons, the motion will be denied.

I

The Debtor, Anthony J. Wallace, filed a Chapter 7 petition in December 2022. Four months later the Chapter 7 Trustee filed a report concluding that the estate did not contain any property available for distribution to creditors. Around the same time, the Debtor filed this adversary proceeding. The complaint is straightforward: the Debtor alleges he is indebted to the IRS for pre-petition income taxes for tax years 2012-2018, and he alleges that those debts are dischargeable notwithstanding 11 U.S.C. § 523(a)(1), which excepts income tax debts from discharge in certain circumstances. The Debtor seeks a finding that the taxes are dischargeable and an order that the IRS not take any action to collect on the pre-petition income tax debts.

Though the Chapter 7 estate has been fully administered, the Debtor has not yet received a discharge. Though he has completed the financial management course required for a discharge under 11 U.S.C. § 727(a)(11), he has not yet filed a certificate of completion. He has delayed filing the certificate under the belief that the entry of a discharge order would prompt the IRS to move to dismiss this adversary proceeding as moot. Instead, the IRS claims the issue is not ripe, as no discharge has been entered. It also suggests that the Court lacks authority to award the requested relief in light of the Declaratory Judgment Act, 28 U.S.C. § 2201. Finally, it argues that the district court, not the bankruptcy court, is the better forum in which to litigate the dischargeability of the Debtor's tax debts. Given those potential problems, the IRS argues, the Court should abstain from hearing this case in favor of the IRS bringing its own suit in the district court under 26 U.S.C. § 7402.

II

Despite its perception of a "jurisdictional quagmire," the IRS does not move to dismiss for lack of jurisdiction. See Fed. R. Bankr. P. 7012(b), incorporating Fed. R. Civ. P. 12(b)(1). It instead raises the bogeyman of a jurisdictional reversal on appeal to try to persuade the Court to abstain. That approach is discouraged; if a party believes jurisdiction is lacking, it should move to dismiss. Still, the Court has the independent duty to assure itself of its subject-matter jurisdiction. Mathis v. Metropolitan Life Ins. Co., 12 F.4th 658, 663 (7th Cir. 2021). The Court is confident that jurisdiction is present.

A

The Debtor brought this adversary proceeding to determine the dischargeability of a debt for income taxes. 11 U.S.C. § 523(a)(1). The district court has original but not exclusive jurisdiction of all civil proceedings arising under title 11, like this one. 28 U.S.C. § 1334(b). The district court has referred all such cases to the bankruptcy judges in this district. Bankr. C.D. Ill. R. 4.1; see 28 U.S.C. § 157(a). Bankruptcy judges have authority to hear "all core proceedings arising under title 11" including "determinations as to the dischargeability of particular debts." 28 U.S.C. § 157(b)(2)(I). Subject-matter jurisdiction is secure. Sprout v. Internal Revenue Service (In re Sprout), No. 19-2113, 2020 WL 2527376, at **3-5 (Bankr. S.D. Ohio 2020).

B

The IRS contends that the Court might lack authority to act under Article III because there is no live case or controversy (or at least there was not at the time the complaint was filed). It cites a number of non-bankruptcy decisions to explain, in general terms, that a matter must be "ripe" before a federal court may exercise jurisdiction. It then points to several bankruptcy decisions holding that a dischargeability action is not "ripe" without a "present or imminent threat of collection action by the government." E.g., Hinton v. United States, No. 09-621, 2011 WL 1838724 (N.D. Ill. May 12, 2011); Mlincek v. United States, 350 B.R. 764 (Bankr. N.D. Ohio 2006).

The case is ripe for adjudication under Article III. Mr. Wallace contends that certain debts owed to a creditor are dischargeable. That contention goes to the "core of the federal bankruptcy power" to restructure debtor-creditor relations. See Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). It does not matter whether the creditor wishes to contest dischargeability, or indeed whether it participates at all. The debtor has standing under the Bankruptcy Code to seek discharge of his prior debts. See Central Virginia Community College v. Katz, 546 U.S. 356, 364, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006). Outstanding debts, including for past taxes, pose a direct threat to a debtor's fresh start in bankruptcy. In re Kilen, 129 B.R. 538, 549 (Bankr. N.D. Ill. 1991); see In re Landrie, 303 B.R. 140, 142 (Bankr. N.D. Ohio 2003) ("[I]n a dischargeability proceeding such as this, the 'case or controversy' requirement will be met as long as there exists a 'debt' to discharge."). The existence of the debt and the imminent discharge¹ here is not speculative or hypothetical; the parties "are at odds about a legal issue with concrete consequences for them." Union Pacific Railroad Co. v. Regional Transportation Authority, 74 F.4th 884, 886 (7th Cir. 2023).

A real and substantial controversy exists about the dischargeability of Mr. Wallace's tax debts. A final judgment will determine the rights of the Debtor under §§ 523(a)(1) and 727(b), statutes intended to provide the honest debtor with a fresh start. See Matter of James Wilson Associates, 965 F.2d 160, 168 (7th Cir. 1992) (defining "standing"). The Debtor's complaint was ripe as soon as he filed a petition seeking a discharge of prior debts under § 727 as a person eligible for relief under Chapter 7. Article III is not offended. Cf. Preiser v. Newkirk, 422 U.S. 395, 401, 95 S.Ct. 2330, 45 L.Ed.2d 272 (1975).

C

The IRS does not seem to contend otherwise. Its "ripeness" argument focuses not on jurisdiction but rather on what you might call "prudential ripeness." See E.F. Transit, Inc. v. Cook, 878 F.3d 606, 609 (7th Cir. 2018) ("Ripeness doctrine has both constitutional and prudential aspects."). A bankruptcy court that has authority to act under the Constitution should not always exercise that authority. Local Loan Co. v. Hunt, 292 U.S. 234, 241, 54 S.Ct. 695, 78 L.Ed. 1230 (1934); Mlincek, 350 B.R. at 768 ("[P]ossessing authority and exercising it are separate considerations."). Whether a case is ripe as a prudential matter turns on (1) the fitness of the issues for judicial decision and (2) the hardship to the parties of withholding court consideration. Nat'l Park Hospitality Ass'n v. Dep't of Interior, 538 U.S. 803, 808, 123 S.Ct. 2026, 155 L.Ed.2d 1017 (2003). In other words: can the dispute fairly be resolved now, and is there reason to believe the dispute now affects the parties? See E.F. Transit, 878 F.3d at 610; Wright & Miller, 13B Fed. Prac. & Proc. Juris. § 3532.1 (3d ed.) ("[C]ourts should not render decisions absent a genuine need to resolve a real dispute.").

There is no question the issue in this adversary proceeding is ripe. The IRS, notwithstanding its arguments, actually seems to agree. It intends to file a complaint under 26 U.S.C. § 7402 to reduce the tax debts to a collectible judgment, having determined that they are nondischargeable. Even it disclaims extending the principle from the main cases it cites—that a § 523(a)(1)(C) determination is not ripe until the IRS has "made up its mind regarding non-dischargeability"—to cases (like this one) in which the IRS has in fact made up its mind.² So while there may be instances in which the Court might determine that a debtor-initiated § 523(a)(1) adversary complaint is not yet ripe as a prudential matter, that is not this case.³ The parties have a dispute affecting their rights, capable of adjudication, that needs to be resolved now. The case is ripe.⁴

III

Even when a Chapter 7 bankruptcy proceeding involves a justiciable controversy, nothing in Title 11 prevents a district court (or bankruptcy court, by reference) from abstaining from hearing that proceeding "in the interest of justice." 11 U.S.C. § 1334(c)(1). The IRS argues that the interest of justice favors abstention because (1) the case might not be ripe, (2) the Court might not have authority to enter judgment due to the Declaratory Judgment Act, and (3) it would be a waste of resources to litigate the § 523(a)(1) issue in this Court, rather than the district court. Those arguments, both in isolation and as a whole, are unpersuasive.

Abstention under § 1334(c)(1) is "informed by principles developed under the judicial abstention doctrines, and courts have usually looked to these well-developed notions of judicial abstention when applying section 1334(c)(1)." Matter of Chicago, Milwaukee, St. Paul & Pacific R. Co., 6 F.3d 1184, 1189 (7th Cir. 1993). The Seventh Circuit has suggested that bankruptcy courts apply twelve factors flexibly according to their relevance and importance under the particular circumstances of each case. Id. The factors include:

(1) the effect or lack thereof on the efficient administration of the estate if a Court

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