788 F.3d 1243
9th Cir.2015Background
- Debtor Cloobeck filed chapter 11 in Jan 2005; case converted to chapter 7 in Oct 2005 and Timothy S. Cory became trustee.
- Trustee paid $340,895 to the IRS on or about May 13, 2009 for the estate’s 2005 federal income tax without giving notice to creditors, requesting a hearing, or obtaining bankruptcy-court authorization for the payment.
- Trustee’s filings before and after the payment (status reports) mentioned retention of accountants and later acknowledged payment but did not state the tax amount; formal notice of the amount first appeared in the Trustee’s Final Report (filed May 9, 2012).
- Creditor Gilbert Dreyfuss, holding an allowed unsecured claim (~$1,006,418), objected to approval of the Final Report arguing the trustee should have given notice and a hearing and that the tax amount may be incorrect; bankruptcy court approved the Final Report without holding a hearing on the tax amount.
- The district court affirmed, finding Dreyfuss’s objection untimely; the Ninth Circuit reviews de novo and granted review on whether section 503(b) required notice and a hearing before paying estate taxes.
Issues
| Issue | Dreyfuss's Argument | Trustee's Argument | Held |
|---|---|---|---|
| Whether estate taxes constitute administrative expenses requiring notice and a hearing before payment | Taxes are administrative expenses under §503(b) and thus required notice and a hearing before payment | Trustee argued requiring notice/hearing would conflict with trustee duties under Bankruptcy and Internal Revenue Codes to file and timely pay tax returns | Held: §503(b) plain language requires notice and a hearing before paying taxes as administrative expenses; trustee must secure hearing/authorization before payment |
| Whether the IRS needed to file an administrative claim before a hearing could occur | Not required; interested creditors may seek a hearing when trustee discovers liability | Trustee contended IRS file claim or trustee had duty to pay without court process | Held: IRS need not file; when trustee discovers tax liability trustee must provide notice and obtain a hearing prior to payment |
| Whether trustee’s statutory duties to file/pay taxes override §503(b)’s notice/hearing requirement | N/A (focus on protection of creditor rights) | Trustee argued §6012(b)(4), §960 and §503(b)(1)(D) create inconsistent duties | Held: Duties are reconcilable — trustee must still ensure notice and hearing under §503(b) before payment, though statutes require timely filing/payment subject to §503(b) procedures |
| Whether Dreyfuss’s objection was untimely and waived | Objected upon Final Report; contends objection timely because Final Report first specified amount | Trustee/district court argued Dreyfuss knew of payment earlier and untimely waited to object | Held: Majority remanded to determine tax amount and hold hearing; concurrence emphasized remand court should address timeliness of Dreyfuss’s objection on remand |
Key Cases Cited
- Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755 (9th Cir. 1998) (administrative-expense priority framework under §503/§507)
- Greene v. Savage (In re Greene), 588 F.3d 614 (9th Cir. 2009) (standard of review for bankruptcy appeals)
- Spaulding v. Univ. of Wash., 740 F.2d 686 (9th Cir. 1984) (prudential rule that parties must timely object or risk waiver)
- Atonio v. Wards Cove Packing Co., 810 F.2d 1477 (9th Cir. 1987) (overruling on other grounds cited for waiver/objection principles)