Kennedy v. Mississippi Department of Revenue, 529 B.R. 345

Background

Debtor James Frank Kennedy Jr. filed a Chapter 13 petition in Feb. 2014 and brought this adversary proceeding challenging prepetition sales and local tax transfer assessments issued in Mar. 2011 while he was the sole owner of Starkville State Theatre, LLC.
Kennedy timely filed a written appeal to the Mississippi Department of Revenue Board of Review but failed to appear at the scheduled July 26, 2011 hearing; MDOR mailed a notice of involuntary withdrawal and upheld the assessments.
Under Mississippi law, failure to attend the Board of Review hearing constitutes withdrawal of the appeal and renders the agency action final and not subject to further review.
Kennedy sued in bankruptcy court seeking (1) a determination of dischargeability of pre-April 4, 2014 assessments, (2) a determination of the validity/amount of the assessments under 11 U.S.C. § 505(a), and (3) a due process claim for allegedly not receiving the hearing notice.
MDOR moved to dismiss for lack of subject-matter jurisdiction under Rule 12(b)(1), arguing § 505(a)(2) bars bankruptcy review because the assessments were contested prepetition and adjudicated (final) under state law; MDOR also argued mailed notice satisfied due process.
The bankruptcy court considered whether the prepetition agency process constituted a contest-and-adjudication under § 505(a)(2) and whether notice met constitutional standards.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether § 505(a) permits bankruptcy redetermination of the tax assessments	Kennedy: his appeal was not decided on the merits because he did not actually litigate the Board hearing; default/involuntary withdrawal is like a default and should not preclude § 505 review	MDOR: Kennedy filed a written appeal and MDOR scheduled and noticed a hearing; the appeal was contested and the involuntary withdrawal produced a final state decision precluding federal review under § 505(a)(2)	Held: MDOR — the agency action became final under Mississippi law and was "contested and adjudicated" for § 505(a)(2); bankruptcy court lacks jurisdiction to redetermine the assessments
Whether an involuntary withdrawal/default precludes § 505(a) review	Kennedy: legislative history and cases indicate defaults should not bar bankruptcy review; need actual litigation on the merits	MDOR: participation in the administrative appeal (filing) and agency adjudication suffices; Mississippi law treats failure to attend as withdrawal that produces finality	Held: MDOR — factual pattern (appeal filed; hearing scheduled; failure to appear -> statutory withdrawal) is not a mere uncontested default for § 505 purposes; preclusion applies
Whether MDOR’s mailed notice satisfied due process	Kennedy: he never received the hearing notice; argues denial of constitutional notice	MDOR: statute requires mailing to the last known address; due process requires notice reasonably calculated to reach recipient, not guaranteed receipt; MDOR mailed to the address provided	Held: MDOR — mailed notice to the return address supplied satisfied the constitutional standard of notice reasonably calculated to apprise Kennedy
Whether the dischargeability claim survives dismissal	Kennedy: seeks determination of dischargeability of tax claim	MDOR: did not move against dischargeability count in its motion	Held: Claim as to dischargeability not addressed by the motion and remains in the case

Key Cases Cited

Wood v. Wood, 825 F.2d 90 (5th Cir. 1987) (§ 505 tax determination is a core bankruptcy proceeding)
University of Tennessee v. Elliott, 478 U.S. 788 (administrative agencies acting in a judicial capacity may have preclusive effect)
Texas Comptroller of Public Accounts v. Trans State Outdoor Adver. Co., Inc., 140 F.3d 618 (5th Cir.) (state prepetition adjudication precludes federal redetermination)
Jones v. Flowers, 547 U.S. 220 (2006) (due process requires notice reasonably calculated under the circumstances)
Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983) (mail to reasonably ascertainable address suffices for constitutional notice)
In re Century Vault Co., 416 F.2d 1035 (3d Cir.) (debtor default may affect whether prior proceeding was a true contest)
Virk v. Mississippi Department of Revenue, 133 So.3d 809 (Miss.) (failure to attend tax board hearing results in involuntary withdrawal and final agency decision)
In re UAL Corp., 336 B.R. 370 (Bankr. N.D. Ill.) (§ 505 determinations arise under the Bankruptcy Code)