Goodman v. Internal Revenue Service (In re Adams)Goodman v. Internal Revenue Service (In re Adams)
ORDER
Today the Court addresses a question that has divided bankruptcy courts: Is a creditor’s late-filed proof of claim in a Chapter 13 case necessarily barred even if the creditor did not receive notice of the case in time to file a timely claim? Some courts hold that late-filed claims are barred regardless of the creditor’s lack of notice. Other courts hold that late-filed claims should be allowed if the creditor did not receive notice. This Court finds the
Facts
The facts of this case are straightforward. On March 30, 2012, the Debtor Tam Denise Adams filed a petition for relief under Chapter 13 of the Bankruptcy Code. [Doc. 1]. She did not list the Internal Revenue Service (the “IRS”) as a creditor on her mailing matrix or schedules. Consequently, the IRS did not receive notice of the filing of the case or the bar date for filing proofs of claim, which in this case was September 29, 2012 for governmental entities (the “Bar Date”). The Court confirmed Debtor’s Chapter 13 plan on June 21, 2013. After the Bar Date, the IRS filed a proof of claim, wherein it asserted a priority unsecured claim for 2011 income taxes in the amount of $751.79 and a general unsecured claim for penalties of $18.60. [Claims Register # 13-1]. The filing deadline for the tax return on which the claim is based was after the petition date so it is conceivable, if not likely, that the Debtor was unaware of the obligation to the IRS on the petition date. The Chapter 13 Trustee (“Trustee”) has objected to the IRS’s claim as untimely and moved to disallow the claim in its entirety. [Doc. 29]. There is no dispute that the IRS received no notice of the bankruptcy case in time to file a timely proof of claim. The Court now considers whether the Trustee’s objection to the IRS’s claim should be granted.
Proofs of Claim Generally
When a debtor files a bankruptcy petition, creditors may file a “proof of claim.” 11 U.S.C. § 501(a).
With the filing of a petition, a debt- or is required to file with the clerk a list of creditors. 11 U.S.C. § 521(a)(2)(A), and that proper notice of such filing be given to those on that list. See 11 U.S.C. § 342(a). Under Section 523(a)(3), a debtor is not entitled to a discharge of a debt to a creditor if that debtor failed to list the creditor in time to permit that creditor to file a timely proof of claim. 11 U.S.C. § 523(a)(3)(A). In this case, the Debtor
The Trustee has objected to the IRS’s proof of claim on grounds that a plain reading of the Code and Rules requires that a late-filed proof of claim be disallowed. The Trustee seeks to disallow the IRS’s claim, which would prevent the IRS from receiving distributions under the Debtor’s Chapter 13 plan. The issue before the Court is whether Section 502(b)(9)’s requirement of timely filing, read together with the Bankruptcy Rules, compels the Court to disallow the IRS’s claim even though it did not receive notice of the commencement of this case and the bar date for filing claims.
Late-Filed Proof of Claim without Notice
There is a split in authority regarding the treatment of a late-filed proof of claim in a Chapter 13 case where the filing creditor did not receive notice of the bankruptcy case. The Eleventh Circuit Court of Appeals has not addressed this issue. Other courts across the country are generally of two conflicting opinions. One line of cases interprets strictly the Code and Rules in such a way that prohibits late-filed claims even when the claimant did not receive notice of the bankruptcy case. The other line of cases focuses on several concerns, including due process and fundamental fairness, and allows late-filed claims of creditors who do not receive notice.
Strict Interpretation View
The courts that adopt what has been referred to as the strict interpretation approach to this issue commonly follow the Ninth Circuit’s opinion in Gardenhire v. IRS (In re Gardenhire),
The courts that do not allow late-filed proofs of claim frequently note that Section 502(b)(9) and Rule 3002(c) are silent as to a notice requirement, and thus view notice to a creditor as immaterial to the decision to allow or disallow a claim. See, e.g., In re Jensen,
Due Process and Fundamental Fairness View
The courts which allow late-filed claims where a creditor lacked notice find support
First, these courts reject the rationale used in Jensen and Brogden that reading Section 502(b)(9) together with Rules 3002(c) and 9006(b)(3) imposes an absolute statute of limitations on filing of a proof of claim. In re Washington,
Next, these courts conclude that the Code assumes the creditor actually received notice of the case. The Bankruptcy Appellate Panel for the First Circuit took the position that because a “[sjtrict application of the Rule 3002 deadline for filing claims assumes that the creditor has received [the] prescribed notice; late filed claims may be permitted in cases where notice to the creditor was materially deficient or misleading.” Vicenty v. San Miguel Sandoval (In re San Miguel Sandoval),
Finally, courts which allow late-filed claims support their position by citing the creditor’s right to due process and fundamental fairness where notice was materially deficient. The Eighth Circuit Court of Appeals addressed a similar issue in In re Hairopoulos,
Analysis
This Court agrees with those courts which allow late-filed claims, and thus will allow the IRS’s late-filed claim in this case. When a creditor has not received notice of the case, questions necessarily arise about the rights of the creditor and the debtor’s ability to achieve a fresh start. It is clear that the Debtor’s tax debt is non-dischargeable under Section 523(a)(3) if it is not administered through the Debtor’s plan. 11 U.S.C. § 523(a)(3). While the IRS could move the Court for relief from stay to recover on a non-dis-chargeable debt, it is very probable that such a request will not be granted because of the negative effect such relief could have on the Debtor’s ability to fund her plan and, consequently, reorganize her debts through bankruptcy and obtain a fresh start. The Debtor’s fresh start could also be compromised if the IRS waits to prosecute its claim — no doubt with interest and penalties — after the completion of the Debtor’s plan. Consequently, it is in the best interest of this Debtor to allow this claim to participate in the distributions under her plan.
Depriving the IRS from any sort of distribution under the Debtor’s Chapter 13 plan affects the IRS’s ability to collect taxes without proper notice. In such a situation, it is not fundamentally fair to the IRS to delay its collection rights for up to five years, including limiting its set off rights, which this Court believes to be a substantial limitation on its rights when it has been deprived of notice. Fundamental fairness and due process provide sufficient grounds under 11 U.S.C. § 105(a) for this Court to exercise its equitable discretion to allow a late-filing when no notice is given to a creditor. See In re Simpkins,
Furthermore, the Court finds persuasive the rationale that a claims bar date is not absolute where there has been no notice. The Code and Rules should not be interpreted on the one hand to require that notice be given to the creditors, but on the other hand to prevent an unscheduled creditor from participating under a plan on account of a bar date of which it was not informed. Thus, the Court holds that the requirement of notice of a bar date takes precedence over a strict reading of the rules to prevent an injustice to the creditor and, perhaps, the Debtor.
Conclusion
In a situation such as this one, where there is lack of notice to a creditor, the Court will allow the late-filed claim. For the reasons stated above, it is hereby
ORDERED that the Trustee’s objection is DENIED and the claim of the IRS is ALLOWED.
IT IS ORDERED.
Notes
. A claim generally means a right to payment owed by a debtor to a creditor. 11 U.S.C. § 101(5).
. The Trustee is a party in interest who may object to a proof of claim. 11 U.S.C. § 323(b).