Purcell v. Khan (In Re Purcell)Purcell v. Khan (In Re Purcell)
MEMORANDUM DECISION
Plaintiff John E. Purcell (“Plaintiff’) seeks a declaration that a debt for unpaid personal property taxes owed to creditor Shabbir A. Khan, Tax Collector for San Joaquin County (“Defendant”), was discharged in the above-captioned bankruptcy case. Plaintiff also seeks injunctive relief prohibiting Defendant from enforcing the debt and ordering Defendant to release tax liens held against Plaintiffs property. For the reasons explained in this Memorandum Decision, Plaintiff is not entitled to judgment for the relief he seeks, and judgment will be entered in favor of Defendant.
This matter came before the court at a pre-trial conference in Sacramento, California on August 23, 2006. Philip Rhodes, Esq. represented Plaintiff, and Lawrence Meyers, Esq., Deputy County Counsel for San Joaquin County, represented Defendant. The parties filed an agreed statement of facts on August 17, 2006. The court requested trial briefs, and the matter was deemed submitted on September 29, 2006; the deadline for the parties’ reply briefs.
On December 27, 2006, the court withdrew the submission, issued a draft memo
This is a core proceeding and the Court has jurisdiction over this matter. 28 U.S.C. §§ 1334 and 157 (2000). The following constitutes the Court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
FACTUAL BACKGROUND
Plaintiff owned a boat that was moored at a marina located in San Joaquin County, California from 1986 through November, 1990. In November, 1990, Plaintiff moved his boat and moored it at a marina located in Alameda County, California. In or around April, 1992, a secured lender repossessed Plaintiffs boat from the marina in Alameda County and sold it at foreclosure.
Defendant levied on an annual basis personal property taxes on the boat for the years 1986 through 1993. Plaintiff did not pay property taxes on the boat for tax years 1986, 1988, 1989, 1991, and 1992, totaling $36,543.91.
On January 6, 1997, Plaintiff, John E. Purcell, doing business as Loadmaster Enterprises, filed the above-captioned bankruptcy case in this court. The case was originally filed under Chapter 13. At the time of the filing, Plaintiff no longer owned the boat, and he did not list Defendant as a creditor in his bankruptcy schedules. Plaintiff converted his case to Chapter 7 on February 23, 1998. A bar date was set for the filing of claims. Plaintiff received a chapter 7 discharge in the above-captioned bankruptcy case on August 27, 1998. The case was closed on August 2, 2002.
In February, 1999, Defendant filed a certificate of delinquency with the San Joaquin County Recorder for $2,177. In July, 2002, Defendant filed another certificate of delinquency for $1,742 with the San Joaquin County Recorder. And in January, 2003, Defendant filed a third certificate of delinquency with the San Joaquin County Recorder for $1,946. Defendant currently asserts that Plaintiff owes San Joaquin County $31,388.55, including interest and penalties, for tax years 1986, 1988, 1989,1991, and 1992.
Defendant did not receive any court-generated notice of Plaintiffs bankruptcy case, nor did he receive notice or acquire actual knowledge of Plaintiffs bankruptcy case, at any time before Plaintiff received his discharge. During the pendency of Plaintiffs bankruptcy case, the Chapter 7 trustee distributed $2,239.13 on account of the administrative expenses of the bankruptcy estate, and distributed $12,570.71 to unsecured priority claimants Internal Revenue Service and Sacramento County. The unsecured priority claims in Plaintiffs case totaled $87,559.36. No distribution was made to any secured creditors or to any unsecured, non-priority creditors.
The factual assumptions to which the parties stipulated as additional facts are the following. First, Plaintiff did not own any real property in San Joaquin County as of any lien date that would apply for securing the personal property taxes assessed on Plaintiffs boat. Second, the secured lender that repossessed Plaintiffs boat in April, 1992, validly foreclosed on the boat in accordance with applicable non-bankruptcy law. Third, the Plaintiffs boat was a vessel that was subject to California documentation requirements for vessels, and the boat was continually moored in
Analysis
In order to resolve this matter, the court must first address the nature of Defendant’s tax claims. The court will then address whether Defendant’s tax claims are excepted from the discharge in Plaintiffs bankruptcy case under 11 U.S.C. Section 523(a)(3). Finally, the court will address Defendant’s collection rights in light of Plaintiffs request for injunctive relief requiring Defendant to release its tax hens.
I. Defendant’s Claims Would Have Been Non-Priority Unsecured Claims
Plaintiff asserts that Defendant’s claims would not have been entitled to secured or priority unsecured status in Plaintiffs bankruptcy case. Defendant asserts that at the time Plaintiffs bankruptcy case was filed, Defendant held a secured claim. For the reasons set forth in this Part the court finds that if Plaintiff had properly scheduled the tax debt, Defendant would have held a non-priority, unsecured claim in the bankruptcy case.
A. Defendant’s Claims Would Not Have Been Secured Claims
Defendant argues that, as taxes were levied on Plaintiffs boat in tax years 1986, 1988, 1989, 1991, and 1992, a tax lien attached to the boat as of March 1st in each of those years pursuant to California Revenue and Taxation Code Section 2192 1 Section 2192 stated, for the years in question, that “all tax liens attach annually as of 12:01 a.m. on the first day of March preceding the fiscal year for which the taxes are levied.” Cal Rev. & Tax Code § 2192 (West 1998). Defendant contends that Section 2192 created a tax lien on Plaintiffs boat on March 1 of 1986, 1988, 1989,1991 and 1992 2 .
Defendant also cites Revenue and Taxation Code Section 2191.3, which allows the tax collector to record a notice of delinquency, the recording of which constitutes a lien upon all of the debtor’s personal and real property in San Joaquin county pursuant to Section 2191.4. Defendant argues that Sections 2191.3, 2191.4, and 2192 work together to create a tax lien on all of Plaintiffs property in the County of San Joaquin as of each March 1st preceding the tax year for which the delinquent taxes were assessed, even though the first certificate of delinquency was not recorded until 1999.
The court concludes that Defendant is mistaken and that Defendant did not have any secured claim prior to or at the time of the filing Plaintiffs bankruptcy case. Defendant misreads the provisions of the California Revenue and Taxation Code, particularly regarding how tax liens on personal property arise in California.
The California Revenue and Taxation Code provides for the assessment and collection of both secured and unsecured taxes. Property taxes in California may be assessed either on the “secured roll” or the “unsecured roll.”
See
Cal. Rev. & Tax Code § 109 (West 1998). “The ‘secured
Whether a tax is secured or unsecured depends on the nature of the tax and the nature of the property against which the tax is assessed. “It is settled law in this state that the lien of a property tax exists only by virtue of statute and that taxes are not a lien on the property assessed unless expressly made so by statute.”
T.M. Cobb Co. v. County of Los Angeles,
Under certain circumstances, a tax hen securing taxes assessed against personal property may be created against the taxpayer’s real property. A tax on personal property may be a lien on any real property on the secured roll also belonging to the owner of the personal property, if the personal property is located upon that real property on the lien date. Cal. Rev. & Tax Code § 2189 (West 1998). A lien on the taxpayer’s real property may also arise if the personal property taxed is located in the same county as the taxpayer’s real property on the secured roll. Cal. Rev. & Tax.Code § 2189.3 (West 1998). The Revenue and Taxation Code creates no lien that attaches as of the time specified in Section 2192 for taxes levied on personal property when the subject personal property is not secured or “cross secured” in this fashion by real property.
See Board of Supervisors v. Lonergan, 27
Cal.3d 855, 859,
Even though personal property taxes not secured or cross-secured by the taxpayer’s real property do not enjoy the benefit of an automatic tax lien against the property assessed, the tax collector has four available methods for collection of unpaid taxes on the unsecured roll. First, pursuant to Revenue and Taxation Code Section 3003, the county may sue the taxpayer in a civil suit in his own name for the recovery of delinquent taxes or assessments, with penalties and costs. Second, pursuant to Revenue and Taxation Code Section 3101, the tax collector may file with the county clerk a certificate setting forth the facts described in Section 3101 and obtain summary judgment against the taxpayer without a hearing. Cal. Rev & Tax Code 3102 (West 1998). Third, pursuant to Revenue and Taxation Code Section 2951, the tax collector may seize and sell any personal property, improvements, or possessory interests belonging or assessed to the assessee. See Cal. Rev & Tax Code §§ 2951-2963 (West 1998).
Fourth and finally, pursuant to Revenue and Taxation Code 2191.3, the tax collector may record a certificate of delinquency. Recording such a certificate constitutes a lien upon all of the debtor’s personal and real property in the county where the certificate is recorded and has the force, effect, and priority of a judgment lien. Cal. Rev & Tax Code § 2191.4 (West 1998).
In conjunction with those unsecured tax collection methods, for vessels that are delinquent in property taxes the tax collector may also notify the owner of the vessel that renewal of the vessel’s certificate number will be withheld by the Department of Motor Vehicles until the delinquent taxes have been paid. Cal. Rev. & Tax.Code § 3205 (West 1998).
Applying the statutes discussed above to the facts of this case, the court concludes that at the time that Plaintiffs bankruptcy case was filed, Defendant had no secured claim against Plaintiff. Plaintiffs boat was not State assessed property. Defendant assessed property taxes on Plaintiffs boat between 1986 and 1993. Plaintiff did not pay taxes in five of those years. Because Plaintiff owned no real property in San Joaquin County as of the lien date for the personal property taxes, 3 the taxes were not secured by a lien against Plaintiffs real property. Therefore, no tax lien against Plaintiffs real property arose by operation of law in the years the taxes were assessed.
Liens against all of Plaintiffs personal and real property located in San Joaquin County could have arisen under state law only as of February, 1999, July, 2002, and January, 2003, and, more specifically, on the exact dates on which the tax collector recorded certificates of delinquency with the San Joaquin County Recorder. Those liens would have been created after Plaintiffs bankruptcy case was filed on January 6, 1997. Claims in bankruptcy are determined as of the petition date. See 11 U.S.C. 502(b) (2000). Defendant had no lien on Plaintiffs personal or real property at the time Plaintiffs bankruptcy case was filed, and thus no secured claim would have been allowed in Plaintiffs bankruptcy case.
B. Defendant’s Claims Would Not Have Been Priority Claims.
If Plaintiff had properly scheduled the tax debt in his bankruptcy filings, notice of the bankruptcy case would have been given to Defendant. If Defendant had properly and timely filed a claim, that claim would not have been entitled to priority status under 11 U.S.C. Section 507. Section 507(a)(8)(B) gives priority status to the allowed unsecured claims of government units, but if the basis of the claim is a property tax, it must be assessed before the commencement of the case and be last payable without penalty after one year before the date of the filing of the petition. Pursuant to Revenue and Taxation Code Section 2922(a), taxes on the ■ unsecured roll as of July 31 of the year in which the taxes are due are delinquent at 5:00 p.m. or the close of business 4 , whichever is later, on August 31. Thereafter, the taxes are subject to a delinquent penalty of ten percent. Here, as the latest unpaid personal property taxes assessed against Plaintiffs boat were last payable without penalty on August 31, 1992, they were not payable without penalty after one year before the filing of Plaintiffs bankruptcy petition.
Thus, at the time Plaintiffs bankruptcy case was filed, Defendant held only non-
Although the nature of Defendant’s claims in this case would have prevented him from receiving a distribution from the chapter 7 estate if Defendant had been scheduled as a creditor, the nature of the claims is relevant to the issue of whether Plaintiffs liability on the claims was discharged.
II. Plaintiffs Tax Debt Was Not Discharged
Plaintiffs tax debt owed to Defendant is excepted from discharge pursuant to 11 U.S.C. Section 523(a)(3)(A). Therefore, Plaintiff has failed to carry his burden of establishing entitlement to injunctive relief prohibiting Defendant from enforcing the debt.
Plaintiff did not schedule the tax debt owed to Defendant in his bankruptcy filings. Generally, Section 523(a)(3)(A) excepts from discharge unscheduled debts that are not of the type described in Sections 523(a)(2), (a)(4) or (a)(6), where the creditor had no notice or actual knowledge of the case in time to file a timely proof of claim. The unscheduled debt here, for unpaid personal property taxes, is not of the type described in Sections 523(a)(2), (a)(4) or (a)(6).
The Ninth Circuit recognizes an exception to the operation of Section 523(a)(3) in no-asset cases where no bar date has been set for filing proofs of claim.
See Beezley v. California Land Title Co. (In re Beezley),
In no-asset chapter 7 cases, no bar date is set for filing proofs of claim. As a result, creditors cannot be deprived of the right to file a timely proof of claim, since
The facts of this case are distinguishable from those in Beezley. Here, assets were available to the trustee and a bar date was set for claims. Plaintiff did not schedule the tax debt, so Defendant never received any court-generated notice of Plaintiffs bankruptcy case, and Defendant did not receive notice or acquire actual knowledge of Plaintiffs bankruptcy case in time to file a timely proof of claim.
Plaintiff argues that the rationale in Beezley should be extended to cover the present facts and allow the debt to be discharged. Plaintiff argues that the right protected by Section 523(a)(3)(A) is, ultimately, the right of a creditor to receive a dividend or payment from the distribution of the bankruptcy estate’s assets. Plaintiff argues that even if he had scheduled the tax debt, Defendant would have received nothing from the distribution of the estate’s assets, since Defendant did not have either a secured or priority claim; as a result, Defendant suffered no prejudice by Plaintiffs failure to schedule the debt. Plaintiff urges the court to use its equity powers to shield him from the operation of Section 523(a)(3)(A) and discharge the debt, as Plaintiff asserts that its omission from his schedules was a harmless error.
As discussed in Part I, supra, Plaintiff is correct in asserting that if he had scheduled the tax debt when he filed his case in time to allow Defendant to file a proof of claim, Defendant would have received nothing from the estate. In chapter 7 cases like Plaintiffs in which a bar date is set, however, courts are divided on the circumstances under which Section 523(a)(3) should apply. In Ninth Circuit courts, both a liberal rule and a strict interpretation approach have been followed.
The Ninth Circuit case that is most often cited for the strict interpretation of Section 523(a)(3) is
Laczko v. Gentran (In re Laczko),
The
Laczko
decision has been followed by other Ninth Circuit courts. In
In re Bosse,
Bosse also rejected the debtor’s argument that Section 726(a)(2)(C) justified discharge of the debt because it prevented prejudice to the creditor by allowing the creditor to file a tardy proof of claim and still participate in a distribution with other unsecured creditors. The court remarked that adopting the debtor’s reasoning would render the provisions of Section 523(a)(3) “meaningless.” Id. at 416.
Instead, section 726(a)(2)(C) supplements the relief provided an omitted creditor under section 523(a). Section 726(a)(2)(C) permits a creditor who holds a nondischargeable claim to share in the distribution of assets, to the extent there are any, providing some immediate payment and limiting the potential for shortfall should collection efforts against the debtor fail or prove difficult outside of bankruptcy.
Id. at 416.
Other Ninth Circuit courts have declined to follow the strict interpretation approach of
Laczko
and have adopted a liberal rule that recognizes an equitable exception to the application of Section 523(a)(3). This approach has emerged from the Fifth Circuit Court of Appeals decision in
Robinson v. Mann,
The bankruptcy court for the district of Alaska followed the
Robinson
approach in
In re Brosman,
As stated above, the
Brosman
court found that
Laczko
failed to reconcile Section 523(a)(3) with Section 726(a)(2)(C).
Brosman
further concluded that Laczko’s failure to reconcile Section 523(a)(3) with Section 726(a)(2) led to “an unnecessarily harsh result to the debtor for no substantive reason” as it “fail[ed] to allow an honest but mistaken debtor a fresh start.”
Id.
at 215. Thus,
Brosman’s
approach was to shield the debtor from the strict language of Section 523(a)(3) where the debtor’s omission of the debt was mistaken or inadvertent, there was no fraud or intentional laches, and the creditor was not prejudiced by the omission. Other Ninth Circuit courts have adopted the “liberal rule” approach of
Robinson
and
Brosman. See In re Bowen,
This court, however, declines to follow that approach in this case. This court agrees with the reasoning in Laczko that Section 523(a)(3) is never triggered when no bar date is set, but that in cases in which a bar date is set, the plain language of Section 523(a)(3) controls.
First, this case is distinguishable from those cases allowing an equitable exception to section 523(a)(3), as no court that has followed Robinson v. Mann has extended its reasoning to cases in which a bar date was set and there were assets to be distributed to creditors.
Second, the court agrees with the rationale in Bosse that Sections 523(a)(3) and 726(a)(2)(C) are not coextensive or inconsistent. The former section provides that certain debts are not discharged and may therefore be collected by the creditor outside the bankruptcy case notwithstanding the debtor’s receipt of a discharge. The latter provides that certain debts may participate in distributions from the bankruptcy estate. The court agrees with Bosse that the fact that Congress chose to allow participation in dividends from the bankruptcy estate by claims that are also excepted from the discharge does not compel the conclusion that the debts cannot or should not also be excepted from the discharge. The court further notes that Congress apparently intended to mitigate the effect of Section 523(a)(3) by allowing partial or complete satisfaction of certain claims through the bankruptcy case, achieving not only supplemental relief to the omitted creditor, but also minimizing or ehminating negative impact on the debt- or’s fresh start. Doing so does not show that Congress did not mean what it) said in Section 523(a)(3).
Third, the law is clear that the court’s equitable powers can only be exercised in furtherance of statutory provisions, not in derogation of such provisions. As the United States Supreme Court has stated, “whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.”
Norwest Bank Worthington v. Ahlers,
Finally, even if the court could exercise its equitable powers to create an equitable exception to Section 523(a)(3), it would decline the opportunity because to do so would further expand the reach of the exception adopted by those courts that have followed Robinson v. Mann and would deprive the omitted creditor of important rights. Plaintiffs argument suggests that the only rights protected by Section 523(a)(3) are the right of a creditor to file a timely proof of claim and the right to receive a dividend or distribution from the bankruptcy estate. Those rights are among those protected by Section 523(a)(3), but the statute effectively protects other rights as well. The right of a creditor to receive a dividend or distribution from the bankruptcy estate extends from the creditor’s right to participate in the distribution of estate assets. The right of participation in the distribution encompasses rights other than the right to receive a distribution or dividend. For example, a creditor with notice of the bankruptcy who files an allowed claim would have the right to object to the claims of other creditors and attempt to increasd the available distribution for his own benefit. Similarly, creditors with notice of the bankruptcy have the right to timely object to the debtor’s discharge or to the dischargeability of their particular debts and may thereby attempt to increase the likelihood of a recovery of the debt outside of bankruptcy. Creditors with notice of the bankruptcy also have the right to object to the trustee’s administration of estate assets and the expenses incurred in doing so. These rights are unaffected by the likelihood that the creditor would receive a dividend or distribution from the estate, but they are compromised if the creditor is not given notice of the debtor’s bankruptcy case.
To invoke an equitable exception to Section 523(a)(3) and extend it to cases like Plaintiffs also runs counter to the policy of ensuring a fair and equitable distribution of the bankruptcy estate. Creditors often play a role in gathering and transmitting information about the bankruptcy case to the trustee, other creditors and the court. As creditors seek to assert and protect their rights and interests as against the debtor, the bankruptcy estate and other creditors, they also furnish the bankruptcy court with information that allows the court to render decisions that result in both a fair and equitable distribution of the assets of the bankruptcy estate to creditors and affords the debtor a fresh start that is justly earned. Creditors can thus assist in the proper functioning of the bankruptcy system. To create an exception that might encourage debtors to schedule creditors selectively on the basis of a hypothetical distribution of assets undermines both this function of the creditor and the goals of the Bankruptcy Code.
III. Defendant Is Not Entitled to Injunctive Relief Requiring Defendant to Release Its Tax Liens
Having found that Defendant would have held only a non-priority unsecured claim in Plaintiffs bankruptcy case and that Plaintiffs tax debts are not discharged, the court now addresses Plaintiffs request for injunctive relief and Defendant’s collection rights. Plaintiff has not carried his burden of establishing entitlement to injunctive relief requiring Defendant to release its tax liens.
Defendants’s first two post-petition attempts to obtain liens by recording certificates of delinquency with the San Joa
Pursuant to 11 U.S.C. § 362(a)(4), “any act to create, perfect, or enforce any lien against property of the estate” is stayed. Creditor actions in violation of the automatic stay are void.
In re Schwartz,
For reasons stated in Part II, supra, Plaintiffs tax debt to Defendant was not discharged. As a result, Defendant’s third recorded certificate of delinquency, recorded in January 2003 after the close of the bankruptcy case, was unaffected by the automatic stay or the discharge injunction of 11 U.S.C. Section 524. The tax lien created by the third certificate therefore remains in effect to the extent that it is properly recorded. Therefore, Plaintiff has failed to carry his burden of establishing entitlement to injunctive relief requiring Defendant to release the tax lien that was created by the third recording.
The court’s rulings regarding Defendant’s collection rights are without prejudice to Defendant’s ability to collect the unpaid taxes through continued use of the procedures described in Revenue and Taxation Code Sections 2191.3 and 2191.4. The court is aware of no statutory authority limiting the time in which the Defendant may file additional certificates of delinquency or extend the lien pursuant to Revenue and Taxation Code Section 2191.4.
Conclusion
For the foregoing reasons, Plaintiff is entitled to no relief by reason of the complaint. Judgment shall be entered in favor of Defendant declaring that the debt validly owed 6 by Plaintiff to Defendant for unpaid personal property taxes in tax years 1986, 1988, 1989, 1991, and 1992 are excepted from discharge in the above-captioned bankruptcy case pursuant to 11 U.S.C. Section 523(a)(3)(A). The court will issue a separate judgment that complies with Bankruptcy Rule 9021.
Notes
. A 1995 amendment to California Revenue and Taxation Code Section 2192 substituted "January” for "March” following the words "on the first day of." This change does not affect the taxes in question.
. Defendant fails to explain how a tax lien on the boat that would be relevant for this bankruptcy case could have been created in 1991 or 1992, after Plaintiff's secured lender sold the boat at foreclosure.
. Furthermore, after November, 1990, the boat was not moored in San Joaquin County.
. A 1990 Amendment to the Revenue and Taxation Code provided that taxes could be paid by the close of business. See Cal. Rev. & Tax Code § 2922(a) (West 1998).
. The court notes that Defendant’s claim for taxes that were not paid in tax years 1991 and 1992 is questionable, as the boat was not moored in San Joaquin County after November, 1990. Pursuant to Article 13, Section 14 of the California Constitution, all property taxed by local government shall be assessed in the county, city, and district in which it is located. "It is plainly the general policy of the law that property situated in one county or city should be taxable in that county or city for local purposes for its actual value, and that that local subdivision
alone
should have the benefit of this value for the purpose of raising its revenue.”
City of Rancho Cucamonga v. Mackzum,
. Nothing in this decision prevents Plaintiff from contesting the validity of any assessment under State law.