United States Ex Rel. Internal Revenue Service v. Cole (In Re Cole)United States Ex Rel. Internal Revenue Service v. Cole (In Re Cole)
MEMORANDUM OPINION AND ORDER
In this bankruptcy appeal, the federal government requests me to reverse the bankruptcy court’s ruling denying its motion to allow a late proof of claim. The debtors, Thomas M. and Sandra L. Cole, concur in the government’s position. The bankruptcy court held that under the Bankruptcy Rules it did not have discretion to allow the government to file an untimely claim. Having reviewed the government’s brief and the record, I find that the facts and legal arguments are adequately presented and the decisional process would not be significantly aided by oral argument. See Bankr.R. 8012.
I. Facts.
The facts are very simple. The Coles filed their Chapter 13 petition on May 25, 1990. On their schedules, they listed the Internal Revenue Service as holding a claim of $2,144.21 for delinquent 1988 and 1989 income taxes. The address given for the IRS on the schedule and on the certificate of mailing for the debtors’ motion to confirm their plan was “IRS, Austin TX
II. Legal Analysis.
A. Can the Bar Date be Extended When the Creditor Had No Notice?
The central question in this case is whether a creditor who has not received notice of a Chapter 13 bankruptcy case or the deadline for filing proofs of claim must be permitted to file a late proof of claim. There is conflicting authority on this issue. In my opinion, however, the better reasoned cases hold that the notice requirements of the Code and Rules, due process and fundamental fairness all require the allowance of late proofs of claim in these circumstances.
The Bankruptcy Code does not specify the time limit within which a creditor must file a proof of claim.
See United States v. Cardinal Mine Supply, Inc.,
If neither the creditor nor the debtor has timely filed a proof of claim, and the creditor later seeks permission to do so, the bankruptcy court must look to Bankruptcy Rule 9006(b) to determine whether it may grant the creditor’s request. This rule grants the bankruptcy court discretion to extend time periods set forth in the rules if the request for extension is made before the period expires, or if the failure to act within the specified period was the result of “excusable neglect.” Bankr.R. 9006(b). The rule has two exceptions, however. The first absolutely prohibits extensions of time with respect to several rules, none of which are involved here. Second, enlargement is permitted in connection with Bankruptcy Rule 3002(c) and other specified rules “only to the extent and under the conditions stated in those rules.” Bankr.R. 9006(b)(3). Thus, “[a] majority of courts agree that the bar date for Chapter 7 and Chapter 13 proofs of claim cannot be extended for excusable neglect,” since it is not one of the exceptions listed in Rule 3002(c).
In re Smartt Constr. Co.,
The bankruptcy court below relied on this principal to deny the government’s motion to allow its late-filed claim. In doing so, it dismissed the government’s reliance on another case nearly identical on its facts,
In re Johnson,
In
In re Smartt Construction Co.,
the debtor company and its principal officer filed separate Chapter 7 bankruptcy pro
On appeal, I reversed, holding that the provision of Bankruptcy Rule 9006(b)(1) permitting extensions of time for excusable neglect was inapplicable to a request for an extension of time to file a proof of claim under Rule 3002(c). Id. at 271. In a footnote, however, I indicated one situation in which this inflexible rule would not apply, explaining:
This was not a situation in which the creditor had no notice of the bankruptcy proceedings or where there had been no attempt to serve notice of the bar date. In such circumstances, failure to extend the bar date could result in denial of due process. See In re Harbor Tank Storage Co.,385 F.2d 111 , 114 (3d Cir.1967). Here, it is undisputed that Otero, and its successor the RTC, had notice of SCO’s bankruptcy and that the NOPD was mailed to all creditors, including Otero.
Id. at 272, n. 6.
In contrast, in
In re Johnson,
despite earlier contact by a local IRS revenue officer, several notices in the debtors’ bankruptcy case were mailed to the IRS at “Ogden, Utah 84201.” In addition, the Chapter 13 Trustee’s notice of bankruptcy filing, which established the date of the first meeting of creditors and the bar date for filing proofs of claim, was never mailed to the IRS.
See
I don’t find the decisions in
In re Smartt Construction
and
In re Johnson
to be in conflict; the facts of the two cases are different. In
Smartt Construction,
the notices of possible dividend, triggering the claims filing period, were properly addressed and mailed to the RTC in both related bankruptcy cases, but for unknown reasons the RTC did not receive one of the notices. The debtor complied with the notice requirements of the Code and Rules; the error, if any, occurred after the notices were mailed. In contrast, in
Johnson
the debtors sent notices to the IRS at a general address. The
Johnson
court ruled that this notice was “simply not sufficient in a pending bankruptcy case, particularly where taxes are at issue and in dispute.”
Courts have permitted the IRS and other creditors to file a late proof claim in similar circumstances. For example, in
United States v. Cardinal Mine Supply, Inc.,
the court held that “[d]ue process and equitable concerns require that when a creditor does not have notice or actual knowledge of a bankruptcy, the creditor must be per
Other courts likewise have permitted a creditor without adequate notice of the bankruptcy proceedings to file a late proof of claim in similar circumstances.
See, e.g., Kilbarr v. General Servs. Admin. (In re Remington Rand Corp.),
In contrast, the court in
In re Global Precious Metals, Inc.,
While the court’s analysis in
Global Precious Metals
is helpful in connection with a case proceeding under Chapter 7, it is not persuasive in the Chapter 13 context. First, section 726(a)(2)(C) is not applicable in a Chapter 13 case, and there is no similar treatment giving recognition to tardily-filed claims in Chapter 13. Likewise, assuming a Chapter 13 debtor receives a discharge under section 1328(a) of the Code, which grants the debtor a discharge after all payments under the plan have been made, certain provisions of section 523 excepting debts from discharge do not apply. Section 523 pertains only to discharges under section 1328(b), which grants the debtor a discharge in hardship and good-faith cases.
2
For example, section 523(a)(1) exempting priority claims from discharge would not apply, nor would a creditor whose debt was neither scheduled nor listed be protected by section 523(a)(3).
But see In re Glow,
Finally, a debtor contemplating a successful completion of plan payments under Chapter 13 has little incentive to file a proof of claim on behalf of a creditor under section 501. The purpose of section 501 is to protect the debtor if the creditor’s claim is
nondischargeable,
so that it may provide for payment of the claim in full or in part under the plan, rather than having to repay the entire debt after the case is closed.
See In re Johnson,
Section 501(c), which allows the debtor or the trustee to file a proof of a creditor’s claim when the creditor does not file a timely proof of claim, is permissive only. There is nothing in the statutory scheme to suggest that debtors must file claims for creditors in order for the debts to be discharged under the liberal discharge provisions of § 1328(a).
In light of the different posture of Chapter 13 cases, affirmance of the bankruptcy court’s ruling could result in dangerous precedent. Debtors would not be encouraged to give proper notice to creditors, thwarting their ability to file timely proofs of claim. Since a proof of claim must be filed in order for a claim to be allowed, these creditors would not be entitled to payments under the plan and their claims would be discharged after consummation of the plan under section 1328(a). Unlike cases under other Code chapters, no back door provisions under Chapter 13 otherwise allow the creditor with no notice to participate in distributions. For these reasons, a creditor who has received no notice in a Chapter 13 case should be entitled to file a late proof of claim, notwithstanding the provisions of Bankruptcy Rules 3002(c) and 9006(b).
B. Was the Notice Defective?
A second issue in this appeal is whether the notice provided to the IRS, mailed to one of its service centers, was effective. The Bankruptcy Rules provide little guidance. Rule 2002(j) is the only rule that speaks of notice to the United States. The provisions of that rule concern only Chapter 11 cases, commodity broker cases, and cases involving a debt to the United States other than for taxes. Nothing in the rule requires notice to be given to the IRS in every Chapter 13 case as in Chapter 11 cases,
see
Bankr.R. 2002(j)(3), or specifies generally where or to whom the notice must be sent. “Since the Bankruptcy Rules ... do not contain any provision dealing with where to send notice to the IRS in a Chapter 13 case, the Court’s inquiry is limited to whether the specific notice given in this case was fair and reasonable under the circumstances.”
In re Daniel,
The two cases most closely on point on this issue are
In re Johnson
and
In re Daniel.
In
Johnson,
as in this case, notices were sent to the IRS at a general address. As noted above, the bankruptcy court found that this notice was simply not reasonable under the circumstances. The court’s conclusion was “derived from rather obvious deficiencies such as Debtors failure to mail their Amended Plan, Motion to Confirm (Amended) Plan, and Notice of Hearing ... to the IRS at (a) a specific,
In contrast, in
Daniel,
the bankruptcy court held that notice to the IRS was sufficient. There the debtors sent bankruptcy notices to the IRS at the address provided on a collection notice they received from the agency before filing for bankruptcy. The IRS argued that the notices should have been sent to its district director, as required in Chapter 11 cases, and not to its collection office, which had no authority to file a proof of claim. The court rejected the IRS’ contention that the notices required of debtors in Chapter 11 proceedings applied in a Chapter 13 proceeding.
Here, there is nothing in the record to indicate why the debtors sent their notices to the IRS at its service center or whether they had knowledge of a more appropriate address. Likewise, the government does not explain why the debtors’ use of the service center address is unreasonable or why the center could not have forwarded the notices to the appropriate office.
See In re Daniel,
Consequently, because of the meager record, I cannot determine whether the IRS had effective notice in this case. If I follow the rationale of In re Johnson, notice sent to a general IRS address, standing alone, is unreasonable. On the other hand, if the only address the debtors had when they filed their case was that of the regional service center and the IRS could have forwarded the notice to the correct division, under the reasoning of In re Daniel, this notice may have been “fair and reasonable under the circumstances.” See id.
III. Conclusion.
In my opinion, contrary to the bankruptcy court’s view, the strict limits on extensions of time for filing proofs of claim do not apply to a situation where the creditor has had no effective notice of the proceedings or the bar date. Thus, I cannot affirm on this ground. Accordingly, I REVERSE and REMAND for a rehearing and a determination by the bankruptcy court whether the notice to the IRS was fair and reasonable under the circumstances.
Notes
. The government states that claim consisted of a priority claim of $1,871.89 and an unsecured general claim of $152.99, though these figures reflect a claim in the combined amount of $2024.88, not $2024.68.
. Section 1328(a) of the Code, however, makes applicable to discharges granted thereunder the exceptions contained in subsections (5), (8) and (9) of section 523. See 11 U.S.C. § 1328(a)(2). These exceptions are not relevant here.
. The court further indicated that the clerk of the bankruptcy court in this district had issued special instructions regarding proper mailing of notices to the IRS and the Colorado Department of Revenue, and that those instructions were at one time provided to practitioners.
See