United States v. MIKHOVUnited States v. MIKHOV
Case Information
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION UNITED STATES OF AMERICA, )
)
Plaintiff, )
) v. ) No. 1:22-cv-01321-SEB-DLP )
VLADIMIR MIKHOV, )
ANGELA MIKHOV, )
COMMERCIAL AND RESIDENTIAL )
CONSTRUCTION SERVICES, LLC, )
)
Defendants. ) ORDER ON THE PARTIES' MOTIONS REGARDING REMOVAL AND/OR REFERRAL OF THIS PROCEEDING TO THE BANKRUPTCY COURT
Aftеr the Government commenced this civil suit against the Defendants seeking to
reduce Defendants' federal income tax liabilities to judgment pursuant to
I. PROCEDURAL BACKGROUND
On April 20, 2017, Defendants Vladimir Mikhov and Angela Mikhov filed a Chapter
7 bankruptcy petition in this district for which they received a discharge on December 14,
2017. Five years thereafter, оn July 5, 2022, the Government commenced this lawsuit
initially only against the Mikhovs, thereafter amending it to add claims against
Commercial and Residential Constructions Services, LLC ("C&R"). C&R is a business
owned by Ilona Mikhov, the Mikhovs' daughter.
[2]
Count I of the Amended Complaint is
based on
[2] The Government's Amended Complaint filed on September 28, 2022, post-dated the parties' respective motions on whether the Bankruptcy Court has jurisdiction over this case. The language added in the Amended Complaint does not impact our analysis or conclusions оn these pending motions.
C&R was established on October 7, 2015. Ilona Mikhov, the Mikhovs' daughter, was listed as the sole member and registered agent of C&R. While C&R was administratively dissolved by the Indiana Secretary of State on April 5, 2018, it continues to be the titleholder of record of the Property. Angela Mikhov has held herself out as a manager of C&R, and Defendants Mr. and Mrs. Mikhov have accessed funds from a bank account in the name of C&R to pay personal expenses. On information and belief, the Government alleges that C&R has failed tо adhere to most if not all corporate formalities.
assert a discharge defense based on their 2017 bankruptcy case filed in this district by
claiming that the exception to discharge statute,
However, Section
On July 28, 2022, the Mikhovs filed what they entitled a "Notiсe of Filing of Notice
of Removal," referencing their filing of a Notice of Removal in the Bankruptcy Court,
and also seeking to "remov[e] this proceeding to the Bankruptcy Court pursuant to
28 U.S.C. § 1452(a) only provides for the removal of cases from state courts to federal courts (including bankruptcy courts) or possibly from one district to another (although the [Government] submits that is really a transfer of venue under28 U.S.C. § 1412 and is within the authority of the court in which the case is commenced).
Docket No. 9, at 1. The Government contends that a civil action such as this "cannot be
removed from a federal district court to the bankruptcy court for the same district, and
thus the notice of removal is a legal nullity."
Id.
The Government, citing
The Mikhovs have not responded directly to the Government's motion; instead, on September 7, 2022, they filed their "Motion to Confirm Referral of Proceeding to Bankruptcy Court or, in the Alternative, to Refer Proceeding to Bankruptcy Court." Their motion asserts that the Court has already automatically referred this lawsuit to the Bankruptcy Court, pursuant to our Local Rules, and requests that we confirm that referral; the Mikhovs, albeit inconsistently, also contend that they possess the right to remove the action to the Bankruptcy Court. "[T]o the extent this proceeding has not already been referred to the Bankruptcy Court," say the Mikhovs, the "Court should expressly make such a referral," arguing that this cause of action both "arises under" and "arises in" the Bankruptcy Code. Docket No. 10, at 15.
II. FACTUAL BACKGROUND
In Count I, the Government's Amended Complaint alleges that the Mikhovs' tax
liabilities for the years 2008 through 2012 wеre excepted from discharge in the
bankruptcy proceeding, pursuant to
• Failing to report over $600,000 of their business's gross receipts on their 2008 and 2009 Forms 1040 (combined).
• Selling investment properties in 2014-2016 (after all the assessment of tax against them) for net sale proceeds in excess of $1 million and declining to use any those amounts to pay their past-due federal income tаx liabilities.
• Selling investment properties to insiders at a below-market rate. • Using business bank accounts for personal expenses, including payment of the mortgage on their residence and purchases of airline tickets, fine wines, and expensive clothing.
• Failing to disclose assets, including Individual Retirement Accounts, on their original and first amended bankruptcy schedules.
• Transferring the operation of their business to C&R, of which their daughter is the sole member owner (though continuing to operate that business) in order to avoid IRS collection efforts.
• Not fully paying their taxes through nearly adequate estimated prepayments during each tax year despite having adjusted gross income of $707,013 in 2008, $540,533 in 2009, $381,791 in 2010, $891,920 in 2011, $678,453 in 2012, $342,401 in 2013, and $317,557 in 2014.
• Not paying the already reported and assessed taxes in succeeding years from the similarly more-than-sufficient income year after year.
• Fraudulently transferring funds to One Plus Two LLC to acquire the Property in its name in 2011.
• Causing One Plus Two LLC to fraudulently transfer the Property to Vladimir Mikhov's sister in 2016 even though he owned 99.9% of One Plus Two while his sister owned only 0.1% as described in Count II below.
Docket No. 19, at 3−4. Regarding tax years 2013 and 2014, the Government alleges the
Mikhovs' tax liabilities were excepted from discharge under
As for Count II, the Government's Amended Complaint alleges that on August 18,
2011, before most of the tax assessments at issue were made but after the Mikhovs had
been notified that the Internal Revenue Service had opened an investigation into their
2008 and 2009 tax returns, Margaret Culberson conveyed the Property to One Plus Two,
LLC, an entity owned 99.9% by Mr. Mikhov and 0.1% by his sister, Ellena Mikhov
Kayyod. On May 10, 2016, One Plus Two LLC conveyed full title to the Property by
Warranty Deed to Ms. Kayyod. The Government has averred, based on information and
belief, that the transfer of property from One Plus Two to Ms. Kayyod on May 10, 2016,
was directed by Mr. Mikhov and/or Mrs. Mikhov. On January 12, 2018, Ms. Kayyod
conveyed the Property by Quitclaim Deed to C&R for zero net dollars; this transfer was
made for the stated consideration of $100,000, but all closing costs (including $5,865.66
to Hamilton County, Indiana, to pay Spring 2016 and delinquent property taxes) were
paid from that $100,000, making the actual amount paid to the seller the amount of
$92,472.50. Mr. Mikhоv then directed payment of $92,472.50 to a bank account in the
name of Two Plus One, LLC, which was another company of which he was the
owner/president. Over the course of the ensuing four months, the $92,472.50 was
distributed through a combination of withdrawals executed by Mrs. Mikhov and transfers
to or for the benefit of other entities controlled by the Mikhovs. Moreover, One Plus Two
reported the sale in the amount of only $10,000, claiming a capital loss corresponding to
that amount that passed through to the Mikhovs' personal tax return. Thus, according to
the Government, the Mikhovs' federal tax liens attach to the Property, either because the
liens had attached to it when it was held by Mr. Mikhov's nominee, One Plus Two LLC,
or, in the alternative, because the initial acquisition of the property by One Plus Two was
made with funds supplied by Mikhov, making all subsequent transfers of the property
fraudulent. The Government therefore requests a declaration under
III. DISCUSSION AND DECISION
We begin our analysis of the parties' respective motions mindful of the following
controlling legal principles. First, "[t]he jurisdiction of the bankruptcy courts, like that of
other federal courts, is grounded in, and limited by, statute."
Celotex Corp. v. Edwards
,
A. GOVERNMENT'S MOTION TO DECLARE THAT NOTICE OF REMOVAL IS VOID
The Mikhovs have attempted to remove this action to the Bankruptcy Court, pursuant
to
The plain language of
Indeed, "it is illogical to interpret the bankruptcy removal statute to authorize
removal
from
a district court
to
the district court in the same district."
Id.
(citing
Mitchell
v. Fukuoka Daiei Hawks Baseball Club (In re Mitchell)
,
Cal. 1997) ("It violates the plain language of
"Without making a definitive ruling on the issue of whether
bankruptcy court would impermissibly undermine thе district court's power to refer
matters to the bankruptcy court (or to withdraw the reference)."
Id.
at 447. This referral
power reflects "the Article III supervision that Congress intended as a remedy for the
defects found by the Supreme Court in
Marathon
."
Thomas Steel Corp. v. Bethlehem
Rebar Indus., Inc.
, 101 B.R. 16, 19−20 (Bankr. N.D. Ill. 1989) (citing
Northern Pipeline
Construction Co. v. Marathon Pipe Line Co.
,
"[W]e pause here to emphasize a fundamental and crucial point." Curtis , 571 B.R. at 447. "The predicate for the referral power is the bedrock principle that the district courts have jurisdiction over bankruptcy cases and proceedings; the bankruptcy court's jurisdiction over such matters is purely and solely derivative of the district court's jurisdiction." Id. "And the bankruptcy court's power to hear, or to hear and determine, as the case may be, bankruptcy cases and proceedings is entirely dependent upon the referral by the district court." Id. "Any interpretation of a statute that would imply that the bankruptcy courts had jurisdiction of bankruptcy cases and proceedings separate and independent from, or even co-equal to, the jurisdiction granted the Article III courts, or that would interfere with the Article III courts' exercise of that jurisdiction and judicial power through thе system of referral to the bankruptcy courts, or that, as here, would permit bankruptcy courts to dispose of matters originating in the district courts in apparent derogation of the power of those courts to control their own proceedings, would be, for the reasons described above, a constitutional non-starter." Id. at 447−48. For these reasons, we grant the Government's motion declaring that the Mikhovs' Notice of Removal to the Bankruptcy Court is void.
B. DEFENDANTS' MOTION TO CONFIRM REFERRAL OF PROCEEDING TO BANKRUPTCY COURT OR, IN THE ALTERNATIVE, TO REFER PROCEEDING TO BRANKRUPTCY COURT
The Mikhovs also seek an order transferring this case tо the Bankruptcy Court, arguing that: "as with every case and proceeding that arises under or relates to the Bankruptcy Code, this Court has already referred the proceeding initiated by Plaintiff's Complaint to the Bankruptcy Court," and, in the alternative, if this proceeding has not already been automatically referred to the Bankruptcy Court, the Mikhovs request that we now do so because, they say, this proceeding both "arises in" and "arises under" the Bankruptcy Code. [4] Docket No. 10, at 10. The Mikhovs' first argument invokes Local Rule 83-8(a) (mistakenly referenced in the motion as Local Rule 83-3(a)), which provides:
Consistent with
United States Code, are referred to the district's bankruptcy court. This
includes all cases removed under
The Mikhovs contend that this referral, "which is automatic and requires no action by the
Court, has been reaffirmed time and again by this Court." Docket No. 10, at 10;
see, e.g., Gibson v. Tucker (In re G & S Livestock Co.)
,
HSBC Capital (USA), Inc. (In re Garrison)
,
The Mikhovs' reliance on this Local rule is entirely misplaced. The case at bar is not a matter arising under Title 11, as we have previously made clear. Thus, it was not automatically referred to the Bankruptcy Court nor will it be. Obviously, if it had been, there would be no need for the Mikhovs to request confirmation of that fact by the court.
In truth of fact, this matter is prosecuted under Title 26, U.S.C., to wit, the Internal Revenue Code. The Mikhovs' apparent intention to raise their bankruptcy discharge as a defense to their ongoing tax liability dispute does not alter the statutory basis for this lawsuit. Neither should it be transferred to the Bankruptcy Court on the grounds that it "arises under" and "arises in" the Bankruptcy Code.
"Congress delineated three types of bankruptcy proceedings: those (1) 'arising under
title 11,' (2) 'arising in' a title 11 case, and (3) 'related to a case under title 11.'"
In re
Ortiz
,
"Congress permits bankruptcy judges to 'hear and determine . . . all core proceedings
arising under title 11, or arising in a case under title 11.'"
Ortiz
,
Whether this case "arises under" Title 11 depends on whether it relates to "a right
'created or determined by a statutory provision of title 11.'"
In re Repository Tech., Inc.
,
Sonnenschein Nath & Rosenthal LLP (In re Commercial Loan Corp.)
,
The Mikhovs' contention that this matter "arises in" bankruptcy—a category "defined
generally as 'administrative matters that arise
only
in bankruptcy cases'"—is equally
unpersuasive.
Ortiz
,
Thus, "[i]ts domain is limited to questions that arise during the bankruptcy proceeding
and concern the administration of the bankrupt estate, such as whether to discharge a
debtor."
Zerand-Bernal Group, Inc. v. Cox
,
Here, the authority to reduce tax assessments to judgments—specifically, the
authority granted by
Storey
,
We further hold that the interests of judicial efficiency are better served by our retention of the instant action on our docket. In re Varner , the bankruptcy court declined to reopen a case to permit an adversary complaint by a debtor where the federal Government had brought suit in the district court claiming that the discharge exception applied as part of its complaint. There, the court observed:
Forcing either party to litigate the dischargeability issue in bankruptcy court, only to present that declaratory judgment to district court, is a waste of resources. District court has original jurisdiction of bankruptcy matters and can review this court's decisions. Allowing it to decide the dischargeability directly makes more sense than piecemeal litigation.
In re Varner
,
Finally, as the Government notes, the Bankruptcy Court would not have jurisdiction
over the Government's additional claim against Defendant C&R, which involves property
that is not part of the "bankruptcy еstate and is titled in the name of a company which is
not a debtor (and the shares of such company are also titled in the name of a non-debtor),
so the bankruptcy court would thus not have subject matter jurisdiction over any issue
with regard to that property. " Docket No. 20, at 2−3. "Nor could the property be brought
into the estate via a fraudulent transfer claim by the Chapter 7 trustee because the period
of limitations to do that has expired."
Id.
at 3 (citing
IV. CONCLUSION
Accordingly, we GRANT the Government's Motion to Declare that Notice of Removal is Void [Docket No. 9] and DENY Defendants Motion to Confirm Referral of Proceeding to Bankruptcy Court or, in the Alternative, to Refer Proceeding to Bankruptcy Court [Docket No. 10]. [6]
IT IS SO ORDERED.
Date:
Distribution:
Jason R. Burke
BLACKWELL, BURKE & RAMSEY, P.C.
jburke@bbrlawpc.com
Amy Lynn Elson
Blackwell, Burke, & Ramsey P.C.
aelson@bbrlawpc.com
Sarah L. Fowler
Blackwell, Burke & Ramsey, P.C.
sfowler@bbrlawpc.com
Bradley A. Sarnell
U.S. DEPARTMENT OF JUSTICE - TAX DIVISION (Washington DC)
bradley.a.sarnell@usdoj.gov
Notes
[1] On November 9, 2022, Defendants filed another motion that: (1) requests the Court confirm referral of this proceeding to the Bankruptcy Court or, alternatively, refer the proceeding to the Bankruptcy Court, and (2) moves to dismiss Count II pursuant to Federal Rule of Civil
[3] In
Curtis
, the Ninth Circuit noted that the only arguable exceptions to this rule are
Philadelphia
Gold Corp. v. Fauzio (In re Philadephia Gold Corp.)
,
[5] Moreover, because the Bankruptcy Court could at most issue a declaratory judgment, the
Government argues that "its jurisdiction would be questionable in light of the prohibition in the
Declaratory Judgments Act on declaratory judgments involving federal taxes. Significаntly, the
same legislation that enacted the modern bankruptcy code in 1978 amended the Declaratory
Judgments Act to make an exception to the tax exclusion clause for § 505 of the Bankruptcy
Code but did not make such an exception for
[6] As previously mentioned, we partially DENY Defendants' Motion filed on November 9, 2022 [Docket No. 30] as it pertains to the issues addressed in this order. That motion remains pending as to the Defendants' request that Count II of the Amended Complaint be dismissed, and nothing in this order shall be construed to affect the standard briefing deadlines set out in Local Rule 7- 1(c)(3) for the Motion to Dismiss portion of Defendants' November 9th Motion.