United States Bankruptcy Appellate Panel of the First Circuit
Ellen E. MONAHAN, Debtor.
Ellen E. Monahan, Appellee. United States of America, Appellant, Bankruptcy No. 07-11974-WCH.
Kathryn Keneally, Esq., Julie Avetta, Esq., and James E. Brown, Esq., on brief, for Appellant.
Nina M. Parker, Esq., and Kate E. Nicholson, Esq., Winchester, MA, on brief, for Appellee.
Before HAINES, DEASY, and GODOY, United States Bankruptcy Appellate Panel Judges.
DEASY, Bankruptcy Judge.
The United States of America, Internal Revenue Service (the " IRS" ) appeals from: (1) a bankruptcy court order granting the debtor's Motion for Determination of a Violation of the Discharge Injunction and Request for Protective Order (the " Determination Motion" ); and (2) the bankruptcy court's denial of reconsideration. For the reasons discussed below, we REVERSE the Determination Motion and deem waived the appeal of the order denying reconsideration.
The debtor filed a voluntary petition for chapter 13 relief in April 2007. In December
2007, the IRS filed an amended proof of claim, reflecting that, as of the petition date, it held an unsecured priority claim in the total amount of $96,472.43, pursuant to § 507(a)(8). The claim was for pre-petition civil penalties assessed pursuant to 26 U.S.C. § 6672 (Internal Revenue Code), for failure to pay so-called trust fund taxes, and did not include any post-petition interest.
In May 2007, the debtor filed and served her initial chapter 13 plan, which provided for payment in full of the allowed priority tax claim of the IRS over the course of the 60-month life of the plan. The debtor subsequently filed and served a First Amended Plan (the " Amended Plan" ), which, like its predecessor, provided for the payment in full of allowed priority tax claims. The Amended Plan provided for no distributions to allowed non-priority unsecured claims.
Absent objection, the court confirmed the Amended Plan in September 2008. Thereafter, the debtor made all of the payments required under the Amended Plan, and in May 2012, she filed a motion for the entry of her discharge. After receiving the trustee's final report, the bankruptcy court entered the discharge order, also without objection. The discharge order provided that " all allowed claims have been fully paid in accordance with the provisions of the confirmed plan." The explanation page appended to the discharge order further provided: (1) " the debtor ha[d] completed all payments under the chapter 13 plan" ; (2) the " chapter 13 discharge order eliminate[d] a debtor's legal obligation to pay a debt that is discharged" ; and (3) " [d]ebts for certain taxes to the extent not paid in full under the plan" were not discharged.
Following the entry of the discharge order, the IRS sent four Notices of Intent to Levy to the debtor. In the first notice, the IRS indicated that the debtor owed " interest charges" of $5,332.05 for the tax year ending June 30, 2003. In the second notice, the IRS indicated that the debtor owed interest charges of $3,697.31 for the tax year ending December 31, 2003. The third notice reflected interest charges of $2,302.69 due for the tax year ending September 30, 2004. The last notice reflected interest charges of $6,026.03 for the tax year ending December 31, 2004. In each notice, the IRS warned:
If you don't call us immediately or pay the amount due ... we may seize (" levy" ) any state tax refund to which you're entitled ...
If you still have an outstanding balance after we seize any state tax refund, we may take possession of your other property or your rights to property.
After receiving the notices, the debtor repeatedly asked the IRS to suspend the threatened levy, on the grounds that the IRS's claim was paid in full under the Amended Plan. Citing Internal Revenue Serv. v. Cousins (In re Cousins), 209 F.3d 38 (1st Cir.2000), the IRS insisted that it was entitled to collect post-petition interest
on its priority tax claim, and refused to halt the seizure action.
The debtor therefore filed the " Determination Motion, in which she asked the court for an immediate determination as to whether the IRS's actions constituted a willful violation of the discharge injunction under § 524, and an order halting the threatened seizure action. In support, the debtor asserted: (1) she timely payed the IRS the full sum set forth in the amended proof of claim in accordance with the terms of the Amended Plan; (2) the IRS never objected to her motion for entry of discharge or to the Amended Plan; (3) the IRS's claim fell within the scope of her discharge; and (4) United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) overruled Cousins.
The bankruptcy court conducted a hearing on the Determination Motion in October 2012. The debtor argued during the hearing that: (1) the " IRS received notice" (presumably of the pendency of confirmation proceedings); (2) the IRS's amended proof of claim " did not indicate that they were going to be asserting any interest after the fact and there's nothing in the Code per se that says that ... this claim is entitled to interest" ; and (3) the IRS did not appeal the confirmation order. Relying on Espinosa, the debtor asserted that the IRS was bound by the confirmation order. She added: " We are not seeking a discharge of the debt. We paid the debt."
The IRS countered that the rule under Cousins, which remains good law after Espinosa, is that " post-petition accruals ... remain nondischargeable." The IRS distinguished the instant case from Espinosa, by arguing that in Espinosa, " the plan specifically provided that the student loan debt would be discharged," while there was " no such provision here in the plan." Lastly, the IRS asserted that the discharge order specifically noted that " there [were] taxes that [were] nondischargeable."
The bankruptcy court granted the Determination Motion, ruling from the bench as follows:
IRS never specifically sought post-petition interest and so what they were— it was claimed they would do and what they said they would do is the amount that they were paid. Now I don't have any problem agreeing with the debtor here. I don't even think I need Espino [ s ]a because I think IRS got what it claimed it wanted and it got it. It could have added one line to the proof of claim and said, " Plus interest as accrues after the filing of the petition under," I forgot what the section number is of the IRC. But they could have thrown that in and they did not.
And so here we are years later and all of a sudden IRS raises its head and says, " Oh, no. We want interest." I'll give you three reasons why IRS has to lose. No. 1 is common sense. No. 2 is Espino [ s ] a. No. 3 is basic fairness.
The debtor has to prevail here. The motion for determination of a violation is granted. Any action by IRS to collect this interest is inappropriate and a violation of the discharge injunction. An order to that effect will enter.
The IRS subsequently filed a motion for reconsideration (the " Reconsideration Motion" ) that the bankruptcy ...