Gilbert Dreyfuss v. Timothy Cory , 788 F.3d 1243 ( 2015 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN THE MATTER OF SHELDON H. No. 13-15432
CLOOBECK,
Debtor, D.C. No.
2:12-cv-01506-
LRH-NJK
GILBERT DREYFUSS,
Appellant,
OPINION
v.
TIMOTHY S. CORY, Chapter 7
Trustee,
Appellee.
Appeal from the United States District Court
for the District of Nevada
Larry R. Hicks, District Judge, Presiding
Argued and Submitted
March 13, 2015—San Francisco, California
Filed June 12, 2015
Before: J. Clifford Wallace, Milan D. Smith, Jr.,
and Paul J. Watford, Circuit Judges.
Opinion by Judge Milan D. Smith, Jr.;
Concurrence by Judge Wallace
2 IN THE MATTER OF CLOOBECK
SUMMARY*
Bankruptcy
The panel reversed the district court’s affirmance of the
bankruptcy court’s order approving the chapter 7 trustee’s
final report following the trustee’s payment of the federal
income taxes of the bankruptcy estate.
The panel held that the bankruptcy estate’s federal income
tax liability is an administrative expense, and so 11 U.S.C.
§ 503(b) requires a chapter 7 trustee to provide notice to
creditors, and obtain a hearing, before paying taxes incurred
by the estate. The panel remanded the case to the district
court for remand to the bankruptcy court with directions that
the bankruptcy court determine the amount of federal income
taxes due from the estate, and conduct such other proceedings
as may be appropriate.
Concurring, Judge Wallace agreed that the trustee did not
follow section 503(b)’s requirement that the income tax
payment be made only “after notice and a hearing.” He wrote
separately to highlight for the court on remand his concerns
about the timeliness of a creditor’s objection to the tax
payment.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
IN THE MATTER OF CLOOBECK 3
COUNSEL
Davis S. Kupetz (argued), SulmeyerKupetz, Los Angeles,
California, for Appellant.
Duane H. Gillman (argued) and Timothy S. Cory, Durham
Jones & Pinegar, P.C., Las Vegas, Nevada, for Appellee.
OPINION
M. SMITH, Circuit Judge:
In this bankruptcy appeal, we consider whether section
503 of the Bankruptcy Code, 11 U.S.C. § 503(b), requires a
chapter 7 trustee to provide notice to creditors, and obtain a
hearing, before paying taxes incurred by the estate. The
Appellee, a chapter 7 trustee, paid the 2005 federal income
taxes of a bankruptcy estate without first providing notice to
the Appellant, a creditor of the estate, requesting a hearing to
determine the appropriate amount of those taxes, or obtaining
an order of the bankruptcy court authorizing the payment of
those taxes. The Appellant contends that the bankruptcy
court erred by approving the Trustee’s Final Report without
holding a hearing to determine the appropriate amount of the
2005 federal income taxes, and without approving the
payment of those taxes. The Appellee argues that construing
the Bankruptcy Code to require trustees to provide notice and
obtain a hearing before paying taxes incurred by the estate
would conflict with trustees’ other obligations under the
Bankruptcy Code and the Internal Revenue Code.
We hold that the plain language of section 503 requires
that notice and a hearing be provided before the payment of
4 IN THE MATTER OF CLOOBECK
taxes as administrative expenses, and that this requirement
does not impose inconsistent obligations on trustees under
other provisions of the Bankruptcy Code or the Internal
Revenue Code. We reverse and remand to the district court
for remand to the bankruptcy court with directions that the
bankruptcy court determine the amount of 2005 federal
income taxes due from the estate, and conduct such other
proceedings as may be appropriate.
FACTS AND PROCEDURAL BACKGROUND
The Appellant, Gilbert Dreyfuss, holds an allowed
unsecured claim of approximately $1,006,417.68 against the
bankruptcy estate of Sheldon Cloobeck. Cloobeck
commenced this bankruptcy case by filing a voluntary chapter
11 petition on January 12, 2005. The case was converted to
a chapter 7 case on or about October 19, 2005. Following the
conversion, the Appellee, Timothy S. Cory (Trustee), was
appointed the chapter 7 trustee.
On or about May 13, 2009, the Trustee paid $340,895 of
estate funds to the IRS to satisfy the estate’s 2005 federal
income tax liability. The Trustee did not give notice, or seek
a hearing, before making the 2005 tax payment, nor did the
bankruptcy court authorize the payment of 2005 taxes before
the Trustee made that payment. Moreover, the Trustee did
not notify either the Appellant or the bankruptcy court of the
amount of 2005 taxes he ultimately paid before making the
payment to the IRS.
On May 9, 2012, the Trustee filed the Final Report with
the bankruptcy court. The Appellant filed an opposition to
the Final Report on June 13, 2012. In the opposition, the
Appellant argued that it was improper for the Trustee to pay
IN THE MATTER OF CLOOBECK 5
the estate’s 2005 federal income taxes without giving notice
and requesting a hearing, and asked the bankruptcy court to
require the Trustee to reimburse the estate for that payment.
The bankruptcy court held a hearing on the Trustee’s
Final Report on July 6, 2012. At the hearing, the Appellant
urged the court to “have a hearing,” and to “determine, as it
has the jurisdiction to do, the actual 2005 taxes.” The court
declined to hold a hearing regarding the amount of the 2005
taxes. The court found that there was “sufficient evidence to
find that the Trustee acted responsibly and reasonably with
respect to filing the tax returns of the estate.”
The Appellant filed a notice of appeal, and the Trustee
elected to have the appeal heard by the United States District
Court for the District of Nevada. On appeal, the Appellant
argued that the bankruptcy court erred by “denying
Appellant’s request that [it] hold a hearing to determine
whether [the 2005 federal income tax] was actually owing by
the bankruptcy estate . . . .” The district court affirmed the
bankruptcy court’s order approving the Final Report. It
concluded that the Appellant’s objection to the payment of
2005 federal income taxes was “severely untimely” because
the Appellant “knew of the payment to the IRS back in 2009,
but did not file an objection to the payment until the final
report in 2012, three years after the payment had been made.”
A timely appeal to our court followed.
JURISDICTION AND STANDARD OF REVIEW
The district court had jurisdiction under 28 U.S.C.
§ 158(a) to hear the appeal from a final order of the
bankruptcy court. We have jurisdiction under 28 U.S.C.
6 IN THE MATTER OF CLOOBECK
§ 158(d)(1) to hear this appeal from the final decision of the
district court.
We review the district court’s decision on appeal from a
bankruptcy court order de novo. Greene v. Savage (In re
Greene), 583 F.3d 614, 618 (9th Cir. 2009). We review the
bankruptcy court’s conclusions of law de novo, and its factual
findings for clear error. Id.
DISCUSSION
The Appellant contends that the estate’s 2005 federal
income tax liability was an administrative expense, and that
the Trustee was therefore required to provide the Appellant
with “notice and a hearing” before paying it. We agree.
“In classifying the order of payment for creditors’ claims,
the Bankruptcy Code affords the highest level of priority
to claims denominated ‘administrative expenses.’”
Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d
755, 756 (9th Cir. 1998) (citing 11 U.S.C. § 507(a)(1)).
Section 503(b)(1) of the Code defines administrative
expenses, and enumerates six specific types of claims that
qualify for first priority. Id. A tax incurred by the estate is an
administrative expense under 11 U.S.C. § 503(b)(1)(B). The
parties do not dispute that the estate’s 2005 federal income
tax liability was an administrative expense.
Section 503(b) provides that administrative expenses
“shall be allowed,” but only “[a]fter notice and a hearing
. . . .” Section 503(b)’s plain language appears to establish
conclusively that “notice and a hearing” were required before
IN THE MATTER OF CLOOBECK 7
the Trustee could pay the estate’s 2005 federal income tax
liability.1
Notwithstanding section 503’s plain language, the Trustee
contends that construing the statute to require that trustees
provide notice and obtain a hearing before paying taxes
would conflict with trustees’ other obligations under the
Bankruptcy Code and the Internal Revenue Code. The
Trustee cites the Internal Revenue Code, which provides that
“[r]eturns of an estate, a trust, or an estate of an individual
under chapter 7 or 11 of Title 11 of the United States Code
shall be made by the fiduciary thereof.” 26 U.S.C.
§ 6012(b)(4) (emphasis added). In addition, the Bankruptcy
Code makes clear that, subject to limited exceptions, a trustee
must pay all federal taxes on or before the date they come
due, 28 U.S.C. § 960, and must pay the estate’s taxes even if
the government does not file a request for administrative
expenses with the bankruptcy court, see 11 U.S.C.
§ 503(b)(1)(D).
Contrary to the Trustee’s argument, these provisions of
the Bankruptcy Code and the Internal Revenue Code are
easily reconcilable with section 503(b)’s notice and hearing
requirement. Subject to limited exceptions, a trustee must
1
The statutory phrase “after notice and a hearing” is a term of art in the
Bankruptcy Code meaning “after such notice as is appropriate in the
particular circumstances, and such opportunity for a hearing as is
appropriate in the particular circumstances.” See 11 U.S.C. § 102(1). The
phrase “authorizes an act without an actual hearing if such notice is given
properly and if–(i) such a hearing is not requested timely by a party in
interest; or (ii) there is insufficient time for a hearing to be commenced
before such act must be done, and the court authorizes such act . . . .” Id.
§ 102(1)(B). In this opinion, we use the terms “notice,” “hearing,” and
“notice and a hearing” as they are defined in 11 U.S.C. § 102(1).
8 IN THE MATTER OF CLOOBECK
pay the taxes of the estate on or before the date they come
due, 28 U.S.C. § 960(b), even if no request for administrative
expenses is filed by the tax authorities, 11 U.S.C.
§ 503(b)(1)(D), and the trustee must insure that “notice and
a hearing” have been provided before doing so, see id.
§ 503(b)(1)(B). The hearing requirement insures that
interested parties, including creditors like the Appellant, have
an opportunity to contest the amount of tax paid before the
estate’s funds are diminished, perhaps irretrievably.
The Trustee contends that the Appellant’s objection to the
Final Report was procedurally improper because the
Appellant failed to object to the IRS’s administrative claim.
This argument is without merit because the IRS never filed an
administrative claim, nor was it required to do so. See id.
§ 503(b)(1)(D). Instead, the Trustee independently
discovered the 2005 federal income tax liability, and paid it
without any claim being filed by the IRS. It was incumbent
upon the Trustee to secure an appropriate hearing and
authorization from the bankruptcy court before making the
payment. See 4 Collier on Bankruptcy ¶ 503.02[3] (16th ed.
2014) (“If the governmental unit does not file a request for
payment but the tax obligation is discovered by the trustee, it
will be the trustee’s responsibility, rather than the government
unit’s responsibility, to provide the notice and obtain the
hearing.”). The Final Report appears to have been the first
formal filing in the bankruptcy court specifying the amount
IN THE MATTER OF CLOOBECK 9
of 2005 taxes paid,2 and the Appellant filed a timely
opposition to its approval.
We conclude that the bankruptcy court erred by approving
the Final Report without first holding a hearing to determine
the amount of the 2005 federal income taxes. Under the plain
language of section 503(b), the Trustee could pay the 2005
taxes as an administrative expense only after “notice and a
hearing,” and only after the bankruptcy court authorized the
payment.
We reverse and remand to the district court for remand to
the bankruptcy court. The district court shall direct the
bankruptcy court to hold a hearing to determine the estate’s
2005 federal income tax liability, see 11 U.S.C. § 505, and
conduct such other proceedings as may be appropriate.
REVERSED AND REMANDED.
2
The Trustee filed a Second Status Report with the bankruptcy court on
April 10, 2009, prior to paying the 2005 taxes. The report stated that the
Trustee had retained an accounting firm to prepare the bankruptcy estate’s
tax returns for calendar years 2005 to 2008, and that the returns would
likely be filed by April 30, 2009, but did not specify the amount of taxes
the estate owed for any of the calendar years. The Trustee filed a Third
Status Report on July 19, 2011, after the Trustee paid the 2005 taxes. The
report acknowledged that the Trustee had paid the estate’s 2005 taxes, but
did not specify the amount paid.
10 IN THE MATTER OF CLOOBECK
WALLACE, Circuit Judge, concurring:
I concur in the opinion because I agree that the trustee did
not follow section 503(b)’s requirement that the payment be
made only “after notice and a hearing.” The trustee does not
argue that notice was somehow “[in]appropriate in the[se]
particular circumstances.” 11 U.S.C. § 102(1)(A). I write
separately, however, to highlight for the court on remand my
concerns about the timeliness of Dreyfuss’s objection.
The thrust of Dreyfuss’s argument over the course of this
litigation has been that the trustee paid the wrong amount of
taxes. The majority opinion, however, focuses instead on
Dreyfuss’s alternative argument—that the trustee failed to
provide a “notice and a hearing” before making the tax
payment. But the opinion does not address the timeliness of
Dreyfuss’s original objection in the bankruptcy court.
A party must object within a reasonable time or risk being
deemed to have consented to the action to which it objects.
Cf. Spaulding v. Univ. of Wash., 740 F.2d 686, 695 (9th Cir.
1984) (“Parties should object to a reference to a magistrate or
a special master at the time the reference is made or within a
reasonable time thereafter” or risk waiving the objection),
overruled on other grounds by Atonio v. Wards Cove Packing
Co., 810 F.2d 1477, 1482 (9th Cir. 1987). The record
indicates that Dreyfuss knew as early as March 15, 2010, that
the trustee made the tax payment in an amount to which he
objected. But for some reason, Dreyfuss failed to object to
this payment until at least June 13, 2012—over two years
after he had notice of the payment. Even if we give Dreyfuss
the benefit of the doubt, and assume he did not officially
know about the payment until the trustee filed the status
report on July 19, 2011, that still leaves the court to question
IN THE MATTER OF CLOOBECK 11
whether it was reasonable for Dreyfuss to sit on his objection
for roughly a year. In my view, the court on remand ought to
ventilate fully the issues surrounding the timeliness of
Dreyfuss’s original objection to the tax payment.