By Ryan C. Wood
It seems like there is no scenario that is not possible for some reason that is unknown until it is unfortunately known. So goes life. Yes, just because you had an asset sold or liquidated for the benefit of your creditors in a Chapter 7 bankruptcy case does not mean you as the bankruptcy filer will not owe something to a creditor after the sale is finalized and the chapter 7 case if closed as fully administered. In a recent Ninth Circuit Bankruptcy Appellate Panel case the panel addressed this issue in a Chapter 11 case filed in 2018. The bankruptcy filer fied a prior Chapter 11 case in 2009 then converted the case to Chapter 7 Jan. 11, 2011. A little under 10 years later the bankruptcy filer learned the hard way he still owed real property taxes on a piece of property liquidated/sold in a prior chapter 7 bankruptcy case in 2011. How can that be though? About ten years passed and no bill or request for payment? The chapter 7 in 2008 was fully administered right?
Chapter 7 Is the Liquidation Chapter
When a chapter 7 bankruptcy case is filed a bankruptcy estate is created upon the filing of the case. The assets included in the chapter 7 case are broadly defined. Any assets of the bankruptcy estate that cannot be exempted or protected can be sold/liquidated for the benefit of creditors. In this Ninth Cir. BAP case the asset that could not be protected was a home, real property. The Los Angeles Tax Collector filed not one but two proof of claims in the Chapter 7 case to be paid through the sale of the real property. Proofs of claims are how creditors get paid if there are funds available to them. Creditors have to file a claim proving what they are owed and why at the time a bankruptcy case is filed. The Los Angeles County Tax Collector’s first claim totaled $33,209.27 (year 2010-2011) and the second claim totaled $14,040.97 (year 2011-2012). The sale of the property commenced and all creditors with claims were paid, the bankruptcy filer received his discharge and the Chapter 7 case was closed. The bankruptcy filer kept swinging the bat to hit a homerun but unfortunately ran into some financial difficulties again and filed a Chapter 11 again in 2018.
Current Chapter 11 Reorganization Case
In a Chapter 11 reorganization case creditors need to file proof of claims to be paid. Los Angeles County Tax Collector filed a claim totaling $6,556.69 (tax year 2010 – 2011), alleging the claim was secured by the real property sold in the prior Chapter 7 case and is a correction for the 2010 – 2011 assessment year pursuant to Cal. Rev. and Tax Code Section 531. Ah, say what? Basically the relevant law provides if a taxing authority makes a mistake their rights revert back to when the mistake was made and can enforce their legal rights they would have had if they had in fact done their job property then. Seems pretty unfair given us real humans do not get a mulligan in life generally. If you did not know this there are special rules of law and procedure that apply to government entities to make sure the mistakes of government employees can cause no harm to the government. This is just an example of that. In the real world the employee of business that fails to bill a customer for $6,556.69 could very well be terminated. Here is California most employees at “at will” employees that can be fired anytime for any reason. The government, ah, no, we will make sure the law provides we can do no wrong and no matter what it is your problem. Long story short the not billed $6,556.69 is arguably and secured debt according the statute even though the real property is sold and gone.
So back to our unfortunate Chapter 11 bankruptcy filer and his bankruptcy attorney, if any, who could never had seen or anticipated this coming. What to do? Well, the Chapter 11 bankruptcy filer filed an adversary proceeding (bankruptcy case lawsuit) against the Chapter 7 Trustee alleging breach of fiduciary duty in not paying the Los Angeles County Tax Collector’s in full causing the current debacle? Okay, so Monday morning quarterbacking is easy but; if the Chapter 7 trustee merely filed the claims filed by the Los Angeles County Tax Collector what could the Chapter 7 trustee have done wrong? How can it be the Chapter 7 trustee’s fault the Los Angeles County Tax Collector filed wrong claims?
The adversary lawsuit went nowhere and was dismissed for a number of reasons and somehow the debtor/bankruptcy filer was deemed a vexation litigant and barred from filing any further claims against the Chapter 7 trustee or in relation to the claims or allegations made in the adversary proceeding. I did not look up why the debtor was deemed a vexation litigant, but that is an extreme remedy that is supposed to be reserved for those that are abusing their right to legal redress from the courts. It is just not what you say, but how you go about saying it. That is the sad truth. I think anyone that gets hit with a $6,556.69 bill about 10 years after the transaction took place would be confused and livid as to how this could possibly happen. Other humans and they system should and could give the person faced with this a little leeway in how they went about trying to enforce their rights. I do not know if this happened in this case, but I hope so.
Objection to the Los Angeles County Tax Recorder’s Claim
At the same time the bankruptcy filer filed an objection to claim filed by the Los Angeles County Tax Collector. Now this should or could have some teeth. Unfortunately the objection to claim did not include a declaration in support of the objection to claim and did not comply with other procedural requirements. Motions and objections need to be supported by admissible evidence usually provided by declaration. The bankruptcy court therefore entered an order overruling the objection. The bankruptcy filer then filed a motion for findings and fact and conclusions of law in support of the order denying the objection to claim. The motion was denied recounting the various procedure problems with the objection to claims. A second motion for findings of fact and conclusions of law was then filed by the bankruptcy filer. The bankruptcy court denied the motion for various procedural deficiencies and that the motion just rehashes allegations made in the first one that was denied. The bankruptcy filer then files a motion for declaratory judgment that rehashes all the allegations already addressed by the bankruptcy court. Okay, so now we know why the bankruptcy court this guy was a vexation litigant. This motion was denied for reasons already provided and the bankruptcy filer was declared a vexation litigant because enough is enough. His bankruptcy case was also dismissed. Ouch.
Subsequent Appeal to the Ninth Circuit Bankruptcy Appellate Panel
So sometimes we cannot just go quietly. I get it. The bankruptcy filer argued the bankruptcy court abused its discretion in denying his various legal maneuverings. The Ninth Circuit BAP rule against the bankruptcy filer holding that the bankruptcy court did not abuse its discretion in overruling the objection to the Los Angeles County Tax Collector’s claim or denying the various motions that came next to try and get another bite of the apple. It is unclear what else took place in this case that led to the dismissal of the chapter 11 bankruptcy case entirely. I will go out on a limb without having done more research that the case was just not viable to reasons that had nothing to do with the Los Angeles County Tax Collector’s claim from 2011.
When Were The Real Property Taxes Due and Why Was The Claim Enforced?
Regardless of what took place here the property taxes were due and payable when the real property was sold. The property taxes are also secured by real property at the time they were due and payable. Why did the Los Angeles County Tax Collector not include ALL the real property taxes in the two proof of claims filed in the bankruptcy case in 2011? It appears to be just a simple case of timing and lack of accurate information. For all we know the Los Angeles County Tax Collector was filing claims based upon the information they had at that time. After the sale and chapter 7 case was closed did they have the information necessary to know that their original filed claims were not sufficient. Unfortunately when the bankruptcy filer ran into some financial difficulties years later the simple human mistake or lack of accurate information at that time came to light and affected his ability to reorganize his debts. It is unfortunate and you would think this should not happen. Again, it was probably just a simple human mistake couple with lack of accurate information that we all fall victim to.
Bankruptcy attorneys beware of the jumping tax claim from a case that is not and should not be on your radar. This also could happen when a refinance is completed or a purchase of a home takes place. If proper demands for payment are not made then the problem will be yours when it comes to light; generally.
