United States of America v. Hinton et al
Filing
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OPINION and Order Signed by the Honorable Joan H. Lefkow on 5/12/2011. (nf, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
JEFFERY L. HINTON,
Plaintiff/Appellee,
v.
UNITED STATES OF AMERICA,
Defendant/Appellant.
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Case No. 09 C 6920
Adversary No. 09 A 621
Bankr. Case No. 09 B 14301
OPINION AND ORDER
This appeal is from an interlocutory order of the bankruptcy court denying the motion of
the United States to dismiss Adversary Proceeding No. 09 A 621 brought by Jeffery L. Hinton,
the debtor in Bankruptcy Case No. 09 B 14301. The debtor filed the adversary proceeding on
July 23, 2009 to obtain a determination that a tax liability owed to the Internal Revenue Service
for the years 1996 through 2005 was not excepted from discharge under § 523(a)(1) of the
Bankruptcy Code.1 The United States (herein “the IRS”) moved to dismiss for lack of
jurisdiction, arguing that there is no case or controversy permitting the court to assume
jurisdiction or, alternatively, if the court has jurisdiction, it should abstain for prudential reasons.
The bankruptcy court denied the motion on October 9, 2009. The IRS timely moved for leave to
appeal pursuant to 28 U.S.C. § 158(a)(3). This court granted leave to appeal (Dkt. No. 7).
The bankruptcy court’s subject matter jurisdiction is received from the district court,2
1
All statutory references herein are to the Bankruptcy Code, title 11, United States Code, unless
otherwise indicated. All references to Rules are to the Federal Rules of Bankruptcy Procedure unless
otherwise indicated.
2
The case was originally referred to the bankruptcy court under 28 U.S.C. § 157. The adversary
proceeding is proper under Rule 7001(6). It is a core proceeding in which the bankruptcy court had
whose jurisdiction is conferred by 28 U.S.C. § 1334(a). This court reviews appeals from the
bankruptcy court as authorized at 28 U.S.C. §§ 158(a). Appellate review of a bankruptcy court’s
determination of jurisdiction is a question of law subject to de novo review. See Matter of
FedPak Sys., Inc., 80 F.3d 207, 211(7th Cir. 1996) (“Whether FedPak had standing in the
bankruptcy court is a question of federal statutory and constitutional law that we review de
novo.”).
FACTS3
Hinton petitioned for relief under chapter 7 of the Bankruptcy Code on April 22, 2009.
His schedule of liabilities included federal tax obligations for 1996 through 2006, and 2008,
amounting to approximately $33,000.00. On June 22, 2009, the trustee filed a report of no assets.
No claims were filed or administered. The debtor was discharged August 17, 2009. Promptly
thereafter, the IRS filed Certificates of Release of Federal Tax Lien for the years 1996 through
2004, inclusive (as well as for all prior years). The IRS had filed no tax lien respecting the year
2005, so no notice of release of a lien was required, leaving Hinton, irrespective of the discharge,
with a zero balance on the IRS’s books and no present or known prospective threat of collection
of any of the tax liability.
Hinton’s complaint alleges that all required returns had been timely filed and the liability
had been listed on his bankruptcy schedules. Because no return was fraudulent, nor had Hinton
willfully attempted to evade the taxes, see § 523(a)(1)(C), he alleged, the debt was dischargeable
under § 523(a)(1). The IRS agreed to stipulate that the debt was not excepted from discharge
authority to enter the order under review. See 28 U.S.C. § 157(b)(2)(I).
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The facts are undisputed.
2
under § 523(a)(1)(A) and (B) but reserved the right to rely on subsection (C) if it later discovered
evidence that plaintiff had willfully attempted to evade or defeat his tax liability.4
Representing that it had no facts indicating that the debt is excepted from discharge, that it
would affirmatively abate the tax upon the debtor’s discharge, and that it had no present intention
of investigating the debtor concerning the liability, the IRS moved to dismiss for lack of
jurisdiction, arguing that the case does not present a case or controversy, a requirement imposed
by Article III, section 2 of the Constitution. Alternatively, the IRS argued, if a case or
controversy exists, the court should for prudential reasons decline to exercise jurisdiction for lack
of “ripeness.” Hinton characterized the issue as one of standing or ripeness; in either event, he
contended he has a real and personal stake in the litigation that would justify exercise of the
court’s remedial powers on his behalf. Without a judgment that the debt is dischargeable, he
argues, the debt will hang over his head, and if the IRS should seek collection in the future, he
may incur further costs associated with reopening the proceeding, evidence would be stale or
inaccessible, and his “fresh start” could be nullified.
The bankruptcy judge denied the motion to dismiss, reasoning that inasmuch as the IRS
had taken action prepetition to collect from Hinton (by sending a prepetition demand for
4
A declaratory judgment of dischargeability on Hinton’s complaint can only be set aside under
Rule 60(b), Fed. R. Civ. P., as applicable through Rule 9024, i.e., through a motion brought within one
year of the judgment and based on newly discovered evidence that the IRS, having used reasonable
diligence, could not have discovered before judgment was entered.
The IRS is concerned that predischarge declaratory judgments of dischargeability entered at the
request of debtors would place an onus on the IRS to diligently investigate every tax debtor on pain of
being barred from ever obtaining a determination that a tax liability should have been excepted from
discharge where it later discovers concealed assets or fraud. Multiplied by many such judgments
throughout the bankruptcy system, the burden would be large and the use of resources in the effort highly
inefficient.
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payment), and the tax liability was Hinton’s primary reason for filing the petition, a justiciable
controversy existed.
ANALYSIS
Jurisdiction depends on the facts at the time the complaint is filed, not on subsequent
events. Doctors Nursing & Rehab. Ctr. v. Sebelius, 613 F.3d 672, 677 (7th Cir. 2010).5
Whether characterized as case or controversy, standing, or ripeness, the issue is one of
justiciability. Justiciability, as Justice Frankfurter described it, is “not a legal concept with a fixed
content or suspectible of scientific verification. Its utilization is the resultant of many subtle
pressures, including the appropriateness of the issues for decision . . . and the actual hardship to
the litigants of denying them the relief sought.” Poe v. Ullman, 367 U.S. 497, 508-09, 81 S. Ct.
1752, 6 L. Ed. 2d 989 (1961). If no actual controversy exists between the parties regarding the
subject on which declaratory judgment is sought, the court lacks subject matter jurisdiction.
Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239-40, 57 S. Ct. 461, 81 L. Ed. 617 (1937). The
boundary of jurisdiction under the Declaratory Judgment Act is where “the facts alleged, under all
the circumstances, show that there is a substantial controversy between parties having adverse
legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory
judgment.” MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127, 127 S. Ct. 764, 166 L. Ed.
2d 604 (2007) (quoting Md. Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273, 61 S. Ct. 510,
85 L. Ed. 826 (1941)). A declaratory judgment “may not be made the medium for securing an
advisory opinion in a controversy which has not arisen.” Coffman v. Breeze Corp., 323 U.S. 316,
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While primarily encountered when determining whether diversity jurisdiction exists, the rule is
not limited to such situations. Doctors Nursing & Rehab. Ctr., 613 F.3d at 677.
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324, 65 S. Ct. 298, 89 L. Ed. 264 (1945). Furthermore, even if a justiciable controversy has been
shown to exist, federal courts have discretion to decline to exercise their jurisdiction. Int’l
Harvester Co. v. Deere & Co., 623 F.2d 1207, 1217 (7th Cir. 1980). The declaratory plaintiff
bears the burden to establish, by a preponderance of the evidence, that the two-part test for an
actual controversy has been met. See McNutt v. Gen. Motors Acceptance Corp., 298 U.S. 178,
189, 56 S. Ct. 780, 80 L. Ed. 1135 (1936) (“[T]he court may demand that the party alleging
jurisdiction justify his allegations by a preponderance of evidence.”).
Similarly, standing requires (1) an injury in fact, (2) a causal connection between the
injury and the conduct complained of, and (3) a likelihood that the injury will be redressed by a
favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S. Ct. 2130, 119 L.
Ed. 2d 351 (1992). An injury in fact is “an invasion of a legally protected interest which is (a)
concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical.” Id. at
560 (citations omitted) (internal quotation marks omitted). A particularized injury is one
affecting the plaintiff in a “personal and individual way.” Id. at 560 n.1. While a plaintiff’s
injury may turn “on the nature and source of the claim asserted,” Warth v. Seldin, 422 U.S. 490,
500, 95 S. Ct. 2197, 45 L. Ed. 2d 343 (1975), the merits of the suit should not be conflated with
the standing inquiry. Aurora Loan Servs., Inc. v. Craddieth, 442 F.3d 1018, 1024 (7th Cir.2006).
Standing’s cousin, ripeness, “is a doctrine of justiciability ‘invoked to determine whether
a dispute has matured to a point that warrants decision.’” Giger v. Ahmann, No. 09 CV 4060,
2010 WL 2491025, at *3 ( N.D. Ill. June 15, 2010) (quoting13B Charles Alan Wright et al.,
FEDERAL PRACTICE AND PROCEDURE: CIVIL § 2532 (3d ed.2008)) “Inquiries into ripeness
generally address two factors: first, whether the relevant issues are sufficiently focused so as to
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permit judicial resolution without further factual development; and, second, whether the parties
would suffer any hardship by the postponement of judicial action.” Triple G Landfills, Inc. v. Bd.
of Comm’rs, 977 F.2d 287, 288-89 (7th Cir. 1992) (internal citations omitted).6
A straightforward application of the facts here to the elements of proof demonstrates
Hinton’s lack of standing. Hinton has no injury in fact. After the bankruptcy petition was filed,
IRS did not take, nor could it have taken, any action to collect the tax due. It did not as much as
file a claim against the estate. The discharge would later operate as an injunction against the
IRS’s attempting to collect. §524(a)(2). In other words, there is no substantial controversy
between the parties of any immediacy or reality. There were insufficient facts to permit the court
to resolve the hypothetical dispute. Indeed, Hinton admits that his only harm is his concern that
the debt might in the future be revived, which could then require him to incur the expense of
asserting the discharge as a complete defense.
Nonetheless, the existence of Rule 4007, which permits Hinton to file a complaint to
determine dischargeability “at any time,” lends some support to Hinton’s position. Although no
reported appellate decisions have addressed the issue as it relates to § 523(a)(1)(C), two
bankruptcy courts have done so. In Mlincek v. United States, 350 B.R. 764 (Bankr. N.D. Ohio
2007), the court held in circumstances virtually identical to the instant case that a case or
controversy existed, but it declined for prudential reasons to exercise jurisdiction, relying on the
doctrine of ripeness. Id. at 767-68. In Dunn v. California, 2008 WL 4346454 (Bankr. E.D. Cal.
Sept. 15, 2008), the court ruled that where a taxing entity opposed a debtor’s complaint to
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“A distinction is sometimes drawn between constitutional ripeness and prudential ripeness.
While constitutional ripeness contemplates a presently existing dispute, prudential ripeness has been
characterized as a judicially created tool for avoiding decisions in cases that lack an optimal factual
setting.” In re Liescheidt, 404 B.R. 499, 500 (Bankr. C.D. Ill 2009) (internal citations omitted).
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determine dischargeability and at the same time sought on a motion for summary judgment a
ruling that any post-petition tax assessment is not discharged, a justiciable controversy existed
and was ripe for determination. Both of these cases withstand the justiciability test, the first court
abstaining for prudential reasons and the second finding a real and sufficiently immediate threat
to the debtor’s legally protected interest to satisfy jurisdictional requirements.
The other cases Hinton cites make reference to the fact that a complaint to determine the
dischargeability of a debt may be filed at any time, but none addresses the issue of justiciability
presented here. In re Higgins, 161 B.R. 993 (Bankr. W.D. Mo 1993), however, reached the same
practical result as Mlincek by deferring the matter. There the court declined to entertain a
debtor’s motion to reopen his case to determine dischargeability where it appeared unlikely that
the claimed debt would be excepted from discharge. (The court did suggest that either party
could proceed under Rule 4007 to obtain a determination under § 523(a) at any time).
Bankruptcy courts have adjudicated dischargeability complaints in pending chapter 13
cases, but with one exception these cases included a finding that determination of dischargeability
could affect the distribution of payments under the plan, a factor not present in a chapter 7
situation. See, e.g., In re Craine, 206 B.R. 598 (Bankr. M.D. Fla. 1997) (appropriate to determine
dischargeability of tax liability before completion of the plan where IRS did not file proof of
claim, the confirmed plan did not provide for distribution to the IRS, and debtors contended that
early resolution would enable them to modify their plan should the debt be owed so as to avoid
accrual of interest and penalties); United States v. Clavelle, Civ. A. No. 93-2059, 1994 WL
780695 (W.D. La. Dec. 8, 1994) (bankruptcy court decision determining dischargeability of debt
before plan was completed was not premature because Rules permit such a complaint to be
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brought at any time)7; Border v. IRS, 116 B.R. 588 (Bankr. S.D. Ohio 1990) (where chapter 13
trustee was about to distribute payments under the plan, the debtors contended that the IRS was
not entitled to payments because it had not filed a proof of claim, and the IRS contended it was
not required to file a proof of claim, a case or controversy existed “since this decision will impact
directly on the amount of funds available for distribution pursuant to the confirmed plan”)8; In re
Malin, 356 B.R. 535 (Bankr. D. Kan. 2006) (the “at any time” provision suggests matter is ripe,
early resolution would allow debtors to modify their plan to propose paying the tax liability and
avoid additional interest and penalties, and “the facts that control the dischargeability of the IRS’s
claims have already occurred, another indicator of fitness of the issue for judicial consideration”);
see also In re Hoffer, 383 B.R 78 (Bankr. S.D. Ohio 2008) (determination before completion of
plan that student loans were dischargeable under hardship provision was ripe for decision). The
Eighth Circuit, however, in In re Bender, 368 F.3d 846 (8th Cir. 2004), ruled that the issue of
whether a debtor’s student loan could be discharged on the basis of undue hardship was not ripe
for adjudication because the factual question is whether there is undue hardship at the time of
discharge, not at the time a § 523(a)(8) proceeding is commenced.
Principles of justiciability, whether it be called case or controversy, standing or ripeness,
point to the conclusion that the bankruptcy court did not have jurisdiction here. Rule 4007 is a
rule of procedure. Unlike a typical court case where, for example, a defendant could not file a
claim or defense or challenge a judgment after a particular amount of time passes (see Fed. R.
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The court dismissed the IRS’s argument that this interpretation leads to a waste of judicial and
governmental resources, stating it “should be addressed to Congress instead of this Court.” 1994 WL
780695, at *1.
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The opinion does not indicate that the IRS argued that decision was premature or not justiciable.
Rather, the court made its own threshold determination.
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Civ. P. 59 and 60), this rule permits filing of a dischargeability complaint at any time. As the
IRS’s brief explains, Rule 4007(b) permits a debtor who is being (wrongfully) pursued by a
creditor to assert the discharge as a complete defense in a law suit, or for either debtor or creditor
to return to the bankruptcy court to obtain a determination that the debt was or was not
discharged. Until such a real dispute arises, however, invasion of the legal protection of the
automatic stay and the discharge injunction is only hypothetical and conjectural. The court lacks
jurisdiction over the subject matter of the adversary complaint.
CONCLUSION AND ORDER
For these reasons, the bankruptcy court’s order denying the United States’s motion to
dismiss is reversed. The case is remanded with directions to the bankruptcy court to dismiss the
adversary complaint without prejudice.
Dated: May 12, 2011
Enter: ___________________________________
JOAN HUMPHREY LEFKOW
United States District Judge
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