Abusive or Serial Filings Is There an Answer to Post-petition Tax Non-compliance

Abusive or Serial Filings Is There an Answer to Post-petition Tax Non-compliance

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Last month, an author for this column considered the effect of tax non-filers on the collection of revenue for the state of Illinois in chapter 13 cases.[2] The author concluded that a chapter 13 debtor's failure to file pre-petition tax returns resulted in a tremendous loss of revenue for the taxing authority and the discharge of pre-petition tax liabilities.

This column takes a prospective look at the failure to pay taxes or file returns post-petition, a problem that has become acute in chapter 13 cases, and, to a lesser degree, in chapter 11 cases. Further, this problem can be characterized as an "abusive" or "serial" bankruptcy problem because many times the accrual of post-petition taxes gives rise to a dismissal and the prospect of the filing of a new case. The National Bankruptcy Review Commission (NBRC) has considered this issue, and appears to have made some inroads in resolving this problem. The NBRC has suggested some fundamental changes to chapter 11 that will make it more difficult for non-viable and serial filers to proceed in bankruptcy, particularly when the debtor has accrued tax delinquencies. Unfortunately, in this author's opinion, the NBRC did not propose legislation that will sufficiently curtail chapter 13 debtors from accruing post- petition tax liabilities and remaining in bankruptcy.

Chapter 11 Abuses

There presently is no requirement in chapter 11 cases that a case be filed in "good faith." Albany Partners Ltd. v. Westbrook (In re Albany Partners Ltd.), 749 F.2d 1068, 1072 (11th Cir. 1984); In re Garsal Realty Inc., 98 B.R. 140, 152 (Bankr. N.D.N.Y. 1989) (good faith determination at inception of case not mandated by Code). Rather, the courts have judicially created certain indicia that would support a finding that a case was filed in "bad faith." E.g., Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989); In re Little Creek Dev., 779 F.2d 1068 (5th Cir. 1986). Regardless, the burden in support of converting or dismissing a non-viable chapter 11 case is with the movant, not the debtor. Moreover, §1112 does not address the issue of a dismissal for failure to pay taxes or file tax returns post- petition.[3]

Additionally, there is no per se limitation on successive chapter 11 cases, although some courts have found that successive chapter 11 cases are only permissible if certain factors are met. Elmwood Dev. Co. v. Gen. Elec. Pension Trust, 964 F.2d 508 (5th Cir. 1992), (successive filings only permitted where there has been a change in circumstances that was not foreseeable); In re Bouy, Hall & Howard and Assoc., 208 B.R. 737, 742-44 (Bankr. S.D. Ga. 1995), (articulated five factors a court should consider in allowing successive 11's); but see In re Jamenway Corp., 202 B.R. 697, 706 (Bankr. S.D.N.Y. 1996), (permitting successive filings does not undermine §1127(b)). As such, there is nothing in the Bankruptcy Code to preclude a successive chapter 11 filing where the debtor accrued post- petition taxes, and subsequently dismissed its case and refiled. Moreover, a debtor could accrue taxes post-confirmation and refile chapter 11 to deal with the taxes accrued after the first case.

The NBRC Recommendation in Relation to §1112

The NBRC recognized the limitations of §1112, particularly as to post-petition taxes and returns and other instances of failure to file reports or show feasibility in the pre- confirmation stage of a case. As such, the NBRC has recommended that §1112 be amended to provide that "cause" for dismissal include "failure to timely pay taxes due after the order for relief or to file tax returns after the order for relief."[4] The NBRC concluded that debtors who are unable to meet their minimal obligations under protected circumstances would be unlikely to do so after confirmation. A debtor or party in interest could object to the motion to dismiss or convert, and rebut evidence presented in support of dismissal or conversion by showing that (a) a reasonable justification exists for the debtor's failure to act or omission; and (b) the act or omission will be cured within a reasonable time fixed by the court not to exceed 30 days after the court decides the motion, unless the movant consents to a longer period.

The proposal to amend §1112 is reasonable and practical. It provides taxing authorities with a remedy in the Code to force debtors to stay current on post-petition filing of tax returns and payment of taxes. It also provides debtors with recourse to correct failures to comply, but in a relatively short amount of time. The proposal will weed out non-viable cases and prevent debtors from accruing post-petition taxes.

The NBRC also has proposed, as to small business debtors only, that in cases where a small business debtor refiles a second case while a first case is still pending, or refiles chapter 11 within two years of the order of dismissal or when a plan is confirmed, the debtor does not receive the benefit of the automatic stay. The debtor can receive a stay if the debtor can show that (a) the new case resulted from circumstances beyond the control of the debtor and (b) the debtor is more likely than not to confirm a reorganization (not liquidation) plan within a reasonable time.

The NBRC's proposal as to small business debtors will help correct some seriatim filings. The problem is that it still places no controls, other than those articulated by the courts, on other chapter 11 debtors, such as individuals or large corporate debtors. In addition, "circum-stances beyond the control of the debtor" are arguably less stringent than what the Fifth Circuit might require, which at least in the Elmwood case, is circumstances that were not foreseeable, clearly not an attempt to renegotiate or modify a confirmed plan. Finally, multiple filings such as those in Continental Airlines would still be possible, where the debtor's motive in filing the case (such as the restructuring of a collective bargaining agreement) would not be the primary focus, as the court's principal concern would be the preservation of millions of dollars of assets and the retention of jobs.

Chapter 13 Abuses

The Bankruptcy Code is silent as to the issue of the remedies available to a taxing authority where a chapter 13 debtor fails to file returns or pay taxes post-petition. Section 1307 does not provide explicitly that the failure to file returns or pay taxes post-petition is "cause" for dismissal or conversion. While §1305(a) does give a taxing authority the right to force the debtor to include post-petition taxes in a plan, the debtor is not required to pay the taxes as a requirement of staying in bankruptcy. Moreover, chapter 13 trustees do not necessarily have the resources to verify that the thousands of debtors under their administration are current on their post-petition tax obligations.

Additionally, there is no prohibition to refiling successive chapter 13 cases.[5] Indeed, the case law is replete with decisions that consider the viability of third, fourth or fifth filings. In fact, second chapter 13 filings are common.[6] Consequently, a debtor who encounters tax problems in his/her first case can always dismiss the case, refile a subsequent chapter 13 case, and include the taxes that were post-petition in the first case as pre-petition taxes in the second case.

The NBRC's Proposal for Serial Chapter 13s

The NBRC has identified the problem of serial filings as one that affects the integrity of the chapter 13 system.[7] As such, the NBRC has recommended that §362 be amended to provide that, in situations where (i) a debtor has filed two or more petitions for relief under Title 11 within six years of the instant petition for relief, and (ii) the debtor has been a debtor in a case within 180 days prior to the instant petition for relief, the debtor is not afforded the protection of the automatic stay. Further, the debtor may request that the stay be imposed, on notice and hearing to all parties, for cause shown, subject to any conditions that the court may impose. Another NBRC recommendation is that the Code provide that a case under chapter 13 otherwise meeting the standard for dismissal shall be converted to chapter 7 after notice and a hearing, unless a party in interest objects that no grounds exist for the conversion to chapter 7.[8]

The proposal of limiting the number of chapter 13 cases filed is necessary in view of the number of times a debtor could file. Further, it places some finality on the recourse that individuals have to the bankruptcy process. Also, conversion to chapter 7 makes sense, particularly if the NBRC convinces Congress that a uniform system of federal exemptions should exist without any resort to state exemptions. The result would be that conversion to chapter 7 under a uniform system of exemptions should provide some distribution to all creditors, even unsecured creditors.

The question still remains as to what a taxing authority can do to limit or prevent the accrual of post-petition taxes or the failure to file post-petition returns. Unless already considered, it would make abundant sense to modify §1307(c) to provide that cause for dismissal include the failure to file tax returns post-petition or pay taxes post-petition. By doing so, debtors who filed chapter 13 and completed their plan would, at least theoretically, not be burdened with taxes accrued during the pendency of the case and would emerge with a true "fresh start."


The NBRC's proposal to modify §1112 to include as "cause" the failure to stay current on post-petition tax obligations will ensure that debtors who emerge from chapter 11 will not be burdened by more tax debt. The ability to dismiss a case for "cause" under the proposed §1112 will also root out debtors who are not viable, and preserve resources of the court and bar to deal with viable chapter 11 filings. Also, placing some limitation on the number of times a person can file chapter 13 will eliminate repeat filing by debtors who never intend to pay their debts. The NBRC's proposed amendments should be commended for attempting to improve the success of chapter 11 and 13 cases and preserving the integrity of the bankruptcy process.


[1] The views expressed in this article are Mr. Gargotta's, and do not necessarily reflect the views of the Department of Justice.[RETURN TO TEXT]

[2] James D. Newbold, "Illinois Survey of Tax Non-filers in Chapter 13 Shows Non-compliance," XVI Am. Bankruptcy Inst. J. 12, (October 1997).[RETURN TO TEXT]

[3] In fact, §1129(a)(9)(A) allows a debtor to pay administrative claims on the effective date, thereby allowing the debtor to pay administrative tax claims on the effective date, as opposed to the date on which the taxes were due. Further, Fed.R.Bankr.P. 3020(a) allows a taxing authority to request that a debtor deposit funds that are to be distributed at confirmation. The problem is that a plan could be confirmed contingent on payment of administrative claims, which does not address the problem of a debtor accruing taxes post-petition.[RETURN TO TEXT]

[4] Excerpts taken from the Small Business Working Group—Revised Small Business Proposal dated June 13, 1997.[RETURN TO TEXT]

[5] Section 109(g) has limited, if any, application to cases where a debtor has accrued taxes or failed to file returns post-petition.[RETURN TO TEXT]

[6] In re Oglesby, 158 B.R. 602 (E.D. Pa. 1993) (district court reversed confirmation of a fourth successive chapter 13 case); In re Coggins, 185 B.R. 762 (Bankr. W.D. Tenn. 1995) (change in circumstances existed where debtor had recovered from cancer and found a job; allowed fifth filing); but see In re Thomas, 123 B.R. 552 (Bankr. W.D. Tex. 1991) (debtor has only 60 months, regardless of number of filings, to complete a chapter 13 plan).[RETURN TO TEXT]

[7] Excerpts taken from Consumer Bankruptcy Proposal draft dated September 2, 1997.[RETURN TO TEXT]

[8] The conversion to chapter 7 would result in a new order for relief under §348(a). As such, a subsequent filing within 180 days of the order of relief in a case filed as a chapter 13, but converted to chapter 7, would appear to meet the proposed requirements in the amended §362, in that the debtor would not automatically receive a stay in a subsequent filing absent cause shown, because two orders for relief would have occurred.[RETURN TO TEXT]

Journal Date: 
Saturday, November 1, 1997