1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2
4 IN RE: CASE NO. 16-01329 BKT 5 6 CONDADO RESTAURANT GROUP INC Chapter 11 and RESTAURANT ASSOCIATES OF 7 PUERTO RICO INC 8 Adversary No. 17-00050 9
10 Debtor(s) 11 CONDADO RESTAURANT GROUP INC 12 and RESTAURANT ASSOCIATES OF 13 PUERTO RICO INC
14 Plaintiff 15 vs. 16 UNITED STATES INTERNAL 17 REVENUE SERVICE 18 19 Defendant(s) FILED & ENTERED ON 06/07/2017
20 21
22 OPINION & ORDER 23 Before this Court is the United States’ Motion to Dismiss [Dkt. No. 14] filed by the United 24 States Internal Revenue Service (“Defendant” or “IRS”), an Opposition to United States’ Motion to 25 Dismiss [Dkt. No. 25] filed by Debtors, Condado Restaurant Group, Inc. and Restaurant Associates 1 of Puerto Rico, Inc. (collectively “Plaintiffs” or “Condado”), and United States’ Reply [Dkt. No. 29] 2 filed by Defendant. For the reasons set forth below, Defendant’s United States’ Motion to Dismiss is 3 GRANTED. 4 5 I. Factual Background 6 On February 20, 2017, Plaintiffs filed a complaint seeking to extend the automatic stay of the 7 related bankruptcy case to its non-debtor principals - its president, vice president, chefs and general 8 9 manager (“Principals”) [Dkt. No. 1]. Condado contends that the IRS assessed Trust Fund Recovery 10 Penalties (“TFRP”) against the Principals, and wishes to enjoin the IRS from collecting such taxes 11 [Dkt. No. 1]. That same day, Plaintiffs filed an application for a temporary restraining order and 12 13 injunctive relief [Dkt. No. 2]. 14 On February 23, 2017, this court sua sponte denied Plaintiff’s request for a temporary 15 restraining order, and ordered the United States to respond to Plaintiffs’ requests for injunctive relief 16 17 by noon on February 28, 2017 [Dkt. No. 8]. On February 28, 2017, Defendant filed its motion to 18 dismiss [Dkt. No. 14] alleging that this court lacked personal jurisdiction over the United States, 19 because the United States was not properly served, and that the bankruptcy court was barred by the 20 21 Anti-Injunction Act (“Act”) to grant the relief sought by Plaintiffs pursuant to 26 U.S.C. § 7421. 22 By its Order entered on March 1, 2017 [Dkt. No. 20] the court held that “Plaintiffs have 23 provided sufficient evidence that no malformity in service or process to the United States existed” 24 25 thus resolving the court’s jurisdiction over Defendant. In said Order the court also held that 1 “Plaintiffs have not addressed the merits of Defendant’s argument [regarding the matter of the Anti- 2 Injunction Act, 26 U.S.C. § 7421], which if valid, would prohibit this court from granting the relief 3 requested in the verified complaint.” 4 5 On March 30, 2017, Plaintiffs filed an opposition to Defendant’s motion to dismiss [Dkt. No. 6 25] where they contend that this action is not barred by the Act because the exemptions to the Act 7 apply. They state: (1) that they will suffer irreparable harm if the IRS is not enjoined and that they are 8 9 likely to succeed on the merits, and (2) the non-debtor Principals have no alternative means to 10 challenge the tax. 11 Finally, on May 5, 2017, Defendant filed a reply to Plaintiff’s opposition [Dkt. No. 29]. In its 12 13 response, Defendant alleges that the Act bars this court from granting the relief requested, and that 14 the statutory exemptions to the Act are inapplicable because (1) Plaintiffs have not demonstrated that 15 they will suffer irreparable harm and a certainty of success on the merits, and (2) Plaintiffs do have 16 17 alternative means of challenging the tax. 18 II. Standard of Review & Analysis 19 The United States argues that Internal Revenue Code § 7421 is an absolute bar to the granting 20 21 of Plaintiff’s request for injunctive relief. The so-called “Anti-Injunction Act” provides in pertinent 22 part that: 23 “no suit for the purpose of restraining the assessment or collection of any tax shall be 24 maintained in any court by any person, whether or not such person is the person 25 against whom such tax was assessed.”
26 U.S.C. § 7421. 1 The Plaintiffs contend that section § 105(a) of the Bankruptcy Code, which permits a 2 bankruptcy judge to issue “any order, or judgment that is necessary or appropriate to carry out the 3 provisions of this title,” empowers the bankruptcy court to enjoin the IRS from collecting a tax 4 5 penalty from the Debtors’ Principals, and that this statute takes precedence over and overrides the 6 Act. Faced with the issue of which statute prevails, the Circuits have split on whether a bankruptcy 7 court may enjoin the IRS’ collection efforts. 8 9 A number of courts have held that the Act does not bar the bankruptcy court from restraining 10 the IRS from collecting taxes from a non-debtor principal where such an order is necessary “to 11 protect its jurisdiction, administer the bankrupt’s estate in an orderly and efficient manner and fulfill 12 13 the Bankruptcy Act.” E.g., Bostwick v. United States, 521 F.2d 741, 744 (8th Cir. 1975); In re 14 Original Wild West Foods, Inc., 45 B.R. 202 (Bankr. W.D. Tex. 1984); Matter of A & B Heating & 15 Air Conditioning, Inc., 48 B.R. 397 (Bankr. M.D. Fla. 1985); In re J.K. Printing Services, Inc., 49 16 17 B.R. 798 (Bankr. W.D. Va. 1985). Other courts, including one within the First Circuit, faced with the 18 same issue have ruled that section 7421 (a) of The Internal Revenue Code does prohibit the 19 bankruptcy court from enjoining the IRS from making assessments or collections as against non- 20 21 debtor principals. Cambridge Machined Products Corp. v. United States, 58 B.R. 22 (D.Mass. 1985); 22 In re Becker’s Motor transportation, Inc., 632 F.2d 242, 246 (3d Cir. 1980); In re Pressimone, 39 23 B.R. 240 (N.D.N.Y. 1984). U.S. v. Huckabee Auto Co., 46 B.R. 741 (M.D. Ga. 1985); In re Original 24 25 Wild West Foods, Inc., 45 B.R. 202 (Bankr. W.D. 1984). There appears to be only one decision 1 pertaining to the Act within the First Circuit. 2 This court agrees with those decisions that have concluded that the Act prohibits the 3 bankruptcy court from enjoining the IRS from making assessments or collections as against non- 4 5 debtor principals. The purpose of the Act is to protect “the government’s need to asses and collect 6 taxes as expeditiously as possible with a minimum of pre-enforcement judicial interference”. Bob 7 Jones University v. Simon, 416 U.S. 725, 736, 40 L. Ed. 2d 496, 94 S. Ct. 2038 (1974). The Internal 8 9 Revenue Code imposes personal liability for unpaid taxes on corporate officers. 26 U.S.C. § § 6671, 10 6672. This liability is separate and distinct from that of the corporate employer. U.S. v. Rayson 11 Sports, Inc., 44B.R. 280 (DC 1984). In fact, the IRS is not obligated to first attempt collection from 12 13 the corporation before pursuing the responsible officers. Id. at 281. There are only two exceptions to 14 the Act’s proscription. The first applies where the plaintiff can demonstrate irreparable harm and a 15 certainty of success on the merits. Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 8 L. 16 17 Ed. 2d 292, 82 S. Ct. 1125 (1962). The second applies where the plaintiff has no alternative means of 18 challenging the tax. South Carolina v. Regan, 465 U.S. 367
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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2
4 IN RE: CASE NO. 16-01329 BKT 5 6 CONDADO RESTAURANT GROUP INC Chapter 11 and RESTAURANT ASSOCIATES OF 7 PUERTO RICO INC 8 Adversary No. 17-00050 9
10 Debtor(s) 11 CONDADO RESTAURANT GROUP INC 12 and RESTAURANT ASSOCIATES OF 13 PUERTO RICO INC
14 Plaintiff 15 vs. 16 UNITED STATES INTERNAL 17 REVENUE SERVICE 18 19 Defendant(s) FILED & ENTERED ON 06/07/2017
20 21
22 OPINION & ORDER 23 Before this Court is the United States’ Motion to Dismiss [Dkt. No. 14] filed by the United 24 States Internal Revenue Service (“Defendant” or “IRS”), an Opposition to United States’ Motion to 25 Dismiss [Dkt. No. 25] filed by Debtors, Condado Restaurant Group, Inc. and Restaurant Associates 1 of Puerto Rico, Inc. (collectively “Plaintiffs” or “Condado”), and United States’ Reply [Dkt. No. 29] 2 filed by Defendant. For the reasons set forth below, Defendant’s United States’ Motion to Dismiss is 3 GRANTED. 4 5 I. Factual Background 6 On February 20, 2017, Plaintiffs filed a complaint seeking to extend the automatic stay of the 7 related bankruptcy case to its non-debtor principals - its president, vice president, chefs and general 8 9 manager (“Principals”) [Dkt. No. 1]. Condado contends that the IRS assessed Trust Fund Recovery 10 Penalties (“TFRP”) against the Principals, and wishes to enjoin the IRS from collecting such taxes 11 [Dkt. No. 1]. That same day, Plaintiffs filed an application for a temporary restraining order and 12 13 injunctive relief [Dkt. No. 2]. 14 On February 23, 2017, this court sua sponte denied Plaintiff’s request for a temporary 15 restraining order, and ordered the United States to respond to Plaintiffs’ requests for injunctive relief 16 17 by noon on February 28, 2017 [Dkt. No. 8]. On February 28, 2017, Defendant filed its motion to 18 dismiss [Dkt. No. 14] alleging that this court lacked personal jurisdiction over the United States, 19 because the United States was not properly served, and that the bankruptcy court was barred by the 20 21 Anti-Injunction Act (“Act”) to grant the relief sought by Plaintiffs pursuant to 26 U.S.C. § 7421. 22 By its Order entered on March 1, 2017 [Dkt. No. 20] the court held that “Plaintiffs have 23 provided sufficient evidence that no malformity in service or process to the United States existed” 24 25 thus resolving the court’s jurisdiction over Defendant. In said Order the court also held that 1 “Plaintiffs have not addressed the merits of Defendant’s argument [regarding the matter of the Anti- 2 Injunction Act, 26 U.S.C. § 7421], which if valid, would prohibit this court from granting the relief 3 requested in the verified complaint.” 4 5 On March 30, 2017, Plaintiffs filed an opposition to Defendant’s motion to dismiss [Dkt. No. 6 25] where they contend that this action is not barred by the Act because the exemptions to the Act 7 apply. They state: (1) that they will suffer irreparable harm if the IRS is not enjoined and that they are 8 9 likely to succeed on the merits, and (2) the non-debtor Principals have no alternative means to 10 challenge the tax. 11 Finally, on May 5, 2017, Defendant filed a reply to Plaintiff’s opposition [Dkt. No. 29]. In its 12 13 response, Defendant alleges that the Act bars this court from granting the relief requested, and that 14 the statutory exemptions to the Act are inapplicable because (1) Plaintiffs have not demonstrated that 15 they will suffer irreparable harm and a certainty of success on the merits, and (2) Plaintiffs do have 16 17 alternative means of challenging the tax. 18 II. Standard of Review & Analysis 19 The United States argues that Internal Revenue Code § 7421 is an absolute bar to the granting 20 21 of Plaintiff’s request for injunctive relief. The so-called “Anti-Injunction Act” provides in pertinent 22 part that: 23 “no suit for the purpose of restraining the assessment or collection of any tax shall be 24 maintained in any court by any person, whether or not such person is the person 25 against whom such tax was assessed.”
26 U.S.C. § 7421. 1 The Plaintiffs contend that section § 105(a) of the Bankruptcy Code, which permits a 2 bankruptcy judge to issue “any order, or judgment that is necessary or appropriate to carry out the 3 provisions of this title,” empowers the bankruptcy court to enjoin the IRS from collecting a tax 4 5 penalty from the Debtors’ Principals, and that this statute takes precedence over and overrides the 6 Act. Faced with the issue of which statute prevails, the Circuits have split on whether a bankruptcy 7 court may enjoin the IRS’ collection efforts. 8 9 A number of courts have held that the Act does not bar the bankruptcy court from restraining 10 the IRS from collecting taxes from a non-debtor principal where such an order is necessary “to 11 protect its jurisdiction, administer the bankrupt’s estate in an orderly and efficient manner and fulfill 12 13 the Bankruptcy Act.” E.g., Bostwick v. United States, 521 F.2d 741, 744 (8th Cir. 1975); In re 14 Original Wild West Foods, Inc., 45 B.R. 202 (Bankr. W.D. Tex. 1984); Matter of A & B Heating & 15 Air Conditioning, Inc., 48 B.R. 397 (Bankr. M.D. Fla. 1985); In re J.K. Printing Services, Inc., 49 16 17 B.R. 798 (Bankr. W.D. Va. 1985). Other courts, including one within the First Circuit, faced with the 18 same issue have ruled that section 7421 (a) of The Internal Revenue Code does prohibit the 19 bankruptcy court from enjoining the IRS from making assessments or collections as against non- 20 21 debtor principals. Cambridge Machined Products Corp. v. United States, 58 B.R. 22 (D.Mass. 1985); 22 In re Becker’s Motor transportation, Inc., 632 F.2d 242, 246 (3d Cir. 1980); In re Pressimone, 39 23 B.R. 240 (N.D.N.Y. 1984). U.S. v. Huckabee Auto Co., 46 B.R. 741 (M.D. Ga. 1985); In re Original 24 25 Wild West Foods, Inc., 45 B.R. 202 (Bankr. W.D. 1984). There appears to be only one decision 1 pertaining to the Act within the First Circuit. 2 This court agrees with those decisions that have concluded that the Act prohibits the 3 bankruptcy court from enjoining the IRS from making assessments or collections as against non- 4 5 debtor principals. The purpose of the Act is to protect “the government’s need to asses and collect 6 taxes as expeditiously as possible with a minimum of pre-enforcement judicial interference”. Bob 7 Jones University v. Simon, 416 U.S. 725, 736, 40 L. Ed. 2d 496, 94 S. Ct. 2038 (1974). The Internal 8 9 Revenue Code imposes personal liability for unpaid taxes on corporate officers. 26 U.S.C. § § 6671, 10 6672. This liability is separate and distinct from that of the corporate employer. U.S. v. Rayson 11 Sports, Inc., 44B.R. 280 (DC 1984). In fact, the IRS is not obligated to first attempt collection from 12 13 the corporation before pursuing the responsible officers. Id. at 281. There are only two exceptions to 14 the Act’s proscription. The first applies where the plaintiff can demonstrate irreparable harm and a 15 certainty of success on the merits. Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 8 L. 16 17 Ed. 2d 292, 82 S. Ct. 1125 (1962). The second applies where the plaintiff has no alternative means of 18 challenging the tax. South Carolina v. Regan, 465 U.S. 367, 79 L. Ed. 372, 104 S. Ct. 1107 (1984). 19 Neither exception applies where the validity of the assessment is not challenged. In re Pressimone, 20 21 39 B.R. 240, 244 (N.D.N.Y. 1984). Plaintiffs contend that none of the Principals have responsibility 22 for the payment of the TFRP because tax payments were handled by their accounting firm and that 23 none of the Principals were kept current on the status of the TFRP payments. Plaintiffs’ allegations 24 25 to challenge the validity of the assessment have no legal merit. The Principals seeking protection 1 must approve all of the Trust Fund payment obligations of the Debtors, thus, must have known that 2 the Trust Fund payments were not being made. Therefore, since no meritorious allegations exist to 3 challenge the validity of the assessment, the court finds the judicially created exceptions to the Act 4 5 inapplicable here. 6 The general source of authority relied on by the debtor in support of its assertion of its 7 exemption from the Act is 11 U.S.C. § 105 (a) which invests the bankruptcy court with broad 8 9 injunctive powers. L. King, 2 Collier on Bankruptcy, para. 105.02 at 105-1, (15th ed. Supp. 1984). 10 However, nothing in the general language or legislative history to § 105 (a) indicates that Congress 11 intended it to supersede the proscription of the Anti-Injunction Act to protect third party non-debtors 12 13 from tax collection proceedings. In re Pressimone, 39 B.R. 240, 245 (DC 1984). 14 A review of other applicable sections of the Bankruptcy Code supports the conclusion that 15 Congress did not intend to shield non-debtors from collection of taxes. 11 U.S.C. Section 505 16 17 expressly provides that bankruptcy courts may “determine the amount or legality of any tax, any fine 18 or penalty relating to a tax, or any addition to tax. 11 U.S.C. § 505 (a)(1) (1979). The legislative 19 history to 11 U.S.C. § 505 reveals that Congress intended that bankruptcy courts determine the tax 20 21 liability of a debtor. There is no authority for bankruptcy courts to determine the tax liability of the 22 officers of a corporate debtor. In re Pierce Coal & Const., Inc., 49 B.R. 779, 780 (Bankr. N.D. Va. 23 1985). In addition, the automatic stay of section 362 (a) does not enjoin a creditor from collecting his 24 25 claim from a co-obligor of a chapter 11 debtor. Only in a chapter 13 case is an action against a co- 1 || obligor automatically stayed. 11 U.S.C. § 1301 (a) (1979). In contrast, section 524 which appliesi 2 chapter 11 cases, 11 U.S.C. § 103(a), specifically provides that the discharge of adebt of the debto 3 4 || “does not affect the liability of any other entity on...such debt”. 11 U.S.C. § 524 (e) (1979). ° || Therefore, it is clear that Congress did not intend section 105 to create a broad exemption fo 6 principals of chapter 11 debtors to the Act by reason of their corporation’ s bankruptcy. In reFrankli 7 g || Press, Inc., 46 B.R. 523, 522 (Bankr.S.D. Fla. 1985). 9 Il. Conclusion 10 WHEREFORE, IT IS ORDERED that since the court finds that the relief requested in th 11 12 || verified complaint is explicitly barred by the Act, the United States’ Motion to Dismiss [Dkt. No. 14] 13 |! filed by the United States Internal Revenue Service is GRANTED. 14 SO ORDERED 15 16 San Juan, Puerto Rico, this 7th day of June, 2017. 17 18 ea Vike 19 Brian K. Tester 20 U.S. Bankruptcy Judge 21 22 23 24 25
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