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Count Days BEFORE Filing for Bankruptcy

Posted on June 24, 2019

The case of Anthony Hugger v. Lawrence J. Warfield et al.; No. AZ-18-1003 (April 5, 2019) shows the danger of not carefully counting days before filing for bankruptcy if you seek to discharge taxes. Mr. Hugger filed a chapter 7 bankruptcy case and received his discharge in May of 2017 before coming to the realization that he had filed too early to obtain a discharge of his tax debts. After the epiphany in September of 2017, he requested that the bankruptcy court vacate his discharge and dismiss the chapter 7 case. Essentially, he requested a do over because it was understood that if the court granted his request he would file another chapter 7 case, but this one after the time passed to allow the tax debts to age into discharge status. The decision linked above is the 9th Circuit Bankruptcy Appellate Panel (BAP) affirming the decision of the bankruptcy court denying the request for vacature and dismissal.

The bankruptcy court denied Mr. Hugger’s request because:

(1) Debtor lacked standing under § 727(d) and (e) to revoke his discharge, and the bankruptcy court could not use its § 105 equitable powers to circumvent the Bankruptcy Code (citing Law v. Siegel, 571 U.S. 415 (2014)); (2) Debtor had not established any grounds for relief under Civil Rule 60 because all of the relevant information was known before the bankruptcy case was filed, and Debtor had proffered no excuse why his or his counsel’s error had not been addressed earlier; (3) the cases cited to the court were distinguishable; and (4) the tax creditors would be harmed if the court were to grant the requested relief.

After the denial, he filed a request for a new trial and alleged that extraordinary circumstances existed. Specifically, he argued that:

(1) Debtor’s counsel had given him inaccurate or incomplete advice regarding the deadlines for filing; (2) no creditors had participated in the case before the motion to vacate discharge was filed; and (3) there would be no prejudice to creditors because the IRS and ADOR could continue to collect, while Debtor would be prejudiced by having to wait to file a new bankruptcy case.

It’s easy to believe that Mr. Hugger’s bankruptcy attorney may have failed to appreciate the need to count and therefore failed to alert him to the bad timing of the filing of the petition. It’s also possible that other issues caused him to file bankruptcy and that taxes did not drive the filing of his petition. The fact that no creditors participated probably results from the fact that he filed a no asset chapter 7 and creditors would have received notice not to bother filing a claim. Just because the creditors did not file a claim does not mean that the bankruptcy did not have an impact on their actions.

The BAP determined that it should review some of the bankruptcy court’s actions for abuse of discretion and other aspects of the case it would review de novo. With respect to abuse of discretion, the BAP determined that the decision of the bankruptcy court properly found that all of the facts were known by the debtor and his attorney at the time of the filing of the bankruptcy petition. This was not a case of fraud on the debtor or later discovered facts. The facts were there. Just because debtor and his attorney did not appreciate the importance of the facts does not form a basis for equitable relief.

The debtor argued that granting his request would not harm the creditors of the estate but the court did not agree:

… a chapter 7 debtor seeking to dismiss his case has the burden to show that doing so would not result in “legal prejudice” to creditors. Hickman v. Hana (In re Hickman), 384 B.R. 832, 841 (9th Cir. BAP 2008); Leach v. United States (In re Leach), 130 B.R. 855, 857 (9th Cir. BAP 1991) (citing Schroeder v. Int’l Airport Inn P’ship (In re Int’l Airport Inn P’ship), 517 F.2d 510, 512 (9th Cir. 1975)). Debtor contends that there would be no prejudice to the taxing authorities in permitting the relief requested because those creditors would be able to collect until such time as Debtor files a new chapter 7 case after enough time has elapsed for him to discharge the older taxes.5 Debtor’s argument ignores the fact that, as things stand, the taxing authorities would have much more time to collect than they would have had the bankruptcy court granted the requested relief. Debtor has not shown that the bankruptcy court abused its discretion in denying the motion.

The BAP found that the debtor had no arguments that established the bankruptcy court abused its discretion in denying him the relief he requested. He offered no good equitable reasons for revoking the discharge and dismissing the original case. Although the court did not fashion its discussion in this manner, the situation in this case reminds me of certain tax cases in which the debtors seek relief from penalties. If the court grants the relief, it essentially lets the attorney off the hook for malpractice. The same circumstances appear present here. If the court allowed Mr. Hugger a do-over, and if his attorney did drop the ball on noticing the dates the taxes would become dischargeable, the bankruptcy court would essentially be allowing Mr. Hugger’s attorney to avoid the malpractice claim that otherwise seems almost certain to follow from these facts. The fact that granting the relief would relieve the bankruptcy attorney from liability is not a reason to deny Mr. Hugger relief but neither is the bad advice a reason to grant the relief under these circumstances.

The case points to the critical importance of understanding tax transcripts and properly counting days in order to maximize the benefits of a bankruptcy filing. Since Mr. Hugger must now wait for years before he can file another chapter 7, the missed date means that it’s open season for the IRS and the state and local taxing authorities on his income and assets. Nothing prevents him from making an offer in compromise or otherwise trying to deal with his liability and the ability of the IRS to collect from him does not mean that it will succeed. Still, he lost the chance to rid himself of the tax liability and the loss has significance.

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