Donald Wayne Bush v. United States ( 2019 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 16-3244
DONALD WAYNE BUSH and KIMBERLY ANN BUSH,
Plaintiffs-Appellants,
v.
UNITED STATES OF AMERICA,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:15-cv-1318-WTL-DKL — William T. Lawrence, Judge.
____________________
ARGUED MAY 22, 2017 — DECIDED SEPTEMBER 20, 2019
____________________
Before FLAUM, EASTERBROOK, and SYKES, Circuit Judges.
EASTERBROOK, Circuit Judge. This appeal presents the
question whether a bankruptcy court can determine the
amount of a debtor’s tax obligations, when the debtor is un-
likely to pay them. Bankruptcy Judge Carr answered yes and
scheduled a trial on the merits, 2015 Bankr. LEXIS 4494
(Bankr. S.D. Ind. July 7, 2015), but a district judge disagreed.
2016 U.S. Dist. LEXIS 106671 (S.D. Ind. Aug. 12, 2016). The in-
terlocutory appeal to the district judge was authorized by 28
2 No. 16-3244
U.S.C. §158(a)(3). Because the district judge blocked further
proceedings in the bankruptcy court, his decision is final and
appealable to us under 28 U.S.C. §1291, for, outside of bank-
ruptcy, tax obligations are stand-alone mahers independent-
ly appealable. See Bullard v. Blue Hills Bank, 135 S. Ct. 1686,
1692 (2015). See also In re Anderson, 917 F.3d 566 (7th Cir.
2019).
The dispute began in 2013 when the Internal Revenue
Service demanded that Donald and Kimberly Bush pay
$107,000 in taxes, plus $80,000 in fraud penalties, for tax
years 2009, 2010, and 2011. (We round all figures to the near-
est thousand.) The Bushes petitioned the Tax Court for re-
view. By the time trial was imminent the parties had stipu-
lated that the Bushes owed $100,000 in taxes, but penalties
remained in dispute: the IRS sought a 75% fraud penalty
under 26 U.S.C. §6663(a), while the Bushes proposed a 20%
negligence penalty under 26 U.S.C. §6662(a). On the date set
for trial, the Bushes filed for bankruptcy, and the automatic
stay prevented the Tax Court from proceeding. The bank-
ruptcy court declined to lift the stay. The United States did
not appeal but did file a proof of claim seeking taxes and
penalties. It also proposed that the tax debt be given priority
over the Bushes’ other unsecured debts, while the penalty
(whatever its ultimate amount) be determined to be nondis-
chargeable under 11 U.S.C. §523(a)(7). The Bushes then initi-
ated an adversary proceeding, asking the bankruptcy court
to set the penalty at 20% of their unpaid taxes.
The Bushes pointed the bankruptcy court to 11 U.S.C.
§505(a)(1), which reads:
Except as provided in paragraph (2) of this subsection, the court
may determine the amount or legality of any tax, any fine or
No. 16-3244 3
penalty relating to a tax, or any addition to tax, whether or not
previously assessed, whether or not paid, and whether or not
contested before and adjudicated by a judicial or administrative
tribunal of competent jurisdiction.
The United States concedes that paragraph (2) does not ap-
ply to its dispute with the Bushes. But it argues that §505 as
a whole does not grant subject-maher jurisdiction to bank-
ruptcy judges and that only a potential effect on creditors’
distributions justifies a decision by a bankruptcy judge about
any tax dispute. The Bushes insisted that §505 does supply
jurisdiction, a view that the bankruptcy judge accepted and
the district judge did not. The parties’ briefs in this court
continue the debate about the “jurisdictional” nature of §505.
This is unfortunate, though we grant that other circuits
writing about §505 have used a “jurisdictional” characteriza-
tion. See, e.g., In re Luongo, 259 F.3d 323, 328 (5th Cir. 2001)
(calling §505 a “broad grant of jurisdiction”); In re Custom
Distribution Services, Inc., 224 F.3d 235, 239–40 (3d Cir. 2000)
(“We have consistently interpreted §505(a) as a jurisdictional
statute”). But we do not see what §505 has to do with juris-
diction, a word it does not use. Section 505 simply sets out a
task for bankruptcy judges. Almost the entirety of the Bank-
ruptcy Code prescribes tasks for bankruptcy judges. For ex-
ample, §503 tells bankruptcy judges how to determine ad-
ministrative expenses, and §547 provides for resolution of
trustees’ preference-recovery actions. Those and other sec-
tions in the Code are unrelated to jurisdiction, just as few of
the many thousand substantive rules in the United States
Code as a whole concern jurisdiction.
The Supreme Court insists that judges distinguish proce-
dural and substantive rules from jurisdictional ones. See,
e.g., Fort Bend v. Davis, 139 S. Ct. 1843 (2019); United States v.
4 No. 16-3244
Kwai Fun Wong, 135 S. Ct. 1625 (2015); Gonzalez v. Thaler, 565
U.S. 134 (2012). The rule in §505 is on the non-jurisdictional
side. The Justices have acknowledged that in earlier years
they used the word “jurisdiction” loosely, and our col-
leagues in other circuits may have been influenced by that
old usage when calling §505 “jurisdictional.” But the Su-
preme Court has restricted the category of laws that can be
called jurisdictional, and we must follow its current under-
standing of that term.
Most genuine jurisdictional rules appear in Title 28, the
Judicial Code, and that’s true of bankruptcy too. The Bank-
ruptcy Code itself tells us this. Section 105(c) reads: “The
ability of any district judge or other officer or employee of a
district court to exercise any of the authority or responsibili-
ties conferred upon the court under this title shall be deter-
mined by reference to the provisions relating to such judge,
officer, or employee set forth in title 28.” Bankruptcy judges
act as officers of the district courts, see 28 U.S.C. §157(a), so
§105(c) means that bankruptcy jurisdiction depends on Title
28. See also Wellness International Network, Ltd. v. Sharif, 135 S.
Ct. 1932, 1939 (2015).
And Title 28 addresses bankruptcy jurisdiction in detail:
(a) Except as provided in subsection (b) of this section, the dis-
trict courts shall have original and exclusive jurisdiction of all
cases under title 11.
(b) Except as provided in subsection (e)(2), and notwithstanding
any Act of Congress that confers exclusive jurisdiction on a court
or courts other than the district courts, the district courts shall
have original but not exclusive jurisdiction of all civil proceed-
ings arising under title 11, or arising in or related to cases under
title 11.
No. 16-3244 5
(c)(1) Except with respect to a case under chapter 15 of title 11,
nothing in this section prevents a district court in the interest of
justice, or in the interest of comity with State courts or respect for
State law, from abstaining from hearing a particular proceeding
arising under title 11 or arising in or related to a case under title
11.
(2) Upon timely motion of a party in a proceeding based upon a
State law claim or State law cause of action, related to a case un-
der title 11 but not arising under title 11 or arising in a case un-
der title 11, with respect to which an action could not have been
commenced in a court of the United States absent jurisdiction
under this section, the district court shall abstain from hearing
such proceeding if an action is commenced, and can be timely
adjudicated, in a State forum of appropriate jurisdiction.
(d) Any decision to abstain or not to abstain made under subsec-
tion (c) (other than a decision not to abstain in a proceeding de-
scribed in subsection (c)(2)) is not reviewable by appeal or oth-
erwise by the court of appeals under section 158(d), 1291, or 1292
of this title or by the Supreme Court of the United States under
section 1254 of this title. Subsection (c) and this subsection shall
not be construed to limit the applicability of the stay provided
for by section 362 of title 11, United States Code, as such section
applies to an action affecting the property of the estate in bank-
ruptcy.
(e) The district court in which a case under title 11 is commenced
or is pending shall have exclusive jurisdiction—
(1) of all the property, wherever located, of the debtor as of
the commencement of such case, and of property of the es-
tate; and
(2) over all claims or causes of action that involve construc-
tion of section 327 of title 11, United States Code, or rules re-
lating to disclosure requirements under section 327.
28 U.S.C. §1334. Other grants of jurisdiction also may apply.
A provision allowing district courts to resolve certain tax
disputes, 28 U.S.C. §1346(a)(1), comes to mind. But the par-
6 No. 16-3244
ties disregard it, and so shall we. The Bushes, as the propo-
nents of jurisdiction, are entitled to choose which grants they
rely on.
The United States protests that sovereign immunity ne-
gates any jurisdiction based on §1334, but 11 U.S.C.
§106(a)(1) waives that defense for subjects within §505. What
is more, we have held that sovereign immunity does not
affect subject-maher jurisdiction. See United States v. Cook
County, 167 F.3d 381 (7th Cir. 1999).
Section 1334 creates jurisdiction for three potentially rel-
evant categories of disputes: those “arising in” bankruptcy
litigation, those “arising under” the Bankruptcy Code, and
those “related to” the resolution of the bankruptcy proceed-
ing. The Bushes rely on all three; the United States contends
that none applies. We take them in order.
A dispute “arises in” bankruptcy if it concerns a maher
that is exclusive to bankruptcy law and practice. See In re
Repository Technologies, Inc., 601 F.3d 710, 719 (7th Cir. 2010).
A proceeding to determine taxes and penalties does not arise
in bankruptcy in this sense. As we have mentioned, it was
set for trial in the Tax Court until the Bushes filed their peti-
tion under Title 11. Most tax disputes are resolved outside of
bankruptcy. The requirements of “arises in” jurisdiction
have not been satisfied.
A dispute “arises under” the Bankruptcy Code when it
presents a substantive question of bankruptcy law. See, e.g.,
BarneN v. Stern, 909 F.2d 973, 981 (7th Cir. 1990). This tax
dispute’s substance depends on the Internal Revenue Code,
not the Bankruptcy Code, so the “arising under” grant of ju-
risdiction is unavailable.
No. 16-3244 7
What remains is the “related to” jurisdiction in the sec-
ond clause of §1334(b), which is how most non-bankruptcy
issues, such as tort and contract disputes, come within a
bankruptcy judge’s powers. The Bushes contend that if this
jurisdiction permits a bankruptcy judge to resolve a contract
dispute, it also permits a bankruptcy judge to resolve a tax
dispute.
Language in In re Collazo, 817 F.3d 1047, 1053 (7th Cir.
2016), suggesting that entry of a money judgment following
the conclusion of a bankruptcy always is “related to” that
bankruptcy for the purpose of §1334(b), is unreasoned and
has the quality of a drive-by ruling, subject to ready reexam-
ination. See Steel Co. v. Citizens for a BeNer Environment, 523
U.S. 83, 91 (1998). We do not think that the unreasoned lan-
guage of Collazo can be given effect, particularly in light of
Northern Pipeline Construction Co. v. Marathon Pipe Line Co.,
458 U.S. 50 (1982), and Stern v. Marshall, 564 U.S. 462 (2011),
which observe that the permissible authority of judges (in-
cluding bankruptcy judges) who lack life tenure is limited.
The difficulties in allocating authority between Article I
and Article III tribunals, and between federal and state
courts, when a dispute is “related to” bankruptcy but not
part of it, need not concern us today, however. After all, dis-
putes about the financial demands of the Internal Revenue
Service always are resolved by federal rather than state tri-
bunals—and the alternative to resolution by a bankruptcy
judge serving under Article I is resolution by a judge of the
Tax Court serving under Article I. Whether the bankruptcy
judge or the Tax Court judge makes the initial decision, the
disposition is subject to review by one or more judges serv-
ing under Article III. The constitutional and prudential con-
8 No. 16-3244
cerns that have led to limits on the “related to” jurisdiction
for state-law disputes are not salient to federal tax disputes.
The United States does not contend that resolution of tax
disputes is never “related to” a bankruptcy. Instead it main-
tains that the tax dispute is not related to this bankruptcy,
because the disposition will not affect other creditors’ enti-
tlements. It points to In re FedPak Systems, Inc., 80 F.3d 207,
213–14 (7th Cir. 1996), which states that a dispute is “related
to” bankruptcy when resolution “affects the amount of
property for distribution [to creditors] or the allocation of
property among creditors.” See also, e.g., In re Kubly, 818
F.2d 643 (7th Cir. 1987); In re Xonics, Inc., 813 F.2d 127 (7th
Cir. 1987). That condition is not met here, the United States
maintains, because other creditors’ claims exceed the Bush-
es’ assets. The existence of insufficient assets would not by
itself be enough to demonstrate the lack of a relation, for the
size of any one debt may affect the allocation among credi-
tors. But tax debts are subordinated to many other claims, so
determining taxes and penalties has no effect here.
This line of argument suggests that the statement in Fed-
Pak needs a qualification. If the related-to jurisdiction really
depends on how things look at the end of the bankruptcy—if
jurisdiction turns, for example, on how many other claims
are made—then authority cannot be determined at the time
of filing. Yet one of the most fundamental rules of federal ju-
risdiction is that judicial authority depends on the state of
affairs when a case begins (equivalently, when a claim is
filed in bankruptcy) rather than on how things turn out. See,
e.g., Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567,
570–71 (2004); Freeport-McMoRan Inc. v. K N Energy, Inc., 498
U.S. 426 (1991); Louisville, New Albany & Chicago Ry. v. Louis-
No. 16-3244 9
ville Trust Co., 174 U.S. 552, 566 (1899); Mollan v. Torrance, 22
U.S. (9 Wheat.) 537, 539–40 (1824); Gardynski-Leschuk v. Ford
Motor Co., 142 F.3d 955 (7th Cir. 1998). And when the Bushes
filed their motion under §505, just two months into their
bankruptcy, only three creditors’ claims had been filed
against them. It does not appear—more importantly, the
United States does not contend—that on the date the Bushes
asked the bankruptcy judge to determine their tax liabilities,
a decision could not have affected the allocation of assets
among the creditors with outstanding claims.
Instead of asking us to evaluate the potential effect of the
tax debt near the start of the bankruptcy, the United States
draws our ahention to the fact that many creditors had filed
claims against the Bushes by the time the bankruptcy judge
proposed to resolve the tax dispute. By then it seemed un-
likely that the amount the Bushes owe in taxes and penalties
would affect other creditors. But taking that ex post view
would contradict the norm that jurisdictional issues must be
resolved ex ante, not in light of how things turn out.
The Supreme Court’s most recent engagement with the
related-to jurisdiction favorably quoted a rule, which it
ahributed to nine courts of appeals, that a maher comes
within the related-to jurisdiction if it “could conceivably
have any effect on the estate being administered in bank-
ruptcy”. Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6 (1996).
That’s an ex ante inquiry and avoids making a jurisdictional
decision only after the merits have been resolved and the
effect can be known with certainty. Under this approach, the
§505 motion is within the related-to jurisdiction because it
might well have mahered if no further creditors had made
claims.
10 No. 16-3244
Celotex said that our circuit uses a “slightly different test”
and pointed to Xonics and Home Insurance Co. v. Cooper &
Cooper, Ltd., 889 F.2d 746 (7th Cir. 1989). Xonics dealt with a
different problem: whether the related-to jurisdiction follows
an asset after it leaves the estate. We held that it does not:
that an asset’s chain of title includes a trip through bank-
ruptcy does not make the asset a ward of the bankruptcy
court forever. Xonics does, however, contain the phrase
“affects the amount of property available for distribution or
the allocation of property among creditors”. 813 F.2d at 131.
Home Insurance quoted this language, which also is the gene-
sis of the statement in FedPak.
None of our decisions addresses the distinction between
ex ante and ex post perspectives. None considers the potential
difference between demanding an actual effect at the case’s
end and a potential effect when the claim is filed. The nine
circuits that have addressed that subject unanimously con-
clude that the ex ante perspective is the right one. We agree.
This does not imply an overruling or even a modification of
circuit precedent; instead we address an issue that the circuit
has not previously considered and align this circuit with the
view widely held by our colleagues elsewhere: the related-to
jurisdiction must be assessed at the outset of the dispute,
and it is satisfied when the resolution has a potential effect
on other creditors. It follows that the bankruptcy court has
subject-maher jurisdiction over this tax dispute.
Although the bankruptcy judge has the authority to de-
cide how much the Bushes owe in tax penalties, whether the
judge should exercise that authority is a distinct question.
When the bankruptcy began, the tax dispute was on the
verge of trial in the Tax Court. Only the automatic stay im-
No. 16-3244 11
posed by 11 U.S.C. §362 blocked that trial. The bankruptcy
appears to be over—at least the parties have not suggested
that anything remains to be done. The estate’s available as-
sets have been used to pay debts; most unpaid debts (though
not the debt for 2011 tax penalties) have been discharged; the
automatic stay has lapsed by its own terms; the Trustee’s fi-
nal report was filed on February 22, 2019. There is no reason
why this residual dispute about tax penalties should stick
with the bankruptcy judge, who otherwise is done with the
case, rather than the specialist judges in the Tax Court. Con-
gress has authorized district courts to relinquish jurisdiction
of bankruptcy disputes “in the interest of justice”, 28 U.S.C.
§1334(c)(1), and that description fits the Bushes’ situation.
Today the tax dispute stands in the same posture as if the
Bushes had never filed for bankruptcy, and the appropriate
forum for its resolution is the Tax Court.
So although the bankruptcy judge was right to hold that
he had authority to resolve the tax dispute while the Bushes’
bankruptcy was ongoing, the exercise of that authority is no
longer appropriate. We vacate the district judge’s decision,
based as it was on an erroneous jurisdictional view, and re-
mand with instructions to remand to the bankruptcy judge
for the entry of an order under §1334(c)(1), which will mark
the final step in the Bushes’ bankruptcy proceedings.