An interesting case out of the 9th Circuit last week should serve as a reminder to Bankruptcy Attorneys to check and double check documents. It should also serve as a warning to debtors who may be inclined to avoid doing the same thing.
The case involved an $18,000 tax debt that the debtor owed to the Franchise Tax Board in California. The debtor filed a Chapter 13 bankruptcy in 1994 and completed the plan in two years. He received a discharge. The FTB did not file a proof of claim – and because they did not file a proof of claim, they did not get paid through the Chapter 13 plan. When the FTB tried to collect the debt after the bankruptcy discharge entered, the debtor brought an Adversary Proceeding arguing that FTB was violating the discharge injunction.
The debtor argued that FTB received notice of the bankruptcy. FTB did not deny that, but FTB argued that the debtor’s social security number on the notice of creditors meeting (which is sent to creditors notifying them of the meeting held under Section 341 of the Bankruptcy Code) was incorrect. In fact, the last number of the social security number was not correct.
FTB also demonstrated that they review their records based on the debtor’s social security number. When they get the notice, they compare the social security number to the number to their records. If a number did not match, FTB had a procedure in place where they sometimes would conduct an investigation to see if taxes were owed – but the procedure was not used often, it at all, because of the limits on FTB’s resources.
The debtor argued that because FTB did not use that process, and did not investigate further, it violated the discharge injunction (the debtor also agued that FTB was purportedly made aware of the bankruptcy prior to the entry of the discharge). But the 9th Circuit Court of Appeals in affirming the Bankruptcy Court’s and District Court’s rulings, held that the notice with the incorrect social security number was not adequate. The Court ruled that the burden is on the debtor to cause formal notice to be given. Citing another 9th Circuit opinion, the Court noted:
The burden is on the debtor to cause formal notice to be given . . . [The debtor] seeks to free itself of an obligation by means of a federal court judgment. As a matter of due process, the person whose entitlement to money from the debtor will be destroyed by the judgment is entitled to notice.
The debtor tried to use case law from other jurisdictions to buttress his argument, but the 9th Circuit rejected them. “[T]here are numerous cases in which other bankruptcy courts have conculsted that a creditor is not required to conduct a search if any of the requisite identification is incorrect or missing from the … [Section] 341 (a) notice.”
“It is not unreasonable to place the burden on the debtors to ensure that their creditors received proper notice of their bankruptcy filing.”
Here, the debtor’s negligence has a price. The tax debt is not dischargeable, and the Court of Appeals awarded costs to the FTB.
You can read the case here.
