Mini et al v. California Board of Equalization et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 01-43201 TG
Chapter 13
THOMAS FRANK MINI and GAIL
F. MINI,
Debtors.
___________________________/
THOMAS FRANK MINI and GAIL
F. MINI, 	A.P. No. 06-4219 AT
Plaintiffs,
vs.
STATE OF CALIFORNIA, BOARD
OF EQUALIZATION and RAMON J.
HIRSIG, EXECUTIVE DIRECTOR OF
CALIFORNIA BOARD OF
EQUALIZATION.
Defendants.
___________________________/
MEMORANDUM OF DECISION AFTER TRIAL
The above-captioned adversary proceeding was tried to the Court
on June 22, 2007 at 9:00 a.m. 	Both parties appeared through counsel.
The proceeding was submitted on stipulated facts, and legal argument
made. 	At 	the 	conclusion 	of 	argument, 	the 	matter 	was 	taken 	under
submission. 	Having considered the undisputed evidence, the argument
made, 	and 	the 	law 	applicable 	to 	the 	issues 	presented, 	the 	Court
Signed: July 30, 2007
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
July 31, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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concludes that plaintiffs are entitled to judgment against defendant
State of California, Board of Equalization (the “SBE”) as set forth
below. 	Judgment 	will 	be 	entered 	in 	favor 	of 	defendant 	Ramon 	J.
Hirsig (“Hirsig”).
SUMMARY OF FACTS
Prior 	to 	the 	commencement 	of 	this 	chapter 	13 	bankruptcy 	case,
the 	plaintiffs 	were 	the 	sole 	shareholders 	of 	Armstrong 	Stationers,
Inc. (“Armstrong”), a corporation doing business in California. 	On
January 	19, 	2001, 	Armstrong 	filed 	a 	chapter 	7 	case. 	The 	SBE 	was
scheduled 	as 	a 	creditor 	based 	on 	Armstrong’s 	unpaid 	sales 	tax
obligations 	and 	received 	notice 	of 	the 	case. 	The 	case 	was 	a 	“no
asset” 	case, 	and 	no 	distributions 	were 	made 	to 	creditors. 	A 	final
decree was entered in Armstrong’s bankruptcy case on March 26, 2001.
The plaintiffs filed the above-captioned chapter 13 case on June
6, 	2001. 	As 	the 	responsible 	persons 	for 	Armstrong, 	the 	plaintiffs
were liable for Armstrong’s unpaid sales tax obligations to the SBE.
They 	scheduled 	the 	SBE 	as 	a 	creditor 	holding 	an 	unsecured 	priority
tax claim. 	The plaintiffs filed a chapter 13 plan that provided that
priority claims would be paid in full.
The 	SBE 	received 	notice 	of 	the 	plaintiffs’ 	bankruptcy 	case 	in
time to file a claim. 	It drafted a proof of claim but then decided
not to file it based on the mistaken belief that the debt was solely
a 	corporate 	debt. 	The 	plaintiffs 	fully 	performed 	their 	plan 	and
received a chapter 13 discharge on August 29, 2002. 	The SBE received
a copy of the discharge order no later than February 18, 2003.
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On January 12, 2005, the SBE informed the plaintiffs that they
should 	arrange 	for 	payment 	of 	the 	tax 	liability. 	The 	plaintiffs
responded 	shortly 	thereafter, 	informing 	the 	SBE 	that 	its 	claim 	had
been 	discharged 	in 	their 	bankruptcy 	case 	and 	referring 	the 	SBE 	to
their 	bankruptcy 	attorney. 	On 	February 	14, 	2006, 	the 	SBE 	sent 	a
Notice 	of 	Determination 	that 	the 	plaintiffs 	were 	personally 	liable
for this debt.
On 	May 	15, 	2006, 	the 	SBE 	caused 	a 	levy 	to 	be 	placed 	on 	the
plaintiffs’ 	checking 	account. 	The 	following 	day, 	the 	plaintiffs’
counsel 	faxed 	a 	letter 	to 	the 	SBE, 	confirming 	his 	telephone
conversation with a representative of the SBE. 	The letter indicates
that 	the 	SBE 	had 	asserted 	that 	the 	tax 	liability 	was 	a
nondischargeable trust fund tax pursuant to 11 U.S.C. § 507(a)(8)(C).
The letter further indicates that the SBE asserted that, because the
tax 	liability 	had 	not 	been 	assessed 	until 	after 	the 	plaintiffs’
chapter 13 bankruptcy case was filed, it constituted a post-petition
claim that was not discharged.
The letter cited authority for the proposition that sales taxes
did not constitute trust fund taxes. 	However, it stated that, even
if 	they 	were, 	they 	would 	have 	been 	discharged 	in 	the 	plaintiffs’
chapter 	case. 	Counsel 	noted 	that 	the 	plaintiffs’ 	chapter 	13 	plan
provided for payment in full of priority claims and that, had the SBE
filed a proof of claim, it would have been paid in full. 	It stated
further 	that 	the 	fact 	that 	the 	taxes 	were 	not 	assessed 	until 	after
the 	bankruptcy 	petition 	was 	filed 	did 	not 	make 	them 	post-petition
taxes. 	The 	liability 	arose 	before 	the 	petition 	was 	filed 	and
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therefore constituted a pre-petition claim. 	Counsel made demand that
the SBE immediately cease all collection efforts and warned the SBE
that 	plaintiffs 	would 	view 	the 	continuation 	of 	such 	efforts 	as 	a
willful 	violation 	of 	the 	discharge 	injunction, 	punishable 	by
contempt.
Notwithstanding 	this 	communication, 	on 	May 	24, 	2006, 	the 	SBE
placed a levy on the plaintiffs’ wages. 	It also withheld Mr. Mini’s
California 	income 	tax 	refund 	for 	the 	year 	of 	2005. 	On 	or 	about
September 1, 2006, counsel for the plaintiffs faxed a second letter
to 	the 	SBE. 	The 	letter 	reflects 	that 	the 	SBE 	was 	now 	taking 	the
position that the tax liability was not discharged because the plan
did not provide for payment of the liability. 	The letter indicates
that a copy of the plan was being transmitted and notes that the plan
provided for payment in full of all priority tax claims. 	Counsel for
plaintiffs 	notes 	that, 	since 	the 	plan 	was 	prepared 	on 	the 	form
required the local bankruptcy court, this provision was necessarily
sufficiently specific to provide for the SBE’s claim.
The SBE did not cease its collection efforts until September 8,
2006 when the plaintiffs filed this adversary proceeding.
DISCUSSION
This adversary proceeding presents four issues:
(1) 	When 	did 	the 	plaintiffs’ 	tax 	liability 	to 	the 	SBE, 	as
responsible persons for Armstrong’s sales tax debt, arise?
(2) If the plaintiffs’ tax liability arose before the filing of
their chapter 13 bankruptcy petition, did the chapter 13 plan provide
sufficiently for the claim so that the claim was discharged?
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1There is no dispute among the parties concerning whether
Armstrong owed the tax liability in question to the SBE or whether
this also constituted a liability of the plaintiffs as responsible
persons for Armstrong.
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(3) 	If 	the 	plaintiffs’ 	tax 	liability 	was 	discharged 	by 	their
completion of their chapter 13 plan, do the Eleventh Amendment of the
Constitution and the doctrine of sovereign immunity prevent the Court
from granting plaintiffs a judgment against the SBE? 1
(4) Are plaintiffs are entitled to an injunction and an award of
damages 	against 	Hirsig 	pursuant 	to 	Ex 	parte 	Young, 	209 	U.S. 	123
(1908)?
The Court will discuss each issue in turn.
A. 	WHEN DID TAX LIABILITY ARISE?
The 	definition 	of 	“claim” 	as 	set 	forth 	in 	11 	U.S.C. 	§ 	101(5)
includes any “right to payment, whether or not such right is reduced
to 	judgment, 	liquidated, 	unliquidated, 	fixed, 	contingent, 	matured,
unmatured, 	disputed, 	undipsuted, 	legal, 	equitable, 	secured, 	or
unsecured....” 	The only limitation on this broad definition is one
of 	due 	process. 	The 	claimant 	must 	have 	had 	some 	reason 	to 	believe
that it might have such a claim. 	See In re Jensen, 995 F.2d 925 (9 th
Cir. 	1993). 	While 	bankruptcy 	law 	frequently 	looks 	to 	state 	law 	to
determine 	the 	participants’ 	rights, 	the 	definition 	of 	“claim” 	is
governed by federal bankruptcy law, not state law.
In the context of the facts recited above, there can be no doubt
that 	the 	SBE’s 	claim 	against 	the 	plaintiffs’ 	arose 	prior 	to 	the
commencement of their chapter 13 case. 	The Armstrong tax liability
clearly 	arose 	before 	the 	filing 	of 	the 	plaintiffs’ 	bankruptcy
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petition. 	Thus, 	as 	responsible 	persons 	for 	Armstrong, 	the
plaintiffs’ 	liability 	for 	that 	debt 	arose 	before 	they 	filed 	their
petition as well. 	The SBE knew about Armstrong’s tax liability and
thus 	knew 	or 	should 	have 	known 	that 	the 	plaintiffs 	might 	be 	liable
for that debt as well before the plaintiffs’ petition was filed. 	The
assessment of the debt did not give rise to the debt, at least within
the meaning of 11 U.S.C. § 101(5).
In support of its position that its claim against the plaintiffs
arose post-petition, the SBE cites In re Bracey, 77 F.3d 294, 295-96
(9 th 	Cir. 	1996) 	and 	In 	re 	King, 	961 	F.2d 	1423 	(9 th 	Cir. 	1992).
According to the SBE, Bracey and King hold that that tax liabilities
that have not been assessed pre-petition are not discharged. 	These
decisions are inapposite. 	Both Bracey and King were chapter 7 cases.
In 	each 	decision, 	the 	issue 	was 	not 	whether 	the 	claim 	arose 	before
the 	bankruptcy 	petition 	was 	filed 	but 	whether 	the 	claim 	was
nondischargeable.
In 	Bracey, 	the 	issue 	was 	whether 	an 	income 	tax 	claim 	was
nondischargeable pursuant to 11 U.S.C. § 523(a)(1)(A) as a claim “not
assessed 	before, 	but 	assessable...after, 	the 	commencement 	of 	the
case.” 	77 F.3d at 295. 	In King, the issue was whether an income tax
claim was nondischargeable pursuant to 11 U.S.C. § 523(a)(1)(A) as a
claim 	assessed 	within 	240 	days 	of 	the 	petition 	date. 	961 	F.2d 	at
1424. 	In 	both 	instances, 	the 	outcome 	of 	this 	issue 	turned 	on 	the
Court’s 	conclusion 	as 	to 	when 	assessment 	occurred. 	Neither 	case
questioned whether the claim had arisen pre-petition. 	Had the claim
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not arisen pre-petition, the issue of dischargeability would not have
arisen.
Thus, 	the 	Court 	concludes 	that 	the 	plaintiffs’ 	liability 	for
Armstrong’s 	tax 	liability 	as 	Armstrong’s 	responsible 	persons 	arose
before their chapter 13 petition was filed and was subject to being
discharged in their chapter 13 case. 	See 11 U.S.C. § 1328(a).
B. 	DID CHAPTER 13 PLAN PROVIDE FOR SBE’S CLAIM?
A chapter 13 debtor receives a discharge upon completion of his
or 	her 	plan. 	11 	U.S.C. 	§ 	1328(a). 	The 	debtor 	is 	thus 	discharged
from 	all 	debts 	(with 	exceptions 	not 	relevant 	here) 	provided 	for 	in
the plan.
It is undisputed that, in their chapter 13 case, the plaintiffs
filed 	a 	chapter 	13 	plan 	on 	the 	form 	required 	by 	the 	United 	States
Bankruptcy 	Court 	for 	the 	Northern 	District 	of 	California, 	Oakland
Division. 	It 	is 	further 	undisputed 	that 	the 	form 	plan 	contains 	a
provision that states that all priority claims will be paid in full.
A 	chapter 	13 	plan 	may 	not 	be 	confirmed 	unless 	it 	contains 	such 	a
provision. 	See 11 U.S.C. §§ 1322(a)(2); 1325(a)(1).
Thus, the plaintiffs’ plan provided for the payment of the SBE’s
priority 	claim. 	Plaintiffs’ 	counsel 	was 	correct 	when 	he 	stated 	in
his September 6, 2006 letter to the SBE that, had it filed a proof of
claim in the plaintiffs’ bankruptcy case, its claim would have been
paid 	in 	full. 	The 	fact 	that 	it 	mistakenly 	failed 	to 	file 	a 	claim
does not prevent its claim from being discharged. 	The SBE makes no
intelligible argument to the contrary.
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2The SBE raised the issue of sovereign immunity only in the
context of the claim against Hirsig. 	Its discussion of the issue
in that context suggested that the SBE assumed that the doctrine of
sovereign immunity would prevent the imposition of attorneys’ fees
and costs against the SBE.
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C. 	DID SBE WILLFULLY VIOLATE DISCHARGE INJUNCTION?
The final issue presented is whether the SBE may be held liable
for plaintiffs’ attorneys’ fees and costs incurred as a result of the
SBE’s 	violation 	of 	the 	plaintiffs’ 	discharge 	injunction. 	See 	11
U.S.C. § 524(a)(2). 	This issue includes two subissues: (1) whether
the 	SBE’s 	conduct 	meets 	the 	standards 	for 	contempt 	and 	(2) 	whether
the 	Eleventh 	Amendment 	of 	the 	United 	States 	Constitute 	and 	the
related 	doctrine 	of 	sovereign 	immunity 	prevent 	the 	imposition 	of
these costs on the SBE. 2
1. 	Did SBE’s Conduct Constitute Civil Contempt?
It 	is 	well 	established 	that 	civil 	contempt 	is 	the 	only 	remedy
for violation of the discharge injunction, regardless of whether the
basis 	for 	the 	remedy 	is 	11 	U.S.C. 	§ 	105 	or 	the 	court’s 	inherent
power. 	In re Dyer, 322 F.3d 1178, 1189-96 (9 th 	Cir. 2003). 	“Civil
contempt authority allows a court to remedy a violation of a specific
order 	(including 	‘automatic’ 	orders, 	such 	as 	the...discharge
injunction).” 	Id. at 1196.
“When the court is acting under its inherent power, it must make
an 	explicit 	finding 	of 	bad 	faith 	or 	willful 	misconduct....In 	this
context,...bad faith or willful misconduct consists of something more
egregious than mere negligence or recklessness.” 	Id.
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3In the prayer of their complaint, the plaintiffs assert all
of their claims against both the SBE and Hirsig. 	Nevertheless, in
the SBE’s answer to the complaint, the only affirmative defense
raised related to sovereign immunity is that the exception created
by Ex parte Young, 209 U.S. 123 (1908) limits the plaintiffs’
remedies against Hirsig to prospective injunctive and declaratory
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However, 	when 	the 	court 	is 	acting 	under 	11 	U.S.C. 	§ 	105, 	the
court need only find, albeit by clear and convincing evidence, that
the 	defendant 	knew 	that 	the 	debtor 	had 	received 	a 	discharge 	and
engaged 	in 	conduct 	that 	violated 	the 	discharge 	injunction. 	The
defendant’s 	good 	faith 	belief 	that 	its 	conduct 	did 	not 	violate 	the
injunction is irrelevant. 	Dyer at 1190-91. 	In this proceeding, the
plaintiffs have satisfied their burden of proving these elements by
clear and convincing evidence.
The 	remedy 	of 	civil 	contempt 	based 	on 	11 	U.S.C. 	§ 	105 	only
supports 	an 	award 	of 	compensatory, 	not 	punitive 	damages. 	Dyer 	at
1192-95. 	However, 	these 	are 	the 	only 	damages 	sought 	by 	the
plaintiffs: 	i.e., 	their 	attorneys’ 	fees 	and 	costs 	attempting 	to
persuade 	the 	SBE 	to 	cease 	their 	post-discharge 	collection 	effort,
first informally and then formally, through these proceedings. 	The
plaintiffs are entitled to a judgment in the amount of those fees and
costs. 	They 	also 	seek, 	and 	are 	entitled 	to, 	a 	judgment 	declaring
their 	debt 	to 	the 	SBE 	for 	Armstrong’s 	tax 	liability 	discharged 	and
enjoining the SBE from any further attempts to collect the debt.
2. 	Does Sovereign Immunity Bars Award Against SBE?
Despite 	the 	parties’ 	failure 	to 	raise 	the 	issue 	of 	sovereign
immunity 	with 	respect 	to 	plaintiffs’ 	claims 	against 	the 	SBE, 	the
Court feels compelled to address it. 3 	Until recently, it would have
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relief. 	In their trial briefs, neither party discussed sovereign
immunity as applied to the plaintiffs’ claims against the SBE. 	The
only discussion in the trial briefs related to the scope of a
remedy against Hirsig under Ex parte Young.
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been questionable whether, pursuant to the Eleventh Amendment and the
doctrine 	of 	sovereign 	immunity, 	a 	state 	or 	an 	“arm 	of 	the 	state”
could be sued in bankruptcy court absent its consent. 	See Seminole
Tribe of Florida v. Florida, 517 U.S. 44, 72, n.16 (1996). 	However,
two 	recent 	Supreme 	Court 	decisions 	have 	established 	that, 	in 	many
instances, 	it 	may 	be. 	See 	Tennessee 	Student 	Assistance 	Corp. 	v.
Hood, 	541 	U.S. 	440 	(2004); 	Central 	Virginia 	Community 	College 	v.
Katz, 546 U.S. 356 (2006).
In 	Hood, 	a 	debtor 	sued 	an 	agency 	of 	the 	state 	for 	a
determination that she was entitled to a bankruptcy discharge of her
student loan obligation as an “undue hardship” pursuant to 11 U.S.C.
§ 	523(a)(8). 	The 	state 	agency 	moved 	to 	dismiss 	the 	complaint,
contending that it was protected from suit in the bankruptcy court on
this 	claim 	by 	the 	Eleventh 	Amendment 	and 	the 	doctrine 	of 	sovereign
immunity. 	The Supreme Court concluded otherwise. 	It held that the
claim 	in 	question 	was 	within 	the 	bankruptcy 	court’s 	in 	rem
jurisdiction 	and 	did 	not 	infringe 	on 	the 	state’s 	sovereignty. 	541
U.S. at 447-51.
In 	Katz, 	a 	bankruptcy 	trustee 	sued 	an 	educational 	institution
that 	constituted 	an 	“arm 	of 	the 	state” 	to 	recover 	a 	preference
pursuant 	to 	11 	U.S.C. 	§§ 	547(b) 	and 	550(a). 	Elaborating 	on 	the
rationale stated in Hood, the Supreme Court observed that bankruptcy
jurisdiction 	is 	“at 	its 	core” 	in 	rem. 	It 	held 	that 	the 	states 	had
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ceded this jurisdiction to Congress and the federal courts was part
of 	the 	“plan 	of 	the 	Convention” 	leading 	to 	the 	formulation 	of 	the
United 	States 	Constitution. 	Moreover, 	the 	Court 	stated, 	“the
jurisdiction 	of 	courts 	adjudicating 	rights 	in 	the 	bankrupt 	estate
included 	the 	power 	to 	issue 	compulsory 	orders 	to 	facilitate 	the
administration and distribution of the res.” 	546 U.S. at 362; In re
Omine, 	485 	F.3d 	1305, 	1313-14 	(11 th 	Cir. 	2007)(chapter 	13 	debtor’s
motion 	for 	sanctions 	against 	Florida 	Department 	of 	Revenue 	for
violation of the automatic stay did not impinge on state’s sovereign
immunity).
Based 	on 	these 	two 	decisions, 	the 	Court 	concludes 	that 	its 	in
rem jurisdiction in bankruptcy permits it to grant the plaintiffs the
remedies 	they 	seek. 	It 	further 	concludes 	that 	the 	permissible
remedies include recovery of its attorneys’ fees and costs resisting
the SBE’s improper collection efforts, including but not limited to
the attorneys’ fees and costs incurred in this adversary proceeding.
D. 	ARE PLAINTIFFS ENTITLED TO JUDGMENT AGAINST HIRSIG?
As noted above, the plaintiffs also asserted all of their claims
against Hirsig, the Executive Director of the SBE. 	Presumably, this
was 	done 	pursuant 	to 	the 	authority 	of 	Ex 	parte 	Young, 	based 	on 	the
assumption that the doctrine of sovereign immunity would prevent the
Court from entering judgment directly against the SBE. 	In Ex parte
Young, 	the 	Supreme 	Court 	held 	that, 	when 	the 	doctrine 	of 	sovereign
immunity prevented a private individual from suing a state or an “arm
of the state” for violation of federal law, the individual could sue
the 	state 	official 	responsible 	for 	the 	violation 	for 	prospective
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relief. 	See 	National 	Audobon 	Society, 	Inc. 	v. 	Davis, 	et 	al., 	307
F.3d 835, 847 (9 th Cir. 2002). 	Absent such a remedy, there would be
no practical way to enforce the Supremacy Clause of the United States
Constitution. 	However, 	as 	discussed 	above, 	given 	Hood 	and 	Katz,
sovereign 	immunity 	does 	not 	prevent 	the 	plaintiffs 	from 	asserting
their 	claims 	against 	the 	SBE. 	Therefore, 	the 	extraordinary 	remedy
authorized by Ex parte Young is unnecessary, and Hirsig is entitled
to judgment in his favor.
CONCLUSION
The 	plaintiffs’ 	tax 	liability 	to 	the 	SBE 	as 	the 	responsible
persons 	for 	Armstrong 	arose 	before 	the 	filing 	of 	their 	bankruptcy
petition 	and 	not 	when 	the 	SBE 	assessed 	them 	for 	the 	liability.
Plaintiffs’ 	chapter 	13 	plan 	provided 	for 	payment 	of 	the 	SBE’s
priority 	tax 	claim, 	and 	therefore 	the 	claim 	was 	discharged 	by
plaintiffs’ performance of the plan. 	The Eleventh Amendment of the
United 	States 	Constitution 	and 	the 	doctrine 	of 	sovereign 	immunity
granting 	the 	plaintiffs 	all 	the 	remedies 	sought, 	including 	their
attorneys’ fees and costs, directly against the SBE. 	Therefore, the
extraordinary remedy authorized by Ex parte Young is unnecessary, and
Hirsig is entitled to judgment is his favor.
Plaintiffs are directed to file a motion for allowance of their
attorneys’ fees and costs, with evidence substantiating the amounts
claimed, 	pursuant 	to 	Local 	Rule 	7007-1 	of 	the 	Local 	Rules 	for 	the
United 	States 	Bankruptcy 	Court 	for 	the 	Northern 	District 	of
California before submitting a form of judgment in this proceeding.
END OF DOCUMENT
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COURT SERVICE LIST
Robert N. Kolb
Law Offices of Robert N. Kolb
312 W 4th St.
Antioch, CA 94509
Kristian D. Whitten
Office of the Attorney General
455 Golden Gate Ave. #11000
San Francisco, CA 94102-7005
Case: 06-04219 Doc# 31 Filed: 07/30/07 Entered: 07/31/07 14:27:12 Page 13 of
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