Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-4_06-ap-04219/USCOURTS-canb-4_06-ap-04219-0/pdf.json

Parties Involved:
Thomas Frank Mini
Plaintiff
Gail F. Mini
Plaintiff
California Board of Equalization
Defendant
Ramon J. Hirsig,
Defendant

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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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There 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 (9th

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

(9th Cir. 1996) and In re King, 961 F.2d 1423 (9th 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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The 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 (9th 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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In 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 (11th 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 (9th 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 

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