Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-15432/USCOURTS-ca9-13-15432-0/pdf.json

Parties Involved:
Sheldon H. Cloobeck

Timothy S. Cory
Appellee
Gilbert Dreyfuss
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN THE MATTER OF SHELDON H.

CLOOBECK,

Debtor,

GILBERT DREYFUSS,

Appellant,

v.

TIMOTHY S. CORY, Chapter 7

Trustee,

Appellee.

No. 13-15432

D.C. No.

2:12-cv-01506-

LRH-NJK

OPINION

Appeal from the United States District Court

for the District of Nevada

Larry R. Hicks, District Judge, Presiding

Argued and Submitted

March 13, 2015—San Francisco, California

Filed June 12, 2015

Before: J. Clifford Wallace, Milan D. Smith, Jr.,

and Paul J. Watford, Circuit Judges.

Opinion by Judge Milan D. Smith, Jr.;

Concurrence by Judge Wallace

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2 IN THE MATTER OF CLOOBECK

SUMMARY*

Bankruptcy

The panel reversed the district court’s affirmance of the

bankruptcy court’s order approving the chapter 7 trustee’s

final report following the trustee’s payment of the federal

income taxes of the bankruptcy estate.

The panel held that the bankruptcyestate’s federal income

tax liability is an administrative expense, and so 11 U.S.C.

§ 503(b) requires a chapter 7 trustee to provide notice to

creditors, and obtain a hearing, before paying taxes incurred

by the estate. The panel remanded the case to the district

court for remand to the bankruptcy court with directions that

the bankruptcy court determine the amount of federal income

taxes due from the estate, and conduct such other proceedings

as may be appropriate.

Concurring, Judge Wallace agreed that the trustee did not

follow section 503(b)’s requirement that the income tax

payment be made only “after notice and a hearing.” He wrote

separately to highlight for the court on remand his concerns

about the timeliness of a creditor’s objection to the tax

payment.

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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IN THE MATTER OF CLOOBECK 3

COUNSEL

Davis S. Kupetz (argued), SulmeyerKupetz, Los Angeles,

California, for Appellant.

Duane H. Gillman (argued) and Timothy S. Cory, Durham

Jones & Pinegar, P.C., Las Vegas, Nevada, for Appellee.

OPINION

M. SMITH, Circuit Judge:

In this bankruptcy appeal, we consider whether section

503 of the Bankruptcy Code, 11 U.S.C. § 503(b), requires a

chapter 7 trustee to provide notice to creditors, and obtain a

hearing, before paying taxes incurred by the estate. The

Appellee, a chapter 7 trustee, paid the 2005 federal income

taxes of a bankruptcy estate without first providing notice to

the Appellant, a creditor of the estate, requesting a hearing to

determine the appropriate amount of those taxes, or obtaining

an order of the bankruptcy court authorizing the payment of

those taxes. The Appellant contends that the bankruptcy

court erred by approving the Trustee’s Final Report without

holding a hearing to determine the appropriate amount of the

2005 federal income taxes, and without approving the

payment of those taxes. The Appellee argues that construing

the BankruptcyCode to require trustees to provide notice and

obtain a hearing before paying taxes incurred by the estate

would conflict with trustees’ other obligations under the

Bankruptcy Code and the Internal Revenue Code.

We hold that the plain language of section 503 requires

that notice and a hearing be provided before the payment of

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4 IN THE MATTER OF CLOOBECK

taxes as administrative expenses, and that this requirement

does not impose inconsistent obligations on trustees under

other provisions of the Bankruptcy Code or the Internal

Revenue Code. We reverse and remand to the district court

for remand to the bankruptcy court with directions that the

bankruptcy court determine the amount of 2005 federal

income taxes due from the estate, and conduct such other

proceedings as may be appropriate.

FACTS AND PROCEDURAL BACKGROUND

The Appellant, Gilbert Dreyfuss, holds an allowed

unsecured claim of approximately $1,006,417.68 against the

bankruptcy estate of Sheldon Cloobeck. Cloobeck

commenced this bankruptcycase by filing a voluntary chapter

11 petition on January 12, 2005. The case was converted to

a chapter 7 case on or about October 19, 2005. Following the

conversion, the Appellee, Timothy S. Cory (Trustee), was

appointed the chapter 7 trustee.

On or about May 13, 2009, the Trustee paid $340,895 of

estate funds to the IRS to satisfy the estate’s 2005 federal

income tax liability. The Trustee did not give notice, or seek

a hearing, before making the 2005 tax payment, nor did the

bankruptcy court authorize the payment of 2005 taxes before

the Trustee made that payment. Moreover, the Trustee did

not notify either the Appellant or the bankruptcy court of the

amount of 2005 taxes he ultimately paid before making the

payment to the IRS.

On May 9, 2012, the Trustee filed the Final Report with

the bankruptcy court. The Appellant filed an opposition to

the Final Report on June 13, 2012. In the opposition, the

Appellant argued that it was improper for the Trustee to pay

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IN THE MATTER OF CLOOBECK 5

the estate’s 2005 federal income taxes without giving notice

and requesting a hearing, and asked the bankruptcy court to

require the Trustee to reimburse the estate for that payment.

The bankruptcy court held a hearing on the Trustee’s

Final Report on July 6, 2012. At the hearing, the Appellant

urged the court to “have a hearing,” and to “determine, as it

has the jurisdiction to do, the actual 2005 taxes.” The court

declined to hold a hearing regarding the amount of the 2005

taxes. The court found that there was “sufficient evidence to

find that the Trustee acted responsibly and reasonably with

respect to filing the tax returns of the estate.”

The Appellant filed a notice of appeal, and the Trustee

elected to have the appeal heard by the United States District

Court for the District of Nevada. On appeal, the Appellant

argued that the bankruptcy court erred by “denying

Appellant’s request that [it] hold a hearing to determine

whether [the 2005 federal income tax] was actually owing by

the bankruptcy estate . . . .” The district court affirmed the

bankruptcy court’s order approving the Final Report. It

concluded that the Appellant’s objection to the payment of

2005 federal income taxes was “severely untimely” because

the Appellant “knew of the payment to the IRS back in 2009,

but did not file an objection to the payment until the final

report in 2012, three years after the payment had been made.” 

A timely appeal to our court followed.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction under 28 U.S.C.

§ 158(a) to hear the appeal from a final order of the

bankruptcy court. We have jurisdiction under 28 U.S.C.

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6 IN THE MATTER OF CLOOBECK

§ 158(d)(1) to hear this appeal from the final decision of the

district court.

We review the district court’s decision on appeal from a

bankruptcy court order de novo. Greene v. Savage (In re

Greene), 583 F.3d 614, 618 (9th Cir. 2009). We review the

bankruptcycourt’s conclusions of law de novo, and its factual

findings for clear error. Id.

DISCUSSION

The Appellant contends that the estate’s 2005 federal

income tax liability was an administrative expense, and that

the Trustee was therefore required to provide the Appellant

with “notice and a hearing” before paying it. We agree.

“In classifying the order of payment for creditors’ claims,

the Bankruptcy Code affords the highest level of priority

to claims denominated ‘administrative expenses.’” 

Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d

755, 756 (9th Cir. 1998) (citing 11 U.S.C. § 507(a)(1)). 

Section 503(b)(1) of the Code defines administrative

expenses, and enumerates six specific types of claims that

qualify for first priority. Id. A tax incurred by the estate is an

administrative expense under 11 U.S.C. § 503(b)(1)(B). The

parties do not dispute that the estate’s 2005 federal income

tax liability was an administrative expense.

Section 503(b) provides that administrative expenses

“shall be allowed,” but only “[a]fter notice and a hearing

. . . .” Section 503(b)’s plain language appears to establish

conclusively that “notice and a hearing” were required before

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IN THE MATTER OF CLOOBECK 7

the Trustee could pay the estate’s 2005 federal income tax

liability.

1

Notwithstanding section 503’s plain language, the Trustee

contends that construing the statute to require that trustees

provide notice and obtain a hearing before paying taxes

would conflict with trustees’ other obligations under the

Bankruptcy Code and the Internal Revenue Code. The

Trustee cites the Internal Revenue Code, which provides that

“[r]eturns of an estate, a trust, or an estate of an individual

under chapter 7 or 11 of Title 11 of the United States Code

shall be made by the fiduciary thereof.” 26 U.S.C.

§ 6012(b)(4) (emphasis added). In addition, the Bankruptcy

Code makes clear that, subject to limited exceptions, a trustee

must pay all federal taxes on or before the date they come

due, 28 U.S.C. § 960, and must pay the estate’s taxes even if

the government does not file a request for administrative

expenses with the bankruptcy court, see 11 U.S.C.

§ 503(b)(1)(D).

Contrary to the Trustee’s argument, these provisions of

the Bankruptcy Code and the Internal Revenue Code are

easily reconcilable with section 503(b)’s notice and hearing

requirement. Subject to limited exceptions, a trustee must

1 The statutory phrase “after notice and a hearing” is a term of art in the

Bankruptcy Code meaning “after such notice as is appropriate in the

particular circumstances, and such opportunity for a hearing as is

appropriate in the particular circumstances.” See 11 U.S.C. § 102(1). The

phrase “authorizes an act without an actual hearing if such notice is given

properly and if–(i) such a hearing is not requested timely by a party in

interest; or (ii) there is insufficient time for a hearing to be commenced

before such act must be done, and the court authorizes such act . . . .” Id.

§ 102(1)(B). In this opinion, we use the terms “notice,” “hearing,” and

“notice and a hearing” as they are defined in 11 U.S.C. § 102(1).

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pay the taxes of the estate on or before the date they come

due, 28 U.S.C. § 960(b), even if no request for administrative

expenses is filed by the tax authorities, 11 U.S.C.

§ 503(b)(1)(D), and the trustee must insure that “notice and

a hearing” have been provided before doing so, see id.

§ 503(b)(1)(B). The hearing requirement insures that

interested parties, including creditors like the Appellant, have

an opportunity to contest the amount of tax paid before the

estate’s funds are diminished, perhaps irretrievably.

The Trustee contends that the Appellant’s objection to the

Final Report was procedurally improper because the

Appellant failed to object to the IRS’s administrative claim. 

This argument is without merit because the IRS never filed an

administrative claim, nor was it required to do so. See id.

§ 503(b)(1)(D). Instead, the Trustee independently

discovered the 2005 federal income tax liability, and paid it

without any claim being filed by the IRS. It was incumbent

upon the Trustee to secure an appropriate hearing and

authorization from the bankruptcy court before making the

payment. See 4 Collier on Bankruptcy ¶ 503.02[3] (16th ed.

2014) (“If the governmental unit does not file a request for

payment but the tax obligation is discovered by the trustee, it

will be the trustee’s responsibility, rather than the government

unit’s responsibility, to provide the notice and obtain the

hearing.”). The Final Report appears to have been the first

formal filing in the bankruptcy court specifying the amount

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IN THE MATTER OF CLOOBECK 9

of 2005 taxes paid,2and the Appellant filed a timely

opposition to its approval.

We conclude that the bankruptcycourt erred byapproving

the Final Report without first holding a hearing to determine

the amount of the 2005 federal income taxes. Under the plain

language of section 503(b), the Trustee could pay the 2005

taxes as an administrative expense only after “notice and a

hearing,” and only after the bankruptcy court authorized the

payment.

We reverse and remand to the district court for remand to

the bankruptcy court. The district court shall direct the

bankruptcy court to hold a hearing to determine the estate’s

2005 federal income tax liability, see 11 U.S.C. § 505, and

conduct such other proceedings as may be appropriate.

REVERSED AND REMANDED.

2 The Trustee filed a Second Status Report with the bankruptcy court on

April 10, 2009, prior to paying the 2005 taxes. The report stated that the

Trustee had retained an accounting firmto prepare the bankruptcy estate’s

tax returns for calendar years 2005 to 2008, and that the returns would

likely be filed by April 30, 2009, but did not specify the amount of taxes

the estate owed for any of the calendar years. The Trustee filed a Third

Status Report on July 19, 2011, after the Trustee paid the 2005 taxes. The

report acknowledged that the Trustee had paid the estate’s 2005 taxes, but

did not specify the amount paid.

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10 IN THE MATTER OF CLOOBECK

WALLACE, Circuit Judge, concurring:

I concur in the opinion because I agree that the trustee did

not follow section 503(b)’s requirement that the payment be

made only “after notice and a hearing.” The trustee does not

argue that notice was somehow “[in]appropriate in the[se]

particular circumstances.” 11 U.S.C. § 102(1)(A). I write

separately, however, to highlight for the court on remand my

concerns about the timeliness of Dreyfuss’s objection.

The thrust of Dreyfuss’s argument over the course of this

litigation has been that the trustee paid the wrong amount of

taxes. The majority opinion, however, focuses instead on

Dreyfuss’s alternative argument—that the trustee failed to

provide a “notice and a hearing” before making the tax

payment. But the opinion does not address the timeliness of

Dreyfuss’s original objection in the bankruptcy court.

A partymust object within a reasonable time or risk being

deemed to have consented to the action to which it objects.

Cf. Spaulding v. Univ. of Wash., 740 F.2d 686, 695 (9th Cir.

1984) (“Parties should object to a reference to a magistrate or

a special master at the time the reference is made or within a

reasonable time thereafter” or risk waiving the objection),

overruled on other grounds by Atonio v. Wards Cove Packing

Co., 810 F.2d 1477, 1482 (9th Cir. 1987). The record

indicates that Dreyfuss knew as early as March 15, 2010, that

the trustee made the tax payment in an amount to which he

objected. But for some reason, Dreyfuss failed to object to

this payment until at least June 13, 2012—over two years

after he had notice of the payment. Even if we give Dreyfuss

the benefit of the doubt, and assume he did not officially

know about the payment until the trustee filed the status

report on July 19, 2011, that still leaves the court to question

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IN THE MATTER OF CLOOBECK 11

whether it was reasonable for Dreyfuss to sit on his objection

for roughly a year. In my view, the court on remand ought to

ventilate fully the issues surrounding the timeliness of

Dreyfuss’s original objection to the tax payment.

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