- Category: Judge Karlin
- Published: 02 April 2013
- Written by Judge Karlin
SIGNED this 28th day of March, 2013.
In the United States Bankruptcy Court
for the District of Kansas
In re, )
Smith Audio Visual, Inc., ) Case No. 11-42026-11
Memorandum Opinion and Order Denying United States’
Motion to Vacate Journal Entry of Confirmation
The United States of America brings this motion on behalf of the Internal
Revenue Service in an effort to set aside the confirmation of Debtor Smith Audio
Visual, Inc.’s Chapter 11 plan. According to the IRS, Smith Audio did not
properly serve a copy of its disclosure statement and plan on the IRS, which
prevented the IRS from timely objecting to the treatment of its claims under the
Case 11-42026 Doc# 142 Filed 03/28/13 Page 1 of 15
plan. Based upon this allegedly insufficient service, the IRS seeks to vacate the
Journal Entry of Confirmation1 entered on August 15, 2012.
This matter constitutes a core proceeding over which the Court has the
jurisdiction and authority to enter a final order.2
I. Findings of Fact
The parties have stipulated to the essential facts. Smith Audio filed its
Chapter 11 bankruptcy proceeding on December 16, 2011. In the creditor
mailing matrix attached to its petition, Smith Audio listed the IRS as a creditor
and indicated it could be served by mail at P.O. Box 21126, Philadelphia, PA,
Twenty-four days later, on January 9, 2012, the IRS responded to that
notice of bankruptcy by filing a proof of claim.3 In that proof of claim, the IRS
indicated its total claim was for $178,525.41; it claimed $153,641.14 was secured
by property of Smith Audio, $24,084.31 was entitled to priority treatment, and
$799.96 was unsecured non-priority debt. The proof of claim form indicates that
all notices should be sent to the IRS at P.O. Box 7346, Philadelphia, PA, 191017346.
IRS later amended its proof of claim on September 25, 2012 (more than a
1 Doc. 99.
2 See 28 U.S.C. §§ 157(b)(2)(B) and (J) (core proceeding) and (1) (authority to hear coreproceedings).
3 Claim No. 6.
Case 11-42026 Doc# 142 Filed 03/28/13 Page 2 of 15
month after plan confirmation) to remove any secured claim and to assert that
$128,960.22 of the $178,525.41 debt was entitled to priority treatment, with the
remainder being a general unsecured claim.
Smith Audio filed its Chapter 11 plan on June 11, 2012,4 followed one day
later with its disclosure statement.5 In the plan, Smith Audio placed the IRS’
unsecured priority claim in Class 4, and indicated that it would be paid
$24,084.31 together with interest at the rate of 4.5%. This amount is equal to the
amount of the priority claim asserted by the IRS in its initial proof of claim. The
plan did not recognize a secured claim by the IRS, treating the remainder of its
claim as a general unsecured claim under Class 9. The plan provided that Class
9 creditors would receive 50% of the amount of their claims, with no interest.
The disclosure statement indicated the IRS’ claim would be treated in the same
manner as was provided for in the plan.
The Court entered an order conditionally approving the disclosure
statement on June 18, 2012.6 In that order, the Court required Smith Audio to
mail to all creditors a copy of the order conditionally approving the disclosure
statement, the disclosure statement itself, the plan and a ballot for voting on the
4 Doc. 80.
5 Doc. 81.
6 Doc. 89.
Case 11-42026 Doc# 142 Filed 03/28/13 Page 3 of 15
plan. The order also set July 17, 2012 as the last day creditors could file
objections to either the disclosure statement or the plan. According to the
certificate of service filed by Smith Audio, all of these documents were mailed to
the IRS on June 19, 2012, again at P.O. Box 21126, Philadelphia, PA 19114.
Only one creditor, a bank, objected to the plan, and once its objection was
resolved by the parties, the Court confirmed the plan at a hearing held on
August 8, 2012. The Journal Entry of Confirmation was entered one week later,
on August 15, 2012.7 The journal entry was served on creditors by the
Bankruptcy Noticing Center on August 17, 2012. The certificate of service by the
BNC indicates that it was served electronically on the IRS by e-mailing a copy
Two and one-half months later, on November 1, 2012, the IRS filed this
motion to vacate the journal entry confirming the plan. The IRS contends that
it never received a copy of the disclosure statement or plan because the address
7 Doc. 99.
8 Doc. 102. The Court asked both counsel whether they had any objection to the Court
taking judicial notice of the following facts, and neither party objected: 11 USC 342(f) permitsa creditor to specify a preferred mailing address to be used by all bankruptcy courts forproviding notice, IRS has opted to participate in this National Creditor Registration Service(NCRS), and the address it has chosen to receive notices is the address to which theBankruptcy Noticing Center e-mailed the confirmation order in this case to the IRS
Case 11-42026 Doc# 142 Filed 03/28/13 Page 4 of 15
used by Smith Audio was inaccurate. The IRS admits that the address used by
Smith Audio is a valid IRS post office box, and that none of the mail sent to that
address by the Court or by Smith Audio was returned as being improperly
addressed. Instead, the IRS claims that the information should have been sent
to the address noted in the IRS’ proof of claim, which is the address our local rule
also requires for service on the Internal Revenue Service. The IRS claims that
had it received the plan and disclosure statement at its preferred address, it
would have timely filed an objection to the plan and disclosure statement
because the former failed to properly treat the IRS’ priority and/or secured
claims, and the latter failed to disclose the actual amounts and status of the IRS
Smith Audio disputes that the IRS is entitled to any relief from the order
confirming its plan and approving its disclosure statement. Smith Audio, while
conceding that it failed to serve the IRS at the address required by D. Kan. LBR
2002.2,9and that it failed to send a copy to the local office of the United States
Attorney, as the local rule also requires, asserts that it served the IRS at a valid
address assigned to the IRS and that the IRS had actual notice of the plan and
9 D. Kan. LBR 2002.2 requires service of any pleadings on the Internal Revenue Servicebe made at P.O. Box 7346, Philadelphia, PA, 19101-7346, as well as on the Office of the UnitedStates Attorney in the city in which the petition was filed.
Case 11-42026 Doc# 142 Filed 03/28/13 Page 5 of 15
disclosure statement. It also asserts that IRS had actual notice of the order of
confirmation in time to appeal or seek reconsideration of it, which it failed to do.
For the reasons set forth below, the Court denies the motion to set aside
the journal entry confirming the Chapter 11 plan and approving Smith Audio’s
The IRS filed this motion under Fed. R. Civ. P. 60(b)(1) and (6).10 Rule 60
provides the court with the power to relieve a party from a final judgment, order,
or proceeding for, inter alia, “mistake, inadvertence, surprise, or excusable
neglect” or “any other reason that justifies relief.”11 Rule 60(b) relief is
extraordinary and may only be granted in exceptional circumstances.12 “Rule
60(b) of the Federal Rules of Civil Procedure strikes a delicate balance between
two countervailing impulses of the judiciary: ‘The desire to preserve the finality
of judgments and the incessant command of the court's conscience that justice
be done in light of all the facts.’”13
10 Fed. R. Civ. P. 60 is made applicable to this proceeding, with certain limitations, byFed. R. Bankr. P. 9024.
11 Fed. R. Civ. P. 60(b)(1) and (6).
12 Mullin v. High Mountain, 182 F. App'x 830, 832 (10th Cir.2006).
13 Id. (quoting Cessna Fin. Corp. v. Bielenberg Masonry Contracting, Inc., 715 F.2d
1442, 1444 (10th Cir. 1983)).
Case 11-42026 Doc# 142 Filed 03/28/13 Page 6 of 15
In analyzing a motion filed pursuant to Rule 60(b)(1), the court should
consider “the facts of each case, taking into consideration the interest in finality,
the reason for delay, the practical ability of the litigant to learn earlier of the
grounds relied upon, and prejudice to other parties.”14 “While there is a
preference for resolving disputes on their merits, ‘a workable system of justice
requires that litigants not be free to appear at their pleasure.’”15 Factors in
determining whether excusable neglect exists include: “the danger of prejudice
to the [opposing party], the length of the delay and its potential impact on
judicial proceedings, the reason for the delay, including whether it was within
the reasonable control of the movant, and whether the movant acted in good
Smith Audio relies extensively on the recent Supreme Court decision in
United Student Aid Funds, Inc. v. Espinosa17 to argue that Rule 60 does not
provide the IRS any relief from the order confirming the plan. In Espinosa, the
debtor filed a Chapter 13 bankruptcy petition in 1992. Espinosa’s plan listed
student loan indebtedness, but provided for payment of only the principal on
14 Id. at 833.
15 Baer v. Daley, 2012 WL 5200029 at *3 (D. Kan. 2012 Oct. 22, 2012) (quoting Cessna
Fin. Corp., 715 F.2d at 1444).
16 Marcus Food Co. v. DiPanfilo, 671 F.3d 1159, 1172 (10th Cir. 2011).
17 559 U.S. 260, 130 S.Ct. 1367 (2010).
Case 11-42026 Doc# 142 Filed 03/28/13 Page 7 of 15
that debt, stating that the remainder—the accrued interest—would be
discharged upon completion of the plan. The clerk of the bankruptcy court served
the student loan creditor, United Student Aid Funds, Inc., with a copy of the
plan along with a notice of the deadline for filing a proof of claim. United timely
filed a proof of claim, but did not object to the proposed discharge of the student
loan interest, nor did it object to the debtor’s failure to initiate an adversary
proceeding to determine if the debt was dischargeable, as required by the
Federal Rules of Bankruptcy Procedure. The debtor’s plan was confirmed and he
completed his plan and received his discharge, in May 1997. In 2000, the student
loan creditor started efforts to collect the unpaid interest from the student loans.
This collection action prompted the debtor to file a motion with the bankruptcy
court seeking enforcement of the discharge order.
United opposed the motion to enforce the discharge order, and filed its own
motion under Fed. R. Civ. P. 60(b)(4) seeking to set aside the order confirming
the Chapter 13 as void. United claimed that the plan provision authorizing the
discharge of the student loan interest was inconsistent with the Code because
it did not require the bankruptcy court to make a finding of undue hardship.
United also claimed that because it had not been served with a summons and
complaint, as required by the Federal Rules of Bankruptcy Procedure, its due
process rights had been violated.
Case 11-42026 Doc# 142 Filed 03/28/13 Page 8 of 15
The Supreme Court rejected United’s claims and held that it was not
entitled to any relief under Rule 60(b)(4). The Court held that because United
had received actual notice of the offending Chapter 13 plan in time for it to raise
an objection before the bankruptcy court, its due process rights were not violated
despite the fact it was not served with a copy of a summons and complaint as
required by the federal rules. The Court also found that the debtor’s failure to
comply with the Federal Rules of Bankruptcy Procedure by not initiating an
adversary proceeding, as well as the debtor’s failure to comply with the
bankruptcy code by discharging a portion of a student loan debt without first
obtaining a determination that repayment of the debt would cause an undue
hardship, were not grounds for invalidating the order confirming the Chapter 13
plan under Rule 60(b)(4).
The IRS claims that Espinosa is distinguishable and does not support
Smith Audio’s objection to setting aside the order confirming the Chapter 11
plan. It argues that Espinosa was limited to deciding whether a creditor that
received actual notice of a proposed plan could seek relief from an order
confirming that plan on the basis that the confirmation order was void under
Rule 60(b)(4) when the plan proponent did not serve the plan in accordance with
the rules. The IRS admits that it is not entitled to relief under Rule 60(b)(4) and
has specifically stated it is not seeking relief under that subsection. Instead, the
Case 11-42026 Doc# 142 Filed 03/28/13 Page 9 of 15
IRS is seeking relief under Rule 60(b)(1) and (6), which were not addressed in
The Court agrees that Espinosa is not dispositive of the issues in this
case—Espinosa only dealt with whether a judgment was void under Rule
60(b)(4). Accordingly, Espinosa is admittedly not binding precedent for the
question of whether the IRS is entitled to relief under Rule 60(b)(1) or (6). But
Espinosa does provide guidance as to the interplay between the need for finality
of reorganization plans and relief under Rule 60. In rejecting relief to the
creditor, the Supreme Court in Espinosa stated
Rule 60(b)(4) does not provide a license for litigants to sleep on theirrights. United had actual notice of the filing of Espinosa's plan, itscontents, and the Bankruptcy Court's subsequent confirmation ofthe plan. In addition, United filed a proof of claim regardingEspinosa's student loan debt, thereby submitting itself to theBankruptcy Court's jurisdiction with respect to that claim. Unitedtherefore forfeited its arguments regarding the validity of service orthe adequacy of the Bankruptcy Court's procedures by failing toraise a timely objection in that court.
Rule 60(b)(4) strikes a balance between the need for finalityof judgments and the importance of ensuring that litigants have afull and fair opportunity to litigate a dispute. Where, as here, aparty is notified of a plan's contents and fails to object toconfirmation of the plan before the time for appeal expires, thatparty has been afforded a full and fair opportunity to litigate, andthe party's failure to avail itself of that opportunity will not justifyRule 60(b)(4) relief.18
18Espinosa, 130 S.Ct. at 1380 (internal citations omitted).
Case 11-42026 Doc# 142 Filed 03/28/13 Page 10 of 15
The Court recognizes that the conduct of the IRS in this case is less egregious
than that of United in the Espinosa case, since it only waited two and one-half
months, instead of 8 years, to bring the matter to the Court’s attention. That
said, the undisputed facts demonstrate that the IRS had actual notice of the plan
and disclosure statement, even if that notice was sent to a different IRS post
office box than the one it preferred.
It is undisputed that the plan and disclosure statement were mailed to the
IRS on June 26, 2012 and the journal entry confirming the Chapter 11 plan was
not entered until August 15, 2012, nearly two months later. Even with the notice
being served on a different post office box belonging to the IRS, it appears there
was ample time for a properly trained IRS employee to route the documents to
the proper department and raise an objection to the plan and disclosure
statement prior to the confirmation of the plan and the approval of the disclosure
It must also be remembered that when IRS received notification that
Debtor had filed its bankruptcy petition, which petition it received at the same
address where the plan and disclosure statement were mailed, it responded by
only 24 days later filing a proof of claim. Accordingly, Debtor did use a valid IRS
address where employees are apparently trained to deal with bankruptcy
matters. The IRS provides no argument, or factual details, about how it
Case 11-42026 Doc# 142 Filed 03/28/13 Page 11 of 15
constitutes “excusable” neglect for it to not train its own employees (who work
in one of its offices in Philadelphia that deals with taxpayers who file
bankruptcy) to forward legal documents to whatever office it chooses, also in
Philadelphia, for review of the plan and disclosure statement.19 It also provides
no argument why it took over two months for the plan and disclosure statement
to make its way to the legal department or other office that handles bankruptcy
court matters. The training of its employees to properly route documents is
within the reasonable control of the IRS. Clearly there was neglect; the Court is
simply unable to find that the neglect is excusable.
More importantly, the IRS admits that it electronically received the
journal entry confirming the plan on August 17, 2012 at the very address it
directed the BNC to use. Notwithstanding its receipt of the order at that
19 Cf. In re Reyes v. Standard Parking Corp., 41 B.R. 153, 160 (D.R.I. 2011) (holding that“[i]n the bankruptcy context, notice to a company’s branch or division generally satisfies thedue process requirements of notice for the entire company.”); In re Frontzak, 2009 WL 4576040,
at *3 (Bankr. N.D. Ill. 2009) (finding notice properly served despite its receipt by the wrongdivision of Wells Fargo bank, and stating “[f]or purposes of due process, moreover, notice to onearm or division of a business entity has frequently been held adequate notice to another armor division of the same entity”); In re Petroleum Prod. Mgmt., Inc., 240 B.R. 407, 415 (Bankr.
D. Kan. 1999) (“A creditor who chooses to operate its business by dividing its activities intovarious departments cannot shield itself against notice properly sent to the creditor in its nameand at its place of business.”); Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Broadhead, 155
B.R. 856, 858–59 (S.D.N.Y. 1993) (“There is no statutory requirement, however, that oneidentify the specific division of a company on a bankruptcy notice. Nor is it required by dueprocess. Once delivered, it is the responsibility of the creditor to distribute the notice to theappropriate party within its organization.”); and In re Drexel Burnham Lambert Group, Inc.,
129 B.R. 22, 24 (Bankr. S.D.N.Y. 1991) (finding notice properly served on branch offices of abank because the bank “bears responsibility for having adequate systems in place to ensurethat legal notices and other communications reach the appropriate parts of its businessempire”).
Case 11-42026 Doc# 142 Filed 03/28/13 Page 12 of 15
address, it failed to file the current motion to set aside the journal entry until
November 1, 2012—approximately two and one-half months later. Despite
receiving timely and accurate service of the order, the IRS failed to take prompt
action to set aside the order (or appeal it) to keep the Chapter 11 plan from being
Although the delays by the IRS in this matter are admittedly not extreme,
the fact that the IRS is seeking to set aside an order confirming a Chapter 11
plan is an important factor in the Court’s decision. The implementation of a
Chapter 11 plan can be a very involved process, which is the basis for the need
for finality in the confirmation process. “Any number of scenarios can and do
play out under the terms of a confirmed plan. Credit is extended, assets are sold,
corporate entities are created or merged, and so on.”20
In fact, the need for finality in the confirmation of Chapter 11 plans is
highlighted by the strict requirements of 11 U.S.C. § 1144, which mandates that
an order confirming a Chapter 11 plan can be revoked “if and only if” the plan
was procured by fraud and the motion to revoke the confirmation order is filed
within 180 days of confirmation. Although Smith Audio has not raised § 1144 as
a defense to the current motion, numerous courts have held that the “if and only
if” language contained in § 1144 precludes any application of Rule 60(b) or
20 In re Winom Tool and Die, Inc., 173 B.R. 613, 616 (Bankr. E.D. Mich. 1994).
Case 11-42026 Doc# 142 Filed 03/28/13 Page 13 of 15
invocation of the Court’s equitable powers under 11 U.S.C. § 105 to set aside an
order confirming a plan unless fraud is alleged.21 And IRS has not alleged fraud.
Because the Court finds that relief is not warranted under Rule 60(b), it declines
to reach the question whether § 1144 also precludes the relief requested by the
In denying relief to the IRS, the Court does not imply that the IRS acted
with bad faith or intentionally sat on its rights with respect to this claim. The
Court is also not condoning Smith Audio’s failure to comply with the local rule
requiring service at a particular address and requiring notice to the United
States Attorney. Instead, the Court is focused more squarely on the need for
finality in the Chapter 11 confirmation process, and on the concepts of due
process. IRS had clearly submitted itself to this Court’s jurisdiction with respect
to its claim when it filed its proof of claim, and was required to act accordingly.
Had the IRS timely sought relief from the order confirming the plan and
approving the disclosure statement after being properly served with those
pleadings by the BNC at the very electronic address it selected—rather than
waiting well over two months to seek relief—the outcome of this matter may
21 See, e.g. In re Logan Place Properties, LTD, 327 B.R. 811 (2005) (holding that Rule60(b) is inapplicable to motions to set aside an order confirming a Chapter 11 plan, and thatthe exclusive means to set aside a confirmation order is 11 U.S.C. § 1144); In re Winom Tool
and Die, Inc., 173 B.R. at 616 (holding that “Congress made the considered choice that onlyfraud would warrant an attempt to ‘unscramble the egg,’ and even then only within the 180day
time frame imposed by § 1144).
Case 11-42026 Doc# 142 Filed 03/28/13 Page 14 of 15
have been different. This is especially true given the fact that it was Smith
Audio’s failure to follow the local rule and to serve pleadings at the address
requested in IRS’ proof of claim that exacerbated the problem, and given the
apparent windfall that it may receive as a result. As it stands, however, the
Court finds that the extraordinary relief IRS seeks under Rule 60(b) is not
appropriate in this case and denies the IRS’ motion.
It is, therefore, by the Court ordered that the United States’ Motion
to Vacate Journal Entry of Confirmation22 is denied.
22 Doc. 106.
Case 11-42026 Doc# 142 Filed 03/28/13 Page 15 of 15
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