In In Re Aero-Fab Inc., No. 3:10-bk-30836 (Bankr. S.D. W.Va 2021) the bankruptcy court refused to reopen a bankruptcy case to allow the debtor to challenge the trust fund recovery penalty (TFRP.)
The debtor filed a small business chapter 11 on October 8, 2010, and used the bankruptcy as a platform for selling the assets of the business rather than reorganization. This was a legitimate use of the bankruptcy platform. It sold the assets to a company owned by the son of the owner of Aero-Fab, Inc. and disclosed that relationship to the court. At the time of the sale there were two liens filed against Aero-Fab. One was to a bank and the other to the IRS. The proceeds were distributed first to the bank, which appears to have had a superior lien since no one objected to that and second, with the remainder of the proceeds, to the IRS in an amount that did not satisfy the tax debt. The purchasing company took the assets free and clear of liens.
On August 3, 2020, the purchasing company and Jeff Maynard, the son of the owner of Aero-Fab moved to reopen the bankruptcy case, alleging that the IRS sandbagged them by assessing a TFRP for unpaid post-petition taxes against Jeff Maynard. The court describes their argument:
The Reopen Movants assert that the trust fund tax assessment against Jeff Maynard is inappropriate and that the IRS should not be allowed to collect the trust fund tax. They rely on the following language in the final sale order: (1) that the Court will “retain jurisdiction of this transaction for the purposes of enforcing provisions of this order and the amended purchase agreement”; (2) that the “sale of property shall be free and clear of liens, claims, encumbrances, and interests with the liens to attach to the proceeds”; (3) that AFI took “title to and possession of the assets free and clear of any and all liens, claims, liabilities, interests, and encumbrances”; and (4) “all persons and entities are hereby prohibited and enjoined from taking action that would adversely affect [or] interfere with the ability of the Debtor to sell and transfer the assets.” This language forms the basis of the Reopen Movants’ claim that the IRS has “blatantly disregarded” the terms of the final sale order by assessing the trust fund tax against Jeff Maynard. The Reopen Movants assert that Jeff Maynard was indeed a purchaser (in addition to AFI), not a “responsible person,” and, thus, the IRS cannot assess this penalty against him. The majority of the Reopen Movants’ arguments address the legality of the trust fund tax assessed against Jeff Maynard and mostly address whether he has been improperly deemed a “responsible person.” They go so far as to file and discuss the transcript of the 2013 hearing approving the final sale order and point to sections they believe would absolve Jeff Maynard from the trust fund obligation.
Jeff Maynard argued that the Anti-Injunction Act (AIA) should not apply because he seeks not to enjoin the IRS from collecting but merely to enforce a prior order of the court. The IRS argues that this is simply an attempt to have the bankruptcy court prevent the IRS from assessing and collection and that Mr. Maynard must instead bring a refund claim in district court or the Court of Federal Claims.
A party in interest may reopen a bankruptcy case pursuant to BC 350(b). The Fourth Circuit has said that a party in interest is anyone “whose pecuniary interests are directly affected by the bankruptcy proceedings.” Assuming that you meet the party in interest test, you bear the burden of proof to show that one of the three BC 350(b) bases for reopening exists: (1) to administer assets, (2) to accord relief to the debtor or (3) for other cause. Here, the basis would be other cause since this request does not impact asset distribution or the debtor. The Fourth Circuit requires compelling circumstances to reopen a case. The first step is determining if reopening would be futile or a waste of resources and that’s where the AIA comes into play.
Les has written about the AIA several times, including posts on CIC Services a case now awaiting decision by the Supreme Court. See some of his prior posts here, here and here. The bankruptcy court notes the general rules regarding exceptions for the AIA:
The Supreme Court has articulated two exceptions to the AIA. The first exception, created in Enochs v. Williams Packaging & Navigation Co., allows injunctive actions against the IRS to proceed only if the plaintiff could prove two elements: (1) that under no circumstances would the Government ultimately prevail; and (2) that equity jurisdiction exists otherwise. Enochs v. Williams Packaging & Navigation Co., 370 U.S. 1 (1962). For the first element, “a court must determine, on the basis of the information available to the government at the time of the suit, whether, under the most liberal view of the law and the facts, the United States cannot establish its claim.” Judicial Watch, 317 F.3d at 407 (citing Enochs, 370 U.S. at 7) (internal quotation marks omitted).
The second exception was created in South Carolina v. Regan, wherein the Supreme Court opined that the AIA “could not stand as a barrier to injunctive relief in situations where . . . Congress has not provided the plaintiff with an alternative legal way to challenge the validity of the tax.” Judicial Watch, 317 F.3d at 407-08 (quoting South Carolina v. Regan, 465 U.S. 367, 373 (1984)) (internal quotation marks omitted). The issue in the Regan case was the constitutionality of state-issued bonds. Judicial Watch, 317 F.3d at 407. The basis for the exception “is not whether a plaintiff has access to a legal remedy for the precise harm that it has allegedly suffered, but whether the plaintiff has any access at all to judicial review.” Id. at 408 (citing Regan, 465 U.S. at 381) (emphasis in the original). “For most aggrieved persons, Congress has provided an alternative avenue to relief: a refund suit under 26 U.S.C. § 7422.” McKenzie-El v. Internal Revenue Service, No. ELH-19-1956, 2020 WL 902546, at *8 (D. Md. Feb. 24, 2020); see also Regan, 465 U.S. at 374-82. For example, the Seventh Circuit noted that the Regan exception did not apply in the matter before it because, should the party contesting the assessed tax want to challenge the tax, it could merely pay the tax and sue for a refund. LaSalle Rolling Mills, Inc. v. United States (In re LaSalle Rolling Mills, Inc.), 832 F.2d 390, 393 (7th Cir. 1987).
These exceptions are narrow, so as to prevent a “flood of lawsuits brought against the IRS . . . creating precisely the kind of judicial interference with the assessment and collection of taxes that the Act was designed to prevent.” Judicial Watch, 317 F.3d at 408
The court decides that the motion to compel in this case is really a request to enjoin the IRS from collecting, and nothing indicates that Mr. Maynard has tried to sue the IRS for a refund under normal TFRP procedures. Although he attempts to characterize this as an action to enforce a settlement, the AIA contains a clear directive regarding this situation, and neither of the exceptions discussed above apply. Because of the AIA, the court finds that reopening the bankruptcy case would “be a textbook example of futility and the wasting of judicial resources.”
We will soon have a decision from the Supreme Court in CIC Services discussed here and here. That case addresses a very different aspect of the AIA than the Aero-Fab case but, if it creates another exception to the AIA or limits the AIA, the decision may be worth looking at for Mr. Maynard as he decides whether to further appeal this case or simply bring a TFRP case in district court. On March 17, Mr. Maynard appealed to the district court for the Southern District of West Virginia.