In Cochran v. Commissioner, 159 T.C. No. 4 (2022) the Tax Court decided in a precedential opinion that confirmation of a chapter 11 plan of reorganization of an individual does not lift the automatic stay imposed by BC 362(a)(8). The decision reverses an earlier Tax Court decision issued before a crucial change in the law. This decision will impact a small minority of individuals. The situation has a fairly easy work around in most cases but still deserves some attention as a precedential opinion of the Tax court.
Each year debtors file a relatively tiny number of bankruptcy petitions under chapter 11 of the bankruptcy code. For the 12-month period ending Sept. 30, 2022, there were 4,762 chapter 11 bankruptcy filings. In contrast, there were 229,703 chapter 7 filings and and 149,077 chapter 13 filings. Individual chapter 11 filings make up only a fraction of the total number of chapter 11 cases. For the the 12-month period ending June 30, 2020, there were only 464 filings. Of that minuscule number of individual chapter 11 cases only a much smaller number will have a pending Tax Court case. So, this decision has a limited universe of impacted individuals.
Individuals seeking to reorganize their debts typically file chapter 13 cases because it is easier and cheaper to do so; however, some individual debtors cannot file in chapter 13 because of the amount of debt they owe. Chapter 13 places dollar limitations on the debtors who can seek relief under its provisions. The individuals who do not qualify for chapter 13 because of debts in excess of the limits can nonetheless seek reorganization through chapter ll. That’s what the Cochrans did here.
After filing their chapter 11 petition, the Cochrans took all of the actions necessary to obtain a confirmation of their chapter plan. At issue in their Tax Court case is the impact of obtaining a confirmed plan. While I mentioned at the outset that the case involves the automatic stay imposed by BC 362(a)(8), the relevant sections for determining the impact of the plan on this provision of the automatic stay are BC 1141(d)(5) addressing the effect of a chapter 11 confirmation and BC 362(c) addressing the termination of the automatic stay.
Starting with the central Bankruptcy Code section at issue, it’s helpful to understand that BC 362(a)(8) is a bit of an outlier in the list of eight things that the filing of a bankruptcy case brings to a halt. The automatic stay seeks principally seeks to protect the bankruptcy estate. Once a debtor files bankruptcy, the debtor has sent up large signal flares that severe financial troubles exist. it would create havoc if these signals caused creditors to come in an start picking apart the debtor’s assets. So, the automatic stay generally requires creditors to stand back in order to allow for an orderly disposition of the estate. Subparagraph (a)(8) was a late legislative addition to the list of stayed actions and has a different tenor than the others. The principle purpose of (a)(8) was to keep the debtor from abandoning a Tax Court case because of lack of financial concern for the outcome. The stay gives the trustee time to come in and protect the interest of all creditors by pursuing the case or, alternatively, postponing the Tax Court case so that the outcome is of concern to the post-petition debtor and no other creditors of the estate.
The reason for the existence of the stay, I think, drove the arguments of the petitioner in this case. The Tax Court describes their argument as follows:
Petitioners also broadly cite Kovitch v. Commissioner, 128 T.C. 108, 112 (2007), People Place Auto Hand Carwash, LLC v. Commissioner, 126 T.C. 359, 363 (2006), and 1983 Western Reserve Oil & Gas Co. v. Commissioner, 95 T.C. 51, 57 (1990), aff’d, 995 F.2d 235 (9th Cir. 1993), for the proposition that an automatic stay under 11 U.S.C. § 362(a)(8) “should not apply unless the Tax Court proceeding possibly would affect the tax liability of the debtor in bankruptcy.”
The Court responded by stating:
These cases are distinguishable on the basis that they were concerned with ascertaining which entities related to a debtor should fall within the scope of 11 U.S.C. § 362(a).
Both the Court and the petitioners are right. The Court is technically right that it does make a difference whether the debtor is an individual or an entity because the discharge provisions and there for the provisions dealing with the end of the automatic stay differ. The petitioners are right that the reason for the creation of the automatic stay makes no difference in this case. Since moving forward with the Tax Court case at this point does nothing to preserve the assets of the case or protect the petitioners as debtors, there is no point to using the automatic stay to keep the Tax Court case from proceeding. The decision here, however, follows a unbroken line of Tax Court decisions strictly limiting its ability to move forward due to (a)(8) until a technical lifting of the stay occurs even if the stay does nothing to protect the debtor or the estate in the specific context of the case.
So, we have a code section that the Tax Court strictly interprets and one that says Tax Court cases stop when the automatic stay exists. The parties agree that the automatic stay came into existence with the filing of the bankruptcy petition. The legal disagreement, aside from the policy disagree discussed above, is the impact of the confirmation of the petitioner’s chapter 11 plan on the automatic stay. The Tax Court gets the impact precisely right in a relatively short opinion.
Under the version of the Bankruptcy Code enacted in 1978, the plan confirmation lifted the stay. That outcome was reflected in the Tax Court’s earlier decision on this issue in Moody v. Commissioner, 95 T.C. 655, 658 (1990). However, in 2005, during the last major change to the bankruptcy laws, Congress amended the relevant bankruptcy code section regarding the effect of plan confirmation in individual chapter 11 cases because of other changes it made principally regarding discharge. It amended BC 1141(d)(5) addressing the impact of plan confirmation of the plan of individual debtors. The provision now says confirmation does not discharge the individual’s debts and that discharge will not occur until some later time.
The amendment to the impact of the confirmed plan has an impact on when the stay comes to an end. As already mention the stay came into effect with the filing of the bankruptcy petition. In order to get around the prohibition of BC 362(a)(8), the Tax Court is looking to see if the stay has lifted to allow the case to move forward. BC 362(c) provides the rules regarding the lifting of the stay and states that the stay is lifted at the earliest of the closing of the bankruptcy case, the dismissal of the bankruptcy case or the granting or denial of a discharge to the debtor.
With the change to the effect of confirmation in an individual case, the plan confirmation does not impact discharge. The confirmation of a plan does not close or dismiss the bankruptcy case. So, nothing had happened in the Cochran’s bankruptcy case to trigger a lifting of the stay and BC 362(a)(8) sits there stopping the Tax Court case from moving forward even though at this point the Tax Court case will have no adverse impact on the bankruptcy. The decision while technically correct does not serve any real purpose.
Instead of fighting about this with the Tax Court, it should be fairly easy in these type situations to convince the bankruptcy court to enter a specific order lifting the stay to allow the Tax Court case to move forward. That’s the workaround.
Congress might consider putting more effort into drafting BC 362(a)(8) to define the situations in which the stay applies to the Tax Court in a way that has it apply only when it would be meaningful to do so. I suspect, aside from the fact there is a relatively easy work around in most cases to this problem, Congress simply feels it has more important things to do.