IRS Barred From Challenging Confirmed Chapter 11 Plan

Bloomberg Law’s® Bankruptcy Law News publishes case summaries of the most recent important bankruptcy law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy...

By Daniel Gill

The IRS couldn’t attack a court order confirming a Chapter 11 plan by objecting to a motion to enforce a plan provision, a Texas federal judge ruled ( United States v. Bros. Materials, Ltd. (In re Bros. Materials, Ltd.) , S.D. Tex., 5:17-CV-0020, 10/20/17 ).

The Oct. 20 opinion by Judge Marina Garcia Marmolejo, of the U.S. District Court for the Southern District of Texas, took the IRS to task for trying to resurrect an argument it should have made at the plan confirmation phase.

Brothers Materials Ltd. filed for Chapter 11 in 2014. Chapter 11 protects companies or individuals from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court.

Brothers Materials is owned by brothers Ramon and Rogelio Soliz, both of whom owe income tax to the IRS, the court said. Their tax liability was secured in part by a lien on land they jointly owned, it said.

The brothers were to contribute the property to the Chapter 11 plan. It would be sold and proceeds used to cover administrative expenses before paying other creditors, including the IRS.

Despite having notice and participating in the bankruptcy case, the IRS didn’t object to the proposed plan, nor did it appeal the order confirming it. The IRS objected when the debtor sought to enforce the plan, seeking to pay attorney’s fees from the expected property sale as a part of administrative expenses. The bankruptcy court granted the motion over the IRS’ objection.

The IRS appealed, arguing that the bankruptcy court didn’t have jurisdiction to enforce the plan because the property wasn’t part of the bankruptcy estate.

The district court rejected the appeal. It found the IRS was trying to attack the order confirming the plan, not the order to enforce it.

“The IRS believes that it can [hijack] this enforcement proceeding to directly attack the Bankruptcy Court’s original jurisdiction to confirm the Plan, but the IRS lost that ability when the time to appeal the Bankruptcy Court’s confirmation order expired,” it said.

A confirmed plan is res judicata—it’s binding law as to the parties—and “cannot be easily undermined once it becomes final,” the court said. Only in rare situations can subject-matter jurisdiction be collaterally attacked to prevent a “manifest abuse of authority,” the court said. But no such circumstances were evident.

So long as the IRS had opportunity to challenge subject-matter jurisdiction at the time the plan was considered, the agency couldn’t challenge it in a later motion to enforce the confirmation order.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Bankruptcy Law News on Bloomberg Law