In re Anderson, 650 B.R. 510 (Bankr. W.D. Tenn. 2023)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:

SUMMARY

The Bankruptcy Court for the Western District of Tennessee (the Court) utilized the doctrine of quasi-estoppel to prevent the Internal Revenue Service from asserting that certain tax debts of chapter 7 debtors were nondischargeable.  In re Anderson, 650 B.R. 510 (Bankr. W.D. Tenn. 2023).

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FACTS

Robert and Carmen Anderson were persuaded by their long-time accountants, BDO Seidman, LLP (BDO), to utilize a tax shelter known as a Distressed Asset/Debt Transaction to reduce their federal tax liability. On this advice, the Andersons entered into such transactions in 2001 and 2002, which resulted in reduced tax liabilities for those years.  In 2005, the Internal Revenue Service (IRS) initiated an audit of the Andersons’ tax returns and eventually disallowed the transactions as illegal.  The Andersons contested this decision at the administrative level and in the Tax Court, but both affirmed the IRS’s ruling.  The IRS then issued notices of tax due in 2013 and 2014 for the 2001 and 2002 tax years in the total sum of about $9,240,000. In 2013 the Andersons sued BDO and others for $65 million in damages as a result of these failed shelters, alleging fraud.  In late 2014, the IRS filed a tax lien against the Andersons.

In February 2015, the Andersons filed chapter 7 and the BDO litigation became property of the estate.  The IRS filed a secured claim for $18 million, but agreed to subordinate that claim to the chapter 7 administrative expenses as the trustee pursued the litigation against BDO.  An IRS bankruptcy specialist investigated the Andersons’ bankruptcy schedules and examined them at the meeting of creditors.  She concluded that the taxes for years 2001-2004 were dischargeable, entered that note in her log, and sent a letter acknowledging that the Andersons’ chapter 7 discharge covered the tax debt for the relevant years.

The trustee settled the BDO litigation with agreements in 2017 and 2019 for a total of $6,665,000; of this sum almost $3 million paid administrative expenses and the balance of $3,679,000 was paid to the IRS on its subordinated lien, with no other estate claimants receiving any funds.  After the IRS received its final payment in early 2021, it contacted the Andersons, asserting that the tax debt for 2001-2004, which it had said previously was discharged, was in fact nondischargeable.  This contact caused the Andersons to file a declaratory relief action against the IRS for a declaration that the tax debt was discharged.  After the IRS answered, the Court realigned the litigation, deeming the IRS the plaintiff with the burden of proof to establish the debt was not discharged.  The Andersons filed a summary judgment motion, which resulted in the Court entering judgment for them against the IRS, concluding the debt was discharged.

REASONING

The Andersons asserted four legal theories entitled them to summary judgment:  equitable estoppel, judicial estoppel, quasi-estoppel and waiver.  Because the Court granted judgment for the Andersons on quasi-estoppel, it did not address the others.

The IRS initially argued that estoppel cannot be asserted against the government, an argument which the Court refuted by citing a myriad of cases where it had been successfully used against government agencies such as the Post Office Department, the Housing and Urban Development Department, the Department of Interior, and the Land Management Office.  The cases relied upon by the IRS turned on specific exceptions to the application of estoppel, not the defense of estoppel as a whole.

Having concluded that estoppel was available against the IRS, the Court noted that quasi-estoppel describes a situation in which an entity is not permitted to take a position inconsistent with prior conduct if this would injure another, whether or not that person actually relied on the prior conduct.  In other words, it “forbids a party from accepting the benefits of a transaction or statute and then subsequently taking an inconsistent position to avoid the corresponding obligations or effects.”  Unlike equitable estoppel, it does not require a misrepresentation by one party or actual or detrimental reliance by the other.  Factors to be considered are whether the party asserting the inconsistent position has gained an advantage, the magnitude of the inconsistency, whether circumstances have changed to justify the inconsistency, and whether the party knew the full facts when it took its original position.  The burden is on the party asserting the doctrine, here the Andersons.

Analyzing the facts before it, the Court found “the IRS in a situation in which it cannot ‘eat [its] cake and have it too.’”  The Court concluded that by asserting the Anderson’s tax debt was nondischargeable, the IRS was maintaining a position at odds with the benefits it had already received.  Because of the IRS’s lien on the BDO litigation claim, the Court entered an agreed order that incentivized the trustee to engage professionals to litigate against BDO and achieve the settlements, all of the proceeds of which went to either administrative expenses or the IRS.  The Court observed that the IRS could have pursued that litigation on its own through a receiver, but chose instead to have the trustee do so.  In addition, the Court recognized that the IRS would not have wanted to file a § 523(a)(1)(C) action against the Andersons during the BDO litigation because it would have allowed the BDO defendants to assert viable defenses against the Andersons/estate.  Instead, it waited until it had received all the settlement funds in 2020 before it approached the Andersons, suggesting that the debt was not discharged.  The Court ruled that this behavior met all the elements of quasi-estoppel against the IRS and granted judgment to the Andersons.

AUTHOR’S COMMENTS

Although I am happy for the Andersons that the remaining, unpaid IRS tax claim of about $6 million was discharged, the application of any kind of estoppel against the IRS based on the facts relied upon by the Court is somewhat puzzling.  The Court seems to conflate estate issues with individual debtor issues and an in rem remedy (enforcement of the IRS lien) with in personam liability of the Andersons if the debt is not discharged.  The IRS essentially had two available remedies: foreclose its lien and pursue the individuals for a nondischargeable deficiency.  The trustee pursed the first, with an agreement that the IRS would foot the litigation expense.  This decision prevents the IRS from pursuing the second. The Court suggested that the IRS would not have wanted to file a § 523(a)(1)(C) action while the case was pending.  But no adversary is required for a tax debt to be nondischargeable under such subsection.  The IRS could have waited, as it did, with no consequence.  I am not suggesting that I have analyzed whether the tax debt was nondischargeable.  I am merely pointing out that the IRS was deemed “estopped” from asserting that position against the Andersons, not the estate.  If the Court had based its decision to some extent on the letter from the investigator saying the tax debt was discharged, I would have better understood how estoppel might come into play.  But the letter had no effect on the ruling.  

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.