F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
MAY 29 2002
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
In re: JOHN MARSHALL TUTTLE;
LEONA JULIA TUTTLE,
Debtors,
------------------------------------------------.
LEONA JULIA TUTTLE,
Appellant,
v. No. 01-3129
UNITED STATES OF AMERICA,
Appellee.
APPEAL FROM THE UNITED STATES BANKRUPTCY APPELLATE PANEL
FOR THE TENTH CIRCUIT
(No. KS-00-074)
Todd A. Luckman (Gary H. Hanson and Wesley F. Smith with him on the brief), Stumbo,
Hanson & Hendricks, LLP, Topeka, Kansas, for the appellant.
Curtis C. Pett, Attorney, Tax Division, Department of Justice (Eileen J. O'Connor,
Assistant Attorney General; Bruce R. Ellisen, Attorney, Tax Division, Department of
Justice; and James E. Flory, United States Attorney, with him on the brief), Washington,
D.C., for the appellee.
Before TACHA, Chief Judge, HENRY, and BRISCOE, Circuit Judges.
BRISCOE, Circuit Judge.
Leona Tuttle, debtor in a Chapter 11 bankruptcy case, appeals from a decision of
the Bankruptcy Appellate Panel (BAP) holding that, even after confirmation and
successful completion of her Chapter 11 plan, she remains personally liable for “gap
interest,” i.e., interest that accrued between the date her petition was filed and the date her
plan was confirmed, on a nondischargeable tax debt to the Internal Revenue Service
(IRS). We exercise jurisdiction pursuant to 28 U.S.C. § 158(d) and affirm.
I.
Tuttle and her husband filed a Chapter 11 bankruptcy petition in April 1993. The
IRS filed an amended claim for $53,997.35. Of this amount, $40,519.17 was for a
priority claim, and $13,478.18 represented a general unsecured claim. Tuttle’s Chapter
11 reorganization plan was confirmed by the bankruptcy court in December 1999. Tuttle
paid the total amount of the IRS claim pursuant to her reorganization plan. However, the
IRS subsequently sought to recover, from her personally, gap interest totaling
approximately $30,000 that accrued on its priority tax claim between the time she filed
her bankruptcy petition and the time her plan was confirmed.1
1
The bankruptcy court found, and the parties do not dispute, that “[n]either the
debtor’s counsel nor counsel appearing for the IRS before the plan was confirmed
realized that the IRS had been accruing interest against the debtor on the priority portion
of the debt for the six years between the time the debtors filed for bankruptcy and Mrs.
Tuttle’s plan was confirmed.” App. at 89.
2
Tuttle filed a motion with the bankruptcy court to enforce the discharge she
received on confirmation of her plan and to prohibit the IRS from collecting the gap
interest. The bankruptcy court denied Tuttle’s motion, “reluctantly” concluding, based on
Tenth Circuit precedent, “that gap interest on the IRS’s priority claim was not discharged
by confirmation of the debtor’s plan” and that the IRS was “not estopped from trying to
collect the interest.” App. at 98. In reaching this conclusion, the bankruptcy court
emphasized that, absent existing Tenth Circuit precedent, it would have ruled in favor of
Tuttle. On appeal, the BAP agreed with the bankruptcy court that, under Tenth Circuit
precedent, “the gap interest owed to the IRS [wa]s not dischargeable, but rather” Tuttle
“remain[ed] personally liable for the gap interest.” Id. at 165.
II.
“In our review of BAP decisions, we independently review the bankruptcy court
decision.” In re Albrecht, 233 F.3d 1258, 1260 (10th Cir. 2000). Where, as here, “[t]here
are no factual disputes and the issues on appeal pertain to the proper application of
bankruptcy statutes and the interpretation of case law,” our review is de novo. Id.
Tuttle contends the BAP and the bankruptcy court erred in concluding that gap
interest was not discharged upon confirmation of her Chapter 11 plan and that she
remains personally liable for the gap interest. Although Tuttle concedes that the BAP and
the bankruptcy court followed Tenth Circuit precedent, she contends that precedent
“should be rejected” either as dicta or “as inconsistent with the intent of the Bankruptcy
3
Code.” Aplt. Br. at 5. In Tuttle’s view, gap interest in a Chapter 11 proceeding “is an
integral part of a priority tax claim, and if the allowed claim is paid in full under a plan,
the gap interest should be considered paid as well.” Id. at 6.
In addressing Tuttle’s arguments, we begin by reviewing how IRS claims for
unpaid taxes are treated in Chapter 11 bankruptcy proceedings. Like other creditors, the
IRS has the right to file a claim in a Chapter 11 bankruptcy proceeding to seek repayment
of unpaid taxes. “If the IRS has a[n unsecured] claim for taxes for which the return was
due within three years before the bankruptcy petition was filed, the claim enjoys eighth
priority under [11 U.S.C.] § 507(a)(8)(A)(i) and is nondischargeable in bankruptcy under
§ 523(a)(1)(A).” Young v. United States, 122 S. Ct. 1036, 1039 (2002); see also 11
U.S.C. § 1141(d)(2) (providing that confirmation of a Chapter 11 plan “does not
discharge an individual debtor from” liability for priority tax claims). As part of its claim
against the bankruptcy estate, the IRS may also seek pre-petition interest and penalties.
E.g., In re Bates, 974 F.2d 1234, 1237 (10th Cir. 1992) (“Pre-petition interest has the
same priority as the underlying tax providing the interest accrued pre-petition.”).
Depending on the terms of a confirmed Chapter 11 plan, the IRS may also receive post-
confirmation interest on its priority tax claims. See 11 U.S.C. § 1129(a)(9)(C).
At issue here is whether the IRS may also collect post-petition, pre-confirmation
interest (i.e., gap interest) on the IRS’s priority tax claims. Like other creditors in
bankruptcy proceedings, the IRS is generally precluded from including unmatured interest
4
as part of its claim. Specifically, § 502(b)(2) of the Bankruptcy Code provides that
unmatured interest cannot be allowed as a claim against the bankruptcy estate. 11 U.S.C.
§ 502(b)(2). The purpose of this rule is to “ensure[] convenient administration of cases
and equity in distribution.” United States v. Victor, 121 F.3d 1383, 1386 (10th Cir.
1997). More specifically, “[t]he rule makes it possible to calculate the amount of claims
easily and assures that creditors at the bottom rungs of the priority ladder are not
prejudiced by the delays inherent in liquidation and distribution of the estate.” In re
Hanna, 872 F.2d 829, 830 (8th Cir. 1989). “Therefore, post-petition[, pre-confirmation]
interest [generally] cannot be included in a Chapter 11 plan.”2 Stacy v. United States, 249
B.R. 683, 685 (Bankr. W.D. Va. 2000).
The IRS asserts that, because priority tax claims are nondischargeable in Chapter
11 proceedings, the debtor remains personally responsible for accruing gap interest. In
support of its assertion, the IRS points to Bruning v. United States, 376 U.S. 358 (1964),
a pre-Bankruptcy Code case, as well as various decisions applying Bruning to cases
governed by the Bankruptcy Code.
In Bruning, the Supreme Court interpreted the provisions of the Bankruptcy Act of
1898 and held that, following discharge in bankruptcy, a debtor remained personally
2
In Victor, we concluded that secured creditors, including the IRS, may seek
payment of post-petition interest as part of the Chapter 11 plan if the value of the
collateral exceeds the value of their claim. 121 F.3d at 1387. That rule does not apply
here, however, since it is uncontroverted that the IRS claim was unsecured.
5
liable for post-petition interest that accrued on an unpaid, nondischargeable tax debt. In
reaching this conclusion, the Court began by noting that § 17 of the Act provided that a
debtor “remained personally liable after his discharge for that part of the principal amount
of the tax debt and prepetition interest not satisfied out of the bankruptcy estate.” Id. at
360. The Court then assumed, based upon the general rule set forth in § 17, that Congress
also “intended personal liability to continue as to the interest on that debt as well as to its
principal amount.” Id. In particular, the Court noted that “[i]n most situations, interest
[wa]s considered to be the cost of the use of the amounts owing a creditor and an
incentive to prompt repayment and, thus, an integral part of a continuing debt.” Id. The
Court rejected the notion that a debtor faced with post-petition interest on a tax debt was
“aided by the now-familiar principle that one main purpose of the Bankruptcy Act is to let
the honest debtor begin his financial life anew.” Id. at 361. In fact, the Court noted,
“§ 17 [wa]s not a compassionate section for debtors,” but instead “demonstrate[d]
congressional judgment that certain problems–e.g., those of financing
government–overr[o]de the value of giving the debtor a wholly fresh start.” Id. Finally,
the Court rejected the debtor’s assertion that “the traditional rule which denie[d] post-
petition interest as a claim against the bankruptcy estate also applie[d] to discharge the
debtor from personal liability for such interest.” Id. at 362. According to the Court, the
basic reasons for the rule denying post-petition interest as a claim against the bankruptcy
estate (i.e., avoidance of unfairness as between competing creditors and the avoidance of
6
administrative inconvenience) were “inapplicable to an action brought against the debtor
personally.” Id. at 363.
Although the parties dispute whether the provisions of the Bankruptcy Code, in
particular the unique provisions of Chapter 11, mandate a different result than reached in
Bruning, they agree that this court has adopted the Bruning rationale in two Chapter 11
cases: Victor, 121 F.3d at 1387 (holding, in Chapter 11 case involving secured claim
asserted by the IRS, that “interest that accrues on a nondischargeable tax debt is an
integral part of an underlying tax claim and is generally treated the same as the original
claim”), and In re Fullmer, 962 F.2d 1463, 1468 (10th Cir. 1992) (holding, in context of
Chapter 11 proceeding, that “[i]nterest that accrues postpetition on a nondischargeable
prepetition tax debt survives bankruptcy as a personal liability”), abrogated on other
grounds, Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15 (2000).3
Tuttle suggests that the critical statements in Victor and Fullmer constitute dicta
and therefore are not binding on the panel in this case. See Bates v. Dep’t of Corrections,
81 F.3d 1008, 1011 (10th Cir. 1996) (holding that “a panel of this Court is bound by a
holding of a prior panel” but “is not bound by a prior panel’s dicta”). In Rohrbaugh v.
3
In In re Grynberg, 986 F.2d 367, 371 (10th Cir. 1993), we also held, consistent
with the holding in Bruning, that the IRS could pursue a claim for unpaid taxes against
the debtor personally despite confirmation and consummation of a Chapter 11 plan. In
reaching this conclusion, we stated: “‘[I]t is apparent to us that Congress has made the
choice between collection of revenue and rehabilitation of the debtor by making it
extremely difficult for a debtor to avoid payment of taxes under the Bankruptcy Code.’”
Id. (quoting United States v. Gurwitch, 794 F.2d 584, 585-86 (11th Cir. 1986)).
7
Celotex Corp., we explained that dicta are “'statements and comments in an opinion
concerning some rule of law or legal proposition not necessarily involved nor essential to
determination of the case at hand.'” 53 F.3d 1181, 1184 (10th Cir. 1995) (quoting Black's
Law Dictionary 454 (6th ed. 1990)).
It is a close question whether the critical statement in Victor can be considered
dicta. The court in Victor was dealing with an oversecured tax claim asserted by the IRS
(as opposed to the unsecured claim asserted here) and was specifically asked to determine
whether the IRS’s failure to seek gap interest as part of its claim resulted in the gap
interest being discharged upon plan confirmation. The IRS argued that the gap interest
was not discharged because, it theorized, the interest was part of a nondischargeable tax
debt that survived bankruptcy. The court rejected the IRS’s arguments:
Admittedly, interest that accrues on a nondischargeable tax debt is an
integral part of an underlying tax claim and is generally treated the same as
the original claim. But here, that proposition lacks force unless the IRS’s
secured claim qualifies as a nondischargeable debt under the relevant
sections of the Bankruptcy Code. We conclude that it does not.
121 F.3d at 1387 (internal citation omitted). Arguably, the opening sentence was not
“essential to determination” of the issue before the court, and indeed the court could have
assumed, without explicitly stating, that “interest that accrues on a nondischargeable tax
debt is an integral part of an underlying claim.” Accordingly, the opening sentence,
which references the issue presented here, more closely resembles dicta than a holding.
A much closer question is whether the key statement in Fullmer was dicta. In
8
Fullmer, the debtor filed a Chapter 11 proceeding and the IRS filed an unsecured claim
for unpaid taxes. After the debtor’s plan was confirmed, the debtor made two large
payments to the IRS, part of which was applied by the IRS to gap interest that had
accrued on the unpaid taxes. The debtor objected to the IRS’s action, contending the IRS
improperly exacted payment for the gap interest from the bankruptcy estate. This court
disagreed:
We do not dispute the contention that unmatured interest, including interest
accruing postpetition on a prepetition tax debt, is disallowed against the
bankruptcy estate pursuant to 11 U.S.C. § 502(b)(2). However, [the debtor]
paid the IRS the [money] after his plan was confirmed. Thus, the payment
was made by him personally and not by the bankruptcy estate. Interest that
accrues postpetition on a nondischargeable prepetition tax debt survives
bankruptcy as a personal liability. Because [the debtor] remained
personally liable for . . . the postpetition interest . . . that accrued on his
prepetition debt, the IRS was entitled to apply a portion of his personal
payment to th[is] debt[].
962 F.2d at 1467-68 (internal footnote and citations omitted). Although the court perhaps
could have grounded its decision solely on the basis that the payment to the IRS was
made by the debtor personally rather than by the estate, the quoted language indicates that
the court also grounded its decision on Bruning and the notion that gap interest “survives
bankruptcy as a personal liability.” Thus, it appears that the court’s statement in this
regard was “essential to its decision” and therefore not dicta. The decision is binding on
this panel even though, as pointed out by Tuttle, the court in Fullmer did not consider or
address all of the arguments now asserted by Tuttle against applying Bruning to Chapter
11 cases.
9
Even assuming, for purposes of argument, that neither Victor nor Fullmer controls,
the great weight of authority clearly supports applying Bruning to cases brought under the
Bankruptcy Code, including Chapter 11 cases. Although a few bankruptcy courts have
held Bruning inapplicable to Bankruptcy Code cases, those decisions subsequently were
reversed. E.g., In re Heisson, 192 B.R. 294, 296 (Bankr. D. Mass. 1996) (Chapter 11
proceedings), rev’d, 217 B.R. 1 (D. Mass. 1997); In re Reich, 66 B.R. 554, 557-58
(Bankr. D. Colo. 1986) (Chapter 7 proceedings), rev’d, 107 B.R. 299 (D. Colo. 1989); In
re Frost, 19 B.R. 804, 810 (Bankr. D. Kan. 1982) (concluding in Chapter 13 proceeding
that “fresh start” policy of Bankruptcy Code undermined rationale of Bruning), vacated
on relevant ground as unripe, 47 B.R. 961 (D. Kan. 1985). Moreover, literally all of the
circuit courts to consider the issue have concluded that Bruning applies to Bankruptcy
Code proceedings. E.g., In re Cousins, 209 F.3d 38, 41 (1st Cir. 2000) (Chapter 12
proceedings); In re Artisan Woodworkers, 204 F.3d 888, 891-92 (9th Cir. 2000)
(Chapters 11 and 12 proceedings); In re Johnson, 146 F.3d 252, 260 (5th Cir. 1998)
(Chapter 7 proceedings); In re Burns, 887 F.2d 1541, 1543 (11th Cir. 1989) (Chapter 7
proceedings); Hanna, 872 F.2d at 830-31 (Chapter 7 proceedings); see also Leeper v.
Pennsylvania Higher Educ. Assistance Agency, 49 F.3d 98, 104 (3d Cir. 1995) (Chapter
13 proceedings involving question of post-petition interest on nondischargeable student
loan).
Notwithstanding this weight of authority, Tuttle suggests there are various policy
10
reasons why Bruning should not be applied to Chapter 11 cases such as hers.4 Most
notably, Tuttle argues that allowing the IRS to recover gap interest from a debtor who
received a discharge in a Chapter 11 proceeding inevitably will undermine the debtor’s
ability to successfully complete the confirmed plan. As noted by Tuttle, because such
debtors generally have few assets with which to repay their confirmed plans, and because
gap interest is not taken into account in such plans, most debtors will be unable to pay
both the gap interest to the IRS and fulfill their remaining obligations under the plan.
While Tuttle’s policy arguments are not without merit, they cannot overcome the
plain language of the Bankruptcy Code. As noted, § 1141(d)(2) specifically provides that
confirmation of a Chapter 11 plan does not discharge a debtor from any debt listed in
§ 523. “Section 523(a)(1)(A), in turn, unequivocally notes that ‘[a] discharge under
section . . . [1141] . . . does not discharge an individual debtor from any debt’ for a tax
liability, irrespective of ‘whether or not a claim for such tax was filed or allowed.’”
Cousins, 209 F.3d at 42 (quoting § 523(a)(1)(A)). In light of these provisions, “[t]ax
liabilities survive the bankruptcy proceeding’s termination, and as Bruning held, so does
the interest upon these liabilities.” Id. Therefore, it appears that the policy arguments
4
Although Tuttle attempts to lump Chapter 11 and Chapter 13 proceedings
together, suggesting that all “reorganization cases” are significantly different than
Chapter 7 cases, the fact is that the Bankruptcy Code treats Chapter 11 cases differently
from Chapter 13 cases, at least in one important respect. In a Chapter 13 case, successful
completion of a reorganization plan results in the debtor’s discharge of liability from
accrued IRS claims. In contrast, Chapter 11 specifically provides that such claims survive
the debtor’s discharge in bankruptcy and remain valid against an individual debtor.
11
raised by Tuttle must be addressed, if at all, by Congress.5 See id. (concluding that “until
and unless” Congress amends the Bankruptcy Code, “we see no basis for the courts to
change the longstanding rule as to nondischargeability of post-petition interest”).
Tuttle raises two additional issues, neither of which we find meritorious. First,
Tuttle contends the bankruptcy court erred in determining that the IRS was not bound by
the terms of her Chapter 11 plan insofar as it purported to satisfy “any and all claims” of
the IRS. According to Tuttle, the confirmation of her plan “destroyed the [IRS’s] old
claim, including any rights to gap interest.” Aplt. Br. at 6. Tuttle’s arguments are clearly
foreclosed by the plain language of the Bankruptcy Code. Section 502(b)(2) of the Code
specifically precluded the IRS from including gap interest as part of its claim against the
estate. Thus, the plan’s reference to “any and all claims” asserted by the IRS did not
encompass the gap interest now sought by the IRS. Further, Tuttle is wrong in asserting
that confirmation of her plan somehow “destroyed” her pre-petition tax debt to the IRS
and any corresponding interest. As previously noted, § 1141(d)(2) specifically provides
that confirmation of a Chapter 11 plan does not discharge a debtor from any debt listed in
§ 523, including priority tax claims.
In her second issue, Tuttle contends the bankruptcy court should have exercised its
power under 11 U.S.C. § 105(a) (granting the bankruptcy court power to “issue any order,
5
Congress could, for example, amend the Code to allow for the collection of gap
interest only if the debtor fails to successfully complete his or her confirmed Chapter 11
plan.
12
process, or judgment . . . necessary or appropriate to carry out the provisions of this title”)
to “rule that the obligation of the IRS has been paid in full.” Aplt. Br. at 26. In support
of her contention, Tuttle offers several reasons why it would be inequitable to allow the
IRS to collect gap interest after she successfully has completed her plan. While her
equitable arguments are compelling, they cannot overcome the plain language of the
Code.
The judgment of the United States Bankruptcy Appellate Panel is AFFIRMED.
13