Texas Comp of Pub v. Russell

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 97-10999
Summary Calendar

IN THE MATTER OF: BILLY G. RUSSELL; JUDY E. RUSSELL,

Debtors,

_________________________________

TEXAS COMPTROLLER OF PUBLIC ACCOUNTS,

Appellants,

versus

BILLY G. RUSSELL; JUDY E. RUSSELL,

Appellees.

- - - - - - - - - -
Appeal from the United States District Court
for the Northern District of Texas
(3:96-CV-3008-K)
- - - - - - - - - -

February 15, 1999

Before HIGGINBOTHAM, JONES and DENNIS, Circuit Judges.

EDITH H. JONES, Circuit Judge:*

§The only issue in this case is the amount and rate of

interest to be included in the state’s claim for unpaid sales

taxed In this Chapter 13 bankruptcy case.2 Concluding that the

*
Pursuant to 5TH CIR. R. 47.5, the court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
2
The Russells do not take issue with the back sales tax of
$17,304.03, and they waived their objection to the Comptroller’s
claim for penalties since the penalty would be treated as a
general unsecured claim in their Chapter 13 case.
 No. 97-10999
-2-

bankruptcy and district courts erred in falling to award the

state certain amounts of interest at the state rate (10%), we

reverse and remand for entry of a revised judgment.

Before these debtors filed a Chapter 13 case, they had been

debtors in a previous Chapter 7 bankruptcy (converted from

Chapter 11). In the prior case they objected to the state

Comptroller’s claim for unpaid sales tax, together with interest

and penalties, and asserted that the tax claim was dischargeable.

As a matter of bankruptcy court procedure, their assertion was

voiced in an adversary proceeding commenced by the debtors

against the State of Texas requesting that the bankruptcy court

“deny the claim of the State of Texas for all sales tax, and for

further relief.” The state responded, praying that its proof of

claim be allowed in full as filed. In pretrial stipulations, the

debtors agreed that if the court should find sales tax was due on

their laundry services and that they are liable for uncollected

sales tax, “the Comptroller’s calculations of tax, interest and

penalty are correct.” The interest and penalties at that time

amounted to approximately $6,000.

After hearing arguments in the adversary proceeding, the

bankruptcy court entered judgment stating that:

The Adversary filed by Billy Russell and
Judy Russell, Debtors, is hereby denied.
The Court further finds that the Sales
Tax Liability in the amount of $17,304.03
was owed by the Debtors to the State of
Texas; the Court further finds that the
amount of money owed by the Debtors is
not dischargeable in bankruptcy.

Moving to the present case, the bankruptcy court stated that

the debtors filed their current Chapter 13 case, in part, to
 No. 97-10999
-3-

address the state’s subsequent claim against them for non-

dischargeable sales tax interest and penalties. Ruling on the

debtors’ objection to the state’s Chapter 13 proof of claim,

which now includes interest and penalties of over $8,000, the

bankruptcy court decided that in reality, in the first adversary

proceeding, it entered judgment against the debtors and in favor

of the State of Texas for $17,304.03. Consequently, that

affirmative judgment, from which the state sought no relief, was

entitled to bear interest only at the federal judgment rate of

5.49%. See 28 U.S.C. § 1961. The district court affirmed the

bankruptcy court’s judgment, and this appeal followed.

The state first contends that in the original adversary

proceeding, the bankruptcy court did not enter judgment against

the debtors on the state’s sales tax claim. We agree. The state

never sought the relief, and the limited purposed of the

adversary proceeding were to determine the amount of the state’s

claim against the debtor’s estate and whether that claim, if

unpaid in bankruptcy, was non-dischargeable. A finding of non-

dischargeability is not the same as entry of judgment on the

claim. No pleading of any party in the adversary proceeding

suggests that the bankruptcy court was asked to or did in fact

enter an enforceable judgment in favor of the state and against

the debtors.3 Since the bankruptcy court did not enter a money

judgment against the Russells, it had no warrant to reduce the

applicable interest rate from the governed by state law to the

3
Whether the court could have done so, consistent with its
core jurisdiction, raises a question we leave for another day.
 No. 97-10999
-4-

lower federal judgment rate.

In finding that the debt owed to the state was non-

dischargeable, however, the bankruptcy court only included the

principal amount owed ($17,304.03), and not the back interest or

penalties; the judgment of non-dischargeability specifically did

not include those other amounts. The state may not at this late

juncture interpret the bankruptcy court’s judgment to include

those additional pre-chapter 7 amounts. Even though the state

asserts that the debtors never contested the amount of interest

or penalties, we may not go behind the express terms of the

judgment in what amounts to a collateral attack by the state.

The state should have asked the bankruptcy court to revise its

judgment to include pre-chapter 7 interest and penalties while

the court still had jurisdiction over the original adversary

proceeding. Thus, the state may not now assert continuing

liability of the Russells for pre-chapter 7 interest and

penalties.

On the other hand, the state compellingly points out that

its proof of claim in the Chapter 7 case could not legally

include post-chapter 7 accruals of interest, and any such claim

was also not a part of the non-discharge ability proceeding.

After the principal amount of the tax debt was ruled non-

dischargeable, interest could accrue against the debtors from and

after the date of the filing of their Chapter 7 petition. That

interest continued to accrue until the debtors filed their

Chapter 13 case. The bankruptcy court should have awarded this

portion of the state’s claim for interest in its ruling on the
 No. 97-10999
-5-

state’s Chapter 13 proof of claim.

To conclude with specificity, the state is entitled to

collect interest at the state’s default rate from the date of

filing of the Russells’ Chapter 7 petition until the date of

filing of their Chapter 13 petition. The applicable interest

rate is therefore 10% for that period of time rather than the

federal judgment rate.

The judgment is REVERSED and the case REMANDED for entry of

judgment as specified.

REVERSED and REMANDED.