United States Court of Appeals
For the First Circuit
No. 99-1976
IN RE: WAYNE COUSINS, DBA COUSINS GARDENS; MARY C. COUSINS,
Debtors,
_____________________
INTERNAL REVENUE SERVICE
Plaintiff, Appellant,
v.
MARY C. COUSINS; WAYNE COUSINS, DBA COUSINS GARDENS,
Defendants, Appellees.
_____________________
LAWRENCE P. SUMSKI,
Trustee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Joseph A. DiClerico, Jr., U.S. District Judge]
Before
Boudin, Circuit Judge,
Bownes, Senior Circuit Judge,
and Stahl, Circuit Judge.
Curtis C. Pett, Attorney, with whom Bruce R. Ellisen,
Attorney, and Loretta C. Argrett, Assistant Attorney General,
were on brief for appellant.
Nancy H. Michels, with whom Michels & Michels, was on brief
for appellees.
April 18, 2000
STAHL, Circuit Judge. The Internal Revenue Service
(“IRS”) appeals a judgment holding that Wayne and Mary Cousins
(“Debtors”), who had filed for bankruptcy protection under
Chapter 12 of the Bankruptcy Code (“the Code”), were not liable
after discharge for postpetition interest on prepetition,
nondischargeable tax liabilities. We reverse.
I.
On November 14, 1990, Debtors filed a petition for
bankruptcy protection under Chapter 12, which is available only
to farmers. On March 14, 1991, the IRS filed a Proof of Claim
for $43,194.42 in assessed federal tax liabilities. Debtors
then filed with the bankruptcy court a Chapter 12 Plan, which
provided for the payment of the government's unsecured priority
claim, but did not provide for the payment of postpetition
interest on the obligation. The bankruptcy court confirmed the
initial Plan and Debtors' subsequent First Modified Revised
Chapter 12 Plan. Each plan required “full payment in deferred
cash payment of all claims entitled to priority under
11 U.S.C. § 507 including . . . the debt to the Internal Revenue
Service in the amount of $43,194.42.” The IRS raised no
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objection to the confirmation of either plan, and during the
life of the plan, the trustee paid the IRS $43,195.00 in
satisfaction of Debtors' prepetition tax liabilities. On
January 31, 1997, the bankruptcy court discharged Debtors after
full satisfaction of all plan payments.
The IRS subsequently demanded a payment from Debtors
of $15,560.11 for interest that had accrued postpetition on the
prepetition tax liability. In response, Debtors brought an
adversarial proceeding, seeking a determination that they were
not liable for postpetition interest on prepetition tax
liabilities, fully paid pursuant to their Chapter 12 plan.
The bankruptcy court held that a Chapter 12 debtor is
discharged from personal postdischarge liability for
postpetition interest on a nondischargeable tax debt because
this interest is not assertable as a claim against the
bankruptcy estate under 11 U.S.C. § 1222. The IRS appealed, and
the district court affirmed. Once again, the IRS appeals.
We review de novo the legal question presented by this
appeal. See Prebor v. Collins (In re I Don't Trust), 143 F.3d
1, 3 (1st Cir. 1998); Thinking Machs. Corp. v. Mellon Fin.
Servs. Corp. (In re Thinking Machs. Corp.), 67 F.3d 1021, 1023
(1st Cir. 1995).
II.
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When a debtor files for protection under Chapter 12,
any actions against the debtor or his property are stayed. See
11 U.S.C. § 1201 (1994). The United States trustee appoints a
trustee who manages the bankruptcy estate. See id.
§ 1202(b)(1). Creditors file claims with the trustee, but may
not include in their filings claims for postpetition interest.
See id. § 502(b)(2). The debtor then files a plan, see id.
§ 1221, which must “provide for the full payment, in deferred
cash payments, of all claims entitled to priority under section
507,” id. § 1222(a)(2). Section 507(a)(8) renders the
government an unsecured priority creditor for its tax
liabilities. The bankruptcy court ultimately decides whether to
confirm the debtor's plan. See id. § 1225. If it does so, it
charges the trustee with “ensur[ing] that the debtor commences
making timely payments required by [the] confirmed plan.” Id.
§ 1202(b)(4). Once these payments are completed, the bankruptcy
court discharges all debts provided for by the plan, except
those specified by § 523(a) as nondischargeable, such as a tax
liability, see § 523(a)(1)(A). The debtor remains personally
responsible for any debt not discharged in bankruptcy. See
Marvin E. Jacob & Jacqueline B. Stuart, The Search for Balance
in Bankruptcy: Congress Debates Bankruptcy Overhaul as Consumer
Bankruptcies Rise, 116 Banking L.J. 369, 377 (1999) (“[D]ebts
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that are nondischargeable pass or ride through the bankruptcy
unaffected and are a postbankruptcy liability of the former
debtor.”).
In Bruning v. United States, 376 U.S. 358 (1964), the
Supreme Court addressed whether the government is entitled to
recover from the debtor postpetition interest on a tax liability
that was not discharged through bankruptcy. See id. at 358
(interpreting the superseded Bankruptcy Act of 1898). As the
Third Circuit explained, in holding that the debtor remains
personally responsible for postpetition accrued interest, the
Bruning Court “distinguished between denial of post-petition
interest against the bankruptcy estate on a nondischargeable
debt and the accrual of interest on a nondischargeable debt
during the pendency of the bankruptcy to be collected from the
debtor after the bankruptcy proceeding is completed.” Leeper v.
Pennsylvania Higher Educ. Assistance Agency, 49 F.3d 98, 101 (3d
Cir. 1995) (emphasis added). The Court reasoned that by
categorizing postpetition interest as nondischargeable, Congress
“intended personal liability to continue as to the interest on
that debt as well as to its principal amount.” Bruning, 376
U.S. at 360. Therefore, it held that postpetition interest on
a nondischargeable tax claim “remains, after bankruptcy, a
personal liability of the debtor.” Id. at 363. Bruning thus
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stands for the proposition that a debtor with tax liabilities in
existence prior to seeking bankruptcy protection is liable after
his debts are discharged for postpetition interest on this tax
debt.
While Bruning addressed the issue under section 17 of
the Federal Bankruptcy Act, ch. 541, § 17, 30 Stat. 544, 550
(1899), repealed by Bankruptcy Code, Pub. L. No. 95-598, 92
Stat. 2549 (1978), its holding is applicable to cases arising
under § 523(a)(1)(A) of the Code. See, e.g., Ward v. Board of
Equalization (In re Artisan Woodworkers), 204 F.3d 888, 891 (9th
Cir. 2000) (noting that Ҥ 17 of the Bankruptcy Act and
§ 523(a)(1)(A) of the Bankruptcy Code are functionally
equivalent”); Burns v. United States (In re Burns), 887 F.2d
1541, 1543 (11th Cir. 1989) (noting that “pre-Code
interpretations are presumed to have survived the enactment of
the Bankruptcy Code unless Congress has expressed an intention
to change the interpretation of judicially created concepts in
enacting the Code” and concluding that with regard to Bruning,
“Congress did not intend to change the pre-Code law”).
Debtors convinced the bankruptcy and district courts
that, while the Bruning rule might apply to some chapters of the
Code, it does not apply to Chapter 12. The Debtors argue that
Congress wrote § 1222(a)(2) to escape Bruning's dictates. They
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contend that “[i]f Congress had intended that unsecured priority
claimholders were to receive [postpetition] interest, it would
have added . . . 'present value' language to § 1222(a)(2).”
This argument obscures the difference between a Chapter 12
debtor's responsibility to satisfy his plan during the pendency
of the bankruptcy proceeding and his remaining personal
postbankruptcy obligation. While it is true that § 1222's
wording frees the estate from any obligation to pay postpetition
interest, it does not speak to the debtor's personal obligation
for such interest. When a debtor files for bankruptcy under
Chapter 12, his assets and liabilities become part of the
bankruptcy estate, which the trustee manages throughout the
bankruptcy proceeding. The debtor must file a plan that will
resolve his debts, which the Code explicitly states may not
include “unmatured interest,” 11 U.S.C. § 502(b)(2). Upon the
debtor's satisfaction of those debts, the bankruptcy court
discharges all of his outstanding dischargeable debts and the
bankruptcy proceeding is over. See id. § 1228. The debtor
remains personally liable, however, for any nondischargeable
debts. See Jacob & Stuart, supra, at 377. Thus, § 1222(a)(2)
only governs how debts must be paid to satisfy the Chapter 12
plan. When § 1222(a)(2), without the “present value” language,
speaks of fully paying the debts, it means that prior to
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debtor's release from bankruptcy, the estate must pay the full
amount of his debts as they stood at the time of the petition,
as opposed to the current amount plus postpetition interest.
Section 1222 “do[es] not affect the exception of tax debts from
discharge or a debtor's personal liability.” In re Artisan
Woodworkers, 204 F.3d at 892.
Debtors contend that because § 1222(a)(2) prohibits the
inclusion of postpetition interest under the plan, Congress
could not have intended for a debtor postdischarge personally to
have to pay postpetition interest. But, “[i]n all situations
where the Bruning rule is applicable, the bankruptcy plan cannot
make allowances for post-petition interest; the interest merely
accrues and is collectable against the debtor [as opposed to the
estate] after the bankruptcy is completed.” Leeper, 49 F.3d at
102. Moreover, Congress intended this scheme. See Hanna v.
United States (In re Hanna), 872 F.2d 829, 831 (8th Cir. 1989)
(“Taken together, sections 502 and 523 simply demonstrate
Congress' intent to codify the general principle that applied
under Bruning. Postpetition interest is disallowed against the
bankruptcy estate under section 502. Priority tax claims remain
nondischargeable for individual debtors.”).
We turn to whether the postpetition interest on
Debtors' tax liability survived § 1228(a) discharge. Debtors
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note that § 1228(a) mandates that all debts under the plan must
be paid in full before the debtor can be discharged. Proceeding
from this premise, they argue that because nondischargeable tax
debts must be satisfied before discharge is entered, neither the
tax liability nor its interest can survive discharge, and
Bruning is inapplicable. We have a different view.
The plain language of § 1228(a)(2) provides that
discharge specifically does not apply to any debt listed in
§ 523(a). Section 523(a)(1)(A), in turn, unequivocally notes
that “[a] discharge under section . . . 1228(a) . . . 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.” 11 U.S.C. § 523(a)(1)(A). In addition,
Debtors' reading of the Code would render even the principal of
a tax liability extinguished after the plan is completed if, for
example, the claim for tax liability was not filed or allowed
and therefore was not included in the Chapter 12 plan. This
interpretation is untenable. See Bruning, 376 U.S. at 360 (“It
is undisputed that . . . petitioner remained personally liable
after his discharge for that part of the principal amount of the
tax debt and pre-petition interest not satisfied out of the
bankruptcy estate.”). Tax liabilities survive the bankruptcy
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proceeding's termination, and as Bruning held, so does the
interest upon these liabilities.
Debtors also contend that allowing the IRS to pursue
postpetition interest contradicts the purpose of Chapter 12,
which is designed to aid a struggling family farmer to escape
from under the thumb of debt. Undoubtedly, Congress intended
that Chapter 12 aid debtor-farmers in their attempts to resolve
their financial difficulties. See 132 Cong. Rec. S15074-05
(daily ed. Oct. 3, 1986) (statement of Sen. Thurmond) (“[Chapter
12] is meant to assist those farmers who have the true potential
to reorganize and to allow them relief from heavy debt burden,
and yet allow farmers to pay creditors what is reasonable under
today's difficult economic situation.”). But, Congress also has
decided that “certain problems--e.g., those of financing the
government--override the value of giving the debtor a wholly
fresh start.” Bruning, 376 U.S. at 361; see also In re Hanna,
872 F.2d at 831 (“Congress attempted to balance the interests of
the debtor, creditors and the government, and in the instance of
taxes and interest on such, Congress has determined that the
problems of financing the government override granting debtors
a wholly fresh start.”). We must respect Congress's judgment.
See Leeper, 49 F.3d at 105 (“Congress . . . may choose to amend
the statute with respect to the treatment of post-petition
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interest [for student loans1]. But until and unless it does so,
we see no basis for the courts to change the longstanding rule
as to nondischargeability of post-petition interest.”).
III.
We reverse the judgment of the district court and
remand the matter to the district court for entry of judgment in
favor of the IRS.
1Debtors argue that because student loans do not have
priority under 11 U.S.C. § 507, the application of Bruning to
them does not support its application here. We disagree. The
absence of student loans in § 507 merely means that such claims
receive no priority under a bankruptcy plan. That fact is
irrelevant to whether the bankruptcy court can discharge a
student loan's principal and interest. Section 1328(a)(2)
provides that discharge does not apply to “any debt of the kind
specified in paragraph (5), (8), or (9) of section 523(a).”
Section 523(a)(8) covers student loans. Similarly, § 1228(a)
provides that discharge does not apply to “any debt of the kind
specified in section 523(a).” This similarity indicates that
student loans under § 1328(a) and tax liabilities under
§ 1228(a) receive identical treatment under Bruning.
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