United States v. Cook (In Re Cook)

Citations: 232 B.R. 554; 1999 Bankr. LEXIS 350; 83 A.F.T.R.2d (RIA) 1984; 34 Bankr. Ct. Dec. (CRR) 154; 1999 WL 212266Docket: 19-50241

Court: United States Bankruptcy Court, D. Connecticut; March 25, 1999; Us Bankruptcy; United States Bankruptcy Court

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Matthew David Cook, the debtor in a Chapter 7 bankruptcy case, filed a complaint under Bankruptcy Code § 523(a)(1)(A) to challenge the dischargeability of a debt owed to the United States. The court previously denied the United States' motion to dismiss the complaint or to abstain from the case, finding no basis for either request. The United States has now moved to lift the automatic stay imposed by Bankruptcy Code § 362(a)(1) to allow it to initiate a district court action against Cook and another individual concerning a 100% penalty assessed by the IRS related to unpaid employment tax liabilities of two companies for specific periods.

Cook opposes this motion, asserting that he has selected an appropriate forum for resolving the tax dispute and that the court has adequate jurisdiction. In his complaint, Cook alleges that he worked for a payroll service corporation that mismanaged client funds, resulting in unpaid withholding taxes. He contends that the client companies, not he, should be responsible for these taxes and seeks a court determination that he is not liable for the alleged nondischargeable debt. The United States has not provided additional factual support or evidence during the proceedings, limiting the court's review to the complaint and the motion.

The United States Court of Appeals for the Second Circuit in Sonnax Industries, Inc. v. Tri Component Products Corp. identified 12 factors for determining whether to allow litigation to proceed in a different forum. These factors include the potential for resolution of issues, connection to the bankruptcy case, fiduciary involvement of the debtor, existence of a specialized tribunal, responsibility of the debtor's insurer, involvement of third parties, potential prejudice to other creditors, subordination of claims, avoidability of liens, judicial economy, trial readiness, and the impact of a stay. Notably, not all factors are relevant in each case.

In the current proceeding, the movant's counsel indicated that if granted permission, the movant could not sue the debtor and another individual in Connecticut due to jurisdictional limitations, but could do so in Massachusetts, where personal jurisdiction over the debtor could be established. The court finds that Sonnax factor No. 12—impact on the debtor and balance of harms—is decisive. Forcing the debtor to defend out of state and potentially hire new counsel favors the debtor's position. 

The court notes that the movant had ample time to address the debtor's tax liability before the bankruptcy filing, which is a consideration under factor No. 10. The movant acknowledges that while consolidating the action may be convenient, separate judgments against each taxpayer are possible without joint litigation. Factors Nos. 1 and 6 are deemed minor, as the issue can be fully resolved in the debtor's adversary proceeding without affecting third-party rights. Factor No. 7 is also supported since the litigation is not expected to harm other creditors, given that there will likely be no distribution to them from the debtor's estate.

Section 362(d)(1) grants the court discretion to lift the automatic stay of a judicial proceeding for "cause." Motions to lift the stay require a fact-specific inquiry. After weighing the relevant factors, the court finds that the burden on the debtor to defend against a yet-to-begin action in another state outweighs the movant's interest in consolidating litigation in one forum. Consequently, the court denies the movant's motion to modify the automatic stay, rendering unnecessary the consideration of the movant's request to stay the debtor's pending complaint against them. The order concludes with a reference to the applicable statutes, clarifying the debtor's filing was under § 523(a)(1)(A) rather than the incorrectly cited § 523(b), and reiterating the stay provisions of § 362(a)(1).