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Abram & Tracy, Inc. v. Internal Revenue Service (In re Abram & Tracy, Inc.)
Citation: 277 B.R. 369Docket: Bankruptcy No. 97-52383; Adversary No. 00-0172
Court: United States Bankruptcy Court, S.D. Ohio; April 11, 2002; Us Bankruptcy; United States Bankruptcy Court
The Court granted Abram. Tracy, Inc.'s Motion for Partial Summary Judgment against objections from the State of Ohio Department of Taxation and the Internal Revenue Service (IRS). The core issue pertained to a confirmed bankruptcy plan that released the Debtor’s principal, which the State and IRS argued exceeded the Court's jurisdiction under section 524(e) of the Bankruptcy Code. This section states that a debtor's discharge does not affect the liability of other entities for the debt. The State and IRS contended that the Debtor improperly modified the confirmed plan. However, the Debtor countered that there was no statutory prohibition against third-party releases and that the State and IRS were barred from challenging the confirmed plan since they did not object or appeal its confirmation. The Court's decision was informed by the Debtor's history, which began in the heating and plumbing business in 1969. Due to uncollectible receivables from 1989 to 1992, the Debtor failed to make tax withholding payments, ceasing operations in 1995 and subsequently entering Chapter 11 on March 28, 1997, amid tax collection efforts. The Debtor listed secured debts to the IRS and State totaling $181,000, backed by property valued at $319,000, suggesting potential surplus for unsecured creditors after satisfying secured claims. The IRS filed a claim for $159,424.42, and the State filed for $67,284.46. The Debtor proposed an Amended Liquidating Plan funded by the sale of the property at $349,000, intending to fully satisfy the State's claim while disputing the IRS's claim but agreeing to pay any amounts found owed. The plan included provisions to prevent further claims against the Debtor and its affiliates post-confirmation, with a hearing scheduled for October 7, 1997, to approve the disclosure statement and confirm the plan. The objection deadline was set for September 26, 1997, with only two objections filed. The State raised concerns about the Debtor's insufficient disclosure regarding the treatment of its claim. Following a confirmation hearing, the Court issued two Agreed Orders on October 31, 1997: one for Keybank, which maintained the stay until November 1, 1999, and included provisions for interim payments; and another for the U.S. Trustee, confirming the ongoing post-confirmation quarterly fees. Neither the State nor the IRS secured an entry to protect their interests. On February 2, 1998, the Court confirmed the Debtor’s Chapter 11 Plan, referencing the two Agreed Orders. To execute the confirmed Amended Liquidating Plan, the Debtor sought to appoint a realtor on May 18, 1998, with approval granted on June 8, 1998. After extensive status updates, a potential buyer was identified. On February 4, 2000, the Debtor filed a motion to sell real estate free of liens for $240,000, significantly lower than its listing price, disclosing that a fire in April 1999 damaged the property. Insurance proceeds of $36,000 were received, with $30,000 paid to Keybank, and remaining funds held in escrow for fire-related costs. The Debtor intended to satisfy Keybank in full and proposed payments of $44,000 to the State and $60,000 to the IRS. On February 23, 2000, the State objected, demanding full payment of its secured liens, followed by an IRS objection on March 14, 2000, claiming the proposal inadequately addressed its liens and improperly modified the plan. An Amended Agreed Order on June 22, 2000, allowed the sale to proceed, requiring the Debtor to resolve the lien validity through an adversary proceeding filed on June 23, 2000. However, the sale fell through due to buyer financing issues, prompting the Court to issue an Order to Show Cause for potential case conversion or dismissal on November 13, 2000, with a hearing scheduled for February 5, 2001. Subsequently, on January 2, 2001, the Debtor filed a second motion to sell the property via public auction, listing State and IRS claims as disputed. The auction occurred on January 22, 2001, with the property selling for $160,000. The Debtor requested authority to complete the sale on January 25, 2001, proposing full payment to Keybank and withholding proceeds for the resolution of the lien disputes. After several complications, a final order allowing the sale's completion was granted on June 18, 2001. The Debtor achieved net proceeds of $65,248.37 from the sale of real property as part of a confirmed Chapter 11 liquidation plan, which faced challenges typical in bankruptcy sales, including potential property devaluation. The sale price was lower than both the listing price and scheduled value, but this outcome does not constitute an impermissible modification of the plan. The State and IRS did not contest the release provision during the confirmation process, which the Debtor argues precludes their current objections. Although they claim a lack of jurisdiction for the third-party release, recent Sixth Circuit rulings affirm that bankruptcy courts can enjoin creditor actions against third parties, even against creditor opposition. The confirmation of the plan is treated as a judgment, barring further litigation on issues raised or that could have been raised previously. Additionally, since the Debtor has already distributed funds, the plan has been substantially consummated, preventing any modifications by the Debtor, IRS, or State. The Court emphasizes the necessity of adhering to the confirmed Amended Liquidating Plan and finds no jurisdictional barrier to granting third-party releases. Consequently, the motion for partial summary judgment is granted, with no criticism aimed at the State and IRS, acknowledging their understandable position given the initial expectations of full claims payment.