The Tax Man Cometh Plan Confirmation Does Not Free Responsible Officers From Trust Fund Recovery

By: Eric J. Dostal

St. John's Law Student

American  Bankruptcy Institute Law Review Staff

Recently, in J.J. Re–Bar Corp. v. United States (In re J.J. Re–Bar Corp.)[1] the Ninth Circuit held that the Anti–Injunction Act[2] does not bar the post-confirmation collection of a trust fund recovery penalty (“TFRP”)[3] from the responsible officers of a debtor corporation by the IRS.[4] The Ninth Circuit, relying on Davis v. United States[5] determined that because TFRP liability arises from officers’ willful conduct, such penalties are the obligations of the officers themselves and not the debtor corporation.[6] This case arose after the IRS assessed a TFRP against the Skokans, the corporate officers responsible for the company’s failure to remit certain “trust fund taxes–the tax withholdings from employee paychecks–to the government.”[7] The IRS chose to assess the TFRP against the responsible officers of the debtor after the debtor had confirmed its plan and paid its outstanding payroll taxes.[8] Seeking to halt the IRS’ collection efforts, J.J. Re–Bar “filed a motion to enforce . . . the Plan and to hold the IRS in contempt.”[9] Both the Bankruptcy Court and the Bankruptcy Appellate Panel ruled for the IRS.[10]    

Same-Sex Married Debtors May File a Joint Petition for Bankruptcy The DOMAs Definition of Spouse is Held Unconstitutional

By: Jennifer K. Arcarola

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In In re Balas & Morales,[1] the United States Bankruptcy Court for the Central District of California held that a legally married same-sex couple could jointly petition for bankruptcy.[2]  The debtors, Gene Balas and Carlos Morales, are a same-sex couple legally married in California who jointly filed for bankruptcy under chapter 13.[3] The United States Trustee (the “Trustee”) moved to dismiss the case, alleging that section 1307(c) of the United States Bankruptcy Code (the “Code”) prohibits two males from jointly filing for bankruptcy[4] because the Defense of Marriage Act (the “DOMA”) defines “spouse” as a person of the opposite sex who is a husband or a wife,[5] and so Trustee alleged that their case should be dismissed “for cause” pursuant to section 1307(c) of the Code.[6]  The court concluded that (1) the DOMA was unconstitutional as applied to a same-sex married couple under the Equal Protection Clause of the Fifth Amendment, (2) no legitimate government interest was served in applying the statute, and (3) none of the eleven grounds for dismissal listed in section 1307 were implicated.[7]

Class Certification Continues to Gum up the Works in Bankruptcy

By: Ravi Vohra

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Motors Liquidation Co.,[1] the Bankruptcy Court for the Southern District of New York denied class certification and disallowed two claims set forth by the Botha and Balintulo claimants (the “Class Claimants”) in General Motors Corporation’s (“Old GM”) chapter 11 proceedings.[2] The claims were first raised prepetition by 26 named plaintiffs in two separate groups, (the “Botha Plaintiffs” and the “Balintulo Plaintiffs”), and Old GM filed its chapter 11 petition while those lawsuits were still pending. The Botha and Balintulo Plaintiffs then filed proofs of claims against the corporation.[3] More than twelve months after Old GM’s chapter 11 filing and eight months after the bar date, the Class Claimants moved for class treatment and Old GM then sought to disallow the class claims.[4] Among other things, the Class Claimants alleged that they were victims of the infamous system of apartheid in South Africa, and that Old GM aided and abetted the perpetrators of the apartheid system in causing the claimants’ injuries.[5]

Discrimination in Hiring Based on Past Bankruptcy Filing Allowed for Private Employers

By: Megan Quail

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Myers v. Toojay’s Management Corp., the Court of Appeals for the Eleventh Circuit affirmed a grant of summary judgment in favor of a private business, Toojay’s, which refused to hire Myers, an individual, based on his prior bankruptcy filing.[1] Myers claimed that Toojay’s violated section 525(b) of the Bankruptcy Code (“the Code”) by declining to offer him employment after learning of his previously filed bankruptcy petition.[2] The court held that section 525(b) of the Code does not prohibit a private employer from declining to hire a person because of a prior bankruptcy despite prohibiting public employers from taking similar action.[3] As the third United States Court of Appeals ruling of its kind, Myers v. Toojay’s Management Corp. continues the trend of protecting the discriminatory hiring decisions of private employers.[4]

In re Lothian Oil Inc. Non-Insider Debt Claims May Be Recharacterized as Equity Under Section 502(b)(1)

 By: David N. Saponara

St. John’s Law Student

American Bankruptcy Institute Law Review Staff