Statute of Limitations Wasn’t Tolled During Bankruptcy, Sixth Circuit Rules

The bankruptcy stay did not extend the statute of limitations with regard to an administrative tax claim that the chapter 11 debtor in possession did not pay, the Sixth Circuit held on March 6.

The opinion also means that the court will not impose sanctions for attempting to collect a time-barred claim if the claim itself was not discharged.

The Unpaid Taxes

The corporate debtor filed a chapter 11 petition in 2005. A chapter 11 trustee was appointed in 2011. A plan confirmed in September 2012 became effective in October 2012.

Between 2005 and 2007, the debtor had incurred post-petition state tax liability, mostly for sales taxes. The debtor filed tax returns, but neither the trustee nor the debtor paid the taxes. The taxes were assessed shortly after the debtor filed the tax returns.

The state filed a timely administrative tax claim when the plan became effective. Neither the debtor nor the trustee objected to the claim, but they did not pay the claim, evidently because the plan called for a creditor to file a request for payment, which the state never did.

In 2015, about three years after filing the administrative claim, the state levied on the debtor’s bank account, causing the company difficulty in paying its bills.

Acting in his capacity as distribution agent under the plan, the chapter 11 trustee responded to the levy by filing a motion for sanctions in bankruptcy court. The state taxing authority contended that the six-year statute of limitations was tolled while the automatic stay was in effect.

The bankruptcy judge ruled that the statute was not tolled and that the levy, made more than six years after assessment, was untimely. The bankruptcy judge also declined to impose sanctions. The district court affirmed, and both sides appealed to the Sixth Circuit.

The Circuit’s Opinion

Circuit Judge Julia Smith Gibbons upheld the bankruptcy court in an unpublished opinion on March 6.

With little to-do, Judge Gibbons held that the levy was “clearly and unambiguously” barred by the Tennessee statute of limitations applicable to taxes because the assessment occurred more than six years before the levy. She then addressed Tennessee’s contention that the statute was tolled during bankruptcy.

Judge Gibbons said that equitable tolling should be used sparingly and only in extreme cases, “when failure to invoke equitable tolling would result in ‘unacceptably unjust outcomes,’” citing the Tennessee Supreme Court.

Judge Gibbons held that equitable tolling was inapplicable because the state “does not present compelling equitable rationales for its failure to pursue its claim” after the stay terminated on plan consummation.

The state fared no better with equitable estoppel, again because the taxing authority “failed to pursue its claims diligently by waiting to issue the levy for three years.”

The appeal was a draw, because the trustee failed to persuade the appeals court to overturn the bankruptcy court and impose sanctions.

Judge Gibbons said that the state had not violated the discharge injunction because the taxes were not discharged. Further, she said the trustee did not show bad faith or intentional abuse. She therefore affirmed the denial of sanctions, “for the reasons explained by” Bankruptcy Judge Jennie D. Latta of Memphis, Tenn.

N.B.: Judge Gibbons was the author of Harker v. PNC Mortgage Co. (In re Oakes), a Section 544 opinion we reported yesterday.