By anticipating amendments to Bankruptcy Rule 3007, the bankruptcy and district courts committed error by ruling that an objection to a claim by the Internal Revenue Service must have been served on the Attorney General and the local U.S. Attorney. Under the “old rule” in effect at the time, service on the IRS was sufficient, the Eighth Circuit said.
Effective in December 2017, the Bankruptcy Rules were amended by adding Rule 3007(a)(2)(A)(i) which requires serving an objection to a claim by a U.S. government agency in the manner prescribed for the service of a summons and complaint in Bankruptcy Rule 7004(b)(4) or (5). In the case of the IRS, Rule 7004 requires services on the Attorney General, the local U.S. Attorney, and the agency.
Before the amendment, Rule 3007(a) only required that a claim objection be “mailed . . . to the claimant,” the debtor, and the trustee.
The IRS Defaults on a Claim Objection
In the case that came to the Eighth Circuit, the individual debtor was liable to the IRS in the amount of $93,000 for his company’s failure to pay withholding taxes. The IRS filed a proof of claim against the individual debtor, who objected.
The debtor mailed the objection to the IRS at the address shown on the IRS’s proof of claim. When the IRS did not respond, the bankruptcy court sustained the objection and disallowed the claim in an order in March 2017, before the amended rule became effective.
Almost a year later, after the amended rule came into effect, the IRS moved to vacate the order disallowing the claim. By order in February 2018, the bankruptcy court vacated the earlier order disallowing the claim. The judge reasoned that the debtor never obtained personal jurisdiction over the IRS because the objection had not been served on the Attorney General and the local U.S. Attorney.
The district court affirmed, but the Eighth Circuit reversed in a seven-page opinion on July 6 by Circuit Judge David R. Stras. He said that service on the IRS was “all the Federal Rules of Bankruptcy Procedure required at the time.”
The lower courts, Judge Stras said, divined a “special requirement for claims filed by a federal agency” mandating service on the Attorney General and the U.S. Attorney. The lower courts, he said, found the additional requirement in Bankruptcy Rule 9014(a), which requires that “relief shall be requested by motion” in “a contested matter not otherwise governed by these rules.” Rule 9014(b) requires service in the manner required for a summons and complaint under Rule 7004, which requires serving the Attorney General and the local U.S. Attorney.
The Distinction Between ‘Objection’ and ‘Motion’
Judge Stras identified an important distinction in the words used in the rules. “An objection is not a motion,” he said, “so it is not subject to the service requirements in Rule 7004.” Instead, he said, “another rule [former Rule 3007(a)] does govern this type of contested matter,” and it only requires service on the agency. [Emphasis in original.]
The lower courts may have been misled by an Advisory Committee Note which said that a claim objection is governed by Rule 9014. Judge Stras didn’t say the note was wrong, but he opined that the note and Rule 9014 address “topics other than just service.”
“What this means,” Judge Stras said, “is that a ‘contested matter initiated by an objection’ can still be ‘governed by Rule 9014,’ as the advisory note directs, even if delivery is accomplished some other way.”
Judge Stras said the lower courts should not have read the Advisory Committee Note “to overcome the plain language of Rule 3007.”
Judge Stras reversed and remanded with instructions to reinstate the prior order sustaining the claim objection,” because “an objection need only be mailed to the ‘claimant’” according “to the plain language of Rule 3007.”
By anticipating amendments to Bankruptcy Rule 3007, the bankruptcy and district courts committed error by ruling that an objection to a claim by the Internal Revenue Service must have been served on the Attorney General and the local U.S. Attorney. Under the “old rule” in effect at the time, service on the IRS was sufficient, the Eighth Circuit said.
Effective in December 2017, the Bankruptcy Rules were amended by adding Rule 3007(a)(2)(A)(i) which requires serving an objection to a claim by a U.S. government agency in the manner prescribed for the service of a summons and complaint in Bankruptcy Rule 7004(b)(4) or (5). In the case of the IRS, Rule 7004 requires services on the Attorney General, the local U.S. Attorney, and the agency.
Before the amendment, Rule 3007(a) only required that a claim objection be “mailed . . . to the claimant,” the debtor, and the trustee.
The IRS Defaults on a Claim Objection
In the case that came to the Eighth Circuit, the individual debtor was liable to the IRS in the amount of $93,000 for his company’s failure to pay withholding taxes. The IRS filed a proof of claim against the individual debtor, who objected.
The debtor mailed the objection to the IRS at the address shown on the IRS’s proof of claim. When the IRS did not respond, the bankruptcy court sustained the objection and disallowed the claim in an order in March 2017, before the amended rule became effective.
Almost a year later, after the amended rule came into effect, the IRS moved to vacate the order disallowing the claim. By order in February 2018, the bankruptcy court vacated the earlier order disallowing the claim. The judge reasoned that the debtor never obtained personal jurisdiction over the IRS because the objection had not been served on the Attorney General and the local U.S. Attorney.
The district court affirmed, but the Eighth Circuit reversed in a seven-page opinion on July 6 by Circuit Judge David R. Stras. He said that service on the IRS was “all the Federal Rules of Bankruptcy Procedure required at the time.”