Grijalva v. New Mexico Taxation and Revenue Dept.

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
SAM GRIJALVA JR.,
Debtor. 	No. 7-05-21678 SA
SAM GRIJALVA JR.,
Plaintiff,
v. 	Adv. No. 06-1118 S
NM TAXATION & REVENUE DEPT.,
Defendant.
MEMORANDUM OPINION ON DEFENDANT’S
MOTION TO DISMISS OR ABSTAIN
This matter is before the Court on NM Taxation & Revenue
Department’s (“Defendant”) Motion to Abstain. 	(Doc 4). 	The
parties have resolved all issues except those related to Count 2
of the Complaint, which seeks to void the liens filed by
Defendant. 	For the reasons set forth below, the Court finds that
it should abstain and dismiss this adversary proceeding.
HISTORY OF THE CASE
Defendant assessed a tax claim against the Debtor after a
2002 audit determined that Debtor owed taxes for a six year
period. 	Debtor hired tax counsel and protested some of the
assessments. 	The tax protest was underway when the Debtor filed
a Chapter 7 bankruptcy. 	(Debtor later withdrew the protest in
January 2009 before it was finally adjudicated.)
Debtor filed his Chapter 7 case on October 14, 2005. 	The
first meeting of creditors was held and concluded on November 27,
2005 and the Trustee filed a Report of No Distribution. 	(Docs
11, 12). 	Debtor was discharged on January 26, 2006 and the case
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was closed on that date. 	(Docs 13, 14). 	On April 28, 2006,
Debtor filed a motion to reopen the case in order to file
adversaries against the Internal Revenue Service and the New
Mexico Taxation and Revenue Department to deal with liens and
dischargeability of tax debt. 	(Doc 15). 	The motion to reopen
was denied as unnecessary on May 1, 2006. 	(Doc 16). 	On May 2,
2006, Debtor filed two adversaries, one against the Internal
Revenue Service (06-1119) and one against Defendant (06-1118).
On June 2, 2006 Debtor filed a second motion to reopen the case,
claiming that the adversaries may result in assets to be
administered. 	The Court denied the second motion to reopen,
suggesting that if assets were realized then the case could be
reopened. 	Debtor filed a third motion to reopen on October 16,
2006 (Doc 22). 	The third motion to reopen was granted on October
24, 2006 and the original trustee was reappointed. 	(Doc 23).
The Trustee filed a report of assets on November 1, 2006 and the
Clerk entered a Notice of Possible Dividend the same date. 	(Doc
26). 	Defendant filed a proof of claim on November 16, 2006.
(Claim 2). 	The Trustee later (on January 31, 2007) filed another
Report of No Distribution. 	The case was reclosed on February 20,
2007.
DISCUSSION
In their briefs, the parties argue the 11 th Amendment, which
bars suits against the state in federal court. 	However, the
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Court finds that this issue was mooted when Defendant filed a
proof of claim in November, 2006. 	Filing of a proof of claim
waives any immunity a state might have had respecting
adjudication of the claim. 	Wyoming Dept. of Transportation v.
Straight (In re Straight), 143 F.3d 1387, 1389-90 (10 th Cir.),
cert. denied, 525 U.S. 982 (1998)(citing Gardner v. New Jersey,
329 U.S. 565, 574 (1947)). 	Therefore, sovereign immunity is not
the issue in this case.
Defendant argues that the Tax Injunction Act, 28 U.S.C. §
1341 prevents this Court from hearing this case. 	That section
provides:
The district courts shall not enjoin, suspend or
restrain the assessment, levy or collection of any tax
under State law where a plain, speedy and efficient
remedy may be had in the courts of such State.
Defendant further argues that a plain, speedy and efficient
remedy is available under Section 7-1-26(c)(2) NMSA, which allows
Debtor to pay the tax and sue for a refund. 	See United Taconite,
L.L.C. v. Minnesota (In re Eveleth Mines, L.L.C.), 318 B.R. 682,
690 (8 th Cir. B.A.P. 2004)(“Once the Tax Injunction Act is
triggered, the federal court may only exercise its jurisdiction
if it finds that a plain, speedy and efficient remedy cannot be
had in the state court.”)
Debtor disagrees, arguing that § 505(a) of the Bankruptcy
Code gives the Court jurisdiction. 	That section provides:
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(a)(1) Except as provided in paragraph (2) of this
subsection, the court may determine the amount or
legality of any tax, any fine or penalty relating to a
tax, or any addition to tax, whether or not previously
assessed, whether or not paid, and whether or not
contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction.
(2) The court may not so determine--
(A) the amount or legality of a tax, fine, penalty, or
addition to tax if such amount or legality was
contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction
before the commencement of the case under this title;
...
Debtor is correct.
Ordinarily, § 1341 will preclude a federal court from
considering actions to “enjoin, suspend or restrain the
assessment, levy or collection of any tax under State
law where a plain, speedy and efficient remedy may be
had in the courts of such State.” See Brooks v. Nance,
801 F.2d 1237, 1240 (10th Cir. 1986) (“for purposes of
section 1341, Oklahoma provides an adequate remedy to
challenge the lawfulness of its taxing policies and
practices under the Oklahoma Cigarette Tax Act”).
Section 1341, however, will not preclude the
determination of state tax liability where federal
courts have jurisdiction under the Bankruptcy Code, 11
U.S.C. § 505. See Adams v. Indiana, 795 F.2d 27, 29
(7th Cir. 1986); cf. Geiger v. City of Southfield (In
re Continental Credit Corp.), 1 B.R. 680, 686 (Bankr.
N.D. Ill. 1979) (interpreting predecessor statute, §
2(a)(2A) of the Bankruptcy Act).
City Vending of Muskogee, Inc. v. Oklahoma Tax Commission, 898
F.2d 122, 123-24 (10 th Cir.), cert. denied, 498 U.S. 823 (1990).
See also Daniels v. County of Chester (In re Daniels), 304 B.R.
695, 700 (Bankr. E.D. Pa. 2003):
To the extent that a bankruptcy court must determine a
debtor's tax liability in an area where such a
determination may otherwise be barred by the Tax
Injunction Act, the overwhelming majority view is that
Congress expressly conferred jurisdiction on bankruptcy
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courts to do so in § 505 of the Code. 	In re Hechinger
Investment Co. of Delaware, Inc., 254 B.R. 306, 315
(Bankr. D. Del. 2000).
This does not end the discussion, however. 	A court’s use of §
505(a)(1) is discretionary. (“The court may determine” the amount
of tax.) 	See, e.g., 1A, Norman Singer and J.D. Singer,
Sutherland Statutory Construction § 21:8 (6 th ed.)(“When the
action is mandatory ‘shall’ should always be employed. When the
action is permissive ‘may’ should be used.”) So, the issue
becomes whether this Court should use its discretion to determine
the amount of tax due.
There are two policies underlying § 505's grant of power to
determine state tax matters. 	City Vending, 898 F.2d at 124.
First, it allows a prompt resolution of tax liability in the same
forum that is addressing the debtor’s overall financial
condition. 	Id. at 124-25. 	Second, it protects creditors from a
dissipation of estate assets which could result if the creditors
were bound by a tax judgment which the debtor, due to his ailing
financial condition, did not contest. 	Id. at 125. 	See also
Daniels, 304 B.R. at 701 (Discussing same two policies.) 	In
general, when deciding whether to exercise its discretion to hear
the tax matter, the Court must consider whether a bankruptcy
purpose would be served. 	Chance Rides, Inc. v. New Jersey (In re
Chance Rides, Inc.), 2001 WL 34656216 at *3 (Bankr. D. Kan.
2001).
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In this case, the Court sees no bankruptcy purpose that
would be served by taking jurisdiction over this tax matter. 	The
case is closed; there is no estate to administer; there would be
no impact on any creditor (except the Defendant). 	The first
policy would not be served because a prompt resolution will not
aid in administering the estate because there is no estate. 	The
second policy would not be served because any reduction in tax
liability would not be shared with creditors. 	In summary, the
Court finds that it should abstain. 	This decision is in
conformity with those in other no-asset cases in which the
debtors have tried to use the Bankruptcy Court to determine tax
liability. 	See, e.g., Cunningham v. Georgia Dept. of Revenue (In
re Cunningham), 278 B.R. 290, 292 (Bankr. M.D. Ga. 2002)(“The
weight of authority demonstrates that abstention is generally
appropriate in no-asset Chapter 7 cases. 	This is because no
bankruptcy purpose would be served by a tax determination if no
distribution will be made.”)(Collecting cases.)
In conclusion, the Court will enter an Order abstaining and
dismissing this adversary proceeding.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	September 23, 2009
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Copies to:
James C Jacobsen
111 Lomas NW Ste 300
Albuquerque, NM 87102-2368
Louis Puccini, Jr
PO Box 50700
Albuquerque, NM 87181-0700
Shay E Meagle
PO Box 50700
Albuquerque, NM 87181-0700
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