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In re Ayre

January 16, 2007

IN RE KEITH L. AYRE AND LISA A. AYRE, DEBTORS,
ILLINOIS DEPARTMENT OF REVENUE, APPELLANT,
v.
KEITH L. AYRE, LISA A. AYRE, DEBTORS, AND JOHN H. GERMERAAD, TRUSTEE, APPELLEES.



Appeal from the U.S. Bankruptcy Court Central District of Illinois. Hon. Mary Gorman, presiding. Bankruptcy No. 05-73602.

The opinion of the court was delivered by: Jeanne E. Scott, U.S. District Judge

OPINION

The Illinois Department of Revenue (Department) appeals from an Opinion and Order entered by the Bankruptcy Court on March 27, 2006, sustaining an objection to its proofs of claim in the Chapter 13 bankruptcy of Keith and Lisa Ayre (the Debtors). The Department had filed proofs of claim for unpaid sales and withholding income taxes totaling $104,635.22. The Debtors disputed the Department's claim and proposed in their Plan of reorganization (Plan) to pay the Department $10,500.00 in full satisfaction of its disputed claim. The Plan was confirmed without objection.

The Chapter 13 bankruptcy Trustee John H. Germeraad then objected to the Department's proofs of claim to the extent that they claimed more than the $10,500.00 called for in the Plan. The Trustee argued that the confirmed Plan bound the Department to accept the payments called for in the Plan. The Bankruptcy Court agreed, and it sustained the Trustee's objection. The Department now appeals that decision. For the reasons set forth below, this Court affirms the decision of the Bankruptcy Court.

STATEMENT OF FACTS

The Debtors previously operated an establishment in Springfield, Illinois, called the Fox Run Restaurant and Lounge. They filed a Chapter 11 bankruptcy in 2002 to attempt to reorganize that business. The Chapter 11 was eventually converted to a Chapter 7 liquidation. Record on Appeal, Part 2 (d/e 2) (R, Part 2), Item 19, Opinion entered March 27, 2006 (Opinion), at 1-2.

On July 7, 2005, the Debtors filed this Chapter 13 proceeding.*fn1 On July 28, 2005, the Debtors filed their Plan of reorganization. Record on Appeal, Part 1 (d/e 1) (r), Part 1), Item 3, Chapter 13 Plan. The Plan stated that the Department asserted a priority claim for $104,039.80. Id., at 2. The Plan stated that the Debtors disputed the Department's claim. The Plan proposed to pay the Department $10,500.00 over 36 months in settlement of this disputed claim. Id.

On August 18, 2005, the Department filed three proofs of claim in the Debtors' bankruptcy. The first and third proofs of claim were essentially the same. The third amended the first by increasing the claim by one cent. Opinion, at 3. The third, amended, proof of claim asserted a claim in the amount of $88,808.83. R, Part 2, Item 29, Proof of Claim #3. The proof of claim stated that $88,716.83 of this claim was secured. The proof of claim did not identify the collateral that secured the debt. The proof of claim also stated that if the claim exceeded the value of any property securing it, the portion of the claim entitled to priority was $72,363.32. The proof of claim did not indicate the basis for the claim of priority. The proof of claim stated that none of the claim was an unsecured priority claim. Id.

Attached to the proof of claim was a spreadsheet listing unpaid sales taxes from December 2000 through November 2001, and April 2002 through July 2002. The Department claimed the same amount, $3,695.00, for each of the months of March 2001 through November 2001, and May 2002 through July 2002. The spreadsheet also listed interest and penalties, and stated that the Department had filed lien notices in Sangamon County, Illinois, for all of these tax claims. Id. According to the Bankruptcy Court, however, the Debtors did not list any property in their bankruptcy that would have been subject to any of these tax liens, and the Department did not identify any such property. Opinion, at 9.

The second proof of claim asserted a claim in the amount of $15,826.39. R, Part 2, Item 29, Proof of Claim #2. The proof of claim stated that all of this claim was secured. The proof of claim did not identify the collateral that secured the debt. The proof of claim also stated that if the claim exceeded the value of any property securing it, the portion of the claim entitled to priority was $12,566.78. The proof of claim did not indicate the basis for the claim of priority. The proof of claim stated that none of the claim was an unsecured priority claim. Id.

Attached to the second proof of claim was a spreadsheet listing unpaid withholding income taxes for the months of April 2000, January 2001 through April 2001, and February through March 2002. The Department claimed the same amount, $1,615.00, for each of the months of January 2001 through April 2001, and February 2002. The spreadsheet also listed interest and penalties, and stated that the Department had filed lien notices in Sangamon County, Illinois, for all of these tax claims. Id. The Department, again, did not identify any real property to which this lien attached, and the Debtors did not list any such property in their bankruptcy filings.

The Department received all of the appropriate notices of the bankruptcy proceeding, including the date of the first meeting of creditors, the date by which to object to the Plan, and the date of the confirmation hearing. The first meeting of creditors occurred on August 25, 2005. The Department did not appear. The Department also did not object to the Plan. The confirmation hearing occurred on October 25, 2005. The Department, again, did not appear. The Court ultimately confirmed the Plan of reorganization by Order dated November 8, 2005. Opinion, at 2-3, 5-6.

On December 16, 2005, Trustee Germeraad filed objections to the Department's proofs of claim. R, Part 1, Item 12, Notice of Objection to Claims. Germeraad asserted that the Department was bound by the terms of the Plan and that the claims should be disallowed to the extent that they exceeded the payment called for in the Plan. The parties argued the objection on February 7, 2006, and February 22, 2006. At the February 7, 2006, hearing, the Bankruptcy Court asked the counsel for the Department why the Department did not object to confirmation. He responded:

Your Honor, the only reason -- and this is my conjecture; it is not anything I can prove -- everything gets sent to Chicago. It takes forever to get down to us. By the time ...


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