California Franchise Tax Board v. Kendall (In Re Jones)

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: BRENDA MARIE JONES, 

Debtor,

CALIFORNIA FRANCHISE TAX BOARD, No. 10-60000

Appellant,

v.  BAP No.

09-1145

JOHN T. KENDALL, Trustee; UNITED OPINION

STATES TRUSTEE, Oakland,

Appellees,

BRENDA MARIE JONES,

Debtor-Appellee.



Appeal from the Ninth Circuit

Bankruptcy Appellate Panel

Baum, Dunn, and Jury, Bankruptcy Judges, Presiding

Argued and Submitted

December 7, 2010—San Francisco, California

Filed July 12, 2011

Before: Dorothy W. Nelson, M. Margaret McKeown, and

Ronald M. Gould,1 Circuit Judges.

Opinion by Judge McKeown

1

Judge Gould was drawn to replace Judge Thompson on this panel after

Judge Thompson’s death.

9379

9382 IN RE: JONES

COUNSEL

Edmund G. Brown, Joyce E. Hee, David Lew (argued), Office

of the Attorney General, Oakland, California, for the appel-

lant.

Max Cline, Melanie Tavare (argued), Oakland, California, for

the debtors-appellees.

OPINION

McKEOWN, Circuit Judge:

At issue in this bankruptcy appeal is a tax debt owed by

Brenda Marie Jones (“Jones”) to the California Franchise Tax

IN RE: JONES 9383

Board (“FTB”). The bankruptcy court and the Bankruptcy

Appellate Panel (“BAP”) found that the debt was not

excepted from discharge in Jones’s Chapter 7 bankruptcy pro-

ceeding. Although debts arising before a discharge order in a

Chapter 7 proceeding are generally discharged, certain tax

debts are excepted. See 11 U.S.C. § 727(b); see also id.

§§ 523(a)(1)(A), 507(a)(8). A statute of limitations, known as

the “three-year lookback period,” carves out tax debts arising

from a taxable year ending on or before the bankruptcy peti-

tion is filed and for which the return was last due no more

than three years before the petition is filed. Id. § 507(a)(8)(A);

see Young v. United States, 535 U.S. 43, 46 (2002).

Because Jones’s tax debt arose more than three years

before she filed her Chapter 7 bankruptcy petition, it would

be discharged unless the lookback period was suspended by

statute. The lookback period is suspended by an unnumbered

paragraph in § 507(a)(8)2 (“the suspension provision”) when,

as relevant here, an automatic stay precludes the creditor from

collecting on the debt. The only automatic stay provisions

potentially at issue in this appeal are those that preclude credi-

tors from pursuing collection actions against the property of

a bankruptcy estate. See 11 U.S.C. §§ 362(a)(3), 362(a)(4).3

The FTB argues that, as a consequence of Jones’s prior Chap-

ter 13 bankruptcy case, the lookback period was suspended

and the tax debt not discharged. We are not persuaded.

When the bankruptcy court confirmed the Joneses’ Chapter

13 plan, the estate property revested in Jones and became

Jones’s property, thus lifting the applicable stay provisions.

See id. §§ 362(a)(3), 362(a)(4). Since this revesting occurred

before the tax debt came due, no stay precluded the FTB from

collecting on the debt under § 362. Consequently, the tax debt

2

Unless otherwise noted, statutory citations are to the Bankruptcy Code

and are located in Title 11 of the United States Code.

3

The parties do not argue that the other elements of the suspension pro-

vision or other subsections of § 362(a) are at issue here.

9384 IN RE: JONES

was not excepted from the Chapter 7 discharge, and the prin-

ciples of equitable tolling do not apply to extend the lookback

period as the FTB was neither precluded from collecting on

the tax debt nor did it actively try to protect its claim. We hold

the debt was discharged and affirm the BAP.

I. BACKGROUND

Jones and her husband filed a joint voluntary Chapter 13

bankruptcy petition in July 2002. The act of filing the petition

created a bankruptcy estate and imposed an automatic stay on

creditor collection activities against property of the estate. See

11 U.S.C. §§ 541, 362(a). The bankruptcy court confirmed the

Joneses’ plan in September 2002. The Joneses filed their joint

income tax return for the year 2002 in October 2003, pursuant

to an extension, but they did not pay the approximately

$6,000 they owed in reported taxes. The bankruptcy court dis-

missed the Joneses’ Chapter 13 proceeding in September

2006.

Thirteen months later, in October 2007, Jones, but not her

husband, filed a voluntary Chapter 7 bankruptcy petition. She

received a discharge of her existing debts, which would

include the tax debt unless it was otherwise excepted, in Janu-

ary 2008. See id. § 727(b). Because the Joneses’ tax return

was due more than three years before Jones filed her Chapter

7 petition, the debt is discharged unless the statutory suspen-

sion provision or equitable tolling apply to extend the look-

back period. See id. § 507(a)(8)(A).

In 2009, the FTB successfully moved to reopen Jones’s

Chapter 7 case before the bankruptcy court and requested a

determination that the tax debt was excepted from discharge.

The bankruptcy court ruled in favor of Jones, holding that nei-

ther the Joneses’ confirmed Chapter 13 plan nor the automatic

stay in place during the Chapter 13 proceeding prevented the

FTB from collecting the debt from Jones when the tax came

due. The BAP affirmed, holding that the three-year lookback

IN RE: JONES 9385

period was not suspended because the suspension provision,

the unnumbered paragraph in § 507(a)(8), applied only to the

lookback period of Jones’s prior Chapter 13 case, and equita-

ble tolling did not apply.

We review de novo both the decision of the BAP and the

legal conclusions of the bankruptcy court. Brawders v. Cnty.

of Ventura (In re Brawders), 503 F.3d 856, 859 n.1 (9th Cir.

2007); Miller v. United States, 363 F.3d 999, 1004 (9th Cir.

2004) (“The issue of dischargeability of a debt is a mixed

question of fact and law that is reviewed de novo.” (citation

omitted)). Although we affirm the BAP’s result, we rely on

different grounds. See Leavitt v. Soto (In re Leavitt), 171 F.3d

1219, 1223 (9th Cir. 1999) (stating that we may affirm on any

ground supported by the record).

II. ANALYSIS

A. THE THREE-YEAR LOOKBACK PERIOD IS DEFINED WITH

RESPECT TO JONES’S CHAPTER 7 PETITION.

[1] We begin with the basic proposition that the debt is dis-

charged unless excepted, because the debt came due before

the bankruptcy court ordered Jones’s debts discharged. See 11

U.S.C. § 727(b). Importantly, however, one exception to a

§ 727 discharge is a tax debt as defined in § 507(a)(8).4 Id.

§ 523(a)(1)(A). Subsection 507(a)(8)(A)(i) in turn excepts a

tax debt from discharge

only to the extent that such claims are for—

4

The FTB also claims that the penalty associated with the Joneses’ non-

payment of the 2002 income tax should not be discharged. The penalties

associated with the tax debt are addressed under § 507(a)(8)(G). The anal-

ysis as to their discharge parallels that for the debt, such that if the tax is

discharged, the penalties are as well. For simplicity, we discuss only the

tax debt.

9386 IN RE: JONES

(A) a tax on or measured by income or gross

receipts for a taxable year ending on or before the

date of the filing of the petition—

(i) for which a return, if required, is last due,

including extensions, after three years before the

date of the filing of the petition[.]

Emphasis added.

[2] This latter requirement, the three-year lookback period,

functions as a statute of limitations. Young, 535 U.S. at 46-47.

Section 507(a)(8)(A)(i) defines the three-year lookback period

with respect to “the petition” (emphasis added). The statute

does not refer simply to “a” or “any” petition under the title,

as the FTB would have us read the statute. Instead, the plain

language refers to “the petition” (emphasis added), meaning,

in this case, the Chapter 7 petition. See Maney v. Kagenveama

(In re Kagenveama), 541 F.3d 868, 872 (9th Cir. 2008)

(“Where statutory language is plain, ‘the sole function of the

courts—at least where the disposition required by the text is

not absurd—is to enforce it according to its terms.’ ” (quoting

Lamie v. United States Tr., 540 U.S. 526, 534 (2004)), abro-

gated on other grounds by Hamilton v. Lanning, 130 S. Ct.

2464, 2478 (2010); see also United States v. Ron Pair Enters.,

Inc., 489 U.S. 235, 240-41 (1989) (“[A]s long as the statutory

scheme is coherent and consistent, there generally is no need

for a court to inquire beyond the plain language of the stat-

ute.”). Thus, the three-year lookback period defined in

§ 507(a)(8)(A)(i) must be the period preceding Jones’s Chap-

ter 7 petition—that is, October 2004 through October 2007.

[3] As the debt came due in 2003, outside the three-year

lookback period in Jones’s Chapter 7 case, it is discharged

unless we determine that statutory suspension or equitable

tolling apply to extend the lookback period to encompass the

2003 due date.

IN RE: JONES 9387

B. THE STATUTORY SUSPENSION PROVISION DOES NOT APPLY

TOJONES’S TAX DEBT.

1. Section 507(a)(8) suspends the lookback period

only where the creditor was specifically precluded

from collection.

Ultimately, this appeal turns on our interpretation of the

suspension provision, which provides that the three-year look-

back period

shall be suspended for any period during which a

governmental unit is prohibited under applicable

nonbankruptcy law from collecting a tax as a result

of a request by the debtor for a hearing and an appeal

of any collection action taken or proposed against

the debtor, plus 90 days; plus any time during which

the stay of proceedings was in effect in a prior case

under this title or during which collection was pre-

cluded by the existence of 1 or more confirmed plans

under this title, plus 90 days.

11 U.S.C. § 507(a)(8).

[4] The suspension provision contemplates three scenarios

in which the lookback period is suspended. By the plain lan-

guage of the statute, the first and third scenarios are limited

to periods in which the government was “prohibited . . . from

collecting a tax” and in which “collection was precluded by”

a confirmed bankruptcy plan. Id. Neither circumstance is

applicable. Instead, the second scenario is relevant here—

“any time during which the stay of proceedings was in effect

in a prior [bankruptcy] case.” Id. (emphasis added). The FTB

would have us read the statute to suspend the lookback period

when a stay is in place against any creditor; Jones reads the

statute narrowly to suspend the lookback period only where

a stay precluding collection of this debt is in place. “Because

neither party’s reading of [the statute] is obviously correct, the

9388 IN RE: JONES

statute is ambiguous,” and we look to the legislative history

in deciphering its meaning. Barstow v. IRS (In re Bankr.

Estate of MarkAir, Inc.), 308 F.3d 1038, 1043 (9th Cir. 2002).

[5] In enacting the unnumbered paragraph of § 507(a)(8),

Congress intended to codify the rule established in Young.

H.R. REP. NO. 109-31, at 101 (2005), reprinted in 2005

U.S.C.C.A.N. 88, 165. In Young, the Supreme Court

addressed a situation in which the debtor’s pre-petition tax

debt came due more than three years before the filing of a

Chapter 7 petition. 535 U.S. at 45. The debtor had also filed

a Chapter 13 petition ten months before the Chapter 7 peti-

tion, which was dismissed one day before the debtor filed the

Chapter 7 petition. Id. The Court held that because the “auto-

matic stay under § 362 [during the Chapter 13 petition] . . .

prevented the [Internal Revenue Service (“IRS”)] from taking

steps to protect its claim,” the three-year lookback period was

equitably tolled for the length of the bankruptcy proceeding—

the time during which the IRS was precluded from collecting

the debt. Id. at 50. In so holding, the Court relied heavily on

the principles of equitable tolling and the fact that the IRS

was prohibited from collecting on the tax debt during a por-

tion of the three-year lookback period of the Chapter 7 peti-

tion. Id. at 50-51 (“[T]he IRS was disabled from protecting its

claim during the pendency of the Chapter 13 petition, and this

period of disability tolled the three-year lookback period

when the Youngs filed their Chapter 7 petition.”).

[6] Because Congress made clear its intent to codify Young

in enacting the suspension provision, we must give effect to

that intent in interpreting the statute. Further, as the Court

noted in Young, “Congress must be presumed to draft limita-

tions periods in light of” equitable tolling principles which

generally apply to statutes of limitations. Id. at 49-50. Those

equitable tolling principles are, in turn, applied “only sparing-

ly” and generally in situations in which a party was precluded

by some obstacle from acting within the limitations period.

See Irwin v. Dep’t of Veterans Affairs, 498 U.S. 89, 96

IN RE: JONES 9389

(1990). We conclude that the suspension provision applies

here only if the FTB was precluded from collecting the debt

by a stay of proceedings in Jones’s prior case.

2. The FTB was not precluded from collecting on

the debt during the three-year lookback period

and therefore does not benefit from the statutory

suspension provision.

The next question is whether the FTB was precluded from

collecting on Jones’s debt by an automatic stay provision

under § 362(a) such that the lookback period was statutorily

suspended. Two automatic stay provisions are potentially rel-

evant, and both preclude creditors from collecting post-

petition debts from the bankruptcy estate. See 11 U.S.C.

§§ 362(a)(3), 362(a)(4); see also id. § 541(a). For post-

petition creditors, the stay of collection from property of the

estate remains in effect “until such property is no longer prop-

erty of the estate.” Id. § 362(c)(1). Section 362(a) does not

stay collection activities by post-petition creditors against

property of the debtor. See Severo v. Comm’r, 586 F.3d 1213,

1216 (9th Cir. 2009) (“An act against the property of the

bankruptcy estate is stayed until it is no longer part of the

estate[.]”). To decide whether the FTB was precluded from

collecting on the debt during the Chapter 13 bankruptcy pro-

ceeding, we must determine whether Jones had property out-

side of the bankruptcy estate from which the FTB could

collect the tax debt.

[7] Property of the bankruptcy estate is defined by

§ 1306(a)(1), which provides, in relevant part:

(a) Property of the estate includes, in addition to the

property specified in section 541 of this title—

(1) all property of the kind specified in such sec-

tion that the debtor acquires after the commencement

of the case but before the case is closed, dismissed,

9390 IN RE: JONES

or converted to a case under Chapter 7, or 11, or 12

of this title, whichever occurs first[.]

Read in conjunction with § 541, § 1306 implies that all prop-

erty held before the filing of the petition—as well as all prop-

erty acquired between the Chapter 13 petition filing date and

the date the case is closed, dismissed, or converted—is prop-

erty of the estate.

[8] Our inquiry would end there, and we would conclude

that there was an automatic stay in place which precluded the

FTB from collecting on the debt until the Joneses’ Chapter 13

case closed, if not for § 1327(b), which provides:

Except as otherwise provided in the plan or the order

confirming the plan, the confirmation of a plan vests

all of the property of the estate in the debtor.

Under § 1327(b), property of the estate revests in the debtor

upon confirmation of a Chapter 13 plan, but § 1306(a)(1) does

not include confirmation of the plan as one of the events

defining the time period in which property acquired by the

debtor becomes estate property. We have not had occasion to

address the interplay between §§ 1306(a) and 1327(b). As the

First Circuit has noted in harmonizing the two sections, “the

status of the property of the estate after the confirmation of a

Chapter 13 plan is a controversial issue.” Barbosa v. Solomon,

235 F.3d 31, 36 (1st Cir. 2000). It is our task, however, to

give meaning to each of these sections. See Dumont v. Ford

Motor Credit Co. (In re Dumont), 581 F.3d 1104, 1111 (9th

Cir. 2009) (“[A] statute ought, upon the whole, to be so con-

strued that, if it can be prevented, no clause, sentence, or word

shall be superfluous[.]” (internal quotation marks and citation

omitted)).

The bankruptcy courts and other circuits have developed

four approaches to harmonizing these sections and determin-

ing whether and to what extent property of the estate revests

IN RE: JONES 9391

in the debtor at plan confirmation. Three of the approaches

are based on the principle that property of the estate revests

in the debtor upon plan confirmation, unless the plan provides

otherwise. These approaches are known as the modified estate

preservation, estate transformation, and estate termination

approaches. Under the modified estate preservation approach,

estate property vests in the debtor upon plan confirmation, but

property acquired after confirmation becomes property of the

estate pursuant to § 1306(a). See Barbosa, 235 F.3d at 36-37.

The estate transformation approach holds that § 1327(b) vests

estate property in the debtor upon confirmation, retaining

estate property only to the extent necessary to carry out the

plan. See Telfair v. First Union Mortg. Corp., 216 F.3d 1333,

1339-40 (11th Cir. 2000); Black v. U.S. Postal Serv. (In re

Heath), 115 F.3d 521, 524 (7th Cir. 1997). Finally, the estate

termination approach, adopted by the bankruptcy court and

the BAP in this case, holds that § 1327(b) revests all property

of the estate in the debtor upon plan confirmation, and any

property acquired after confirmation likewise vests in the

debtor unless the plan or confirmation provides otherwise. See

In re Petruccelli, 113 B.R. 5, 15 (Bankr. S.D. Cal. 1990).

Under any one of these approaches, estate property would

have vested in Jones at plan confirmation, and that property

would not have been subject to an automatic stay. See 11

U.S.C. §§ 362(a)(3), 362(a)(4).

The fourth approach, known as the estate preservation

approach, holds that although property of the estate “vests” in

the debtor upon plan confirmation under § 1327(b), the prop-

erty does not become property of the debtor. Instead, the

estate remains fully intact and protected by the automatic stay

until the case is closed, dismissed, or converted. See In re

Aneiro, 72 B.R. 424, 429 (Bankr. S.D. Cal. 1987). No circuit

has adopted the estate preservation approach, and we affirma-

tively decline to do so here. Although the BAP in this case

read the Eighth Circuit’s decision in Sec. Bank of Marshall-

town, Iowa v. Neiman, 1 F.3d 687 (8th Cir. 1993), as adopting

the estate preservation approach, we read it to provide only

9392 IN RE: JONES

that the Chapter 13 estate continues to exist post-

confirmation. Id. at 689 (“The only issue before this court is

whether the Chapter 13 estate existed after confirmation of

the Chapter 13 plan[.]”). Significantly, Neiman explicitly

noted that “[t]he estate can continue to exist as a legal entity

after confirmation even if it holds no property.” Id. at 690

(emphasis added).

[9] Resolution of this case does not require us to adopt one

of the other specific approaches. Regardless of whether and

to what extent the estate continues as a legal entity post-

confirmation, we hold that, at the very least, some estate prop-

erty revests in the debtor at confirmation. This interpretation

gives meaning to § 1327(b), which provides that the estate

property vests in the debtor upon confirmation unless pro-

vided otherwise in the plan. 11 U.S.C. § 1327(b). The statute

does not define the term “vests,” but “[w]hen terms used in

a statute are undefined, we give them their ordinary mean-

ing.” Hamilton, 130 S. Ct. at 2471 (internal quotation marks

and citation omitted). The common definition of vest is “[t]o

confer ownership (of property) upon a person” and “[t]o

invest (a person) with the full title to property.” BLACK’S LAW

DICTIONARY (9th ed. 2009).5

[10] In sum, we hold that under the plain language of

§ 1327(b), the property of the estate revests in the debtor upon

plan confirmation, unless the debtor elects otherwise in the

plan. Because Jones did not elect otherwise, she once again

became the owner of her property at confirmation, except as

to those sums specifically dedicated to fulfillment of the plan.

Accordingly, the FTB was not precluded from collecting the

post-petition tax debt from property that revested in Jones

5

This is consistent with our prior holding that “revesting” in § 349(b)(3)

means “ ‘to restore all property rights to the position in which they were

found at the commencement of the case.’ ” In re Nash, 765 F.2d 1410,

1414 (9th Cir. 1985) (quoting S. REP. NO. 95-989 (1978), reprinted in

1978 U.S.C.C.A.N. 5787, 5835).

IN RE: JONES 9393

upon plan confirmation. See 11 U.S.C. § 362(c)(1). Since the

tax debt arose after plan confirmation, the FTB could have

collected on the debt during the gap period between the due

date of the debt and the second bankruptcy filing, and the

lookback period is not statutorily suspended. See id.

§ 507(a)(8).

C. EQUITABLE TOLLING DOES NOT APPLY.

[11] Because the FTB could have collected on the debt at

any time after the tax came due, the principles of Young do

not apply in this case, and we will not equitably toll the look-

back period. The debt is accordingly discharged. Cf. Young,

535 U.S. at 50 (tolling the lookback period where “the IRS

was disabled from protecting its claim during the pendency of

the Chapter 13 petition”).

The FTB argues that the unresolved issue of how to inter-

pret §§ 1306(a) and 1327(b) effectively precluded it from

attempting collection and therefore weighs in favor of equita-

ble tolling. Any uncertainty in the statutes did not impede the

FTB’s other options. For example, the FTB could have sought

relief from the stay under § 362 or moved to dismiss the

Joneses’ case for failure to pay post-petition taxes. As the

bankruptcy court noted here, no court has imposed sanctions

on a party attempting to determine the viability of its claim

using either of these means.

[12] It also bears noting that the FTB had more than one

year after the dismissal of the Joneses’ Chapter 13 case during

which it could have collected on the debt without any fear

whatsoever of sanctions.6 Instead, the FTB did not take any

action to protect its claim until 2009, six years after the debt

arose. This inaction creates the appearance that, rather than

exercising caution in light of uncertainty, the FTB simply did

6

The bankruptcy court dismissed the Chapter 13 case in September

2006, and Jones did not file her Chapter 7 petition until October 2007.

9394 IN RE: JONES

not pursue its claim until the opportunity to do so had passed.

Equitable tolling is not appropriate where a party takes no

timely step to preserve its claim and, in fact, faces no prohibi-

tion on asserting its claim during the limitations period. See

Young, 535 U.S. at 47 (noting that the policies underlying

statutes of limitations include the elimination of stale claims

and a guarantee of certainty for both parties regarding their

rights and potential liabilities).

AFFIRMED.