Document Page 1 of 13 IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION ) In re: ) ) EDISON MISSION ENERGY, et al., ) ) Debtors. ) ) Chapter 11 Case No. 12-49219 (JPC) (Jointly Administered) Re: Docket No. 1747 CREDITOR UNITED STATES OPPOSITION TO DEBTORS MOTION TO ESTIMATE CLAIMS The creditor United States of America, on behalf of the Department of Treasury, Internal Revenue Service, submits this opposition to the debtors motion (Docket No. 1747) to estimate claims for pre-petition tax liabilities filed by the United States Department of the Treasury, Internal Revenue Service and docketed as Claim Nos. 1846-A and 2012-14 (the IRS Claims ), and requests a hearing on the same. BACKGROUND 1. On December 17, 2012, (the Original Petition Date ), seventeen related entities (the Original Debtors ) filed petitions with the Court under Chapter 11 of the Bankruptcy Code. On May 2, 2013, (the Homer City Petition Date ), three additional related entities (the Homer City Debtors ) filed petitions with the Court under Chapter 11 of the Bankruptcy Code. The Court has approved procedural consolidation and joint administration of these chapter 11 cases and the twenty related entities are referred to herein collectively as the Debtors. The Debtors continue to operate their businesses as debtors in possession. 1
Document Page 2 of 13 2. The Court set June 17, 2013, as the deadline for governmental units to file proofs of claim against the Original Debtors and November 29, 2013, as the deadline for governmental units to file proofs of claim against the Homer City Debtors. [Docket Nos. 669, 1422, respectively]. 3. On June 10, 2013, the United States Department of the Treasury, Internal Revenue Service ( IRS ), timely filed a proof of claim, amended on August 9, 2013, asserting an unsecured priority claim (see 11 U.S.C. 507(a)(8)) in the amount of $1,305,958,600.46 and a secured claim in the amount of $0.00, reserving a right to setoff. [Claim Nos. 1097, 1846-A]. 4. The unsecured priority claim encompasses claims for the consolidated income tax periods ending December 31, 1984, December 31, 1994, December 31, 1995, December 31, 2002, December 31, 2003, December 31, 2004, December 31, 2005, December 31, 2006, December 31, 2007 and December 31, 2008 (the delinquent years ). 5. The IRS had selected the delinquent years for examination subsequent to receipt of the consolidated corporate tax returns. The IRS completed its examinations and mailed the reports of the examination changes to the consolidated group on November 4, 2010 for the 1984, 1994, 1995, 2002, 2003, 2004, 2005, and 2006 tax years and mailed the reports of the examination changes to the consolidated group on February 28, 2013 for the 2007, 2008 and 2009 tax years. The amounts on the IRS proof of claim were derived from the results of the IRS examinations and represent the agency s determination of the correct amount of tax owed for each of the delinquent years. 6. The IRS filed three other proofs of claim, against the three Homer City Debtors, on November 20, 2013, that assert a secured claim against each entity for the 2010, 2011 and 2012 tax years in the amount of $5,000 per year based on a general right to setoff. [Claim Nos. 2
Document Page 3 of 13 2012 (EME Homer City Generation L.P.), 2013 (Edison Mission Finance Co.), and 2014 (Homer City Property Holdings, Inc.)]. 7. Edison Mission Energy and most of the Debtors are members of an affiliated group of corporations that chose to file a consolidated federal income tax return pursuant to 26 U.S.C 1501, et seq., for each of the delinquent years. Accordingly, they submitted a single income tax return to the IRS, the IRS calculated the consolidated tax debt of the affiliated group as a whole, and each member of the group is severally liable for the entire unpaid tax debt. 26 C.F.R. 1.1502-75, 1.1502-6. 8. The affiliated group chose Edison International to act as the common parent and sole agent authorized to act for each member with respect to the consolidated tax returns. 26 C.F.R. 1.1502-77(a). Accordingly, it was Edison International who filed protests of the examination changes for the delinquent tax years and has been managing the administrative appeal of the agency s decision. 9. The IRS proof of claim asserted the consolidated tax debt of the affiliated group of corporations based upon the tax examination. On October 1, 2013, the IRS and the Debtors stipulated that the single IRS Proof of Claim should (a) be deemed to be filed against each Consolidated Tax Member Debtor and (b) represent a separate claim asserted against each Consolidated Tax Member Debtor.... The Stipulation was approved by the Court on October 16, 2013. [Stipulation, annexed as Exhibit 1 to the Debtors Motion to Approve Stipulation and Agreed Order, and Agreed Order. Docket Nos. 1273, 1356] 10. On January 2, 2014, the Debtors filed a Motion to Estimate Claims, seeking prompt estimation of certain claims filed by Edison International and its non-debtor affiliates, by the Pension Benefit Guaranty Corporation and by the IRS. [Docket No 1747]. The Debtors did 3
Document Page 4 of 13 not object to the allowance of the IRS proofs of claim or set forth any valid grounds for the disallowance of the proofs of claim. The Debtors did not serve the motion on the Attorney General, as reflected by the certificate of service attached thereto. 11. The United States requests that the Court deny the Debtors motion to estimate claims insofar as it seeks estimation of the IRS claims, which are not contingent or unliquidated. DISCUSSION THE COURT SHOULD NOT ESTIMATE THE PRIORITY CLAIMS OF THE INTERNAL REVENUE SERVICE BECAUSE THEY ARE LIQUIDATED AND THEY ARE NOT CONTINGENT I. Introduction and Initial Matter 12. As an initial matter, we note that Rule 9014 of the Federal Rules of Bankruptcy. Procedure generally governs the procedures for filing motions in bankruptcy cases. That rule makes Fed. R. Bankr. P. 7004 applicable to the service of motions. Rule 7004, in turn, specifically requires service upon the United States to be effected by mailing a copy of the [motion] to the civil process clerk at the office of the United States attorney for the district in which the action is brought and also by mailing a copy of the [motion] to the Attorney General of the United States in Washington, District of Columbia... Fed.R.Bankr.P. 7004(b)(4). As Bankruptcy Rule 7004 expressly provides, both the mailing to the United States Attorney and the mailing to the Attorney General are mandatory requirements of proper service on the United States. If service upon both is not made as prescribed, a court cannot have jurisdiction over the United States. In re Laughlin, 210 B.R. 659, 660-61 (1st Cir. BAP 1997). As reflected by the certificate of service attached to the motion here, the motion for estimation was not served upon the Attorney General. To the extent that service of the motion was not properly made upon the United States, this Court lacks jurisdiction over the United States and the motion should be dismissed. 4
Document Page 5 of 13 13. In addition to this jurisdictional defect, the United States notes that a proof of claim filed in accordance with the Bankruptcy Rules is prima facie evidence of the validity and the amount of the claim. Fed.R.Bankr.P. 3001(f); In re Salem, 465 F.3d 767, 779 (7th Cir. 2006); In re Hemingway Transport, Inc., 993 F.2d 915, 925 (1 st Cir. 1993); In re Chapman, 132 B.R. 132, 143 (Bankr. N.D. Ill. 1991). In the absence of an objection, a proof of claim is deemed allowed. See 11 U.S.C. 502(a). 14. A proof of claim on an official form that identifies a claim under the Internal Revenue Code for a tax period and type of tax sufficiently puts the estate and creditors on notice as to the validity and amount of the United States' claim. See Fed. R. Bankr. P. 3001(a); Martin v. United States, 180 B.R. 90, 92-93 (E.D.N.C. 1994). The United States was not required to attach any documentation to its proof of claim under the Bankruptcy Rules since the obligation of the debtors is established by statute and is not founded on a writing. See Fed. R. Bankr. P. 3001(c); In re Los Angeles Intern. Airport Hotel Associates, 106 F.3d 1479, 1480 (9 th Cir.1997), In re Tucker, 2012 WL 1918528 (Bkrtcy.S.D.Ill. 2012.) citing In Re White, 168 B.R. 825, 834 (Bankr. D.Conn 1994). 15. Moreover, under applicable non-bankruptcy law, a presumption of correctness attaches to the official acts of public officers, including the making of an audit determination and assessment by the Internal Revenue Service. See Cebollero v. C.I.R., 967 F.2d 986, 990 (4 th Cir. 1992); Ruth v. United States, 823 F.2d 1091, 1093 (7 th Cir. 1987). In the absence of clear evidence to the contrary, courts presume that the public officers have properly discharged their official duties. United States v. Chemical Foundation, Inc., 272 U.S. 1, 14-15 (1926). In order to overcome this presumption, an objecting party must demonstrate by the preponderance of the evidence that the determination is entirely incorrect. See United States, et al. v. Janis, 428 U.S. 5
Document Page 6 of 13 433, 441 (1976); Coleman v. United States, 704 F.2d 326, 328-29 (6 th Cir. 1983). This presumption applies to claims in bankruptcy cases. See Raleigh v. Illinois Dept. Of Revenue, 530 U.S. 15, 20-22 (2000). 16. Under Section 506 of the Bankruptcy Code, claims are treated as secured claims to the extent that the value of the property subject to the lien or any amount subject to offset, and unsecured to the extent that the value of the property or amount subject to offset is less than the amount of the allowed claim. 11 U.S.C. 506(a) and (d)(2). Subsection (b) of Section 506 provides for the allowance of post-petition interest on a secured claim to the extent that a creditor is oversecured. See 11 U.S.C. 506(b); United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 239-40 (1989). 17. Section 553 of the Bankruptcy Code specifically preserves the right to offset prepetition claims. See 11 U.S.C. 553; In re Luongo, 259 F.3d 323, 333 (5 th Cir. 2001) ( It is impossible for us to ignore the clear statement of 553 that this title [Bankruptcy Code] does not affect any right of a creditor to offset... ). Section 553 provides that, [e]xcept as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect prepetition setoff rights. See 11 U.S.C. 553. Section 502 is not an exception to the immunity provided by Section 553. 18. For claims by and against governmental units, Section 106(c) of the Bankruptcy Code specifically addresses the subject of setoff and mandates the setoff of claims. That section provides: Notwithstanding any assertion of sovereign immunity by a governmental unit, there shall be offset against a claim or interest of a governmental unit any claim against such governmental unit that is property of the estate. 6
Document Page 7 of 13 11 U.S.C. 106(c). The phrase shall be offset unambiguously requires the offset of claims falling within the statute. The term claim includes both prepetition claims and postpetition claims, see 11 U.S.C. 101(5), but the claim against the government must be property of the estate. The property of the estate is comprised of the property described in 541 and includes the debtor s choses-in-action. 19. The United States, as sovereign, may not be sued without its consent, and the terms of its consent define a court s jurisdiction. United States v. Testan, 424 U.S. 392, 399 (1976). Any waiver of the federal Government s immunity to suit must be explicit and must be strictly construed. Soriano v. United States, 352 U.S. 270, 276 (1957). 20. Section 106 of the Bankruptcy Code (11 U.S.C.) addresses the waiver of the sovereign immunity in bankruptcy cases by governmental units, including, federal, state and local governments. See 11 U.S.C. 101(26). That section abrogates the United States sovereign immunity to the extent set forth in certain other sections of the Bankruptcy Code, including Section 502. 11 U.S.C. 106(a). Section 106 does not create any substantive claim for relief not otherwise existing under the Bankruptcy Code. 11 U.S.C. 106(a)(5). 21. Section 105 empowers a court to issue any order, process, or judgment that is necessary or appropriate to carry out other provisions of the Bankruptcy Code. 11 U.S.C. 105(a); see In re American Bicycle Ass'n, 895 F.2d 1277, 1279-80 (9th Cir. 1990). However, Section 105 plainly only works in conjunction with another provision of the Bankruptcy Code which needs to be implemented. See 11 U.S.C. 105(a); In re American Bicycle Ass'n, 895 F.2d at 1279-80. 22. The sole issue presented in this motion that concerns the IRS is whether it would be appropriate for this Court to ignore the amounts set forth on the IRS proof of claim, as 7
Document Page 8 of 13 determined under the Internal Revenue Code and the Treasury Regulations thereunder, and determine that a different amount should be paid. This Court may estimate a claim for the purpose of allowance under 11 U.S.C. 502 if the claim is contingent or unliquidated and where the time required to determine the amount of the claim would unduly delay the administration of the case. 11 U.S.C 502(c)(1). 1 Although the Bankruptcy Code does not define contingent or liquidated, case law has developed an established definition for each term. Barcal v. Laughlin (In re Barcal), 213 B.R. 1008, 1013 (8 th Cir. BAP 1997). Section 502(c) does not permit the Court to ignore the Debtors liabilities under applicable non-bankruptcy law. II. The IRS Claim Is Not A Contingent Claim 23. A contingent liability is one that depends on a future event that may not even occur [ ] to fix either its existence or its amount. Freeland v. Enodis Corp., 540 F.3d 721, 730 (7 th Cir. 2008), quoting In re Knight, 55 F.3d 231, 236 (7 th Cir. 1995). Freeland, a case brought under Chapter 11, applied the definition of contingent liability developed under the threshold inquiry to determine if an individual qualifies for relief under Chapter 13, 11 U.S.C. 109(e), and we submit that those definitions for both contingent and liquidated may also be applied to this Chapter 11 case. 24. It is clear that the IRS claim is not contingent upon a future event. The income taxes listed on the IRS s proof of claim are for the 1984, 1994, 1995, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, and 2011 tax years. All of the events that gave rise to these liabilities occurred prior to the petition date 1 The IRS claims do not concern a right to payment arising from a right to an equitable remedy for breach of performance, so Section 502(c)(2) is not applicable. 8
Document Page 9 of 13 25. A taxpayer s duty to pay taxes derives from statute and arises upon its nonpayment of the taxes when due. Therefore, its obligation to pay taxes is not contingent on any future event. In re Mazzeo, 131 F.3d 295 (2d Cir. 1997). III. The IRS s Priority Claim Is Liquidated 26. A claim is liquidated if it is capable of ready determination. In re Knight, 55 F.3d at 235, United States v. Verdunn, 89 F.3d 799, 802 (11 th Cir. 1996). 27. The majority of courts have held that a debtor s dispute of either the underlying liability or the amount of a debt does not automatically render the debt either contingent or unliquidated. In re Mazzeo, 131 F.3d at 304-05, citing United States v. Verdunn, 89 F.3d at 802 (listing cases). See, also, In re Knight, 55 F.3d at 235 ( [i]f the amount of a claim has been ascertained or can readily be calculated, it is liquidated whether contested or not, quoting, Norton, Bankruptcy Law & Practice, 18.12 at 18-48. 28. In this case, the IRS has issued Examination Reports to the consolidated group, setting forth the amounts the IRS has determined are due for each of the delinquent tax years up to 2009. Therefore, the claim is capable of ready determination by reference to the close of those taxable years and the Revenue Agent Reports, and the consolidated group s appeal of the determinations (which they appear to no longer want to pursue) does not render the debt unliquidated. 29. Moreover, there is no requirement that the IRS issue a final deficiency letter to the Debtors to fix the liquidity of its determination of the tax liability. For example, in Knight, the Seventh Circuit held that a demand letter issued by the Indiana Attorney General to the debtor prior to the petition date, that set forth the statutory basis for the claim against the debtor, was sufficient to state a liquid claim. The Examination Reports issued by the IRS to the group are 9
Document Page 10 of 13 analogous to the demand letter issued in Knight, setting out the statutory basis for the examination changes and the final amount of the liabilities, and this Court should hold that the IRS claims are liquid. Therefore, the IRS claims are neither contingent nor unliquidated and may not be estimated by this Court. Accord, United States v. Verdunn, 89 F.3d at 803 (Statutory Notice of Deficiency allowed computation of tax through the application of fixed legal standards set forth in the tax code.). IV. The Debtors May Not Avoid Their Consolidated Tax Liability Through Estimation Of The IRS Claim 30. Even assuming that the Debtors could prove that the IRS claims are somehow contingent or unliquidated, which they cannot, this Court should not ignore the statutes and regulations that provide that the tax liability of a consolidated group of corporations is unitary in order to carve out a separate tax liability for the Debtors, as requested in the Debtors Motion to Estimate Claims. 31. It is telling that the Debtors have failed to reference the relevant statutes or regulations, because review of that authority quickly shows that there is absolutely no basis for the relief they request, as taxpayers who seek the privilege of filing consolidated tax returns for a given year are bound by that decision. 26 U.S.C. 1501, et seq., 26 C.F.R. 1.1502 75. 32. The regulations further direct that a single common parent acts as the sole agent for the entire consolidated group with respect to all matters relating to the tax liability for that consolidated return year, for (A) Each member in the group 26 C.F.R. 1.1502-77(a)(1)(A). 33. Moreover, the common parent is solely responsible for interaction with the IRS, and its duties include, inter alia, making any election that is available to a subsidiary in the computation of its separate taxable income, all correspondence concerning the income tax liability for the consolidate return year, filing for all extensions of time, giving waivers, giving 10
Document Page 11 of 13 bonds, and executing closing agreements, offers in compromise and other documents or agreements and any document executed by the common parent is considered as having also been given or executed by each member. 26 C.F.R. 1.1502-77(a)(2). 34. With only very specific and defined exceptions that are not applicable to the Debtors Motion to Estimate Claims, no subsidiary has authority to act for or to represent itself in any matter related to the tax liability for the consolidated return year. 26 C.F.R. 1.1502-77(a)(3), (a)(6). Since the agent for the Debtors is not a party to this contested matter, the motion is invalid because the Debtors lack standing to bind the consolidated group. 35. Finally, the common parent corporation and each subsidiary which was a member of the group during any part of the consolidated return year shall be severally liable for the tax for such year, precluding a determination of a separate liability for the Debtors. 26 C.F.R. 1.1502-6. 36. Therefore, even though the common parent corporation, Edison International, is not a debtor in this action, a determination of the Debtors tax liability for the delinquent years will require a determination of the tax liability for the entire consolidated group of corporations, rather than a carve-out that will create a separate or different liability for the Debtors. Any agreements among members of the consolidated group to allocate liability is not binding upon the United States under applicable Treasury Regulations. 26 C.F.R. 1.1502-6. 37. Fed. R. Bank. P. 9013(a) requires a party filing a motion to particularize the grounds therefore. A motion commences a contested matter and the doctrine of res judicata applies to such proceedings. Cen-Pen Corp. v. Hanson, 58 F.3d 89, 93 (4th Cir.1995) ( confirmation of a... plan is res judicata only as to issues that can be raised in the less formal procedure for contested matters... confirmation generally cannot have [a] preclusive effect as to 11
Document Page 12 of 13 [matters] which must be raised in an adversary proceeding. ). The bankruptcy rules do not permit piecemeal litigation. The debtors should not be permitted to reserve any grounds for their motion and, instead, the Court should rule that all grounds not raised in their motion are waived. The remainder of this page is intentionally left blank. 12
Document Page 13 of 13 CONCLUSION For the foregoing reasons, the creditor United States of America requests that the Court deny the Debtors Motion to Estimate Claims as to the claims filed by the United States Department of the Treasury, Internal Revenue Service. Respectfully submitted, UNITED STATES OF AMERICA (DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE), Creditor By: /s/ Sarah T. Mayhew SARAH T. MAYHEW Trial Attorney, Tax Division U.S. Department of Justice P.O. Box 55 Washington, D.C. 20044 202-616-1929 (v) 202-514-5238 (f) Sarah.T.Mayhew@tax.usdoj.gov Of Counsel: ZACHARY T. FARDON United States Attorney 13