Ruling against the California Franchise Tax Board, the 9th Circuit upheld Oakland bankruptcy judge Edward Jellen’s decision in the Chapter 13 case of Brenda Marie Jones.
At issue was whether Jones could discharge a state tax debt in her Chapter 7 case; the question turned on an arcane question of what the Bankruptcy Code means when it provides that property “vest” in the debtor at plan confirmation.
If the automatic stay continued in effect after confirmation in Ms. Jones’ prior Chapter 13 bankruptcy, the FTB’s claim in her subsequent case was protected from discharge. If, however, vesting terminated the protection for her property provided by bankruptcy law, sufficient time had run to make the tax claim dischargeable.
The Court of Appeals noted that there are four different legal theories about what it means for property to “vest” in a Chapter 13 case. While declining to decide directly which of those four approaches was correct, the 9th Circuit panel held that some property of the estate vested in the debtor at confirmation and therefore the clock started ticking on the FTB’s window for collecting the tax. That window closed before Ms. Jones filed her new Chapter 7, and the tax was thus old enough to be eliminated in bankruptcy.
I’ve been following and speaking on this issue of vesting for a couple of years. I had hopes that this circuit would choose sides and provide some guidance to bankruptcy practitioners. It’s frustrating that presented with an opportunity to affirm the Bankruptcy Appellate Panel’s analysis that the estate terminates at vesting, the circuit court ducked. But their decision came to the same place the BAP was: a post petition creditor is free to collect its claim against the debtor following the vesting of the property of the estate at confirmation of a Chapter 13 plan.
