Monday, November 17, 2008

Debtor's Error in Social Security Number on Petition Results in Failure to Discharge Tax Debt

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Ellett v. Goldberg (In re Ellett)
Ninth Circuit Court Case No. 05-16677

October 29, 2007

In this case of first impression for the Ninth Circuit, indeed for any Circuit, the Court held that if a debtor prepares a bankruptcy petition with an inaccurate social security number, containing one inaccurate digit, the bankruptcy notice with that inaccuracy sent to a creditor does NOT put the creditor on sufficient notice to protect its rights, even if that notice included the debtor's accurate name and address. Accordingly, more than $21,000 of otherwise dischargeable tax liabilities were left not discharged after this debtor's Chapter 13 case.

The Facts

This individual debtor filed his Chapter 13 case before BAPCPA (when FRBP Rule 1005 required that the bankruptcy petition include the debtor's entire social security number not just its last four digits). His petition was filed with an inaccurate last digit in his security number. So a tax creditor, the California Franchise Tax Board (FTB) received a bankruptcy notice with the inaccurate social security number, and did not file a proof of claim or participate in any other way in the Chapter 13 case because its records showed no debt owed by the person with that social security number. The FTB's usual procedure when a social security number did not match the name on the petition was to put this information into a special list, and FTB's policy provided "an alternative procedure for an FTB employee to investigate further and attempt to match the name of the debtor to the correct SSN. This procedure, however, was used infrequently, if at all, due to resource limitations." The creditor here did not attempt to match the debtor with an accurate social security number, and so did not connect this taxpayer to his Chapter 13 case filing until after the claims bar date had passed.

After the completion of the Chapter 13 case and entry of discharge, the FTB contacted debtor to attempt to collect the debt, and debtor filed an adversary proceeding to determine dischargeability of the debt. The bankruptcy court held that the tax debt was not discharged because the erroneous social security number left FTB without proper notice, the U.S. District Court affirmed, and debtor appealed.

The Ninth Circuit's Rationale

The Court weighed the debtor's obligation to provide accurate identifying information--the social security number--against the creditors' obligation to identify the debtor from the other accurate information--name and address--it had received. Its rationale was that a § 1328(a) discharge covers "all debts provided for by the plan or disallowed under section 502" of the Code, and that a debt is not "provided for" if it does not receive adequate notice of the case. But what is adequate notice? Although this was a case of first impression, the Court spent most of its analysis reviewing its own and other related case law in answering this question. It concluded that, in spite of the fact that FTB had readily accessible information, between its records and the accurate information on the petition, to identify the debtor, and indeed had a policy and procedure to do so:
[the debtor] was in the best position to list the correct SSN on his petition and comply with the additional requirements of Rule 1005 of the Federal Rules of Bankruptcy Procedure. Requiring a creditor to ferret out a debtor’s correct identity when incorrect identifying information is provided would be overly burdensome and inappropriate. . . . . Here, due to [the debtor’s] negligence in listing an erroneous SSN on his bankruptcy petition and § 341(a) notice, proper notice was not provided to the FTB. Consequently, [debtor's] Chapter 13 plan did not “provide for” the FTB taxes. The FTB should not be punished because [debtor] failed to provide proper notice including his correct SSN.
The Court came to this conclusion in spite of the tax creditor having sufficient information very readily available to connect the bankruptcy notice it had received to the correct taxpayer. The Court is close to saying that if there is ANY inaccuracy in the petition information, the creditor has no duty to investigate, no duty to look at the other, accurate, information provided to it by the debtor or at the creditor's own records, to identify the debtor. The Court is being very solicitous of the governmental agency's administrative burden, perhaps recognizing both their limited personnel resources and contemporary realities of computer automation requiring that such information be completely accurate in order to be efficiently found in creditors' databases.

The Clear Bottom Line
Clearly debtors' attorneys must take extreme care to ensure that all of debtors' identifying information is accurate as shown on their bankruptcy petitions, including adding to their client disclosure forms a place for clients to sign or initial that the clients verify the accuracy of that petition information. Otherwise, the Professional Liability Fund will be paying off such nondischarged debt.

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys

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