In Re International Horizons, Inc.

*724 ORDER W. HOMER DRAKE, Jr., Bankruptcy Judge. This case is before the Court on the debtors’ Motion for Summary Judgment and on the May 6, 1983 cross-Motion for Summary Judgment filed by the United States of America, by and through its agency, the Internal Revenue Service (“the Service”) with respect to the debtors’ March 25, 1983 objection to certain proofs of claim. Initially, the Court notes that an objection to the allowance of a proof of claim is not equivalent to the commencement of an adversary proceeding. But see In the Matter of Sims, C82-1799A, (N.D.Ga., April 7, 1983). The Advisory Committee Notes to Rule 306(c) of the Rules of Bankruptcy Procedure clearly state that “The contested matter initiated by such an objection to a claim is governed by Rule 914, unless a counterclaim by the trustee is joined with the objection to the claim. ■ The filing of a counterclaim ordinarily commences an adversary proceed- . ing subject to the Rules in Part VII.” The comment to Bankruptcy Rule 306(c) under the 1978 Bankruptcy Code sets forth the fact that Rule 306(c) remains effective under the Code. Accordingly, this case is properly before the Court. A brief review of the factual background of these proceedings as it relates to the matters now before the Court is in order. These reorganization proceedings were commenced on March 20,1981 upon the filing of voluntary Chapter 11 petitions by International Horizons, Inc., International Horizons (Curacao), N.V., North American Exports, Inc., and International Horizons, N.V. Thereafter, on July 7,1981, two affiliates of the original four debtors, World of English, N.V. and Communication & Studies International, Ltd., also filed for reorganization under Chapter 11 of the Bankruptcy Code. On February 1, 1982, another affiliate, Financial Resources K.K., filed its Chapter 11 petition. Throughout these proceedings, the debtors have operated their businesses as debtors in possession. On June 17, 1981, pursuant to Rule 3001(b)(2)(B) of the Interim Bankruptcy Rules, adopted by this Court and applicable only to cases under Chapter 11 of Title 11 of the United States Code, this Court established August 31, 1981 as a bar date by which all creditors desiring to assert claims against International Horizons, Inc., International Horizons (Curacao), N.V., North American Exports, Inc., or International Horizons, N.V. were required to file their respective proofs of such claim. Notice of that Order issued to all creditors of the debtors, including the Service. The Service has not applied for an extension of time to file claims. On May 18, 1981, and June 29, 1981, the Service filed timely proofs of claim as to the debtor, North American Exports, Inc. (“NAE”), asserting claims for withholding taxes and Federal Unemployment Tax Act (“FUTA”) taxes. On May 18, 1981, the Service filed a timely proof of claim as to debtor, International Horizons, Inc. (“IHI”), asserting claims for withholding taxes for two quarterly tax periods. These proofs of claim were the only proofs of claim filed by the Service in the Chapter 11 proceedings of NAE and IHI on or before August 31,1981. On November 2, 1982, the Service filed a new proof of claim as to NAE, reasserting its earlier claims for withholding and FUTA taxes and adding a new claim for corporate income taxes for the taxable years 1974 and 1975 in the principal amount of $14,886,-908.00, plus interest, and penalties aggregating approximately $9,000,000.00. On November 18, 1982, the Service filed a new proof of claim as to IHI reasserting its earlier claims for withholding taxes, and also adding a new claim for corporate income taxes for the taxable year 1980 in the principal amount of $1,719,649.00, plus interest in the amount of $81,412.42. The debtors have not objected to the May 18,1981, and June 29,1981 claims. Accordingly, these claims are deemed to be allowed pursuant to 11 U.S.C. § 502(a). The debtors have objected to the November 2, 1982 and November 18, 1982 claims to the extent that they assert claims against NAE and IHI for corporate income taxes. The *725 debtors base these objections on the ground that claims for corporate income taxes are untimely. The question before the Court is whether the Service should be allowed to amend the May 18, 1981, and June 29, 1981, proofs of claim, which it filed timely as to the debtors, North American Exports, Inc. (“NAE”) and International Horizons, Inc. (“IHI”), asserting claims for withholding taxes and Federal Unemployment Tax Act (“FUTA”) taxes, by adding claims for corporate income taxes for the taxable years 1974 and 1975. The subject amendments were filed on November 2, 1982, and November 18, 1982, as to NAE and IHI, respectively. Rule 914 of the Rules of Bankruptcy Procedure governs the procedure to be employed in contested matters. While Rule 914 does not specifically provide for the application of Rule 715 of the Rules of Bankruptcy Procedure to contested matters, Rule 914 does give the Court the discretion to “direct (at any stage in a particular matter) that one or more of the other rules in Part VII shall apply.” The Court now makes Rule 715 of the Rules of Bankruptcy Procedure applicable to the contested matter before the Court. Rule 715 of the Rules of Bankruptcy Procedure incorporates Rule 15 of the Federal Rules of Civil Procedure for determining when amendments to pleadings are to be allowed in bankruptcy cases. Generally, the Court is to grant liberally leave to amend a pleading under the Federal Rule of Civil Procedure 15(a). As the United States Supreme Court stated in Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962), the mandate that leave to amend shall be freely given when justice shall require it is to be heeded. However, the courts have limited the use of amendments to assert an entirely new claim. In the Matter of Commonwealth Corp., 617 F.2d 415 (5th Cir.1980). With these general guidelines in mind, the Court will undertake its analysis of whether to allow the Service to amend its May 18, 1981, and June 29, 1981, claims filed against NAE and IHI. 1 Prior to commencing its analysis of this case, the Court notes that the bar Order entered in these cases was issued pursuant to Rule 3001(b)(2)(B) of the Interim Bankruptcy Rules, while all the cases on which the Court relies in this Order concerned acts which took place while § 57n of the Bankruptcy Act was in effect. The judicial establishment of a bar date is entitled to no less dignity than the statutory establishment of a bar date for the filing of proofs of claim in reorganization proceedings. Therefore, the Court, as have the debtors and the Service, will employ cases concerning amendments under § 57n of the Bankruptcy Act to aid in the determination of whether an amendment should be allowed in the case sub judiee. In its consideration of this case, the Court has observed two lines of decisions concerning when to allow amendments to proofs of claim in bankruptcy proceedings. The first trend in these cases, which may be termed traditional or conservative, allows an amendment to be filed in those instances where a new claim is not being asserted and where there is a timely proof of claim that has been filed which can be amended. These cases were not concerned with actual notice of the existence of a claim and generally held that notice alone will not suffice to allow the filing of an untimely proof of claim. The second line of eases takes a more liberal approach to determining whether to allow the filing of an amendment to a proof of claim and requires a balancing of competing interests based on the facts and circumstances of each case. The analysis which follows will address both the traditional and liberal approach to determining whether to allow amendments to proofs of claim. *726 Courts have recognized that withholding taxes and FUTA taxes, while a form of federal taxation, are not the same as income and profits taxes. Shaw v. United States, 331 F.2d 493 (9th Cir.1964); In re Little & Ives Co., Inc., 68-1 USTC ¶ 9345 (B.C.S.D.N.Y.1968) at footnote 1. Cf. Menick v. Hoffman, 205 F.2d 365 (9th Cir.1953). This Court disagrees with the Service’s contention that because federal taxes are of the same generic origin the Court should allow the amendment of withholding and FUTA taxes by adding corporate income taxes without further inquiry. The Service cites in support of this contention Menick v. Hoffman, 205 F.2d 365 (9th Cir.1953). While it is true that in Menick the Court allowed an amendment for income taxes to a proof of claim for withholding taxes, Menick is limited to its facts. In Menick, the bankrupt, Arthur Hoffman, was an individual and not a corporation. Withholding taxes in Menick as to the bankrupt’s business had a dual identity of being income taxes as to the bankrupt individually. Accordingly, notice of withholding taxes for Hoffman’s business also constituted notice to Hoffman individually of his income tax liability. The corporate income taxes in the instant case do not evolve from withholding or FUTA tax liabilities. The determination that the filing of a proof of claim for one type of federal tax does not automatically provide a basis for an amendment to assert a claim for another type of federal tax does not end the Court’s analysis of whether the IRS should be allowed to amend its proofs of claim against NAE and IHI. As the Court stated in In the Matter of Commonwealth Corp., 617 F.2d 415 (5th Cir.1980), “The reason for liberality in permitting a late-filed amendment to a proof of claim, subject to the restrictions described above, is that ‘[a] bankruptcy court .. . sits as a court of equity, duty bound to examine each claim to see that injustice is not done and that all claims are fairly considered.’ [cites omitted]. The Supreme Court described the equity powers of bankruptcy courts and the objectives of the use of said equity powers as follows: ‘The bankruptcy courts have exercised these equitable powers in passing on a wide range of problems arising out of the administration of bankrupt estates. They have been invoked to the end that fraud will not prevail, that substance will not give way to form, that technical considerations will not prevent substantial justice from being done.’ Pepper v. Litten, 308 U.S. 295, 304-05, 60 S.Ct. 238, 244, 84 L.Ed. 281 (1939) (footnote omitted).” One criterion to be examined in allowing amendments to proofs of claim is whether the trustee had notice of the substance of the amendment which was to be asserted. As one commentator has stated in discussing Federal Rule of Civil Procedure 15(c): “An approach that better reflects the liberal policy of Rule 15(c) is to determine whether the adverse party, viewed as a reasonably prudent man, ought to have been able to anticipate or should have expected that the character of the originally pleaded claim might be altered or that other aspects of the conduct, transaction, or occurrence set forth in the original pleading might be called into question.” 6 Wright & Miller, Federal Practice and Procedure § 1497, at 499. The policy of allowing amendments based on notice is exemplified in Walsh v. Lockhart Associates, 339 F.2d 417 (5th Cir.1964); Cert. Denied 380 U.S. 953, 85 S.Ct. 1085, 13 L.Ed.2d 970 (1965). In Walsh, the Court allowed a proof of claim to be filed late, treating it as an amendment even though there was no timely proof of claim filed which the creditor could have amended. The reason for this decision distinguishes Walsh from the case sub judice because in Walsh, the bankrupt, the trustee, the trustee’s attorney, and the referee all had notice of the existence of the claim at issue therein, while the creditor was unaware of the debtor’s change of name just shortly prior to the filing of its bankruptcy petition. *727 There is substantial authority which stands for the proposition that notice of a claim will not support the filing of an untimely proof of claim. For example, in In the Matter of Paul R. Dean Co., Inc., 460 F.Supp. 447 (W.D.N.Y.1978), the Court held that the filing of a letter with a state court assignee for the benefit of creditors was not sufficient for a creditor to establish its claim in a bankruptcy proceeding. In In the Matter of Vega Baja Lumber Yard, Inc., 285 F.Supp. 143 (D.P.R.1968), the Court stated that “Pendency of litigation in and of itself, is not a sufficient basis on which to permit an amendment.” Id. at 147. “(M)ere knowledge on the part of the trustee or of the referee in bankruptcy as to the existence of a claim is not sufficient basis for allowing the filing of an amended claim...” [cites omitted] Id. at 147. In In re Moro Supply Company, 229 F.Supp. 129 (E.D.Ark.1963), the Court noted that the listing of a claim in a bankrupt’s schedules will not support the filing of an untimely proof of claim or the filing of an amendment to the same effect. See also In re Little & Ives Co., Inc., 68-1 USTC ¶ 9345 (B.C.S.D.N.Y.1968); In re Pigott, 684 F.2d 239 (3rd Cir.1983). Finally, in In re Little & Ives Co., Inc., supra, Judge Babitt held that there was no claim to amend where a timely proof of claim was withdrawn and thereafter a new proof of claim was sought to be filed after the bar date. 2 The final case which the Court will examine concerning the allowance of amendments to proofs of claim is In re Miss Glamour Coat Co., Inc., 80-2 USTC ¶ 9737 (S.D.N.Y.1980). In Glamour Coat, the Internal Revenue Service (IRS) filed a timely proof of claim for FICA and FUTA taxes for 1974 and withholding taxes for 1973. After amending this claim at various times, the IRS filed a claim for corporate income taxes for the years 1968,1969, and 1971, after the bar date. This was the first time that the IRS had claimed corporate income taxes in Glamour Coat. The IRS also filed other proofs of claim after the bar date seeking corporate income taxes for 1970. The Bankruptcy Court disallowed the IRS’ amended claim holding, inter alia, that timely claims for FICA, FUTA, and withholding taxes may not be amended to include an untimely claim for corporate income taxes. The District Court remanded Glamour Coat to the Bankruptcy Court for further analysis consistent with the District Court’s opinion. The District Court in Glamour Coat stated that there was a tension between the liberal test for amendment under Rule 15 of the Federal Rules of Civil Procedure and the use of “technical or mechanical” tests for determining whether a proposed amendment should be allowed. 68-1 USTC ¶ 9345 at p. 85434. The District Court in Glamour Coat approved an approach which consists of taking an “overall view of the problem.” Id. This overall view was stated to inherently require a balancing of equities. The District Court continued, stating that the following five considerations were appropriate for the Bankruptcy Court to address in determining whether an amendment should be allowed: (1) whether the debtor and creditors relied upon the Service’s earlier proofs of claim or whether they had reason to know that subsequent proofs of claim would be filed pending the completion of an audit; (2) whether other creditors would receive a windfall, to which they are not entitled on the merits, by the Court’s refusing to allow the Service to amend; (3) whether the Service intentionally or negligently delayed in filing its proof of claim stating the amount of corporate tax due; (4) the justification, if any, for the failure of the Service to file for a time extension for the submission of further proofs of claim; and (5) whether or not there are any other considerations which should be taken into account in assuring a just and equitable result. The Court believes that the reasoning of the District Court in Glamour Coat reflects an appropriate policy to be employed in *728 determining whether to allow an amendment to a proof of claim in the instant case. Accordingly, the Court, as have the debtors and the Service in their briefs, will address the five considerations stated in Glamour Coat. The first criterion is whether the debtors and creditors relied on the Service’s timely proofs of claim or whether they had reason to know that subsequent proofs of claim would follow pending the completion of the Service’s audit of IHI and NAE. The Service began its audit of the IHI and NAE corporate income tax returns for the taxable years 1974 and 1975 prior to or during 1978. (See affidavit of Fredric L. Blank attached to the debtors’ May 13,1983 Brief in Opposition to Cross-Motion for Summary Judgment by the United States of America and in Support of Debtors’ Motion for Summary Judgment.) On October 15, 1980, a closing conference concerning this audit was held by the debtors and the Service, at which conference the parties discussed the adjustments to the debtors’ corporate income tax, which taxes are the subject of this Order. (See affidavit of Fredric L. Blank.) Thereafter, on October 28,1980, the debtors were notified by letter that a recommendation would be made that certain adjustments be made to the debtors’ income tax liability for the debtors’ tax years 1974 and 1975. (See Exhibit “B” to the affidavit of Fredric L. Blank.) IHI and NAE filed their respective Chapter 11 petitions on March 20, 1981, and a bar date of August 31, 1981, was set as the time by which proofs of claim were to be filed against said debtors. Thereafter, the IRS issued its notice of tax due for 1974 and 1975 by IHI and NAE on December 28, 1981. The debtors filed their second plan and original disclosure statement on January 22, 1982. This disclosure statement contained disclosure of certain contingent and unliquidated claims, which included the possibility of a tax deficiency claim being asserted by the Service. (See Disclosure Statement at p. 28.) The disclosure contains, inter alia, the following language: “The debtors intend to vigorously contest the deficiency asserted by the Service and, in the event satisfactory settlement of the matter cannot be obtained, to refer the determination of any tax due for 1974 and 1975 to the Court pursuant to § 505, Title 11 United States Code. Provision is made in the Plan for payment of any contingent tax liabilities of the debtors and the affiliates.” Disclosure Statement at p. 31. The debtors’ disclosure statement at Exhibit “0” anticipated payments under the plan for taxes of only $71,360.00. On October 28,1982, the debtors, Bank of America, N.T. & S.A. (“BOA”) and certain other parties received written approval of a settlement agreement whereby the debtors’ disputes with BOA were terminated and on December 15,1982, an Order was entered confirming the debtors’ second amended and restated consolidated plan of reorganization. The debtors contend that great reliance was placed on the Service’s failure to timely file a proof of claim for corporate income taxes in reaching a settlement with BOA, as well as in the development, confirmation, and substantial consummation of the debtors’ plan of reorganization. The Court rejects this contention in view of the fact that the debtors did not enter into meaningful settlement negotiations with BOA until after the death of David N. Smith in July, 1982, and that these negotiations were not concluded until October 26, 1982, when the Court orally approved the compromise and settlement entered into by the debtors and BOA. While it is true that the Service did not file its amended proofs of claim until November, 1982, the debtors’ disclosure statement which was filed in January of 1982 exhibited the debtors’ awareness of, and concern with, the potential of claims being asserted by the Service for corporate income taxes for NAE and IHI for the years 1974 and 1975. The creditors in this case were also aware of the Service’s interest in this case, and it is likely that this knowledge accounted for the assignment by BOA to the unsecured creditors of a portion of BOA’s secured *729 status in an attempt to enable unsecured creditors to be in a position superior to that of the Service. 3 (See the October 28, 1982 Order approving the settlement agreement at page 6 and paragraph 6 at page 8 of the settlement agreement attached as exhibit A thereto.) Therefore, the Court finds that the debtors and creditors knew of the potential of the Service’s asserting a claim for corporate income taxes against the debtors and that certain of the debtors and creditors actions were based on this knowledge. The second consideration which the Court will address is whether other creditors would receive a windfall to which they are not entitled if the Service’s amendment is not allowed. The Court believes that the payment of substantially all of the allowed claims of creditors pursuant to the debtors’ confirmed plan, buttressed by the fact that the payment of those claims was expressly consented to by the Service at the December 15, 1982 confirmation hearing, estops the Service from attempting to avoid the effects of consummation of the debtors’ plan. Therefore, the Court finds that other creditors would not receive a windfall if the Service’s amendment is not allowed. The third consideration which the Court will address is whether the Service intentionally or negligently delayed filing the amended proofs of claim. The Service in its Memorandum in Opposition to Debtors’ Motion for Summary Judgment and in Support of the Cross-Motion for Summary Judgment by the United States states that, “While it may have been prudent to file an estimated claim or an unliquidated claim, it cannot be said to be negligent to • await completion of the normal audit and administrative process.” The Court rejects this position. The Service does not operate in a vacuum. The proper procedure for the Service to have followed was to file a proof of claim, at least stating the existence of an undetermined liability for corporate income taxes which could have later been amended to reflect the actual amount assessed by the Service. (See In the Matter of Little & Ives Co., Inc., 68-1 USTC ¶ 9345 (B.C.S.D. N.Y.1968)). While the failure to file a timely proof of claim was clearly not intentional, it was negligent. Furthermore, the Court notes that the Internal Revenue Manual, Bankruptcy Code Handbook, ¶¶ 326.1 to 326.3 at pp. 8493-12 through 8493-13 (1982) (Appendix A) sets forth a procedure which the Service is to follow to obtain an extension of time for filing a proof of claim where tax liability is as yet unliquidated. The Service did not follow this procedure in the instant case. The fourth consideration which the Court will discuss is the justification, if any, for the failure of the Service to file for an extension of time for filing claims. The Service has stated that the element of special justification is insignificant in this case when compared with the other four factors of Glamour Coat. (Service’s Memorandum in Opposition to Debtors’ Motion for Summary Judgment at p. 11) The Court finds that there was no justification for the Service’s failure to seek an extension of time for filing its claim for corporate income taxes in these cases. The fifth and final criterion to be discussed under Glamour Coat, supra, is whether there are any other considerations which should be taken into account to assure a just and equitable result. Generally, this Court, like other courts, does not wish to have conflicts decided on procedural bases, thereby preventing parties from having their cases heard on the merits. However, procedural requirements serve a purpose, particularly in a Chapter 11 proceeding, of enabling a debtor to attempt to efficiently and economically reorganize itself. Other than these general principles, there are no compelling equitable criteria which have not been addressed by the Court earlier in this Order. After a careful review of the arguments of counsel and the record in this case, the Court concludes that the Service will not be allowed to amend the May 18, 1981, and *730 June 29,1981 proofs of claim filed as to the debtors, NAE and IHI. The Court reaches this determination for the following reasons: In analyzing this case from the traditional point of view contained in such cases as In the Matter of Vega Baja Lumber Yard, Inc., supra, and In re Moro Supply Company, supra, it is clear that the Service’s amendment must be disallowed. The Court has found earlier in this Order that the corporate income taxes asserted by the Service constitute a separate and distinct claim from the PUTA and withholding taxes asserted in this case. Accordingly, the Service’s amendment asserts a new claim — i.e. a claim not arising out of the same occurrence or transaction as the timely filed proofs of claim filed by the Service in these cases. To the extent that the Court could find that a tax audit, closing conference and letter showing an intent to recommend adjustments to income tax liability constituted notice to the debtors of the Service’s claims for corporate income taxes, the Court would hold that notice of the existence of a claim is not sufficient to establish that claim in a bankruptcy proceeding and that a creditor has an affirmative duty to protect its interest by filing timely a proof of claim. In examining this ease under the more liberal test contained in In re Miss Glamour Coat Company, Inc., 80-2 USTC ¶ 9737 (S.D.N.Y.1980), this Court would refuse to allow the Service to amend its proof of claim. While the debtor and its creditors acted with knowledge of the potential of the IRS’ asserting a claim for corporate income taxes in these cases, when balanced against the Service’s behavior, it would not be appropriate to grant the Service leave to amend. The Service has disregarded its internal procedures concerning the filing of proofs of claim for unliquidated or disputed claims and has offered no justification for its failure to act timely. While amendments are to be freely allowed where justice so requires, and to the extent that Glamour Coat could be interpreted to allow amendments setting forth a new claim if a debtor had timely notice of the existence of or potential for asserting, said claim, the Service’s unexplained negligence does not present an instance under which justice or fairness requires the allowance of an amendment. Therefore, for the above-stated reasons, the Service’s Motion for Leave to Amend Certain Proofs of Claim and May 6, 1983 Motion for Summary Judgment are denied, and the debtors’ Motion for Summary Judgment on their objection to the Service’s November 2, 1982, and November 18, 1982 proofs of claim filed against NAE and IHI, respectively, is granted. IT IS SO ORDERED. *731 APPENDIX A *732 *733 *734 Footnotes [1] The Service has not filed a separate pleading requesting that it be allowed to amend its May 18, 1981, and June 29, 1981 proofs of claim filed against NAE and IHI. However, it is clear that this is the Service’s intent and the Court will treat the Service’s cross-motion for summary judgment as containing a request for leave to amend the Service’s timely filed and unobjected to proofs of claim. [2] The late claim sought to be asserted in In re Little & Ives Company, Inc. was for income taxes for the year 1955, while the timely but withdrawn proof of claim concerned income taxes for the years 1962 through 1965, inclusive. [3] The validity of this assignment became moot at the confirmation hearing in this case where the Service affirmatively approved confirmation of the debtors’ plan.