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In Re: Syed M. Hussain v. Syed M. Hussain

December 7, 2010

IN RE: SYED M. HUSSAIN, DEBTOR. BARRY W. FROST, TRUSTEE IN BANKRUPTCY, PLAINTIFF/APPELLANT,
v.
SYED M. HUSSAIN, DEFENDANT/APPELLEE.



The opinion of the court was delivered by: Garrett E. Brown, Jr., U.S.D.J.

NOT FOR PUBLICATION

MEMORANDUM OPINION

BROWN, Chief Judge

This matter comes before the Court upon an appeal of Barry Frost, Trustee for the debtor Syed M. Hussain, ("Trustee" for the "Debtor") from the March 3, 2010 Order of the United States Bankruptcy Court for the District of New Jersey ("Bankruptcy Court") Surcharging the Trustee. (Record on Appeal ("ROA") 458.) Debtor, appearing pro se, in addition to filing opposition to the appeal, has also filed a "motion to shorten time, fast track the case based on his medical condition." (Doc. No. 17.)*fn1 The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 158. The Court has considered the parties' submissions. For the reasons that follow, the Court will affirm the Bankruptcy Court's March 3, 2010 Order Surcharging the Trustee.

I. BACKGROUND

This appeal arises from proceedings which occurred during the administration of bankruptcy involving the Debtor Syed M. Hussain. Pursuant to the Bankruptcy Court's March 3, 2010 order and the record on appeal, it appears that the Bankruptcy Court surcharged the Trustee because it determined that the Trustee failed to timely file income tax returns with the Internal Revenue Service ("IRS") on behalf of the Debtor. The Bankruptcy Court, therefore, surcharged the Trustee the resulting late fees that were assessed against Debtor in the amount of $98,908.78, less any tax refunds that the estate received during the years 2007, 2008, and 2009. It is the result of these principal facts that the Trustee now appeals.

This matter originally commenced in Bankruptcy Court on October 25, 1999, when the Debtor filed a voluntary petition under Chapter 13. (Trustee's Br. at 4, Doc. 6.) On August 15, 2000, the casewas converted to a Chapter 7 petition and Barry W. Frost was appointed as Interim Chapter 7 Trustee on August 23, 2000. (Id.)

In February 2002, the Trustee filed an application to retain The Hermes Group as accountants (ROA221) for Debtor, but the Bankruptcy Court denied the application (ROA222). In November of 2002, the Trustee submitted an application to hire Ronald C. Moonin, CPA, ("Moonin") as an accountant (ROA260), and the Bankruptcy Court granted the application on November 19, 2002 (ROA261). Subsequently in September of 2006, Moonin filed tax returns on behalf of Debtor's estate for the years 2000 through 2006. (ROA421.) In January 2007, the Trustee submitted his Final Report to the United States Trustee ("U.S. Trustee") and the U.S. Trustee filed the Statement of Review indicating no objection to the Final Report. (ROA376.) On May 24, 2007, the Bankruptcy Court approved the Statement of Review and issued an Order Granting Allowances. (ROA379.)

In October 2008, the Trustee filed an Amended Final Report to the U.S. Trustee. (ROA389.) The U.S. Trustee filed a Statement of Review indicating no objection to the Amended Final Report on October 29, 2008. (ROA398.) However, objections to the Amended Final Report were filed by the Debtor and his non-debtor spouse. (ROA406, 410.) The Bankruptcy Court overruled these objections and issued a Revised Order Granting Allowances in May of 2007. (ROA411.) On December 18, 2008, Appellee filed a Motion for Reconsideration. (ROA415.) On February 2, 2009, the Bankruptcy Court issued an order denying the motion as to all issues other than the issue of income tax and ordered that the Trustee address the issue as to whether all expenses were properly deducted. (ROA421.) In April 2009, the Trustee submitted the Final Distribution Report to the U.S. Trustee and on May 12, 2009, the U.S. Trustee filed her Statement of Review indicating that she had no objections to the Final Distribution Report. (ROA434.) On May 14, 2009, the Bankruptcy Court entered the Final Decree discharging the Trustee as trustee and closing the case. (ROA435.) However, on December 21, 2009, the Bankruptcy Court suasponte issuedan Order to Show Cause why the Trustee should not be surcharged and ordered to disgorge compensation. (ROA446.)

At the hearing on March 3, 2010, the Bankruptcy Court found that the Trustee failed to "fulfill[] his duties in this case and must reimburse the estate for the tax penalties and interest that have been paid." (Mar. 3, 2010 Tr. 4:6-8; ROA476.) The Bankruptcy Court noted that the estate earned income during 2000, 2001, and 2002 largely from the sale of real property, but returns were not prepared for those years until late 2006 with the taxes paid thereafter. (Mar. 3, 2010 Tr. 4:14-15.) The Bankruptcy Court found that as a result of the delay, "the estate paid to the Internal Revenue Service interest of over $86,000 and penalties of approximately $50,000." (Mar. 3, 2010 Tr. 4:19-21.) The Court also found that, as a result of the delay, interest had been paid from the estate to the State of New Jersey Division of Taxation in the amount of approximately $7,000 and penalties of approximately $5,000. (Mar. 3, 2010 Tr. 4:21-23.) The Court found that the total interest and penalties incurred and paid by the estate was $149,000. (Mar. 3, 2010 Tr. 4:23-24.) The Bankruptcy Court further detailed that "the penalties charged by the IRS were refunded in the amount of approximately $50,000. So the net total of interest and penalties that were incurred . . . is $98,908.78." (Mar. 3, 2010 Tr. 4:25-5:3.) The Court also detailed the filings and returns regarding tax years 2007 and 2008. (Mar. 3, 2010 Tr. 5:4-9.)

The Bankruptcy Court, having made these findings of fact, concluded that "[t]he Internal Revenue Service Code specifically puts the obligation on a Chapter 7 Trustee to file tax returns for the estate." (Mar. 3, 2010 Tr. 6:20-22.) Further, the Court held that even though it was proper for the Trustee to hire an accountant, the Trustee could not "shift the responsibility for timely filing the returns and payment of taxes to the accountant." (Mar. 3, 2010 Tr. 6:24-25.) In so holding, the Bankruptcy Court addressed the Trustee's argument that the U.S Trustee "signed off and they had no objection to the accounting" that the Trustee had provided of his administration of Debtor's estate and there were no other objections filed. (Mar. 3, 2010 Tr. 7:2-10.) The Bankruptcy Court, however, rejected the argument and pointed out that "although [the Bankruptcy Court] previously had approved the accountings by [the Trustee], that it is [the Court's] responsibility and . . . right under Section 105 of the Bankruptcy Code, to raise these issues sua sponte." (Mar. 3, 2010 Tr. 8:9-19.) Accordingly, the Court issued an Order Surcharging Trustee in the amount of $98,908.78 less any tax refunds that the estate received during the years 2007, 2008, and 2009. (Mar. 3, 2010 Tr. 9:24-10:2.)

The Trustee filed a Notice of Appeal of the March 3, 2010 Order of the Bankruptcy Court on April 27, 2010. (Notice of Appeal; Doc. No. 1.) Thereafter, the Trustee and Debtor filed their briefs. (Doc. Nos. 6, 8, 9.) In addition, Debtor filed a motion to shorten time, fast track the case due to his medical condition, and this motion was opposed by the Trustee, to which Debtor filed a reply. (Doc. Nos. 17, 18, 19.) Because the Court understands Debtor's motion as one seeking a decision from this Court, and because the Court herein issues its decision, the Court denies Debtor's motion as moot.

II. DISCUSSION

A. The Parties' ...


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