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Margaret Kinney v. HSBC Bank USA

Summarizing by Bradley Pearce

In re Anthony Ray Lincoln

Summarizing by Mawerdi Hamid

In re Feshback

Case Type:
Case Status:
19-10060 (11th Circuit, Sep 09,2020) Published
The bankruptcy court properly considered both the debtors' personal expenses and offers in compromise when it ruled that the debtors knowingly violated their duty to pay their 2001 income tax obligation. The fresh start doctrine does not require a court to accept the self-serving testimony of sophisticated debtors that they acted in good faith when those debtors' pre-bankruptcy conduct shows a pattern of delay and deceit when dealing with the IRS.
Procedural context:
Following a bench trial, the bankruptcy court ruled that the debtors' 2001 income tax debt was nondischargeable under § 523(a)(1)(c) because the debtors had subsequently earned more than enough income to pay the debt in full, had engaged in tactics to delay the IRS rather than engage in meaningful negotiations to repay the debt, and had made only partial payments at the debtors' convenience. The debtors' appealed, and the district court affirmed. The debtors appealed to the Court of Appeals.
Matthew and Kathleen Feshbach lived the life of caviar wishes and champagne dreams. Matthew Feshbach is an investment professional and former hedge fund manager. Beginning in the 1980s, he employed a strategy called “selling short against the box” that allowed him to delay the recognition of his taxable income from investments. The strategy worked well for Mr. and Mrs. Feshbach for several years. Without having to pay taxes on their “boxed-in” capital gains, they built a $14 million home in the 1990s. In 1999, the Feshbachs incurred an income tax liability of $1,950,827 when his investment strategies failed. The Feshbachs made some payments and received other credits during the 1999 tax year, but did not submit a payment with their tax return. In June of 2001, the Feshbachs submitted an “offer-in-compromise” (an “OIC”) to the IRS to settle the outstanding tax debt from 1999 for $1 million, about half of what they owed. The Feshbachs made a $200,000 payment toward their 1999 tax liability, consistent with their offer. However, the Feshbachs increased their tax liability by liquidating securities, and incurred capital gains taxes for 2001, in order to make the $200,000 payment under the OIC. Considering the Feshbachs’ income and allowable expenses, the IRS believed the OIC was a “nonstarter.” The Feshbachs submitted documents showing that the collection potential was not only greater than their offer, but also greater than the entire debt. According to the IRS, the Feshbachs were living “way over their allowable expenses.” The Feshbachs withdrew their OIC before the IRS could reject it. They opted instead for a temporary agreement in which they would make monthly payments of $1,000 while the IRS suspended its collection efforts. This arrangement was intended to give the Feshbachs breathing room to sell a house and adjust their standard of living to free up cash for debt payments. The Feshbachs next incurred a $3,247,839 tax liability for the 2001 tax year. By the time they filed their tax return for 2001, the Feshbachs owed the IRS a total of $5,198,156. That, however, could be paid by the Feshbachs. Mr. Feshbach founded a hedge fund for “ultra-high net worth” investors that was “highly” profitable, earning the Feshbachs over $13MM over the next nine years. the Feshbachs would also spend about $8.5 million on personal expenses and charitable contributions in those nine years, leaving a balance of more than $3.8 million on their tax debt. The Feshbachs made a second OIC in 2002 that was much lower as a percentage of their tax liability, offering to pay $1.25 million on more than $6 million in liability. In support of this OIC, the Feshbachs submitted a financial disclosure to the IRS claiming that they were earning only $180,000 annually. In contrast, their 2002 and 2003 income tax returns showed earnings of $611,413 and $736,608, respectively. Further, the Feshbachs paid the IRS only $1,000 per month towards their tax debt while their personal expenditures were over $1.5 million. The IRS rejected the Feshbach’s second OIC. The Feshbachs made two $50,000 payments in April and May of 2005 and obtained a loan to pay the balance of the 1999 tax debt. The IRS then approved a permanent installment plan in which the Feshbachs would pay $120,000 per quarter until the 2001 debt was satisfied. From October of 2005 through January of 2008 the Feshbachs stayed on pace with the installment plan, paying $1.2 million over ten quarters. But in 2008 the financial crisis hit and Mr. Feshbach’s health declined. The investment fund faltered and the Feshbachs began missing payments. In September of 2008, the Feshbachs made a third offer-in-compromise of $120,000 on a $3.6 million balance for the 2001 tax debt. They proposed monthly payments of $2,500 over 48 months. Along with this offer they submitted another personal financial statement in which they claimed a monthly income of $833, or $9,996 annually. They were incurring monthly household expenses of over $12,000. Further, the Feshbachs’ 2008 income tax return showed an income of $193,205. While their third offer was pending from September 2008 to August 2009, the Feshbachs spent between $1,400 and $1,500 per month on entertainment, more than $4,000 per month for groceries, $4,000 per month for domestic help, and $4,500 per month on rent, besides other expenses. In 2009 and 2010, the Feshbachs spent about $90,000 on household employee wages and $143,000 in charitable contributions. Mr. Feshbach made about $40,000 of those charitable contributions through his business in his son’s name. In December 2010, the IRS concluded that the Feshbachs could pay $15,000 per month to retire the tax debt. The Feshbachs made four $15,000 payments toward a new installment plan but ceased payments altogether in May of 2011. The Feshbachs then filed a chapter 7 bankruptcy petition, and the government opposed discharge, arguing that the Feshbachs willfully attempted to evade and defeat that liability.
JORDAN and TJOFLAT, Circuit Judges, and BEAVERSTOCK, District Judge

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