State Court Jurisdiction Over Dischargeability Action

09 Jun State Court Jurisdiction Over Dischargeability Action

1st. Cir. B.A.P. this January decided In re Crocker, 362 B.R. 49 (1st Cir. BAP 2007). This case addressed the issue of a bankruptcy judge’s discretion to allow a debtor’s motion to reopen a bankruptcy case. The motion had been filed because after the debtor’s Chapter 7 case closed, the Massachusetts Department of Revenue (“MDOR”) sued him in state court for a declaratory judgment that his pre-petition tax liability of $70,285.37 was nondischargeable pursuant to §523(a)(1)(C) of the Bankruptcy Code. The MDOR alleged that the debtor had “willfully, consciously and intentionally attempted to evade or defeat assessment and payment of the Massachusetts income tax” and that, consequently, the debt was nondischargeable. The panel pointed out that state courts have concurrent jurisdiction with federal courts to determine dischargeability under this section. See Fed. R. Bankr.P. 4007, Advisory Committee’s Note (1983) (“Jurisdiction over this issue on these debts [debts listed under §§ 523(a)(1), (3), (5), (7), (8), (9)] is held concurrently by the Bankruptcy Court and any appropriate nonbankruptcy forum.”) After commencement of the state suit, the debtor sought to reopen his bankruptcy case and determine the point there. The MDOR opposed the effort, seeking to decide the issue in state court. The panel affirmed the bankruptcy court’s decision to grant the debtor’s motion to reopen. The judge would have likely not abused his discretion had he denied the motion to reopen, however. One lesson is that it makes sense to seriously consider addressing thorny dischargeability issues in the first instance during the course of a bankruptcy case. The unpleasant alternative in some cases can be post-petition state court litigation.

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