In The Matter of Cloobeck

A trustee must give notice and a hearing before an administrative expense is made.

Sheldon Cloobeck filed for a chapter 11 bankruptcy, which was later converted to a chapter 7, whereupon Timothy S. Cory was appointed as the chapter 7 Trustee. Gilbert Dreyfuss held an allowed unsecured claim against Cloobeck’s estate for $1,006,417.68. Without notice, a hearing, or authorization from either the bankruptcy court or Dreyfuss, the Trustee paid $340,895 in federal income tax liability to the Internal Revenue Service. The Trustee proceeded by filing a final report with the bankruptcy court, which was affirmed by the district court. On appeal, the Ninth Circuit reviewed whether the trustee’s payment of the federal income tax liability went beyond the Trustee’s duties and obligations, constituting an error. The panel held that the trustee erred in not providing notice or a hearing on the matter. Under 11 U.S.C. § 503(b)(1)(B), taxes incurred by the estate is considered an administrative expense, however, those expenses can only be cared for after notice and a hearing. As a result, the panel remanded the case back to the bankruptcy court to determine the amount of federal income taxes due, allowing for those interested parties to have an opportunity to challenge the amount of taxes paid before the estate’s funds are diminished. REVERSED and REMANDED.