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6331 Bankruptcy page 5 |
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Claude C. Lightfoot, Jr., Lilley & Lightfoot, P.C., 3500 N.
Causeway Blvd., Metairie, La., for debtors. John David Ziober,
Shockey & Ziober, P.C., 5551 Corporate Blvd., Baton Rouge, La.
70898-0286, for plaintiff. Claude C. Lightfoot, Jr., Lilley &
Lightfoot, P.C., 3500 N. Causeway, Metairie, La., John M.
Bilheimer, Department of Justice, Washington, D.C. 20530, for
defendants. MEMORANDUM OPINION BRAHNEY, This matter came before the court on a Motion to Dismiss Adversary
Proceeding or Alternatively for Adequate Protection filed by the
Department of Justice ("DOJ") on behalf of the Internal
Revenue Service (" On Hancock feared the On In response, the Debtors argue that despite the tax levy, they
still retained rights in the property and, therefore, the account
funds should be turned over to the estate. The Debtors also argue
that the funds are of great value in their efforts to reorganize.
Finally, the Debtors claim that the government should have moved
for adequate protection or to lift stay in the bankruptcy case
itself, so that the instant Motion is not properly before the
Court within this adversary proceeding. Property of the estate held by a third party must be turned over to
the trustee under the Bankruptcy Code. 11 U.S.C. §542(a). The
estate contains all legal or equitable interests of the debtor in
property as of the commencement of the bankruptcy case. 11 U.S.C.
§541(a)(1). The question, therefore, is whether the A question arises, however, as to whether the same result occurs
when the property in question is cash or an equivalent. The issue
has been considered by many courts, and two distinct lines of
analysis have evolved since the Whiting Pools decision. On
one side, courts have held that the residual property rights that
were retained in Whiting Pools are inapplicable to account
funds. Therefore, a debtor retains no interest in the property and
the This Court chooses to side with the latter line of cases. It does
not appear that all rights of the Debtors in these funds
have been lost as a result of the Third, the enforcement provisions of the Internal Revenue Code
"do not transfer ownership of the property to The Debtors, however, are not able to include these funds as
property of the estate without any further effort on their part. A
pre-petition tax levy does give the (1) requiring the trustee to make a cash payment or periodic cash
payments to such entity, to the extent that . . . use sale or
lease under section 363 of this title . . . results in a decrease
in the value of such entity's interest in such property; (2) providing to such entity an additional or replacement lien to
the extent that such stay, use, sale, lease, or grant results in a
decrease in the value of such entity's interest in such property;
or (3) granting such other relief, other than entitling such entity to
compensation allowable under section 503(b)(1) of this title as an
administrative expense, as will result in the realization by such
entity of the indubitable equivalent of such entity's interest in
such property. 11 U.S.C. §361. The Debtors apparently have been providing their other secured
creditors with monthly payments in order to protect their secured
interests. The This is an inaccurate statement of the procedures required for
adequate protection in a bankruptcy proceeding. The creditor is
not required to move for adequate protection at all. In actuality,
the debtor must offer some form of adequate protection if
required, to which the creditor may object and ask the court for a
determination of adequacy. The Bankruptcy Code does not state, nor
has this Court discovered a case that states, that a creditor is
required to move for adequate protection on his secured claim
within the main bankruptcy case if the debtor does not offer any.
The court may consider this issue at any stage of the bankruptcy
proceeding at which the creditor claims that it is a relevant
issue. Here, the Debtors are trying to retrieve the property held in trust
by the Bankruptcy Clerk and make it property of the estate under
Section 542. Presumably, they would then be able to petition the
Court to be allowed to use the collateral in the restructuring of
their business. The In their Motion to Dismiss or Alternatively for Adequate
Protection, the DOJ made two other arguments. They claimed that
the Debtors could not carry their burden to show that the tax
liens were an avoidable preference under 11 U.S.C. §547(c). They
also argued that some of the named defendants (the An appropriate order will be entered. [97-2 USTC ¶50,695] In re Quality Health Care, Debtor.
Gordon E. Gouveia, Trustee, Plaintiff v. Internal Revenue Service
of The United States of America, Defendant U.S. Bankruptcy Court, No. Dist. Ind., Hammond
Div. at Gary, 96-61064, [Code
Sec. 6871 ] LINDQUIST, Bankruptcy Judge: This Adversary Proceeding came before the Court on a Motion for
Summary Judgment filed by the Defendant, United States of America
(hereinafter: "U.S.A.") on behalf of its Agency, the
Internal Revenue Service, (hereinafter: " By Order of this Court dated A Response or Answer to said Motion for Summary Judgment was filed
by the Trustee on March 27, 1997. A Reply to said Answer was filed by the U.S.A., the movant, on
April 11, 1997. The Trustee's Complaint filed on September 25, 1996 alleges: 1. Debtor Quality Health Care, Inc., filed its
Petition for Relief under Chapter 7 of the United States
Bankruptcy Code on May 7, 1996. 2. The Plaintiff, Gordon E. Gouveia, was
appointed trustee in the above-entitled action and duly qualified
as such on May 7, 1996. 3. That at the time of the filing of the
aforesaid bankruptcy proceeding, the Debtor possessed monies in a
checking account held with the Calumet National Bank under Account
No. 098-161-1. 4. That the Defendant caused a Notice of Levy to
be sent to the Calumet National Bank on 5. That the Defendant seized the Debtor's funds
in the aforesaid checking account on May 23, 1996, in the amount
of $1,928.01. 6. The funds seized by the Defendant were
property of the estate pursuant to 11 U.S.C. Section 541(a)(1),
and the action taken by the Defendant occurred post-petition, when
the automatic stay was in effect. 7. On August 13, 1996, Plaintiff made a written
demand on the Defendant requiring turnover of the aforesaid
property. That a copy of Plaintiff's correspondence dated August
13, 1996, is attached hereto and made a part hereof as Exhibit
"B". 8. The Defendant has failed and refused to
deliver the aforesaid property of the estate to the Plaintiff and
wrongfully retains possession thereof without right. The Trustee prayed that the Court enter an Order
requiring the U.S.A. to turn over the estate property seized
"post-petition", for attorneys fees, costs and other
just relief. The U.S.A. filed an Answer on November 1, 1997, which alleges, in
part, as follows: 3. The United States admits that at the time of
the filing of the bankruptcy petition, funds were being held in a
checking account at Calumet National Bank under the name of the
Debtor. The United States lacks sufficient knowledge or
information to form an opinion regarding the truth of the
remaining allegations contained in paragraph 3. 4. The United States admits that the Internal
Revenue Service served a Notice of Levy upon Calumet National
Bank, however, the United States further avers that the Notice of
Levy was served upon Calumet National Bank on April 30, 1996. The
United States denies the remaining allegations of paragraph 4. 5. The United States denied the allegations
contained in paragraph 5 and further avers that, on May 23, 1996,
the balance of the checking account of Quality Health Care, Inc.
in the amount of $ 1,903.01, held at Calumet National Bank was
turned over to the United States by the Bank. 6. To the extent the allegations contained in
this paragraph require a legal analysis and seek a legal
conclusion, no response is necessary. The United States denies the
remaining allegations contained in paragraph 6. 7. The United States admits that Plaintiff made a
written demand upon the Internal Revenue Service for turnover of
the funds received by the Internal Revenue Service on May 23,
1996, from the Calumet National Bank account on or about August
13, 1996. The United States further admits that a copy of a
portion of Plaintiff's written demand is attached to the adversary
complaint at Exhibit B. 8. The United States admits that the Internal
Revenue Service has refused to deliver the funds sent by Calumet
National Bank to the Trustee. The United States denies the
remaining allegations of paragraph 8. The Answer also sets out the following
Affirmative Defenses: 1. The Court lacks jurisdiction over the United
States because the United States was not properly served with the
adversary complaint. 2 2. The Internal Revenue Service is not an
appropriate party to this action. The only appropriate party is
the United States of America. 3 3. The adversary complaint fails to state a claim
upon which relief can be granted. 4. The Plaintiff is not entitled to turnover of
the funds because he has not identified the use for which the
funds will be put. 5. The Plaintiff has not established that he can
provide adequate protection for the funds for which he seeks
turnover. 4 II No objections were made by the parties to the subject-matter
jurisdiction of this Court, and the Court concludes that it has
subject matter jurisdiction over this Proceeding pursuant to 28
U.S.C. §1334(b), and that this Adversary Proceeding is a core
proceeding pursuant to 28 U.S.C. §157(b)(2)(E). In addition,
notwithstanding the fact that, in its Answer as an affirmative
defense, the U.S.A. alleges that this court is without in personam
jurisdiction based on the alleged improper service of the
Complaint by the Trustee upon it, the Court concludes that it has
in personam jurisdiction over the U.S.A. as service of the
Complaint and Summons upon the U.S.A. appears to fully comport
with the requirements of Fed. R. Bk. P. 7004(b)(4) and (5), and
was not raised by the U.S.A. in its Motion for Summary judgment.
However, as observed in footnote 2, the U.S.A. is correct as to
its Second Affirmative Defense as the Internal Revenue Service is
not a proper party defendant. Nevertheless, the U.S.A. did not
address this issue in its Motion for Summary judgment, and
proceeded to argue the case on the merits. As a condition of any
final order entered in this Adversary Proceeding, the Trustee will
be required to amend his Complaint to name the USA as the proper
party defendant. B Under Rule 56(c) Fed. R. Civ. P., as made applicable by Fed. R. Bk.
P. 7056, summary judgment is proper if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to
judgment as a matter of law. Celotex Corp. v. Catrett, 477
U.S. 317, 322, 106 S. Ct. 2548, 2552, 91 L. Ed. 2d 65 (1986); Anderson
v. Liberty Lobby Inc., 477 U.S. 242, 247, 106 S. Ct. 2505,
2509-10, 91 L. Ed. 2d 202 (1986); Matsushita Elec. Indus. Co.
v. Zenith Radio Corp., 475 U. S. 574, 585-86, 106 S. Ct. 1348,
1355, 89 L. Ed. 2d 538 (1986). The inquiry that the court must
make is whether the evidence presents a sufficient disagreement to
require trial or whether one party must prevail as a matter of
law. Anderson, 477 U.S. at 251-252, 106 S. Ct. at 2511-12. The moving party bears the burden of showing that there is an
absence of evidence to support the nonmovant's case. Celotex
Corp. v. Catrett, 106 S. Ct. at 2554, supra. Stated
differently, the moving party, in making a motion for summary
judgment, "has the burden of establishing the lack of a
genuine issue of material fact." Big O Tire Dealers, Inc.
v. Big O Warehouse, 741 F.2d 160, 163 (7th Cir. 1984); Korf
v. Ball State University, 726 F.2d 1222, 1226 (7th Cir. 1984). Federal Rule of Civil Procedure 56(e) provides in part as follows: When a motion for summary judgment is made and
supported as provided in this rule, an adverse party may not rest
upon the mere allegations or denials of the adverse party's
pleading, but the adverse party's response, by affidavits or as
otherwise provided in this rule, must set forth specific facts
showing that there is a genuine issue for trial. If the adverse
party does not so respond, summary judgment, if appropriate, shall
be entered against the adverse party. When a motion for summary judgment is made and supported by the
movant, Fed. R. Civ. P. 56(e) requires the non-moving party to set
forth specific facts demonstrate that genuine issues of fact
remain for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith
Radio Corp., 106 S. Ct. at 1355, supra. Accordingly,
once a moving party has met its initial burden, the opposing party
must "set forth specific facts showing that there is a
genuine issue for trial" and that the disputed fact is
material. Posey v. Skyline Corp., 702 F.2d 102, 05 (7th
Cir. 1983), cert. den., 464 U.S. 960, 104 S. Ct. 392, 78 L.
Ed. 2d 336 (1983). Thus, if the movant carries his initial burden,
the opposing party may not defeat the motion by merely relying on
the allegations or denials in its pleadings. Rather, its response
must set forth in the required filings specific facts showing that
there is a genuine issue for trial. Celotex, 477 U.S. at
324, 106 S. Ct. at 2553; Anderson, 477 U.S. at 248, 106 S.
Ct. at 2510; Matsushita, 475 U.S. at 587, 106 S. Ct. at
1356. See also, First National Bank v. Cities Service Co.,
391 U.S. 253, 289-90, 88 S. Ct. 1575, 1593, 20 L. Ed. 2d If the non-movant does not come forward with evidence that would
reasonably permit the finder of fact to find in the non-movant's
favor on a material question, then the Court must enter Summary
Judgment against the non-movant. Waldridge v. American Holchst
Corp., 24 F.3d 918, 920 (7th Cir. 1994). The burden on the
non-movant is not onerous. Id., 24 F.3d at 920. The non-movant
need not tender evidence in a form that could be admissible at
trial. Id., 24 F.3d at 921. Of course, the evidence set
forth must be of a kind admissible at trial. Id., 24 F.3d
at 921, n. 2. Moreover, the non-movant need not match the movant
witness for witness, nor persuade the Court that the non-movant's
case is convincing, the non-movant need only come forward with
appropriate evidence demonstrating there is a pending dispute of
material fact Id., 24 F.3d at 921 (Collecting cases). C The ultimate burden of proof at the trial of this Adversary
Proceeding is or the Trustee who is the Nonmovant. Hunter v.
Patton (In re Patton), 200 B.R. 172, 174 (Bankr. N.D.
Ohio 1996) (Trustee bears the burden of proof on a complaint for
turnover). In re Amco Products, Inc., 50 B.R. 723, 725 (W.D.
Mo. 1983); Yaquinto v. Greer 81 B.R. 870, 878 (N.D. Texas
1988); In re Galster, 38 B.R. 72, 75 (Bankr. W.D. Mo.
1984). As to the standard of proof, it should be noted that the
Supreme Court in the case of Anderson, et. al. v. Liberty
Lobby, Inc. and Willis A. Carto, 477 U.S. 242, 106 S. Ct.
2505, 91 L. Ed. 2d 202 (1986) held that in determining whether a
factual dispute exists on a motion for summary judgment, the court
must be guided by the substantive evidentiary standards of the
case that are applicable at trial, and thus in ruling on a motion
for summary judgment the Supreme Court held that the court must
apply the clear and convincing standard in a case where the actual
malice rule applied, as this was thus the standard of proof for
such a claim. Here the standard of proof at trial as to the Trustee as the
Nonmovant is by the preponderance-of-the-evidence. Hunter v.
Patton (In re Patton), 200 B.R. at 174-75, supra.
In Hunter, the court distinguished Oriel v. Russell,
278 U.S. 358, 362, 49 S. Ct. 173, 174, 73 L. Ed. 419 (1929), which
held that the clear and convincing evidence standard applied under
the bankruptcy act of 1898 in a case for the turnover of assets,
by reasoning: (1) that a turnover proceeding is not an action for
fraud; (2) referring to the holding in Grogann v. Gardner,
498 U.S. 279, 286, 111 S. Ct. 654, 659, 112 L. Ed. 2d 755 (1991),
1 that the preponderance of evidence standard generally applies in
civil actions between private litigants; and, (3) noting that a
turnover proceeding under §542(a) does not imply coercive methods
or imprisonment. Hunter, 200 B.R. at 174-75. Thus, the
court must apply the preponderance-of-the-evidence standard of
proof to the Trustee in this Adversary Proceeding in testing the
sufficiency of the Motion for Summary Judgment by the U.S.A. 5 D Federal Rule of Civil Procedure 56(c) provides as follows: (c) Motion and Proceedings Thereon. The motion shall be served at
least 10 days before the time fixed for the hearing. The adverse
party prior to the day of hearing may serve opposing affidavits.
The judgment sought shall be rendered forthwith if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law. A summary judgment,
interlocutory in character may be rendered on the issue of
liability alone although there is a genuine issue as to the amount
of damages. (Emphasis added). The court has reviewed the following materials that have been filed
of record to determine if they may be properly considered in
ruling on the Motion for Summary judgment by the U.S.A. 1. The Trustee's Complaint and attached Exhibit "A"
(Notice of Levy by Lake County Sheriff on behalf of the Indiana
Dept. of Treasury to Calumet National Bank, dated 2. The U.S.A.'s Answer and Affirmative Defenses to the Trustee's
Complaint filed on 3. The U.S.A.'s Motion for Summary Judgment, which included a
Statement of Material Facts with Supporting Materials and Brief
filed on Attached to the USA's Statement of Material Fact as Exhibit
"1" is a Notice of Levy by the 4. The Response by the Trustee to the U.S.A.'s Motion for Summary
Judgment and Brief filed on 5. The U.S.A.'s Reply Brief in support of its Motion for Summary
Judgment filed on STATEMENT OF MATERIAL FACTS FILED BY U.S.A. Local Bankruptcy Rule B-756, Motions for Summary Judgment, states
as follow: In addition to complying with the requirements of
N.D. Ind. L.B.R. B-707.1, all motions for summary judgment shall
be accompanied by a "Statement of Material Facts" which
shall either be filed separately or as part of the movant's
initial brief. The "Statement of Material Facts" shall
identify those facts as to which the moving party contends there
is no genuine issue and shall be supported by appropriate
citations to discovery responses, depositions, affidavits, and
other admissible evidence. Any party opposing the motion shall,
within thirty (30) days of the date the motion is served upon it,
serve and file a "Statement of Genuine Issues" setting
forth all material facts as to which it is contended there exists
a genuine issue, supported with appropriate citations to discovery
responses, affidavits, depositions or other admissible evidence,
together with any affidavits or other documentary material
controverting the movant's position. The "Statement of
Genuine Issues" may either be filed separately or as part of
the responsive brief. In determining the motion for summary
judgment, the court will assume that the facts as claimed and
supported by admissible evidence by the moving party are admitted
to exist without controversy, except to the extent that such facts
are controverted in the "Statement of Genuine Issues"
filed in opposition to the motion, as supported by the
depositions, discovery responses, affidavits and other admissible
evidence on file. 7 Pursuant to Local Rules, if a summary judgment respondent fails to
file a timely statement of disputed material facts, uncontroverted
statements in the moving party's statement in support of summary
judgment are deemed admitted. Gianopolous v. Brach & Brock
109 F.3d 406, 412 (7th Cir. 1997) (collecting cases); Wienco v.
Katahn Associates, Inc., 965 F.2d 565, 567 (7th Cir. 1992); Schulz
v. Serfilco, Ltd., 965 F.2d 516, 518-19 (7th Cir. 1992).
However, the party opposing summary judgment is deemed to have
admitted through failure to controvert, only those facts as set
forth in the moving party's statement. Wolf v. Buss America
Inc., 77 F.3d 914, 922 (7th Cir. 1996). The U.S.A. on On The Notice of Levy by the The Internal Revenue Code provides that there is
a lien for the amount that is owed. Although we have given the
notice and demand required by the Code, the amount has not been
paid. This levy requires you to turn over to us this person's
property and rights to property (such as money, credits, and bank
deposits) that you have or which you are already obligated to pay
this person. However, don't send us more than the "Total
Amount Due." Money in banks, credit unions, savings and loans,
and similar institutions described in section 408(n) of the
Internal Revenue Code must be held for 21 calendar days
from the day you receive this levy before you send us the money.
Include any interest the person earns during the 2 1 days. Turn
over any other money, property, credits, etc. that you have or are
already obligated to pay the taxpayer, when you would have paid it
if this person asked for payment. Exhibit 2 to the Exhibit 3 to the The Trustee on On On The record reflects that the The Court concludes that the facts set out in the U.S.A.'s
Statement of Material Facts Which Are Undisputed are deemed
admitted. However, this conclusion is not dispositive e of the
U.S.A.'s Motion as it does not follow that the U.S.A. is entitled
to a summary judgment as a matter of law. The Court is required,
at a minimum, to examine the movant's motion for summary judgment
to ensure he has discharged his initial burden. Carver v. Branch
946 F.2d 451, 454-55 (6th Cir. 1991). The Court must make a
further finding that give the undisputed facts, summary judgment
is proper as a matter of law. Wienco v. Katahn Associates,
Inc., 965 F.2d at 568, supra. E The Court takes judicial notice of the record in the Debtor's main
case, and finds as follows: 1. That the Debtor filed its voluntary Chapter 7 Petition on 2. That the Debtor in Schedule E--Creditors Holding Unsecured
Priority Claims, list the 3. That the Notice of the Debtor's Petition to all creditors by the
Clerk dated 4. That the Bank was listed by the Debtor at Schedule B--Personal
Property at No. 2, wherein two accounts were shown having a
negative balance of $30.00, so that the Bank was not listed as a
creditor of the Debtor in its Schedules. However, the Certificate
of Service by the Bankruptcy Noticing Center on behalf of the
Clerk giving notice of the Debtor's Petition dated 5. That the Debtor's Statement of Affairs, No. 4. Suits and
Administrative proceedings, executions, garnishments and
attachments, No. 5, repossession, foreclosures and returns, and
No. 11 Closed Financial Accounts do not list the Notice of Levy by
the According to Exhibit "1" to the F 1. The Motion and Brief of the The Motion of the USA acknowledges that on The U.S.A.'s Brief in Support of its Motion for Summary judgment
concedes that the The U.S.A. asserts that the Trustee has not established that he is
entitled to the turnover of the funds levied upon by the U.S.A.
pursuant to §542(a), 8
and refers this court to §363(e) which addresses the use, sale,
or lease of property of the estate. Section 363(e) states as
follows: (e) Notwithstanding any other provision of this section, at any
time on request of an entity that has an interest in property
proposed to be used, sold, or leased, by the trustee, the court,
with or without a hearing, shall prohibit or condition such use,
sale, or lease as is necessary to provide adequate protection of
such interest. 9
(emphasis supplied). The U.S.A. refers this Court to United States v. Whiting Pools
Inc. [83-1 USTC ¶9394], 462 U.S. 198, 204, 103 S. Ct. 2309,
2313 + N. 7, 2316, 76 L. Ed. 2d 515 (1983) (holing that a court
can order the United States to turn over property of the estate
that is seized prepetition, but only after the court ensures that
the 2. The Brief of Trustee in Response to
the USA's Motion for Summary Judgment. On The Trustee reminds the court that on the date of the Debtor's
Petition, or The Trustee asserts that the In In re Challenge Air, Inc., the Eleventh Circuit expanded
upon Whiting Pools and found that accounts held by a third
party subject to a prepetition tax levy remained property of the
estate. [92-1 USTC ¶50,090], 952 F.2d 384 (11th Cir. 1992). The
Eleventh Circuit determined that the prepetition levy only gave
the The Id. [97-1 USTC ¶50,102], 202 B.R. at 626-27. The Trustee argues that the funds in the two bank accounts on the
date of the filing of the Debtor's Petition, or $1,928.01 should
be turned over to the Trustee for administration. The Trustee also
argues that the The last issue to be addressed is whether the Id., 184 B.R. at 813. 8 The Trustee points out that
the Camacho case holds that the The levy in question occurred pre-petition on Camacho v. United States,
190 B.R. 895, 902 (D. Alaska 1995). The Trustee then refers this court to Matter of Fernandez,
125 B.R. 317, (Bankr. M.D. Fla. 1991), where the court stated: As to the post-petition levy, this Court finds
that such a levy is a technical breach of the automatic stay. The As to the post-petition seizure of funds
predicated on the pre-petition levy, the Id., 125 B.R. at 319. On appeal, the District Court, affirming the Bankruptcy Court in
part, declared In order for the automatic stay to have full
effect, positive action on the part of the creditor may be
required to halt the continuation of the garnishment. Accordingly,
the creditors must release the lien within a reasonable period of
time after notice of the bankruptcy and failure to do so is a
violation of the automatic stay. In re Carlsen, 63 B.R.
706, 710 (Bkrtcy. C.D. Cal. 1986); In re Baum, 15 B.R. 538,
541 (Bankr. E.D. Va. 1981). The "reasonable time period"
is unique to each case and must be determined on a case by case
basis. In re Carlsen, supra, 63 B.R. at 710. In the instant case it is apparent that
Appellant's actions were a willful violation of the automatic
stay. Appellant not only filed a Notice of Levy post-petition, but
also failed to timely release the pre-petition levy. The I.R.S.
must be charged with the knowledge of it's agents, and the size
and complexity of the I.R.S. does not excuse its disregard for the
automatic stay. In re Price [89-2 USTC ¶9502], 103 B.R. In re Fernandez,
132 B.R. 775, 778-79 (M.D. Fla. 1991). The Trustee also referred
this court to Matter of Toti [92-2 USTC ¶50,336], 141 B.R.
126, 132 (Bnkr. E.D. Mich. 1992), where the Court stated: It is quite clear to the Court that applications
of the law in the Sixth Circuit to either parties factual
assertions indicates that the payments(s) seized by the As a result of the Civil contempt sanctions may be imposed even if
the absence of willfulness. In re Shafer [86-2 USTC ¶9523],
63 B.R. 194 (Bankr. D. Kan. 1986). In addition, accidental,
inadvertent or negligent conduct can be grounds for imposing civil
contempt sanctions, and those sanctions may include attorney fees.
Id., A stay violation is willful when the party acts
with knowledge of the filing of the bankruptcy. In the present
case, Toti filed his bankruptcy petition on A creditor must release the levy within a
reasonable period of time after notice of the bankruptcy. In re
Carlsen, 63 B.R. 706, 710 (Bankr. C.D. Cal. 1986). The Court
concludes that the Id. [92-2 USTC ¶50,336], 141 B.R. at 132. The Trustee relies on the foregoing cases in arguing that the USA's
postpetion retention of the funds is in violation of the automatic
stay. The Trustee reminds the court that the §341 notice of the
Debtor's Petition was mailed on The Trustee also asserts that the USA had the means to move for
adequate protection of its interest in the funds pursuant to Fed.
R. Bankr. P. 4001(a)(1), and that the (c)(1) If the business of the debtor is authorized to be operated
under §§721, 108, 1203, 1204, or 1304 of this title and unless
the court orders otherwise, the trustee may enter into
transactions, including the sale or lease of property of the
estate, in the ordinary course of business, without notice or a
hearing, and may use property of the estate in the ordinary course
of business without notice or a hearing. (2) The trustee may not use, sell, or lease cash collateral under
paragraph (1) of this subsection unless-- *** (e) Notwithstanding any other provision of this section, at any
time, on request of an entity that has an interest in property
used, sold, or leased, or proposed to be used, sold, or leased by
the trustee, the Court, with or without a hearing, shall prohibit
or condition such use, sale, or lease as is necessary to provide
adequate protection of such interest. This subsection also applies
to property that is subject to any unexpired lease of personal
property (to the exclusion of such property being subject to an
order to grant relief from the stay under Section 362. The Trustee reminds the Court that he is not
operating the Debtor's business under §721, and thus, he is not
using, selling, or leasing property of the Debtor's estate, but is
collecting assets of the bankruptcy estate to be distributed to
creditors pursuant to the priorities in the Bankruptcy Code, citing
In re Dant & Russell, Inc., 67 B.R. 360, 363 (D. Ore.
1986). The Trustee admits that the U.S.A. is a secured creditor
with a tax lien on certain property of the Debtor. However, the
Trustee also refers this court to §724(b), which states: (b) Property in which the estate has an interest and that is
subject to a lien that is not avoidable under this title and that
secured an allowed claim for a tax, or proceeds of such property,
shall be distributed-- (1) first, to any holder of an allowed claim secured by a lien on
such property that is not avoidable under this title and that is
senior to such tax lien; (2) second, to any holder of a claim of a kind specified in section
507(a)(1), 507(a)(2), 507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6),
or 507(a)(7) of this title, to the extent of the amount of such
allowed tax claim that is secured by such tax lien; (3) third, to the holder of such tax lien, to any extent that such
holder's allowed tax claim that is secured by such tax lien that
exceeds any amount distributed under paragraph (2) of this
subsection; . . . It is clear that §724(b) provides that the tax
liens of the The Trustee then refers the court to In re Bino's Inc., 182
B.R. 784, 787-90 (Bankr. N.D. Ill. 1995), where the court upheld
the Chapter 11 Trustee's objection to an interim cash collateral
order which gave the tax creditor a superpriority administrative
claim pursant, to §506(b) because the order would violate §724(b)
in the event that the case converted to a chapter 7. The Trustee
quotes the Bino's court as follows: The effect of §724(b) is to allow a Chapter 7
trustee to liquidate property subject to tax liens and distribute
the proceeds to the priority claimants enumerated in §507(a)(1)
through §501(a)(6) prior to any distribution to taxing
authorities. . . . The only parties affected by the operation of §724(b)
are the priority claimants and the tax lien creditors. 4 Collier
on Bankruptcy, ¶724.03, pp. 724-6. Section 724(b)(2) subordinates
the claims of a tax lien holder, up to the amount of its lien, to
the claims of the kind specified in §§507(a)(1)-(6). Section
724(b) allows a trustee to use the liquidated value of the
collateral securing the tax lien to satisfy these priority
creditors. See 4 Collier on Bankruptcy, ¶724.03, pp.
724-6-8. If such priority creditors do not entirely deplete the
tax lien, the holder of the tax lien is, of course, entitled to
the remaining proceeds. §724(b)(3) . . . The legislative history
indicates that Congress made a policy decision to favor the claims
of wage earners, the costs of administration of the estate, and
other priority claims over tax liens. H.R. Rep. No. 686, 89th
Cong., 1st Sess. (1965), U.S. Code & Admin. News at 2442,
2462. In In re Life Imaging Corp., 131 B.R. 174
(Bankr. D. Colo. 1991), the court essentially held that a cash
collateral order may not be enforced if it violated the
subordination provision of §724(b). See Life Imaging, 131
B.R. at 177. . . . The Court found that the This Court agrees with the plain reading given to
§724(b) in Life Imaging. Although the precise distribution
order of tax liens pursuant to §724(b) is initially difficult to
grasp, there can be no doubt that the purpose of the statute is to
subordinate tax liens to the interest of other priority creditors.
The subordination of tax liens can result in harsh treatment for
taxing authorities, but the congressional intent is clear.
"If the statute is clear and unambiguous 'that is the end of
the matter, for the court . . . must give effect to the
unambiguously expressed intent of congress'. . ." Board of
Governors, If the Taxing Authorities were faced with a
diminution in the value of their collateral resulting from the
automatic stay, they would be entitled to §507(b) superpriority.
However, what the Taxing Authorities essentially seek is a
superpriority for the entire amount of the tax liens because of §724(b)
may result in the subordination of that amount of their claims.
Section 507(b) does not permit a superpriority for a diminution in
value due to the distribution scheme of §724(b). . . . Id., 182 B.R. at 787-90. The Trustee argues that the U.S.A.'s demand for adequate protection
violate the distribution scheme of §724, by allowing the U.S.A.
to receive more than it would be entitled to under §724. The
Trustee refers this court to In re Wolensky's Ltd. Partnership,
163 B.R. 629, 636-37 (Bankr. D. Colo. 1994), where the court
stated: A levy gives the Because the funds are subject to federal tax
liens, those liens are entitled to adequate protection. The
trustee shall be required, pending further order in the main case,
to keep the funds in an interest-bearing insured account separate
from other estate funds unless the United States and the trustee
agree otherwise. Beyond that, no further adequate protection is
necessary. The tax liens will give the government's non-penalty
tax claims priority over general unsecured creditors and over tax
creditors holding only unsecured claims entitled to priority under
11 U.S.C. §507(a)(7). But by virtue of 11 U.S.C. §724(b), the
funds will be available to pay administrative and other non-tax
priority claims first and by virtue of 11 U.S.C. §§724(a) and
726(a)(4) any penalty claims secured by the tax liens will be paid
only after other claims in the case. Subjecting the tax liens to §§724 and 726(a)(4)
does not deprive the tax liens of adequate protection. Contra,
Sigmund London, 139 B.R. at 772. It is simply an application
of the funds that are subject to the liens in accordance with
congressional intent. To hold that the requirement of adequate
protection in 11 U.S.C. §363(e) prevents the use of 11 U.S.C.
§§724 and 726(a)(4) would render those latter sections a
nullity, an absurd result that Congress could not have intended.
Instead, I view §§724 and 726(a)(4) as illustrating that the
debtor's ownership of an account receivable levied upon by the Id., 163 B.R. at 636-37. The Trustee also refers this
court to In re A.G. Can Metre, Jr., Inc., 115 B.R. 118, 121
(Bankr. E.D. Va. 1993); In re Grand Slam U.S.A., Inc. 178
B. R. 460, 461 (E.D. Mich. 1995). The Trustee then points out that based on the facts of the case,
and the size of he administrative and wage claims, that it would
be unlikely that the U.S.A. on behalf of the 3. U.S.A.'s Reply Brief in Support of
Its Motion for Summary Judgment. The USA asserts that the requirements of §363, that a lienholder
be provided with adequate protection for his lien interest is not
separate and apart from the question of turnover, and the property
in issue is cash collateral that the Trustee is prohibited from
using without either the consent of the United States or after
notice and hearing pursuant to §363(c)(2). The USA also asserts that the fact that the Trustee is not
operating the Debtor's business pursuant to §721, does not mean
that the Trustee is not required to provide adequate protection
for the The USA next asserts that the Trustee's "implicit
assumptions" that the distribution of assets of the Debtor's
estate by the Trustee to pay other creditors, including
administrative expenses is not a "use" of property is
incorrect, citing, In re Quality Beverage Co. Inc., 81 B.R.
887, 896-97 (Bankr. S.D. Tex. 1995), and In re Addison
Properties Limited Partnership), 185 B.R. 766, 767 (Bankr.
N.D. Ill. 1995) (Cash collateral may appropriately be used to pay
administrative expenses if the interest secured by the cash
collateral is adequately protected, not otherwise). The USA does not dispute that under §724(b), the USA is
subordinated to senior, lienholders, and §507(a) unsecured
priority creditors, but asserts that this distribution scheme does
not preclude the USA from receiving adequate protection for its
lien interest. The USA asserts that the fact that the monies
collected so far by the Trustee are not sufficient to pay all wage
claims, does not support the Trustee's assertion, that the USA may
receive nothing, and thus, is not entitled to adequate protection,
as the relevant comparison is between the amount of claims that
will have priority over the claim of the USA and the funds that
will ultimately be available to pay those claims. The U.S.A. then responds to the Trustee's assertion that the U.S.A.
has violated the automatic stay, by arguing that the inaction by
the U.S.A. does not amount to a violation of the automatic stay.
The U.S.A. argues that the authorities referred to by the Trustee
do not mandate a finding that the U.S.A. violated the automatic
stay. The U.S.A. distinguishes the cases cited by the Trustee
based on the distinguishable facts upon which the opinions cited
by the Trustee are based. The USA admits that the Trustee correctly notes that in In re
Camacho, 184 B.R. 807 (Bankr. D. Alaska 1995) held that the The USA asserts that an examination of the circumstances
surrounding the rulings in the cases cited by the Trustee shows
that the case of In re Fernandez, is readily
distinguishable as the prepetition levy the court found should
have been released after receiving notice of the bankruptcy, was a
continuing wage levy that operated as a new levy on postpetition
funds for nearly six (6) monthsafter the bankruptcy petition was
filed and nearly five(5) months after the The U.S.A. refers this court to United States v. National Bank
of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720, 105 S. Ct.
2919, 86 L. Ed. 2d 565 (1985) ("[i]n contrast to the
lien-foreclosure suit, the levy does not determine whether the
Government's right to the seized property are superior to those of
other claimants; it, however, does protect the Government against
diversion or loss while such claims are being resolved."),
and Phelps v. United States [75-1 USTC ¶9467], 421 U.S.
330, 337, 95 S. Ct. 1728, 44 L. Ed. 2d 201 (1975) (Government
served a notice of levy upon cash assets of the debtor held by an
assignee for the benefit of creditors, the court held that the
service of the notice of levy upon cash assets of the debtor held
by the assignee was a transfer of possession sufficient to oust
the summary jurisdiction of the bankruptcy court.). The U.S.A.
acknowledges that Whiting Pools has limited Phelps,
but did not overrule the doctrine that a Notice of Levy accords
the G 1. Property of the Estate Pursuant to
§541. The initial inquiry is whether the subject funds represent property
of the Debtor's bankruptcy estate on the date of the filing of the
Debtor's Chapter 7 Petition. This is because the Trustee cannot
compel the turnover of funds under §542 when the Debtor has no
present right thereto because the Trustee's claim is no greater
than the Debtor's claim at the time of filing. In re Lyons,
957 F.2d 444, 445 (7th Cir. 1992) (collecting cases). Section
541(a) of title 11 provides as follows: (a) The commencement of a case under section 301, 302, or 303 of
this title creates an estate. Such estate is comprised of all the
following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this
section, all legal or equitable interests of the debtor in
property as of the commencement of the case. 10 The Code does not define "property", and makes no
distinction between tangible real or personal property and
intangible personal property. In addition §542(a) provides as
follows: (a) Except as provided in subsection (c) or (d) of this section, an
entity, other than a custodian, in possession, custody, or
control, during the case, of property that the trustee may use,
sell, or lease under section 363 of this title, or that the debtor
may exempt under section 522 of this title, shall deliver to the
trustee, and account for, such property or the value of such
property, unless such property is of inconsequential value or
benefit to the estate. Again, "property" is not defined in §542(a), and this
section makes no distinction between tangible real or personal
property and intangible personal property. Section 101(15) provides that an "entity" as referred to
in §542(a) includes a "governmental unit". Section
101(27), provides that a "governmental unit" includes
the United States and any department, agency, or instrumentality
of the United States. Thus, §542(a) is applicable to the It should also be noted that §103(a) provides that, except as
provided in §1161, Chapters 1, 3, and 5 of Title 11 apply in
cases under Chapter 7, 11, 12, and 13 of Title 11. Thus, §§542,
and 363, are fully applicable to this Chapter 7 case. The trustee succeeds to and has exclusive control over all assets
of the estate, including causes of action. In re Smith, 640
F.2d 888, 892 (7th Cir. 1981); Anderson v. St. Paul Indemnity
Co., 340 F.2d 406, 409 (7th Cir. 1965) (Act case). However,
the estate's rights are limited to those had by the debtor, i.e.,
"whatsoever rights a debtor had at the commencement of the
case continue in bankruptcy--no more, no less." Matter of
Jones, 768 F.2d at 927, supra, (quoting, Moody v.
Amoco Oil, Inc., 734 F.2d 1200, 1213 (7th Cir. 1984)). Thus,
the filing of a bankruptcy petition does not expand or change a
debtor's interest in an asset; it merely changes the party who
holds that interest. Matter of Sanders, 969 F.2d 591, 593
(7th Cir. 1992). A trustee takes property subject to the same
restrictions that existed at the commencement of the case, and to
the extent an interest is limited in the hands of a debtor, it is
equally limited as property of the estate. Id. Thus, any
defense, legal or equitable, which might have been raised against
the debtor may be raised against the trustee. 5 Collier on
Bankruptcy, ¶541.04 at pp. 541-11 (L. King revised 15th ed.
1997). The trustee is "subject to the same defenses as could
have been asserted by the defendant had the action been instituted
by the debtor." Hayes & Co. v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 885 F.2d 1149, 1154 (3rd Cir. 1989)
(quoting, 2 Collier on Bankruptcy, ¶323.02(4)). It is clear that absent the Intangible personal property is property which has no intrinsic
value but is merely representative or evidence of value, such as
stock certificates, bonds, or promissory notes. 73 C.J.S. Property
5 (1951). The relationship between a bank and a depositor is
ordinarily that of debtor and creditor. City National Bank of
Auburn v. Brink, Trustee, (1933) 98 Ind. App. 275, 187 N.E.
689; State ex. rel. Board of Finance of Washington Township v.
Aetna Casualty, (1934) 100 Ind. App. 46, 189 N.E. 536. A debt
is a chose in action, as opposed to a chose in possession. Black's
Law Dictionary 305 (rev. 4th ed. 1968). Id., 462 N.E. 2d at 1320. 2. The Scope and Extent of an This court in In re McDaniel, Bankr. No. 83-60725, slip op.
at pp. 3-6 (Bankr. N.D. Ind. In the application of a Federal Revenue Act,
state law controls in determining the nature of the legal interest
which the taxpayer had in the property sought to be reached by the
statute. Aguilino v. United States [60-2 USTC ¶9538], 363
U.S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960). United
States v. Brosman [60-2 USTC ¶9516], 363 U.S. 237, 80 S. Ct.
1-108, 4 L. Ed. 2d 1192 (1960); Wagner v. United States
[78-1 USTC ¶9340], 573 F.2d 447 (7th Cir. 1978) (Ind. law); United
States v. Stonehill [83-1 USTC ¶9285], 702 F.2d 1288 (9th
Cir. 1983). In matters of substance, the government's lien
does not exceed the rights of the taxpayer. In other words, the
rights of the government can rise no higher than those of the
taxpayer whose property is sought to be levied upon. Avco Delta
Corporation Canada, Ltd. v. United States [72-1 USTC ¶9359],
459 F.2d 436 (7th Cir. 1972). In United States v. Bess
[58-2 USTC ¶9595], 357 U.S. 51, 55, 78 S. Ct. 1054, 2 L. Ed. 2d
1135 (1958), the Supreme Court stated that the federal tax lien
provision "creates no property rights but merely attaches
consequences, federally defined, to rights created under state
law." In Bess, the Supreme Court held that the cash
surrender value of an insurance policy owned by a taxpayer was
property for tax lien purposes even though under state law it was
not subject to creditor's liens. The Court held that once it has
been determined that state law creates sufficient interests in the
insured taxpayer in the insurance policy to satisfy the
requirements of property under the federal tax lien statute, state
law is inoperative to prevent the attachment of liens created by
federal statutes in favor of the United States. A tax lien created by 26 U.S.C. §6321 covers all
property owned by a delinquent tax payer both at the time the lien
arises and thereafter until it is paid. United States v. Union
Central Life Insur. Co. [62-1 USTC ¶9103], 368 U.S. 291, 82
S. Ct. 349, 7 L. Ed. 2d 294 (1961). Thus, the lien extends to
after-acquired property. Glass City Bank v. United States
[45-2 USTC ¶9449], 326 U.S. 265, 66 S. Ct. 108, 90 L. Ed. 56
(1945). It has also been held that a federal tax lien may
attach to the rights of a taxpayer under a contract. See e.g.,
Seaboard Surety Co. v. United States [62-2 USTC ¶9653], 306
F.2d 855, 859 (9th Cir. 1962); Atlantic National Bank v. United
States [76-2 USTC ¶9483], 210 Ct. Cl. 340, 536 F.2d 1354,
1356 (Ct. Cl. 1976); Valley Bank of Nevada v. City of Henderson
[82-1 USTC ¶9122], 528 F. Supp. 907 (D. Nev. 1981). **** A tax lien created pursuant to 26 U.S.C. §6321
upon all property of a defaulting taxpayer attaches to the
proceeds of sale of that property. Phelps v. United States
[75-1 USTC ¶9467], 421 U.S. 330, 95 S. Ct. 1728, 44 L. Ed. 2d 201
(1975). The Supreme Court in Phelps, stated: [A federal tax lien] attache[s] to the proceeds of the sale. See
Sheppard v. Taylor, 5 Pet. 675, 710, 8 L. Ed. 269 (1831); Loeber
v. Leininger, 175 Ill. 484, 51 N.E. 703 (1898). "The lien
reattaches to the thing and to whatever is substituted for it. .
." The owner and the lien holder, whose claims have been
wrongfully displaced, may follow the proceeds wherever they can
distinctly trace them. [75-1 USTC ¶9467], 421 U.S. at 334-335, 95 S. Ct. at 1731
(Footnote omitted). The transfer of property subject to attachment of
a federal tax lien does not affect the lien, it being the very
nature and essence of the lien, that the property no matter into
whose hands it goes, passes cum onere. United States v. Bess
[58-2 USTC ¶9595], 357 U.S. 51, supra. It is also noted that at 26 U.S.C. §6331(b)
regarding levy and distraint, it is provided that, "In any
case in which the Secretary may levy upon property or rights to
property, he may seize and sell such property or rights of
property (whether real or personal, tangible or intangible)".
(Emphasis supplied). The determination of whether a taxpayer has
an interest in property so that it may be subject to levy is
governed by state law. Wagner v. United States [78-1 USTC
¶9340], 573 F.2d 447 (7th Cir. 1978). A levy may be made on
intangibles. The contractual right to receive property is
equivalent of a right to property. United States v. Augspurger
[78-1 USTC ¶9339], 452 F. Supp. 659 (W.D.N.Y. 1978); St. Louis
Union Trust Co. v. United States [80-1 USTC ¶9282], 617 F.2d
1293 (8th Cir. 1980). Id., slip op. at pp. 3-6. With reference to property subject to a federal tax lien, this
court in Chael v. Whyte, Adv. P. 90-6115, slip op. at 25
(Bankr. N.D. Ind. In matters of substance, the government's tax
lien cannot exceed the right, title, and interest of the taxpayer
in the property asserted to be subject to the tax lien. In other
words, the rights of the government can rise no higher than those
of the taxpayer whose property is sought to be levied upon. Chicago
Mercantile Exchange v. United States [88-1 USTC ¶9203], 840
F.2d 1352 (7th Cir. 1988) (Tax lien attaches to taxpayer's
interest in proceeds, but to nothing beyond that interest); Avco
Delta Corporation Canada, Ltd. v. United States, 459 F.2d 436
(7th Cir. 1972). In United States v. Bess [58-2 USTC ¶9595],
357 U.S. 51, 55, 78 S. Ct. 1054, 2 L. Ed.2d 1135 (1958), the
Supreme Court stated that the federal tax lien provision
"creates no property rights but merely attaches consequences,
federally defined, to rights created under state law." In Bess,
the Supreme Court held that the cash surrender value of an
insurance policy owned by a taxpayer was property for tax lien
purposes even though under state law it was not subject to
creditors' liens. The Court held that once it has been determined
that state law creates sufficient interests in the, insured
taxpayer in the insurance policy to satisfy the requirements of
property under the federal tax lien statute, state law is
inoperative to prevent the attachment of liens created by federal
statutes in favor of the United States. Id., slip op. at 25. This court continued: The scope of the federal tax lien is prescribed by 26 U.S.C. §6321,
which states the following: If any person liable to pay any tax neglects or refuses to pay the
same after demand, the amount (including interest, additional
amount, addition to tax, or assessable penalty, together with any
costs that may accrue in addition there) shall be a lien in
favor of the United States upon all property and rights to
property, whether real or personal, belonging to such person.
(Emphasis added). The general rule is that a federal tax lien versus a
Debtor-taxpayer is a "secret lien" in the Debtor's
property which arises or "attaches" "at the time
the assessment is made." 26 U.S.C. §6322. That the
government might not file a notice of tax lien until some future
date, if at all, does not effect the immediate attachment of a tax
lien when liability has been admitted or assessed. Sgro v.
United States [79-2 USTC ¶9733], 609 F.2d 1259 (7th Cir.
1979). A tax lien normally takes precedence over other liens
arising subsequent to assessment of the delinquent tax. J. D.
Court v. United States [83-2 USTC ¶9454], 712 F.2d at 261, supra.
However, §6323(a) provides protection to certain interests even
if a notice of a tax lien imposed by §6321 has been filed
pursuant to §6323(f). Section 6323(a) creates an exception to §6322's
rule that a federal tax lien generally attaches at the time the
delinquent tax is assessed. J. D. Court v. United States
[83-2 USTC ¶9454], 712 F.2d at 261, supra. Under 6323(a)
when the "holder of a security interest" also claims an
interest in property subject to a federal tax lien, the federal
tax lien is deemed to have attached when the **** A tax lien created by 26 U.S.C. §6321 covers all
property owned by a delinquent tax payer both at the time the lien
arises and thereafter until it is paid. United States v. Union
Central Life Insur. Co. [62-1 USTC ¶9103], 368 U.S. 291, 82
S. Ct. 3497 7 L. Ed. 2d 294 (1961). Id., slip op. at 40-45. (footnote omitted). 3. The Rights and Interest of a
Prepetition Debtor in a Bank Account That Has Been Subject to a
Prepetition Notice Levy by the The I.R.C. defines the rights and interest of the taxpayer-debtor
following a Notice of Levy. Pursuant to §6335(a), as soon as
practicable after seizure of property, notice in writing of the
seizure must be given to the owner of the property. Section
6335(b) mandates that as soon as practicable after the seizure of
property, notice of the sale of the property seized must be given
to the owner. Under §6337(a), the debtor has the right to redeem
the property prior to sale; for real property, the redemption
right continues for 180 days following the sale. §6337(b). The
debtor has the right to any surplus proceeds after the payment of
the delinquent tax and expenses under §6342. However, a special rule applies to bank accounts that are levied
upon by the §301.6332-3 The 21-day holding period applicable to property held
by banks. (a) In general. This section provides special rules relating to
the surrender, after 21 days, of deposits subject to levy which
are held by banks. The provisions of §301.6332-1 which relate
generally to the surrender of property subject to levy apply, to
the extent not inconsistent with the special rules set forth in
this section, to a levy on property held by banks. **** (c) 21-day holding period--(1) In general.
When a levy is made on deposits held by a bank, the bank shall
surrender such deposits (not otherwise subject to an attachment or
execution under judicial process) only after 21 calendar days
after the date the levy is made. The district director may request
an extension of the 21-day holding period pursuant to paragraph
(d)(2) of this section. During the prescribed holding period, or
any extension thereof, the levy shall be released only upon
notification to the bank by the district director of a decision by
the Internal Revenue Service to release the levy. If the bank does
not receive such notification from the district director within
the prescribed holding period, or any extension thereof, the bank
must surrender the deposits, including any interest thereon as
determined in accordance with paragraph (c)(2) of this section (up
to the amount of the levy), on the first business day after the
holding period, or any extension thereof, expires. See §301.6331-1(c)
to determine when a levy served by mail is made. (2) Payment of interest on deposits.
When a bank surrenders levied deposits at the end of the 21-day
holding period (or at the end of any longer period that has been
requested by the district director), the bank must include any
interest that has accrued on the deposits prior to and during the
holding period, and any extension thereof, under the terms of the
bank's agreement with its depositor but the bank must not
surrender an amount greater than the amount of the levy. If the
deposits are held in a noninterest bearing account at the time the
levy is made, the bank need not include any interest on the
deposits at the end of the holding period, or any extension
thereof, under this paragraph. Interest that accrues on deposits
and is surrendered to the district director at the end of the
holding period, or any extension thereof, is treated as a payment
to the bank's customer. **** (3) Transactions affecting accounts.
A levy on deposits held by a bank applies to those funds on
deposit at the time the levy is made, up to the amount of the
levy, and is effective as of the time the levy is made. No
withdrawals may be made on levied upon deposits during the 21-day
holding period, or any extension thereof. (4) Waiver of 21-day holding period.
A depositor may waive the 21-day holding period by notifying the
bank of the depositor's intention to do so. Where more than one
depositor is listed as the owner of a levied account, all
depositors listed as owners of the account must agree to a waiver
of the 21-day holding period. If the 21-day holding period is
waived, the bank must include with the surrendered deposits a
notification to the district director of the waiver. (5) Examples. The provisions of this paragraph (c) may be
illustrated by the following examples: Example 1. On **** (d) Notification to the district director of errors with
respect to levied upon bank accounts--( 1) In general. If a depositor believes that
there is an error with respect to the levied upon account which
the depositor wishes to have corrected, the depositor shall notify
the district director to whom the assessment is charged by
telephone to the telephone number listed on the face of the notice
of levy in order to enable the district director to conduct an
expeditious review of the alleged error. The district director may
require any supporting documentation necessary to the review of
the alleged error. The notification by telephone provided for in
this section does not constitute or substitute for the filing by a
third party of a written request under §301.6343-1(b)(2) for the
return of property wrongfully levied upon. (2) Disputes regarding the merits of the underlying
assessment. This section does not constitute an additional procedure for an
appeal regarding the merits of an underlying assessment. However,
if in the judgment of the district director a genuine dispute
regarding the merits of an underlying assessment appears to exist,
the district director may request an extension of the 21-day
holding period. 4. Discussion of Cases deciding whether
or not the Debtor has a Property Interest in a Bank Account as of
the Date of its Petition when the The United States Supreme Court in the seminal case of U.S. v.
Whiting Pools, Inc. [83-1 USTC ¶9394], 462 U.S. 198, 211, 103
S. Ct. 2309, 2317, 76 L. Ed. 2d 515 (1983), held that pursuant to
§541(a), the debtor's estate included tangible personal
property of the debtor which had been seized by the I.R.S.
prior to the filing of the petition for reorganization. The Court
found that the seizure of the tangible personal property did not
transfer ownership to the I.R.S., only possession, and ownership
of property is transferred only when the property is sold to a
bona fide purchaser at a tax sale. Id. [83-1 USTC ¶9394],
103 S. Ct. at 2317, (citing Bennett v. Hunter, 9 Wall. 326,
336, 19 L. Ed. 2d 672 (1870), and 26 U.S.C. §6339(a)(2), which
provides that a certificate of sale of property other than real
property shall transfer to the purchaser all right, title and
interest of the party deliquent in and to the property sold). It
is accepted that Whiting Pools, Inc., has settled the right
of a debtor under §542(a) to obtain the turnover of tangible
personal property physically seized by the I.R.S. pursuant to
a prepetition Notice of Levy. However, there is a split of opinion
over whether §542(a) requires the turnover of cash received by
the In resolving this issue, the Court believes it is important to note
certain observations made by Justice Blackmun in United States
v. Whiting Pools, Inc. Justice Blackmun noted that while there
are explicit limitations on the reach of §542(a), none require
that the debtor hold a possessory interest in the property at the
commencement of the case. Id. [83-1 USTC ¶9394], 103 U.S.
at 2314. Justice Blackmum, also observed that under the old
Bankruptcy Act, a bankruptcy court's summary jurisdiction over a
debtor's property was limited to property in the debtor's
possession when the petition was filed. Id. [83-1 USTC ¶9394],
103 S. Ct. 2314 + N. 13 (citing, Phelps v. United States
[75-1 USTC ¶9467], 42 U.S. 330, 335-36, 95 S. Ct. 1728, 1731-32,
44 L. Ed.2d 201 (1975)). Phelps was a case that involved a
liquidation under the prior Bankruptcy Act, wherein the Supreme
Court held that the bankruptcy court lacked jurisdiction to direct
the The Court in Whiting Pools concluded that the reorganization
estate includes property of the debtor that has been seized by a
creditor prior to the petition for reorganization. Id.
[83-1 USTC ¶9394], 103 S. Ct. at 2315. While acknowledging that
by virtue of §103(a), §542(a) also governs turnovers in
liquidation and individual adjustment proceedings under Chapters 7
and 13, the Court in Whiting Pools stressed that it was
expressing no view on the issue of whether §542(a) has the same
broad effect in liquidation or debt adjustment proceedings. Id.
at N. 17. 11 The Court in Whiting Pools stated: The Service is bound by §542(a) to the same
extent as any other secured creditor. The Bankruptcy Code
expressly states that the term "entity," used in §542(a),
includes a governmental unit. §101(14). See Tr. of Oral
Arg. 16. Moreover, Congress carefully considered the effect of the
new Bankruptcy Code on tax collection, see generally S.
Rep. No. 95-1106 (1978) (report of Senate Finance Committee), and
decided to provide protection to tax collectors, such as the B Of course, if a tax levy or seizure transfers to
the The Service's interest in seized property is its
lien on that property. The Internal Revenue Code's levy and
seizure provisions, 26 U.S.C. §§6331 and 6332, are special
procedural devices available to the IV When property seized prior to the filing of a
petition is drawn into the Chapter 11 reorganization estate, the
Service's tax lien is not dissolved; nor is its status as a
secured creditor destroyed. The Id. [83-1 USTC ¶9394], 103 S. Ct. at 2315-2317.
(Footnote omitted). The Supreme Court emphasized that the provision of 26 U.S.C. §§6321-6326
relating to tax liens and their enforcement do not transfer
ownership of property to the A majority of the Courts subsequent to Whiting Pools, have
held that a prepetition Notice of Levy by the A minority of cases hold that a Notice of Levy by the The Court concludes that the position taken by the majority of the
Courts in the proper one. As the Court in In re Flynn's
Speedy Printing, 136 B.R. 299 (Bankr. M.D Fla. 1992) observed: [t]he Internal Revenue Code itself and the Treasury Regulations
promulgated thereunder provide further support for the proposition
that cash levied upon pre-petition does, indeed, become property
of the debtor's estate upon the filing of a petition for relief
under the Bankruptcy Code. Section 6332(c) of the Internal Revenue Code of
1986 (26 U.S.C.) provides: Any bank . . . shall surrender . . . any deposits (including
interest thereon) in such bank only after 21 days after service of
levy. The proposed Treasury Regulations under this section provides: To the extent that interest is accrued on the deposits and
surrendered to the district director at the end of the [21-day]
holding period, such interest is considered to be paid to the
bank's customer and must be reported by the bank to the Internal
Revenue Service as interest paid to the bank's depositor. Prop. Treas. Reg. §301.6332-3(c)(2), 56 Fed. Reg. 19963 (1991). It
is utterly inconsistent for the Id., 136 B.R. at 301. And as noted by the Court in In
re Giaimo, 194 B.R. 210 (E.D. Mo. 1996): In 1990, Congress amended the surrender provision
of the IRC's levy procedures to include a "special rule for
banks." This provision reads: Any bank (as defined in section 408(n)) shall surrender (subject to
an attachment or execution under judicial process) any deposits
(including interest thereon) in such bank only after 21 days after
service of levy. 26 U.S.C. §6332(c). The regulations pertaining to this provision
indicate that the depositor/taxpayer has certain rights during the
21 day holding period. First, interest on the money in the bank
account that accrues during the holding period, while surrendered
to the If a depositor believes that there is an error with respect to the
levied upon account which the depositor wishes to have corrected,
the depositor shall notify the district director . . . to enable
the district director to conduct an expeditious review of the
alleged error. 26 C.F.R. §301.6332-3(d)(1) (1995). For example, suppose the
taxpayer paid the amount levied from a source other than the
levied bank account to the In addition, the conclusion that the taxpayer
retains an interest in bank account funds during the holding
period is consistent with the court's reasoning in Professional
Services: "An The conclusion in Whiting Pools that
ownership of tangible property is transferred to the Id., 194 B.R. at 213-14. One commentator's analysis as to the legal effect of a Notice of
Levy on a Debtor's bank account is also persuasive. See
Coleman, Pre-Petition Serving a Notice of Levy on an account debtor or
bank (the "leviee") imposes a duty on the leviee to pay
to the Several of the minority view cases reason that by
imposing liability on the leviee (via serving the Notice of Levy),
the leviee's contractual obligation to pay the debtor is
extinguished. They conclude the obligation is extinguished because
they are unable to discern any legal right exercisable by the
debtor with respect to the right to payment. The problem with this
conclusion--apart from ignoring the fact that Section 6332(e)
provides that the obligation is discharged only at a later time,
namely payment to the **** The Supreme Court has given us several
descriptions of how a levy impacts upon the respective rights and
duties between the debtor/taxpayer, the provisional remedy that do[es] not determine the Service's right to
the seized property, but merely bring[s] the property into the
Services' legal custody . . . [and which] do[es] not transfer
ownership to the According to Phelps [Phelps v. United States
[75-1 USTC ¶9467], 421 U.S. 330, 334 (1975)] (as amplified in National
Bank of Commerce, [United States v. National Bank of
Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720 (1985)] (Levy
gives National Bank of Commerce elaborated on the levy's legal effect by
saying In contrast to the lien-foreclosure suit, the levy does not
determine whether the government's rights to the seized property
are superior to those other claimants; it, however, does protect
the Government against diversion or loss while such claims are
being resolved. Yet another case involving a levy on a bank
account said that service of the Notice of Levy effectively froze
the money in the account . . . and the contents of the safe
deposit boxes. [Commissioner v. Shapiro [76-1 USTC ¶9266],
424 U.S. 614, 619 (1976)]. As shown by the quoted text, the Supreme Court
repeatedly states that a levy does not determine the rights of the
taxpayer, the Id., 100 Comm. L. J. at 485-489. The Court is persuaded by the reasoning of the majority of the
Courts on this threshold issue, and concludes that the fact that
the H Section 362(a) provides, in part, as follows: (a) Except as provided in subsection (b) of this
section, a petition filed under section 301, 302, or 303 of this
title, or an application filed under section 5(a)(3) of the
Securities Investor Protection Act of 1970 operates as a stay,
applicable to all entities of-- (1) the commencement or continuation, including the issuance or
employment of process, of a judicial, administrative, or other
action or proceeding against the debtor that was or could have
been commenced before the commencement of the case under this
title, or to recover a claim against the debtor that arose before
the commencement of the case under this title; **** (3) any act to obtain possession of property of the estate or of
property from the estate or to exercise control over property of
the estate; (4) any act to create, perfect, or enforce any lien against
property of the estate; (5) any act to create, perfect, or enforce against property of the
debtor any lien to the extent that such lien secures a claim that
arose before the commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the
debtor that arose before the commencement of the case under this
title; The Trustee apparently takes the position that §542(a) accords him
the absolute right to the turnover by a secured party of any
estate property that has been "repossessed by a secured party
prepetition, (or as in this case is in the constructive possession
of the The Court respectfully disagrees with the conclusion reached by the
court in Sharon, and concludes that the analysis of whether
an act of a creditor violates §362(a)(3) in refusing to
relinquish possession of estate property postpetition that was
properly repossessed prepetition requires a close reading of the
purposes of §542(a), §362(a)(3), §363(e) and §363(o)(1), and
their interrelationship, as made by the court in In re Young,
193 B.R. 620 (Bankr. D. Col. 1996). The court in Young
stated as follows: As suggested, the 1984 language forbidding an act
to exercise control over property has been interpreted by some
courts to mean that any postpetition retention of the debtor's
property violates the automatic stay and is, indeed, sanctionable.
See In re Knaus, 889 F.2d 773 (8th Cir. 1989) (duty to
return property arises upon the filing of petition); Carr v.
Security Savings & Loan Association, 130 B.R. 434 (D.N.J.
1991) (creditor sanctioned for not turning over property despite
alleged bad faith of petition); In re Coats, 168 B.R. 159
(Bankr. S.D. Tex. 1993); In re Ryan, 183 B.R. 288 (M.D.
Fla. 1995). **** In contrast, other courts have rejected the Knaus
approach, reasoning that §362(a)(3) freezes the status quo on the
filing of the petition rather than mandates affirmative action by
the creditor in possession of property seized prepetition to
return it immediately. In re Richardson, 135 B.R. 256
(Bankr. E.D. Tex. 1992); cf. In re Deiss, 166 B.R. 92
(Bankr. S.D. Tex. 1994) (creditor entitled to adequate protection
before turnover); In re Najafi, 154 B.R. 185, 194-95
(Bankr. E.D. Penn. 1993) (same). See also In re Briggs, 143
B.R. 438, 448 n. 15 (Bankr. E.D. Mich. 1992) (dicta rejecting Knaus). **** In espousing the status quo approach, the court
in Richardson distinguished the contrary authority in the
Eighth Circuit's decision in Knaus on the grounds that Knaus
failed to address the creditor's entitlement to proof of adequate
protection before the seized property is turned over. See Id.
at 259. Richardson distinguishes Carr on similar
grounds--the creditor in that case had demanded and received proof
of insurance (and thus adequate protection) from the debtor and
yet still refused to turn over the property. See id. Richardson
and the other courts supporting the status quo approach argue that
where there is no proof of adequate protection, "prior
to the turnover of property, the rights of a creditor must be
adequately protected." Id. IV This court rejects the Knaus court's (and
its progeny's) interpretation of the amendment to §362(a)(3),
which requires immediate turnover by the secured creditor
possessing property rightfully seized prepetition. At best, as
will be discussed below, the meaning of the Code's restriction of
an act "to exercise control" is ambiguous, and the Knaus
court's analysis is too great a departure from traditional
bankruptcy practice for this court to adopt that analysis without
some legislative history endorsing such a dramatic change. **** That §362(a)(3) is susceptible of a plausible
interpretation contrary to that in Knaus is readily
demonstrated. While each of the words "exercise" and
"control" is clearly defined by Webster's the
significance of the phrase "to exercise control" in the
Code is, at best, ambiguous, as evidenced by the split of
authority cited above. And, absent any legislative history,
Congress's (sic) intent in amending the Code to restrict such an
act is equally undivinable. The turnover provision of §542(a)
applies to property in the "possession, custody or
control" of a creditor. Similarly, §362(a)(3) restricts both
an act to "obtain possession" of the property and an act
to "exercise control" over the property. Courts must
give meaning to all words in the statute. Negonsott v. Samuels,
507 U.S. 99, 113 S. Ct. 1119, 122 L. Ed. 2d 457 (1993).
Accordingly, Congress must have though that "control"
differs from "possession", or "custody". **** In contrast to the act of passively retaining
possession, the prohibited act of exercising control implies a
more affirmative act by the creditor. As the Webster's definition
indicates, the word exercise connotes the positive acts of
bringing into play, making effective in action, bringing to bear,
exerting. One commentator has commented that had Congress intended
the amendment to §362(a)(3) to require immediate turnover,
"more passive language such as 'retain control' would
be found in the revision to Section 362(a)(3) of the Code." See
John C. Chobot, Some Bankruptcy Stay Metes and Bounds, 99
Com. L. I. 301, 309 (1994) (emphasis added). By the same logic, if
Congress intended to prohibit creditors from holding property
seized prepetition, it also could have barred an act to
"retain possession." Read in this context, the
prohibition against an act to exercise control does not reach the
passive act of continuing to possess property. **** This court finds the Knaus court's
resolution of this ambiguity unsatisfactory because that court's
interpretation leads to an inconsistent and illogical statutory
scheme and would result in a dramatic shift in pre-Code and
pre-amendment practice. **** The effect of Knaus court's interpretation
of §362(a)(3) is completely to prevent creditors from retaining
possession of seized property sought by the trustee. Procedurally,
under the Knaus approach, the only appropriate
non-sanctionable course of action for the secured creditor in
possession of property of the debtor seized prepetition is to turn
over the property to the estate immediately and thus waive the
right to assert its defenses to turnover under §542(a) until after
the property has been turned over to the trustee pursuant to a
motion for relief from stay under §362(d) or a motion for
adequate protection under §363(e). See In re Ryan, 183
B.R. at 289. This proves too much. Section 542(a) itself expressly recognizes one
circumstance in which turnover is not required, namely, when the
"property is of inconsequential value or benefit to the
estate." Under Knaus, that would not be a valid
defense to §362(a)(3) because §362(a)(3) contains no exception
for property of inconsequential value or benefit to the estate.
Congress would not logically have intended that the estate
expressly not be entitled to turnover under §542(a) in such a
case but for the creditor simultaneously to be required by §362(a)(3)
to turn over the collateral. More importantly, §542(a) also limits turnover
to property that can be used under §363. Under §363(e) the
creditor can obtain an order prohibiting a proposed use of the
property unless the estate provides adequate protection. This
constitutes a significant defense to the grant of a turnover order
under §542(a). The defense would be abrogated by an
interpretation of §362(a)(3) requiring turnover without
permitting invocation of the defense. Such an approach is contrary to the logical
interaction of §§363(e) and 542(a). The burden is on the
trustee, when the issue is raised, to prove adequate protection.
11 U.S.C. §363(o)(1). Logically, therefore, the creditor should
be entitled to hold onto the property during the pendency of the
§542 action until the adequate protection question is resolved.
The obvious rationale implicit in permitting the secured creditor
to retain possession of the seized property while opposing may
suffer the very harm that adequate protection is designed to avoid
if the property is turned over to the trustee before the trustee
proves that the creditor is being given the adequate protection to
which it is entitled. Finally, §363(c)(2) provides that the trustee
may not use cash collateral without the creditor's consent or a
court order. Section 542(a) does not require turnover of such
collateral in a creditor's possession when there has been no
consent or court order. But under Knaus, the creditor would
required to relinquish possession. **** In Whiting Pools, the Court noted that
"[under Chapter X, the reorganization chapter of the
Bankruptcy Act of 1878 . . ., the bankruptcy court could order the
turnover of collateral in the hands of a secured creditor. Reconstruction
Finance Corp. v. Kaplan, 185 F.2d 791 (1st Cir.
1950)."[83-1 USTC ¶9394], 462 U.S. at 208, 103 S. Ct. at
2315 (other citations omitted). The case cited by the Court, Kaplan,
confirms that pre-Code such a turnover required an order of the
court and required some proof of adequate protection by the debtor
or trustee before such a turnover was ordered. 185 F.2d at 797-98. **** Furthermore, as can also be seen from the Whiting
Pools decision, under the Code, prior to the §362(a)(3)
amendment, the common practice of conditioning turnover orders on
proof of adequate protection continued. Courts uniformly supported
the practice that "[a] secured creditor may insist upon
adequate protection as a condition precedent to the
turnover of property since the property may not be used, sold or
leased under section 363 without it." In re Purbeck &
Assoc., Ltd., 12 B.R. 406, 408 (Bankr. D. Conn. 1981)
(emphasis added); accord In re Williams, 44 B.R. 422, 425
(Bankr. N.D. Miss. 1984); In re Loof, 41 B.R. 855, 856
(Bankr. E.D. Pa. 1984); In re Radden, 35 B.R. 821, 826
(Bankr. E.D. Va. 1983); In re Day Resource & Development
Co., Inc., 21 B.R. 176, 177 (Bankr. D. Idaho 1982); In re
Bridges, 19 B.R. 847 (Bankr. D. Me. 1982); In re Williams,
6 B.R. 789, 792 (Bankr. ED. Mich. 1980); In re Fairway Records,
Inc., 6 B.R. 162, 164 (Bankr. E.D.N.Y. 1980); In re Roy
Ind. Catering Serv., 2 B.R. 521, 526 (Bankr. E.D. Mich. 1980). Hence, were this court to interpret the ambiguous
amendment to §362(a)(3) to require immediate turnover, it would
represent a dramatic shift in both pre-Code and pre-amendment
practice, all of which without one word of legislative history. It
is difficult for this court to believe that Congress intended such
a radical change, and the court declines to adopt it. That the exercise control language in §362(a)(3)
requires only that the secured creditor maintain the status quo is
also supported by a decision in this circuit in United States
v. Inslaw, 932 F.2d 1467 (D.C. Cir. 1991), cert. denied,
502 U.S. 1048, 112 S. Ct. 913, 116 L. Ed. 2d 813 (1992). In Inslaw,
the debtor alleged that the Justice Department's continued use and
dissemination of the debtor's trade secrets in computer software
that were the subject of a title dispute constituted an act to
"exercise control over the property of the estate"
prohibited by §362(a)(3). In reversing this court's decision that
the Justice Department had willfully violated the automatic stay,
the District of Columbia Court of Appeals discussed the inherent
limitations and boundaries of the automatic stay under §362(a). **** The court of appeals further noted, however, that
such a broad reading of §362(a) would also be contrary to
Congress's (sic) intent. Even apart from constitutional concerns, [the
debtor's] view of §362(a) would take it well beyond Congress's
[sic] purpose. The object of the automatic stay provision is
essentially to solve a collective action problem--to make sure
that creditors do not destroy the bankruptcy estate in their
scramble for relief. Fulfillment of that purpose cannot require
that every party who acts in resistance to the debtor's view of
its rights violates §362(a) if found in error by the bankruptcy
court. . . . Since willful violations of the stay expose the
offending party to liability for compensatory damages, costs,
attorney's fees, and, in some circumstances, punitive damages, see
11 U.S.C. §362(h) (1988), it is difficult to believe that
Congress intended a violation whenever someone already in
possession of property mistakenly refuses to capitulate to a
bankrupt's assertion of rights in that property. Id., at 1473 (citation omitted). Id., 193 B.R. at 623-29 (footnotes omitted)
(emphasis supplied). The issue of the scope of §362(a)(3) also has been analyzed in
some detail in two recent law review articles. See Carlson,
Turnover of Collateral in Bankruptcy: Must a Secured
Party-In-Possession Volunteer? 6 J. of Bankr. Law &
Practice 483; Chobot, Some Bankruptcy Stay Metes and Bounds,
99 Comm. L.J. 301. Chobot states as follows: There is a significant body of case law holding
that a creditor repossessing a debtor's property post-petition,
without knowledge of a bankruptcy filing, is required to restore
the status quo as of the bankruptcy filing and return the
repossessed property within a reasonable period of time. Knaus,
[889 F.2d 773 (8th Cir. 1989)] has nothing to do with restoring
the status quo as of the petition date, because, in Knaus,
the secured creditor was in possession of the property on the
petition date. In Carr v. Security Savings and Loan
Association, [130 B.R. 434 (D.N.J. 1991)] the debtor filed a
second Chapter 13 proceeding after a creditor had obtained relief
from the stay in the debtor's first Chapter 13 proceeding and had
repossessed an automobile. The New Jersey district court held that
Section 362(a)(3) had been violated by the creditor's failure to
turn over the automobile after the second Chapter 13 filing and
ordered the creditor to pay compensatory damages (cost of a
replacement rental car) plus attorney's fees, but gave the
creditor a credit for the repossession costs it had incurred. The expansive view of the automatic stay
expressed in Knaus and Carr runs counter to the
interplay of Bankruptcy Code provisions when a bankruptcy filing
intervenes in time between a creditor's repossession and the
disposition of the property pursuant to the UCC, real estate
foreclosure proceeding or other state law methods by which the
creditor's lien or security interest is foreclosed. Since the United States Supreme Court's 1983
decision in United States v. Whiting Pools, Inc., secured
creditor have been aware that a bankruptcy filing stays resale or
other collateral disposition activities. However, before turning
over property pursuant to Section 542(a) of the Bankruptcy Code, Whiting
Pools recognizes that secured creditors have the right to
demand adequate protection of their interests in the property
pursuant to Sections 3611 and 363(e) of the Code. The Knaus
court ignores the secured creditor's right to "demand
adequate protection as a condition precedent to turnover", [citing,
4 Collier on Bankruptcy, ¶545.02]. **** A decision of the Circuit court of appeals for
the district of Columbia may help clarify the problems created by
the Knaus decision and stimulate further evaluation of
Section 362(a)(3), United States v. lnslaw, [932 F.2d 1467
(D. C. Cir. 1991, cert. den. 116 L. Ed.2d 813 (1992)]
involved a dispute between the Department of Justice and a Chapter
11 debtor/supplier of software enhancements. The debtor alleged
that the Department violated the Section 362(a)(3) "exercise
control over property of the estate" clause by the retention
and further dissemination of enhanced software supplied by the
debtor. While distinguishable from the collateral
repossession situation because actual title to the software was at
issue, Inslaw is instructive in setting forth the inherent
limitations and boundaries of the automatic bankruptcy stay. In
addressing the Department's alleged willful violation of the
bankruptcy stay, the Court explained that: Here the Bankruptcy court appears to have left the words of the
statute in the dust. The automatic stay, as its name suggests,
serves as a restraint only on acts to gain possession or control
over property of the estate. Nowhere in its language is there a
hint that it creates an affirmative duty to remedy past acts of
fraud or bias of harassment as soon as a debtor files a bankruptcy
petition. The statutory language makes clear that the stay applies
only to acts taken after the petition is filed. Inslaw correctly interprets Section 362(a)(3) as
requiring that there be "acts to gain possession or control
over property of the estate . . . taken after the petition
is filed" for a stay violation to exist. The Inslaw
approach is fully consistent with the wording of the clause added
by Congress in 1984 which employs the term "exercise
control," indicating that some affirmative act by the
creditor is required. Had Congress intended a Knaus result,
more passive language such as "retain control" would be
found in the revision to Section 362(a)(3) of the Code. **** Even if there is vagueness or ambiguity in the
clause added by Congress in 1984, Section 362(a)(3) should not be
construed to have radically expanded the automatic bankruptcy stay
to impact pre-petition creditor repossessions absent support in
the legislative history. As explained by the United States Supreme
Court in Dewsnup v. Timm, interpreting Section 506(d) of
the Bankruptcy Code: "When Congress amends the bankruptcy
laws, it does not write 'on a clean slate'. . . . Furthermore, the
Court has been reluctant to accept arguments that would interpret
the Code, however vague the particular language under
consideration might be, to effect a major change in pre-Code
practice that is not the subject of at least some discussion in
the legislative history." One The Court rejected Knaus and Carr, explaining: In this Court's opinion, the Debtor and the cases [Knaus and
Carr] supportive of her position have misread and
misapplied Section 362(a)(3) of the Code. By statute, the filing
of a petition for relief imposes a mandatory stay of any
creditor's collection attempts. The effect of this stay is to
freeze the status quo. To the extent that a creditor fails to
desist in these collection attempts and attempts to exercise
control over the property of the estate post-petition, such
creditor can be sanctioned pursuant to Section 362(h). However,
this provision for creditors who affirmatively act in violation of
the stay post-petition cannot be extrapolated to punish creditors
who where legally seizing the property of the estate pre-petition,
failed to return this property immediately to the debtor
post-petition. In maintaining the seized property in the status it
enjoyed just before the filing of the debtor's petition, a
creditor is merely complying with the spirit of the Section 362
freeze. As for the issue of the meaning of the phrase
"exercise control over property of the estate" contained
in Section 362(a)(3), this Court holds that any exercise of
control, to be sanctionable, must occur post-petition and involve
an affirmative act on the part of a creditor. Richardson is consistent with the requirement in Inslaw
that the stay applies only to creditor acts taken after the
bankruptcy petition is filed. Id., 99 Comm. L.J. at 307-10 (footnotes omitted)
(emphasis supplied). Carlson observed as follows: Of the sweeping nature of the automatic stay,
Justice Antonin Scalia has written: "It is an elementary rule
of construction that 'the act cannot be held to destroy
itself'". It may be presumed then, that exceptions to the
automatic stay may be deduced from other parts of the Bankruptcy
Code. This article concerns itself with such an implied
exception. The exception arises in favor of secured parties that
have lawfully repossessed collateral prior to a bankruptcy
petition. According to Section 362(a)(3), the automatic stay
prohibits: any act to obtain possession of property of the estate or of
property from the estate or to exercise control over property of
the estate. Courts have read Section 363(a)(3) to mean that continued
possession by a secured party constitutes "control" over
property of the estate. According to these courts, this
"control," no matter how passive, places the secured
party in a contempt of court. Only divestment of possession purges
a secured party of contempt. The purpose of this article is to establish that
because of an implied exception to Section 362(a)(3), the
automatic stay does not imply a duty to surrender
possession at the behest of a bankruptcy trustee. The reason is
that the Bankruptcy Code, in Section 542(a), provides for a
trustee's right to a turnover of such collateral. In response to
the trustee's action, a secured party will have an opportunity to
assert defenses that are described in and around Section 542(a).
These defenses imply that a secured party need not surrender
collateral in the absence of a court order. Rather, a secured
party may hold collateral in anticipation of the trustee's action
for a Section 542(a) turnover. The reading of the automatic stay
being criticized in this article would obliterate these defenses. In particular, it will be shown that the United
States Supreme Court has already decided this question. In Citizens
Bank v. Strumpf, [116 S. Ct. 286 (1995)] Justice Antonin
Scalia ruled that, when a bank "freezes" a deposit
account, it has not violated the automatic stay. Freezing a
deposit account is precisely analogous to holding repossessed
collateral pending the turnover action. Therefore, Strumpf
stands for the proposition being urged in this article. Thus, Section 362(a)(3) must be read in
conjunction with Section 542(a). To guarantee a secured party
continued access to turnover defenses, Section 362(a)(3) must not
be read to require the voluntary termination of a secured party's
lawfully obtained possession of collateral. **** Whether Section 542(a) or Section 543 applies, defenses exist that
a secured party might assert to resist the obligation to turn over
collateral. The limitations to the trustee's right to a turnover
suggest that a secured party-in-possession of collateral does not
have to surrender that possession. These defenses, then, imply an
exception to Section 362(a)(3), which otherwise bars
"control" by the secured party over property of the
bankruptcy estate. To be distinguished, of course, are cases in
which the repossession occurs after the bankruptcy
petition. In such cases, the integrity of automatic stay requires
the return of the repossessed collateral. In these circumstances,
a secured party may not even assert the absence of adequate
protection as a reason not to undo the wrong. Overt violations of
the automatic stay must be corrected. But mere passivity--mere
failure to surrender collateral repossessed before
bankruptcy--should not be considered a violation of the stay at
all. Some courts insist that the secured party has a
duty to tender repossessed collateral upon the debtor's demand and
that failure to do so is itself a violation of the automatic stay.
The authority for this proposition is Section 362(a)(3), which
chastises "any act . . . to exercise control over property of
the estate," words added to the Bankruptcy Code in 1984 to
broaden the scope of the stay. Mere continued possession is said
to constitute the exercise of control, in violation of Section
362(a)(3). [In re Sharon, 200 B.R. 181 (Bankr. S. D. Ohio
1996)]. The leading case to hold for an affirmative duty
to turn over collateral--even though the trustee has not brought
an action for turnover under Section 542(a)--is Knaus v.
Concordia Lumber Co. (In re Knaus, [889 F.2d 773 (8th
Cir. 1989)]. **** It is submitted that the Supreme Court has already held that a
secured party-in-possession of collateral has no obligation to
volunteer a turnover in the absence of a court order. In Citizens
Bank v. Strumpf, a bank put an "administrative
freeze" on a checking account, hoping to preserve a setoff
right. It then moved to lift the automatic stay. This freeze can
be compared with holding repossessed collateral pending the
trustee's turnover action against the repossessing secured party. The bankruptcy court in Strumpf had ruled
the freeze to be in violation of the automatic stay. It cited
Section 362(a)(7), barring postpetition setoffs. Later, the
bankruptcy court lifted the automatic stay so that the bank could
manifest the setoff, but by that time the debtor had written
checks on the account, which the bank was obliged to honor. Hence,
the bank lost its setoff right altogether. Justice Antonin Scalia reversed, holding that the
administrative freeze was not a setoff and hence not a violation
of the automatic stay. One of his reasons was that, otherwise, the
bank's defenses to a turnover under Section 542(b) (which applies
to account debtors) would be destroyed: It would be an odd construction of §362(a)(7) that required a
creditor with a right of setoff to do immediately that which §542(b)
specifically excuses it from doing as a general matter: pay a claim to which a defense of setoff applies . . . [I]t would .
. . eviscerate §542(b)'s exception to the duty to pay debts. It
is an elementary rule of construction that "the act cannot be
held to destroy itself." [116 S. Ct. at 289-90]. So far, this does not help us in our inquiry. In the above-quoted
passage, Justice Scalia denies that the freeze is a setoff, and so
Section 362(a)(7) is not violated. But could the debtor have argued that the
administrative freeze was an act of "control" over the
deposit account? Justice Scalia denied the proposition, but then
made the point that is asserted here--the defenses to Section 542
turnover imply an exception to the automatic stay permitting
continued "control" of collateral. Here is how Justice
Scalia addressed the point that the administrative freeze might be
an act of control under Section 362(a)(3): Finally, we are unpersuaded by respondent's additional contentions
that the administrative hold violated §362(a)(3) and §362(a)(6).
Under these Sections, a bankruptcy filing automatically stays
"any act to obtain possession of property of the estate or of
exercise from the estate or to exercise control over property of
the estate," and "any act to collect, assess, or recover
a claim against the debtor that arose before the commencement of
the case under this title." Respondent's reliance on these
provisions rests on the false premise that petitioner's
administrative hold took something from respondent, or exercised
dominion over property that belonged to respondent. That view of
things might be arguable if a bank account consisted of money
belonging to the depositor and held by the bank. In fact, however,
it consists of nothing more or less than a promise to pay was
neither a taking of possession of respondent's property nor an
exercising of control over it, but merely a refusal to perform its
promise. In any event, we will not give §§362(a)(3) or (6) an
interpretation that would proscribe what §542(b)'s
"exception" and §553(a)'s general rule were plainly
intended to permit: the temporary refusal of a creditor to pay a
debt that is subject to setoff against a debt owed by the
bankrupt. [116 S. Ct. at 290]. In this passage, Justice Scalia suggests that debts owed to the
debtor are distinguishable from tangible property held by the
bank. This distinction is drawn because Scalia feared the effect
of Section 362(a)(3)--with its breathtaking admonition against
"control" over property of the estate. Later, more will be said regarding this
distinction between tangible and intangible property. For now,
please note that Scalia makes this distinction but does not rely
on it. The important point is that, immediately after hazarding
this distinction, he excuses the Section 362(a)(3) violation in
order to preserve the turnover defenses under Section 542. Given that the administrative freeze of a bank
account can plausibly be characterized as "control" over
property of the debtor, Justice Scalia's reasoning shows that, in
general, secured parties need not surrender collateral that they
have already possessed. Rather, they can put an
"administrative freeze" on the collateral and move to
lift the automatic stay or wait for the debtor to bring a turnover
action. Id., 6 J of Bankr. Law and Practice, at pp. 487-95
(footnotes omitted). Based on the foregoing analysis, the Court concludes that the
failure or refusal of the Obviously, the prepetition Notice of Levy by the The Court perceives one possible basis to conclude that the two
postpetition failure or refusals to act by the |