6321 Bankruptcy page5

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In re Edgar Ballard, In re Beulah H. Ballard, Debtors. Jeffrey Fairfield, Trustee, Plaintiff-Appellant v. United States of America , Defendant-Appellee, Commonwealth of Virginia , Appellee

(CA-4), U.S. Court of Appeals, 4th Circuit, 94-2199, 9/20/95, 65 F3d 367, Affirming an unreported District Court decision

[Code Secs. 6321 and 6323 ]

Tax liens: Bankruptcy: Property held in tenancy by the entireties: Right of survivorship: Joint vs. individual creditors: Priority.--Proceeds from the sale of debtors' residence held in tenancy by the entireties became the sole property of the surviving debtor upon the death of his spouse, and, thus, the joint or individual character of creditors' claims did not affect their priority. Accordingly, the proceeds were required to be applied first to unsecured priority claims, including the IRS's claim for a trust fund recovery penalty, regardless of whether both or just the surviving debtor was liable for the penalty. The proceeds were not required to be applied exclusively to payment of the debtors' joint creditors, despite the trustee's contention that, under state ( Virginia ) law, entireties property is available in bankruptcy administration solely for the benefit of joint creditors. Upon the death of his spouse, the right of survivorship released the surviving debtor and his bankruptcy estate from all such conditions of the tenancy conceived to preserve unity of entireties property.

Jeffrey John Fairfield, Jeffrey J. Fairfield, P.C., 1175 Herndon Parkway , Herndon , Va. 22070 , for plaintiff-appellant. Helen F. Fahey, United States Attorney, Loretta C. Argrett, Assistant Attorney General, Patricia McDonald Bowman, Gary R. Allen, Gary D. Gray, Department of Justice, Washington, D.C. 20530, for defendant-appellee.

Before: HALL and WILLIAMS, Circuit Judges, and PHILLIPS, Senior Circuit Judge.

OPINION

WILLIAMS, Circuit Judge:

In this appeal, we confront an admittedly arcane but interesting question of first impression in this circuit concerning the interaction between federal bankruptcy law and Virginia property law. More specifically, we consider the effect of the termination of the marital estate and resulting devolution of tenancy by the entireties property upon the death of a spouse following the commencement of the couple's joint bankruptcy case. Ruling on the motion of the United States for summary judgment, the bankruptcy court concluded that the proceeds derived from the sale of debtors' property, held by tenancy in the entireties, became the sole property of Edgar Ballard upon the death of his wife, Beulah Ballard. The court held that the proceeds from the sale of the Ballards' entireties property must be applied to pay the unsecured priority claims before a distribution may be made to unsecured general creditors regardless of the joint or individual character of the claim. Trustee, Jeffrey Fairfield, appeals the entry of summary judgment by the United States Bankruptcy Court and affirmance by the United States District Court for the Eastern District of Virginia. For the reasons discussed below, we affirm.

I.

The parties do not dispute the underlying facts in this action. The debtors, Edgar and Beulah Ballard (the Ballards), filed a joint Chapter 11 petition on February 26, 1990. On the date of filing, the Ballards' principal asset consisted of residential real property located at 1841 Clachan Court , Vienna , Virginia . They owned this real property in fee simple as tenants by the entireties. On the List of Twenty Largest Creditors Holding Unsecured Claims, the Ballards included the following as undisputed, non-contingent debts: withholding taxes in the amount of $45,000 owed to the United States Internal Revenue Service and withholding taxes in the amount of $17,000 owed to the Commonwealth of Virginia , Department of Taxation.

On or about May 31, 1990, the IRS timely filed a proof of claim which was amended on February 13, 1992 when the IRS filed an amended proof of claim in the amount of $23,303.56, which consisted solely of a claim for a 100% penalty for the period ending December 31, 1989. ¹

Upon conclusion of the investigation into the employment tax liabilities of Ballene Services, Inc., ² the IRS determined that both Edgar and Beulah Ballard were responsible persons who failed to collect and pay over federal employment taxes withheld from the wages of the employees of Ballene Services, and that both should be held liable for the $23,303.56 penalty, pursuant to 26 U.S.C. §6672 .

On December 28, 1990, the bankruptcy court entered an order authorizing the debtors to sell their residential real property. Also on that date, the court entered a separate order requiring that the proceeds derived from the sale of the Ballards' residential real property "be paid by the settlement attorney in the form of a check payable to Edgar Ballard, Beulah H. Ballard and [their attorney] James G. Smalley; [and] that the check ... be deposited in an interest bearing account requiring the signatures of the Debtors and their counsel to release the funds." (J.A. 49.) The Ballards sold their property, realizing approximately $43,000 from the sale.

On March 18, 1991, Leanne Njus and Associates, Inc. (Njus), an unsecured joint creditor represented by the later-appointed and now-current Trustee, Jeffrey Fairfield, objected to the proofs of claim filed by other claimants and moved to determine the extent of consolidation of the debtors' estates for disallowance of certain claims and for related relief. Specifically, Njus objected to the IRS proof of claim on the basis that Beulah Ballard "was not a responsible person [as defined in IRC §6672(b) ] required to collect, truthfully account for, and pay over trust fund payroll taxes." (J.A. 50.) Njus further requested that the court enter an order allocating"one-half of the net sales proceeds resulting from the sale of the debtors' residence to each of the respective estates of the joint petitioners;" directing "that the respective estates of the debtors be held separate and apart;" and disallowing "the proofs of claim including the proof of claim filed by the United States." (J.A. 50-51.) Following a May 14, 1991, hearing, the bankruptcy court determined that Njus lacked standing to contest the tax claims of the United States and the Commonwealth of Virginia and dismissed Njus's motion with prejudice.

Beulah Ballard died after the May 14, 1991, hearing but before the bankruptcy case was converted to a Chapter 7 proceeding. Thereafter, by order entered April 6, 1993, Mr. Fairfield was confirmed as Chapter 7 trustee. On or about July 27, 1993, the Trustee, in his new capacity, renewed the motions and objections he had presented to the court on behalf of the Njus creditors in March of 1991. The United States , in turn, moved for summary judgment requesting dismissal of the Trustee's motion to segregate the debtors' estates and to overrule the Trustee's objection to the IRS's proof of claim. The United States argued that in light of Mrs. Ballard's death, whether she was personally liable for the §6672 penalty was a moot question.

In its entry of oral findings from the bench, the bankruptcy court granted summary judgment to the United States , finding that upon Mrs. Ballard's death, Mr. Ballard's estate acquired the entire amount of the proceeds from the sale of their home, based on the Ballards' tenancy by the entireties interest in the proceeds. Thus, the court reasoned, whether Mrs. Ballard was also liable for the IRS tax claim was moot because, after her death, all the proceeds from the sale must be allocated to Mr. Ballard's estate. In its brief written order granting summary judgment to the United States , the bankruptcy court stated:

... the proceeds derived from the sale of the debtors' tenants by the entireties property was held by the debtors as tenants by the entireties, that such proceeds became the sole property of Edgar Ballard upon the death of Beulah Ballard, that such proceeds must first be applied to pay the unsecured priority claims before a distribution may be made to unsecured general creditors regardless of whether such creditors hold joint or non-joint claims and that the United States of America's motion for summary judgment should be granted.

(J.A. 15-16.) The Trustee appealed and the district court, in an oral ruling from the bench, affirmed the judgment of the bankruptcy court. The Trustee now appeals, articulating two arguments in support of reversal: (1) only joint creditors are entitled to distribution from the bankruptcy estates; and (2) that the sale of the Ballards' house under §363 of the Bankruptcy Code terminated their tenancy by the entireties and mandated an allocation of the sale proceeds between the two bankruptcy estates.

II.

We review de novo the bankruptcy court's grant of summary judgment and the district court's affirmance thereof. Savers Fed. Sav. & Loan Ass'n v. McCarthy Constr. Co. (In re Knightsbridge Dev. Co.), 884 F.2d 145, 147 n.3 (4th Cir. 1989).

A.

The Trustee's first contention need not detain us long. In support of his claim, the Trustee asserts that the sale of the Ballards' house under §363 of the Bankruptcy Code terminated their tenancy by the entireties and mandates an allocation of the sale proceeds between the two bankruptcy estates. ³ The record reflects that upon authorization of the bankruptcy court, the Ballards sold the property which they held as tenants by the entireties. The $43,000 proceeds from the sale were placed in an interest bearing account requiring the signatures of the Ballards and their counsel to release the funds.

Like the bankruptcy court, we discern no intent by Mr. and Mrs. Ballard to terminate their tenancy by the entireties upon the sale of their home. Again, looking to Virginia law, absent "an agreement or understanding to the contrary, the proceeds derived from a voluntary sale of real estate held by the entireties are likewise held by the entireties." Oliver v. Givens, 129 S.E.2d 661, 663 ( Va. 1963). The Trustee cannot point to any evidence in the record of this appeal which reflects an intent by the Ballards to sever their entireties interest in the proceeds from the sale of their home. Indeed, the manner in which the proceeds were paid and retained by order of the bankruptcy court preserved the tenancy by the entireties. Given the absence of any agreement or other indicia of the Ballards' intent to sever the entireties tenancy upon the sale of the real estate, we affirm the determination of the bankruptcy court that the entireties interest continued in the proceeds.

B.

The Trustee next contends that the bankruptcy court erred in concluding as a matter of law that the proceeds from the sale of the Ballards' residence, held as tenants by the entireties, became the sole property of Edgar Ballard's bankruptcy estate upon the death of Beulah Ballard, thus placing such proceeds within the reach of the IRS to satisfy a priority tax claim against Mr. Ballard. Specifically, the Trustee contends that because only joint creditors are entitled to distribution from the bankruptcy estates, the bankruptcy court's refusal to entertain his objection to the tax claim against Beulah Ballard must be reversed even if the tenancy by the entireties in the sale proceeds of the Ballards' residence endured until the death of Mrs. Ballard. The United States, however, contends that the bankruptcy court properly concluded that the Trustee's arguments are foreclosed by the death of Beulah Ballard and the resulting devolution by operation of Virginia property law of the entireties property in fee simple to her husband, Mr. Ballard, and consequently to his bankruptcy estate. Thus, whether the IRS is a joint creditor or merely a creditor of Mr. Ballard is irrelevant for the purpose of determining the priority of the various creditors. For the following reasons we agree with the conclusions of the bankruptcy court and, therefore, affirm.

The Bankruptcy Code broadly defines the property interests included in the bankruptcy estate to comprise "all legal or equitable interests of the debtor in property as of the commencement of the case," 11 U.S.C.A. §541(a)(1) (West Supp. 1995), and, in pertinent part, "[a]ny interest in property that the estate acquires after the commencement of the case." 11 U.S.C.A. §541(a)(7) (West Supp. 1995). This general rule of inclusion applies with equal force to the debtor's interest in entireties property, Chippenham Hosp., Inc. v. Bondurant (In re Bondurant), 716 F.2d 1057, 1058 (4th Cir. 1983); Napotnik v. Equibank and Parkvale Sav. Assoc., 679 F.2d 316, 318 (3d Cir. 1982) (construing §541 to include the debtor's interest in entireties property), although state law determines the particular features of this property interest. Butner v. United States , 440 U.S. 48, 55 (1979).

It is undisputed that at the time of the Ballards' joint filing for bankruptcy, they owned their home as tenants by the entireties, a form of concurrent ownership of property recognized by the Commonwealth of Virginia . Pitts v. United States , 408 S.E.2d 901, 903 ( Va. 1991); First Merchants Nat'l Bank v. Richmond Lumber & Bldg. Supply Co. (In re Norris), 5 B.R. 799, 802 (Bankr. E.D. Va. 1980); Vasilion v. Vasilion, 66 S.E.2d 599, 602 ( Va. 1951). Tenancy by the entireties comprises "four essential characteristics, that is, unity of time, unity of title, unity of interest, and unity of possession." Pitts, 408 S.E.2d at 903. In particular, neither spouse can effectuate a severance of the tenancy by his or her sole act either by conveying or disposing of any part of the property. Id. ; Vasilion, 66 S.E.2d at 602. This restriction on alienation stems from the common-law recognition of the husband and wife as a "juristic person separate and distinct from the spouses themselves." Pitts, 408 S.E.2d at 903 (citation and quotation marks omitted).

The Trustee argues that the anti-alienation feature of entireties property requires that the proceeds from the sale of the Ballards' residence be applied exclusively to payment of joint creditors. He relies upon the general rule that entireties property under Virginia law is available for bankruptcy administration solely for the benefit of joint creditors. Sumy v. Schlossberg, 777 F.2d 921, 925 (4th Cir. 1985) (characterizing Maryland entireties property as an asset of debtors' joint bankruptcy estates and permitting liquidation only for the benefit of joint creditors); Ragsdale v. Genesco, Inc., 674 F.2d 277, 279 (4th Cir. 1982) (applying the same principle to Virginia entireties property); Virginia Nat'l Bank v. Martin (In re Martin), 20 B.R. 374, 376 (Bankr. E.D. Va. 1982) (same); Reid v. Richardson, 304 F.2d 351 (4th Cir. 1962) (same). In this appeal, however, we confront a distinguishing factual development--the death of Mrs. Ballard following the joint filing of bankruptcy--which implicates another equally important attribute of entireties property, the right of survivorship vested in the remaining spouse: ⁴

Upon the death of either spouse the whole of the estate by the entireties remains in the survivor. This is so not because he or she is vested with any new interest therein, but because in the first instance he or she took the entirety which, under the common law, was to remain to the survivor.

Vasilion, 66 S.E.2d at 602 (citing Lang v. Commissioner [3 USTC ¶1088 ], 289 U.S. 109, 111 (1933)). Of course, we recognize that the unique character of entireties property is such that the death of one spouse does not vest the other with interests he or she did not already hold. The termination of coverture does, however, extinguish the"separate and distinct" juristic personality that underlies those restrictions on alienation unique to entireties property. Thus, Mrs. Ballard's death released her surviving spouse, and thus, his bankruptcy estate, from all conditions of the tenancy conceived to preserve unity of entireties property. See Dollinger v. Bottom (In re Bottom), 176 B.R. 950, 953 (Bankr. N. D. Fla. 1994) ("[t]here is no question that the debtor's right of survivorship is part of the estate"); Waldschmidt v. Shaw (In re Shaw), 5 B.R. 107, 109-10 (Bankr. M.D. Tenn. 1980) (same). More simply put, when the dust settles, by operation of law, Mr. Ballard's bankruptcy estate holds a fee simple interest in the proceeds of the sale of their home.

Although no doubt disappointing to the Trustee and the joint creditors of the bankruptcy estate, it should come as no surprise that upon the destruction of the tenancy by the entireties, in this case by the death of Mrs. Ballard, their status as joint creditors would accord them no greater priority than that enjoyed by any non-joint creditor. Indeed, had Mrs. Ballard died prior to the bankruptcy filing, the joint creditors would fully expect to be in the same position they find themselves today. This result is not dictated by any provision of bankruptcy law but rather by the unique character of property held in tenancy by the entireties. We agree with the Trustee's contention that the commencement of a joint bankruptcy case does not disrupt a debtor's co-ownership of property as a tenant by the entireties. The Trustee, however, must accept all those features peculiar to this form of concurrent property ownership, those that inure to the benefit of joint creditors, such as preferred status during coverture, but also rights of survivorship that upon the death of a spouse collapse any meaningful distinction between joint and non-joint creditors. On this basis, therefore, we agree with the district court and affirm the decision of the bankruptcy court.

III.

In summary, we conclude that the bankruptcy court did not err in its determination that the proceeds derived from the sale of the Ballards' property held by tenancy in the entireties became the sole property of Edgar Ballard upon the death of his wife, Beulah Ballard. Thus, the funds must be applied first to pay the unsecured priority claims regardless of the joint or individual character of the claim.

AFFIRMED.

¹ The original proof of claim was in the amount of $29,975.65, listing two estimated claims in the amount of $2,236.00 for the debtors' federal income tax liability for the 1989 taxable year and in the amount of $27,739.65 for a 100% penalty for the period ending March 31, 1990. The sums claimed on the original and amended proofs of claim relate to unpaid federal withholding taxes withheld from the wages of the employees of Ballene Services, Inc. during the fourth quarter of 1988 and the second, third, and fourth quarters of 1989.

² The Ballards were the sole stockholders in Ballene Services, Inc.

³ Section 363 defines the rights and powers of the trustee with respect to the disposition of the property of the estate. It also articulates the rights of third parties asserting an interest in the subject property. 11 U.S.C.A. §363 (West Supp. 1995). See 2 Collier on Bankruptcy ¶363.01, at 363-6 (15th ed. 1995). The Ballards as Chapter 11 debtors-in-possession held the powers and duties of the Trustee. 11 U.S.C. §1107(a) (1988).

⁴ Until the moment of Mrs. Ballard's death, the Trustee would have been correct in his assertion. The Trustee, however, in his select focus on the anti-alienation provision, has ignored an equally important feature of tenancy by the entirety: the right of survivorship enjoyed by the spouse of the deceased.

[Dissenting Opinion]

HALL, Circuit Judge

I dissent because I believe that the sale of the property had the effect of severing the tenancy by the entireties, and, as a result, each bankruptcy estate should be deemed to contain half of the proceeds. It is therefore necessary to determine whether Mrs. Ballard was liable on the tax claims; if she was not, the tax creditors would be limited to the proceeds in her husband's estate.

At filing, all property of the debtors came into their respective estates. 11 U.S.C. §541(a)(1) . Filing alone did not sever the tenancy by the entireties. See In re DeMarco, 114 B.R. 121, 123 (Bankr. N.D.W.Va. 1990). However, the debtors-in-possession, who act as trustees, ¹ are charged with administering the estate, and the sale of the house severed the tenancy by the entireties. See id. at 124 ("The trustee has no title to property of the estate until he elects to take affirmative action and proceedings are had or orders made."). In the absence of an exemption that might dictate a different result, ² the money is simply allocable between the two estates.

I would agree that, had the sale occurred outside bankruptcy, there is support in Virginia law for finding a new tenancy by the entireties in the proceeds. See Oliver v. Givens, 129 S.E.2d 661, 663 ( Va. 1963) ("It is true ... that the sale of the real estate which the husband and wife owned as tenants by the entireties terminated such an estate in that property.... [I]n the absence of an agreement or understanding to the contrary, the proceeds derived from a voluntary sale of real estate held by the entireties are likewise held by the entireties."). However, the sale of the Ballards' residence was not a "voluntary sale" by a husband and wife. Instead, it was a liquidation of bankruptcy estate assets by debtors-in-possession, undertaken with the "agreement or understanding" that creditors would eventually consume the entire amount. By focusing on how state law would view the transaction, the majority loses sight of the bankruptcy context in which the sale took place.

"[A] debtor in possession shall have all the rights, ... and shall perform all the functions and duties ... of a trustee serving in a case under [chapter 11]." 11 U.S.C. §1107(a). One of a trustee's duties is to "collect and reduce to money the property of the estate ...." 11 U.S.C. §704(1) . The bankruptcy court ruled that the sale of the Ballards' residence was authorized under 11 U.S.C.§363(b)(1), which provides that "[t]he trustee, after notice and hearing, may ... sell ... property of the estate ...." ³ The debtors-in-possession gave notice of the proposed sale pursuant to Bankr. R. 6004, which is required for the sale of estate property by a trustee or debtor-in-possession. The debtors' initial reorganization plan, filed after the sale, stated that the plan was one "of liquidation." The net proceeds, which were earmarked in the plan for payment to their creditors, constitute property of the estate that was being temporarily held by them in their role as debtors-in-possession.

The pivotal fact underlying the bankruptcy court's ruling that the tenancy by the entireties survived the sale of the residence was that "the proceeds were deposited into an interest-bearing account requiring the signature of both parties and their attorney." J.A. 25 (bench ruling on IRS's summary judgment motion). The majority likewise holds that "the manner in which the proceeds from the sale were paid and retained by order of the bankruptcy court preserved the tenancy by the entireties." Majority op. at 6. I believe this logic elevates form over substance.

A trustee "may make such deposit or investment of the money of the estate ... as will yield the maximum reasonable net return on such money ...." 11 U.S.C. §345. Debtors-in-possession, in the performance of their administrative duties, may do the same. Had the proceeds been placed in separate accounts, would the majority's analysis be different? Inasmuch as the debtors had not identified any individual debts of either of them, it simply made sense to require that the proceeds be kept in a single account. This mere administrative detail should not be permitted to eclipse the substance of the sale.

I would vacate the judgment below and remand with directions to determine whether Mrs. Ballard was liable on the tax claims.

¹ A trustee was not appointed until after the cases were converted to chapter 7.

² With regard to the residence, the only exemption claimed was the state homestead exemption; the debtors did not claim the exemption under 11 U.S.C. §522(b)(2)(B). The majority notes that had Mrs. Ballard not died, liquidation of the entireties estate would have been for the benefit of the joint creditors only. See majority op. at 8 & n.4. The majority seems to assume that this result would obtain even without a §522(b)(2)(B) exemption having been claimed. Only when the exemption option has been exercised, however, does the entireties property stand available for the satisfaction of only the joint debts. See Sumy v. Schlossberg, 777 F.2d 921, 927-29 (4th Cir. 1985); In re Ford, 3 B.R. 559, 570 (Bankr. D. Md. 1980) ("The trustee merely obtains and retains custody of the debtor's undivided interest consisting of the same unities, intact and unaltered, as they existed immediately prior to the filing of the petition, until such time as that interest, still intact and unaltered, is exempted from the estate under §522(b)(2)(B)."), aff'd Greenblatt v. Ford, 638 F.2d 14 (4th Cir. 1981). In each of the cases cited by the majority-- Sumy , Ragsdale, Martin and Reid (see majority op. at 8)--the debtor(s) had in fact claimed the exemption.

Even if only Mr. Ballard is liable for the tax claims, the IRS and other individual creditors would still be able to reach his portion of the sale proceeds. This result, however, is dictated by his failure to claim the §522(b)(2)(B) exemption and not, as the majority holds, by a dissolution of the tenancy by the entireties occasioned by Mrs. Ballard's death.

³ Whether the sale was conducted pursuant to §363(b)(1) or (h) is irrelevant. Inasmuch as both co-tenant spouses had filed for bankruptcy, there was no need to invoke §363(h) to consider the benefits of partition in kind or sale of one debtor's undivided interest. Subsection (h) was clearly written with non-debtor co-owners in mind.

 

 

 

In re Thomas Arthur Jones, Debtor. United States of America , Appellant v. Thomas Arthur Jones, Appellee

U.S. District Court, Dist. Kan., 93-4250-RDR, 4/27/95, 181 BR 538, Affirming in part, reversing in part and remanding an unreported Bankruptcy Court decision

[Code Sec. 6321 ]

Tax liens: Bankruptcy estate: Noncompetition payments.--Noncompetition payments made to a dentist in bankruptcy were subject to the IRS's tax liens. The noncompetition payments were for goodwill and a customer list in connection with the sale of his practice. The payments were not for post-petition services but were rooted in the period prior to bankruptcy. Therefore, the payments were includible in the bankruptcy estate, and the liens attached to the payments.

[Code Sec. 6672 ]

Application of payment: Voluntary payment.--The IRS was equitably estopped from applying a payment to a dentist's income tax liabilities rather than his payroll withholding tax liabilities. A pre-bankruptcy petition payment to the IRS made by the dentist was voluntary and should have been applied first to payroll withholding tax liabilities as agreed upon by the dentist and an IRS agent. The dentist was harmed by the IRS's application of his payment to his income tax liabilities because it resulted in a larger tax obligation than under the original agreement

Richard C. Wallace, Evans & Mullinix, P.A. 15301 W. 87th St., Pkwy., Lenexa, Kan. 66219-1428, for debtor. James J. Long, Department of Justice, Washington , D.C. 20530 , for appellant. Richard C. Wallace, Evans & Mullinix, P.A. 15301 W. 87th St., Pkwy., Lenexa, Kan. 66219-1428, for appellee. William H. Griffin, 433 Kansas Ave. , Topeka , Kan. 66601 -3527, for trustee.

MEMORANDUM AND ORDER

ROGERS, District Judge:

This is an appeal from the bankruptcy court. The United States contends that the bankruptcy court erred (1) in finding that payments under a covenant not to compete were not property of the debtor's estate and (2) in finding that a payment made by the debtor to the Internal Revenue Service was voluntary and that the IRS is equitably estopped from applying this payment to the debtor's income tax liability. Having carefully reviewed the arguments of the parties, the court is now prepared to rule.

The standards of review are well-settled. The bankruptcy court's findings of fact must be upheld unless they are clearly erroneous. Bankr.R. 8013; In re Mullet, 817 F.2d 677, 678 (10th Cir. 1987). The bankruptcy court's legal determinations are reviewed de novo. In re Yeates, 807 F.2d 874, 877 (10th Cir. 1986).

The factual background of this case is generally not in dispute. The debtor is a dentist who has practiced and is currently practicing in Kansas City , Kansas . Over the course of his practice, the debtor incurred significant tax liabilities, some for payroll withholding taxes (941 taxes) and some for income taxes (1040 taxes). Since 1984, the United States has assessed debtor for his failure to pay these taxes and filed a number of notices of federal tax liens. The debtor owed $29,078.97 in 941 taxes and $90,739.65 in 1040 taxes. In 1990, the debtor and IRS revenue officer Robert E. Moore entered into an oral agreement. The agreement provided that the debtor would make monthly payments of $1,000 to the IRS on his payroll tax liabilities and then make a lump sum payment in May 1991 for the remaining balance. Agent Moore had told debtor that he would have to pay all of his payroll taxes before the IRS would consider any offer to compromise or make monthly payments on his income taxes. Debtor made his monthly payments, but he was unable to make the necessary lump sum payment in May. Agent Moore informed the debtor that the IRS was "closing [him] out." In response, the debtor suggested selling his dental practice to satisfy the remaining balance owed on his payroll tax liabilities. The debtor made efforts to sell his business, but he was not successful until the summer of 1992. On June 8, 1992, the IRS mailed debtor its final notices of intention to levy. The notices gave him thirty days to pay the amounts owed or the IRS would seize his property, including his dental practice. The debtor made his efforts to sell his practice known to Agent Moore, and Agent Moore agreed to allow the debtor additional time to sell his practice before the IRS proceeded to levy on the property.

On July 3, 1992, debtor sold his dentistry practice and entered into an asset purchase agreement. Pursuant to the agreement, debtor received a cash payment of $75,000.00, an interest in gross collections generated from the dentistry practice valued at $100,000.00, a security agreement in the assets of the practice until the remainder of the purchase price was paid, and a right to use the facilities of the practice for an indefinite period. The debtor had told the sales agent and the buyer that the purchase amount, less the amount allocated to the debtor's agreement not to compete with the buyer in providing dental services, would have to be sufficient to pay the 941 taxes. The parties agreed to allocate $75,000.00 of the purchase price to the assets of the practice, which was enough to pay the costs and expenses of the sale, the liens prior to the IRS liens, and the 941 debt. They allocated the balance of the purchase price to the noncompetition agreement. This amounted to $50,000.00 and was to be paid over several years if certain conditions were met. The debtor has readily admitted that the price of the covenant not to compete represented business goodwill and customer base. After payment of the expenses of the sale, the debtor obtained a cashier's check in the amount of $29,078.97 payable to the IRS and himself. On October 16, 1992, debtor remitted the check to the IRS. The amount of the check was identical to the amount of 941 taxes shown on one of the final notices of intention to levy. The check and the attachments, however, contained no notation directing the IRS to apply it to debtor's 941 taxes. The IRS applied the amount contained on the check to debtor's 1983 and 1984 income taxes. On October 30, 1992, the debtor filed a voluntary petition in bankruptcy under Chapter 13 of the Bankruptcy Code. The debtor had informed the IRS in early October that he was contemplating filing bankruptcy.

The bankruptcy court decided that the postpetition payments made to the debtor pursuant to covenant not to compete were not subject to the tax liens of the IRS. In reaching this conclusion, the court relied upon In Re Wilson, No. 84-40588 (Bankr.D.Kan. 1986), aff'd, No. 86-4062-R (D.Kan. 1987). The bankruptcy court also determined that the IRS was equitably estopped from applying debtor's payment of $29,078.97 on October 16, 1992 to his income tax liability. The bankruptcy court held that the IRS was forced to credit the payment to debtor's 941 tax liability.

The court is faced with two issues: (1) Are the payments made pursuant to the covenant not to compete subject to the liens of the IRS? and (2) Should the IRS be equitably estopped from applying the $29,078.97 payment to debtor's 941 taxes?

I.

In general, a federal tax lien attaches to "all property and rights to property, whether real or personal, belonging to" the taxpayer. 26 U.S.C. §6321 . The lien imposed by §6321 arises when an assessment is made and continues until either the taxpayer's liability is satisfied or the statute of limitations on collection expires. 26 U.S.C. §6322 . Under the Bankruptcy Code, the claim of the IRS is a secured claim only if the claim is secured by a lien on "property in which the estate has an interest" and only "to the extent of the value of such creditor's interest in the estate's interest in such property." 11 U.S.C. §506(a). The secured status of the IRS is determined as of the petition date. 11 U.S.C. §506; In re Riley, 88 B.R. 906, 912 (Bankr.W.D.Wis. 1987). As a general rule, property acquired by the debtor's estate after the commencement of the bankruptcy is not subject to the liens of the IRS. 11 U.S.C. §552(a) ; In re Dente/Pender, 60 B.R. 164, 165 (Bankr.M.D. Fla. 1986).

The question here is whether the monies earned by the debtor from the noncompetition payments constitute earnings from personal services so that they were not part of the debtor's estate at the time of the filing of the bankruptcy petition or constitute proceeds from a contract right which existed and became property of the estate on the filing date. If the noncompetition payments constitute earnings from personal services, the liens of the IRS do not attach because such earnings were not part of the debtor's estate at the commencement of his bankruptcy. If, however, the payments were not considered earnings from personal services, but are deemed proceeds of a contract right which existed and became property of the estate on the filing date, the liens of the IRS would attach.

The issue before the court has arisen in a number of bankruptcy cases, although none involving Chapter 13. One of the earliest cases deciding this issue, In re Hammond, 35 B.R. 219 (Bankr.W.D.Okla. 1983), held that postpetition noncompetition payments were not property of the estate because these payments were conditioned on the debtor's compliance with the covenant not to compete, and the debtor could not be compelled to perform services for the benefit of his creditors. The court reasoned as follows:

If an entity, be it Hammond or Hammond's estate, is to receive the payments in question, Hammond must abide by the agreement. We cannot force Hammond to comply. 'The bankrupt ... cannot be compelled to perform work or services for the benefit of his creditors or his trustee in bankruptcy.' 3 Remington on Bankruptcy 1228.25 (1941). It is a foil which thrusts both ways. Hammond is therefore performing a service which is not 'sufficiently rooted' in the bankruptcy past so as to render the payments property of the estate.

Id. at 223.

The support for Hammond in other courts has been limited. In In re Walden, 12 F.3d 445, 451-52 (5th Cir. 1994), the Fifth Circuit, relying upon Hammond, suggested in dicta that annuity payments made pursuant to a covenant not to compete were not part of the debtor's estate because such payments were for services performed by debtor after commencement of case. In In re Hofstee, 88 B.R. 308 (Bankr.E.D.Wash. 1988), aff'd without opinion, 116 B.R. 872 (B.A.P. 9th Cir. 1990), the bankruptcy court initially embraced Hammond ,, but later distinguished it in an addendum to the opinion.

Many cases, however, have criticized Hammond and held that such payments were not tantamount to earnings from services performed by the debtor. See, e.g., In re Johnson, 178 B.R. 216 (B.A.P. 9th Cir. 1995); In re Andrews, 153 B.R. 159 (Bankr.E.D.Va. 1993); In re McDaniel, 141 B.R. 438 (Bankr.N.D.Fla. 1992); In re Prince, 127 B.R. 187 (N.D.Ill. 1991); In re Bluman, 125 B.R. 359 (Bankr.E.D.N.Y. 1991). In Johnson, the bankruptcy appellate panel of the Ninth circuit explained the essence of these rulings with the following comment: "We conclude that compliance with a anti-competition agreement is not 'services performed' because refraining from the performance of services is not the performance of services." 178 B.R. at 220.

In Wilson , this court considered the issue. After a careful examination of the factual situation, the court affirmed the bankruptcy court's ruling that the postpetition payments under the noncompete agreement were compensation for the debtor's post-bankruptcy personal services and therefore excluded from the bankruptcy estate. In Wilson , the debtor sold an automobile dealership prior to filing for bankruptcy. The sales agreement contained a covenant not to compete clause. In reaching the conclusion that the payments under the noncompete agreement constituted earnings for personal services, the court stated:

The negotiations for Wilson 's dealership suggest, as noted by the bankruptcy court, that the non-competition payments were not part of the price for the sale of the business. The addition of the payments to the negotiated sale price would have put the final figure above Wilson 's initial asking price. This indeed would have been an odd result. Further, the facts fail to support any contention that these payments constituted value for goodwill. [The buyer] planned to move Wilson 's dealership and to operate it under another name. Finally, the facts suggest that the noncompetition agreement was entered into after the purchase agreement had been made. This fact again supports the contention that the payments were not part of the purchase price.

After carefully reviewing the recent law on this issue and considering the particular facts of this case, we are convinced that the bankruptcy court erred in concluding that the liens of the IRS did not attach to the noncompetition payments. The court is persuaded by recent opinions that have suggested that the decision in Hammond was incorrect and that payments made pursuant to a covenant not to compete are not services performed under the Bankruptcy Code. The court, however, need not decide that Wilson was erroneously decided because the particular facts of this case are readily distinguishable from Wilson . The undisputed facts in the record indicate that the noncompetition payments in this case were for goodwill and the customer list. The noncompetition payments were a method of paying for the value of the debtor's goodwill and customer list. The goodwill and the customer list were established prepetition. Under these circumstances, the noncompetition payments are not for postpetition services, but are "sufficiently rooted in the pre-bankruptcy past," such that any legal or equitable interest in property arising therefrom is includable in the bankruptcy estate.

This case is very similar to Prince. In Prince, an orthodontist filed a petition for bankruptcy. During the pendency of the proceeding, the debtor negotiated the sale of his orthodontist practice. As part of the agreement, the parties entered into a covenant not to compete which prohibited the debtor from engaging in any orthodontist practice in the immediate area. The debtor sought to exclude the noncompetition payments from his estate on the theory that he was earning the payments by not competing. The bankruptcy court held that the payments were for goodwill rather than services and, since the goodwill was inextricably tied to his prepetition activities, the payments were part of the estate. 127 B.R. at 191-92.

In his brief, the debtor has not disputed that the noncompetition payments are "rooted in [his] pre-bankruptcy past." Rather, the debtor argues only that these payments should not be regarded as property in the bankruptcy estate because such a finding would entangle his ability to make a "fresh start."

The court is not persuaded by the debtor's argument. As pointed out by the government, the fact that a covenant not to compete is determined to be property of the estate would not affect a debtor's ability to make a fresh start any more than any other type of property which is secured by lien. The concept of a fresh start would not be frustrated where a creditor has a secured claim in payments under a covenant not to compete. As explained by the court in McDaniel: "This section [11 U.S.C. §541 ] was intended to give debtor the ability to make a fresh start, not shield his pre-bankruptcy assets from his creditors." 141 B.R. at 440.

Moreover, the debtor's "fresh start" will not be inhibited by this ruling. The covenant not to compete only precludes him from working in an area within seven miles of the practice that he sold. With that exception, he can work anywhere as a dentist, and all of his earnings will be free from the claims of his prepetition creditors.

In sum, the court finds that the bankruptcy court erred in concluding that the liens of the IRS did not attach to the noncompetition payments. The decision of the bankruptcy court is reversed and remanded for proceedings consistent with this opinion.

II.

The United States next contends that the bankruptcy court erred as a matter of law in holding that the $29,078.97 payment made by the debtor was voluntary, and that the government was estopped from applying this payment to debtor's 1983 and 1984 federal income tax liability.

Estoppel is an equitable doctrine which may be invoked to avoid injustice. Heckler v. Community Health Services, Inc., 467 U.S. 51, 59 (1984). For estoppel to apply, a party claiming estoppel "must have relied on its adversary's conduct in such a manner as to change his position for the worse, and that reliance must have been reasonable in that the party claiming the estoppel did not know nor should it have known that its adversary's conduct was misleading." Id. The application of estoppel against the government is less than clear. See Penny v. Giuffrida, 897 F.2d 1543, 1546 (10th Cir. 1990). Although the Supreme Court has never applied estoppel against the government, the Court has left open the possibility that estoppel could be applied under the appropriate circumstances. Office of Personnel Management v. Richmond , 496 U.S. 414, 423 (1990). "[W]e are hesitant . . . to say that there are no cases in which the public interest in ensuring that the Government can enforce the law free from estoppel might be outweighed by the countervailing interest of citizens in some minimum standard of decency, honor, reliability in their dealings with their Government." Heckler, 467 U.S. at 60-61 (emphasis in original). "At a minimum, estoppel against the government is disfavored when its application 'thwarts enforcement of the public laws.' " Muck v. United States [93-2 USTC ¶50,592 ], 3 F.3d 1378, 1382 (10th Cir. 1993) (quoting Trapper Mining Inc. v. Lujan, 923 F.2d 774, 781 (10th Cir.), cert. denied, 112 S.Ct. 81 (1991)).

A party seeking to establish equitable estoppel against the government has the burden of demonstrating the following traditional elements of estoppel: (1) the party to be estopped must have known the facts; (2) the party to be estopped must intend that his conduct will be acted upon or must so act that the party asserting the estoppel has the right to believe that it was so intended; (3) the party asserting the estoppel must be ignorant of the true facts; and (4) the party asserting the estoppel must rely on the other party's conduct to his injury. Penny, 897 F.2d at 1545-46.

Having carefully reviewed the arguments of the parties, the court is persuaded that the bankruptcy court correctly decided that the government should be equitably estopped from applying the debtor's prepetition payment of $29,078.97 to his income tax liability. Pursuant to the agreement reached between the debtor and IRS, the payment made by the debtor to the IRS in October 1992 should have been credited to the debtor's 941 tax liability.

The United States has suggested that the payment made by the debtor was not voluntary and therefore debtor could not designate how the payment would be applied. Under the peculiar circumstances of this case, we believe that the payment was voluntary and that the IRS was aware or should have been aware of where the payment was to be applied. "The distinction between a voluntary and involuntary payment . . . is not made on the basis of the presence of administrative action alone, but rather the presence of court action or administrative action resulting in the actual seizure or property or money, as in a levy." Muntwyler v. United States [83-1 USTC ¶9275 ], 103 F.2d 1030, 1033 (7th Cir. 1983). The IRS had issued final notices of intention to levy in this case. However, following the issuance of these notices, the debtor contacted Agent Moore and informed him of his efforts to sell his dental practice in order to make the lump sum payment to the IRS. Agent Moore allowed the debtor additional time to pay voluntarily before the IRS proceeded to levy. These circumstances clearly indicate that the IRS viewed any forthcoming payment as voluntary. The mere presence of the administrative action alone does not convert the debtor's payment into an involuntary payment under these circumstances.

In considering the elements of estoppel, the court is in agreement with the assessment of those factors made by the bankruptcy court. The IRS was well apprised of the facts in this case. The debtor had a running dialogue with Agent Moore on the payment of these taxes. Agent Moore made it clear to the debtor that the IRS was interested in initially collecting the 941 taxes and provided him with an incentive in making these payments. The actions of the IRS, through Agent Moore, gave the debtor every reason to believe that his payment would be applied to his 941 taxes. The statements of Agent Moore after the debtor initially failed to make the lump sum payment led the debtor to believe that the intentions of the IRS had not changed. These statements by Agent Moore suggested that the agreement was still available and allowed the debtor additional time to comply with it. The debtor's actions in obtaining a check in the exact amount of the 941 taxes are an indication that he believed that the earlier agreement was still valid. The debtor was harmed because the application of his payment to his income taxes rather than his 941 taxes has left him with an obligation to pay a greater portion of his total tax debt than he would have paid if the IRS had abided by the original agreement. In sum, the court shall affirm this aspect of the bankruptcy court's ruling because we find that these circumstances compel the application of equitable estoppel. Equitable estoppel against the government under the circumstances of this case serves to promote fair play and does not thwart the enforcement of the public laws. As stated by Justice Jackson in his dissenting opinion in Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380, 387-88 (1947): "It is very well to say that those who deal with the Government should turn square corners. But there is no reason why the square corners should constitute a one-way street." Or, as stated by Justice Black in a dissenting opinion in St. Regis Paper Co. v. United States, 368 U.S. 208, 229 (1961): "Our Government should not by picayunish haggling over the scope of its promise, permit one of its arms to do that which, by any fair construction, the Government has given its word that no arm will do. It is no less good morals and good law that the Government should turn square corners in dealing with the people than that the people should turn square corners in dealing with their government."

IT IS THEREFORE ORDERED that the decision of the bankruptcy court is affirmed in part and reversed in part. This case is remanded to the bankruptcy court for further proceedings consistent with this opinion.

IT IS SO ORDERED.

 

 

 

In re Elmer J. Schreiber and Linda Schreiber a/k/a Linda Spies, Debtors. Linda Schreiber a/k/a Linda Spies, Plaintiff v. The United States of America , Department of the Treasury, Internal Revenue Service, Defendant

U.S. Bankruptcy Court, No. Dist. Ill. , East. Div., 91 B 16970, 1/21/94, 163 BR 327, 163 BR 327

[Code Sec. 6321 ]

Bankruptcy and receivership: Lien for tax.--

In determining how much money was available to be applied against an IRS lien for taxes, the bankrupt owners' equity in their home was determined as of the date the home was sold, not the date the bankruptcy petition was filed. Due to a post-petition agreement by the second mortgage lender to settle its claim for less than the face amount, the owners' equity in the home went from a negative amount on the date the bankruptcy petition was filed to a positive balance. It had been argued that, at the time of filing, there was no equity for the IRS to attach. However, the confirmed plan of reorganization specifically mandated that any proceeds from the sale of the home should be distributed in accordance with local law to allowed secured claims. Thus, the proceeds remaining after payment of the mortgage lenders were properly allocable to the payment of the IRS's lien.

[Code Secs. 6321 and 6334 ]

Bankruptcy and receivership: Levy and distraint: Collection of tax: Seizure of property for unpaid taxes: Retirement accounts.--

A statutorily required clause in a pension plan that precluded ordinary creditors from attaching an employee's pension payments did not prevent a bankrupt couple's IRA from being subject to an IRS lien. Such anti-alienation clauses are not effective to block tax liens, tax judgments or tax levies.

[Code Sec. 6871 ]

Bankruptcy and receivership: Interest on tax: Post-petition interest.--

As an over-secured creditor, the IRS was entitled to post-petition interest from the date the bankruptcy petition was filed to the date the secured claim was fully paid. The value of the bankrupts' available assets following the sale of their residence was more than enough to satisfy the pre-petition IRS lien.

[Code Sec. 6321 ]

Bankruptcy and receivership: Lien for taxes: Property transferred during divorce.--

The liability of a former wife who divorced after a tax lien was filed and after she and her ex-husband filed a bankruptcy petition was not limited to the value of the property apportioned to her in the divorce. The IRS lien attached to the property, no matter who held it, and was unaffected by the divorce proceedings.

Arthur G. Jaros, Jr., Richter & Jaros, 1200 Harger Rd., Oak Brook, Ill. 60521, for plaintiff. Samuel D. Brooks, Department of Justice, Washington , D.C. 20530 , for defendant.

MEMORANDUM OPINION

SCHMETTERER, Bankruptcy Judge:

This adversary proceeding relates to the bankruptcy petition of Elmer and Linda Schreiber ("Schreibers" or "Debtors") filed under Chapter 11 of the Bankruptcy Code, Title 11 U.S.C. Their Plan was confirmed. Pursuant thereto, their house was later sold. The net proceeds of that sale are here in dispute. The United States asserts a tax lien against those proceeds.

Ms. Schreiber filed this action partly to determine the extent of the government's lien on Debtors' home. Mr. Schreiber is not a party to this adversary proceeding. Ms. Schreiber contends that, for purposes of the Internal Revenue Service's ("IRS") lien under 11 U.S.C. S 6321 , the amount of its allowed secured claim should be determined as of the petition date. She thereby seeks to take advantage of certain work by her attorney during the bankruptcy which resulted in a negotiated reduction of the second mortgage on the house. The home has since been sold and net proceeds resulted. The IRS claims that its lien applies to those proceeds. Pre-bankruptcy, the IRS held a tax lien on Debtors' property of $41,486.92. Ms. Schreiber says that the IRS had no equity to attach to when the bankruptcy was filed, and therefore cannot claim such equity now.

Ms. Schreiber further maintains that Mr. Schreiber's Qualified Individual Retirement Annuity ("IRA") should be excluded from the property subject to the IRS lien when determining extent of that lien. Plaintiff maintains that the IRA is exempt from the IRS lien pursuant to Treasury Regulation 401(a) -13(b)(2), and therefore should be excluded from Debtors' property subject to the lien. Finally, she contends that the government lien on other property, to the extent it applies to her, only applies to the value of "her" portion of those properties because the Schreibers are now divorced.

The IRS argues that the government is an oversecured creditor, as defined by §506(b), and thereby is entitled to post-petition interest. In addition, the government maintains that there is no legal basis for valuing the Schreiber's residence as of the petition date or for excluding the IRA from the reach of its lien.

The parties herein filed cross-motions for summary judgment. Both parties have made their respective filings required under Local District Rule 12(m) and (n).

For reasons discussed below, the government's allowed secured claim is valued as of the date of sale and at the actual sale price of the home, and Mr. Schreiber's IRA is found to be included in Debtors' property subject to the IRS lien. After those rulings, Debtors' home equity exceeds the amount of the IRS allowed secured claim, and so the IRS lien and claim accrued interest post-petition.

Ms. Schreiber's contentions as to the extent of the government's lien on other property are not supported by authority and are overruled.

Accordingly, by separate order the IRS motion for summary judgment is allowed and that of Ms. Schreiber is denied. Judgment will enter accordingly.

UNDISPUTED FACTS

From the respective filings these facts emerge as undisputed:

When the bankruptcy was filed, in addition to their home and Mr. Schreiber's IRA, Debtors had personal property subject to the IRS lien, and that other property is valued at $23,850.00. ¹ In addition, Mr. Schreiber owned an IRA valued at $15,856.87.

The Schreibers filed their petition for relief under Chapter 11 of the Bankruptcy Code on August 9, 1991. Their marriage has since been dissolved. Debtors scheduled an IRS secured claim of $40,000 pursuant to 26 U.S.C. §6321 , for income taxes, penalties, and interest for the tax periods ending December 1986 and 1987. In addition, an IRS unsecured priority claim for $84,000.00 was scheduled due to an asserted 100% tax liability of Mr. Schreiber as responsible officer of his corporate business under 26 U.S.C. §6672 . The latter claim arose because of withholding taxes owed by Princeton Products, Inc., for tax periods through August of 1991.

The IRS filed proofs of claims on October 11, 1991; December 16, 1991; and July 2, 1993. The amounts sought included $41,486.92 related to the secured claim under §6321 , and $35,016.35 for all IRS unsecured claims under §6672 for tax periods ending September of 1991. On September 18, 1990, the IRS had recorded a revenue lien against the Debtors in the Cook County, Illinois, Recorder of Deed's office for $33,772.28. Its $41,486.92 secured claim includes pre-petition interest and penalties on top of the recorded revenue lien.

When the bankruptcy petition was filed, the IRS lien against Debtors' residence was subordinate both to a first mortgage having a balance between $65,000.00 and $70,000.00 and a second mortgage of $195,000.00. Thus, on the filing date, the home was encumbered with a total of $265,000.00 in liens superior to that of the IRS. Since the home was appraised at $230,000.00 and ultimately sold for $231,000.00, a sum far less than this total of pre-bankruptcy liens, Plaintiff argues that the Debtors had no equity when the proceeding was filed. Subsequent to the bankruptcy filing, however, through settlement the second mortgage was allowed in the sharply reduced amount of $97,338.12, thereby lowering the total of the two superior liens to $167,661.88, at the time of sale, much less than the sale price.

On May 28, 1992, (nine and one-half months after the bankruptcy filing), Debtors' First Amended Plan of Reorganization as modified ("Plan") was confirmed herein. That Plan provided for sale of the Debtors' residence and for distribution following sale of all proceeds according to priorities of liens under non-bankruptcy law. On April 30, 1993, (eleven months after Plan confirmation) the Debtors' residence was sold for a gross selling price of $231,100.00. After disbursing proceeds in full payment to holders of the two mortgages and paying closing costs, $45,022.59 remained. The parties here each seek some or all of those proceeds.

The actual sale price of $231,100.00 may be compared to the estimated home value of $275,000.00 scheduled by Debtors when they filed in bankruptcy, ² the appraised value of that property at $230,000.00, and the Debtors' asking price of $268,500.00. Disclosure Statement at p. 10. Thus, the ultimate sale price was very close to the appraised value reported in the Disclosure Statement, but well below the Debtors' hopes for the sale.

Through litigation and negotiation, the total of mortgage liens on the property was reduced and the house sale produced a surplus. Who gets the benefit, Debtors or the government?

JURISDICTION

These matters are before the Court pursuant to 28 U.S.C. §157, and are referred here under Local District Rule 2.33. This Court has subject matter jurisdiction under 28 U.S.C. §1334, and this is a core proceeding under 28 U.S.C. §157(b)(2)(K).

SUMMARY JUDGMENT STANDARDS

In order for a party to prevail on a motion for summary judgment, the movant must meet the criteria set forth in Fed. R. Civ. P. 56 (Fed. R. Bankr. P. 7056). A summary judgment avoids unnecessary trials when there is no genuine issue of material fact in dispute. Trautvetter v. Quick, 916 F.2d 1140, 1147 (7th Cir. 1990).

The burden is on the moving party to show that no genuine issue of material fact is in dispute. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 322 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

On a summary judgment motion, inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 255; Matsushita, 475 U.S. at 586; Billups v. Methodist Hosp. of Chicago , 922 F.2d 1300, 1302 (7th Cir. 1991). However, the existence of a material factual dispute is sufficient only if the disputed fact is determinative of the outcome under applicable law. Anderson, 477 U.S. at 248; Howland v. Kilquist, 833 F.2d 639, 642 (7th Cir. 1987).

When the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial and summary judgment should be granted. Matsushita, 475 U.S. at 587.

Cross Motions for Summary Judgment

When each side seeks summary judgment, that does not by itself indicate that there are no genuine issues of material fact. The Court must rule on each motion separately in determining whether or not each judgment should be entered, in accordance with applicable principles. ITT Indus. Credit Co. v. D.S. America, Inc., 674 F.Supp. 1330, 1331 (N.D. Ill. 1987) (Shadur, J.); In re Woodstock Assoc. I, Inc., 120 B.R. 436, 442 (Bankr. N.D. Ill. 1990). See C. Wright, A. Miller & M. Kane, Federal Practice and Procedure §2720 (2d ed. 1983 & Supp. 1987). The Court can deny both motions if both parties fail to meet their burden. ITT, 674 F.Supp. at 1331; Wolf v. Maryland Casualty, 617 F.Supp. 456, 458 (S.D. Ill. 1985). See C. Wright, A. Miller & M. Kane, Federal Practice and Procedure §2720 (2d ed. 1983 & Supp. 1987).

However, that is not the result indicated here. For reasons discussed below, Plaintiff's motion for summary judgement will be denied and that of the United States will be allowed.

DISCUSSION

A. Valuation of the IRS Allowed Secured Claim

The moment at which an allowed secured claim should be valued is not expressly stated in the Bankruptcy Code. In re Melgar Enterprises, Inc., 151 B.R. 34, 39 (Bankr. E.D.N.Y. 1993); In re Johnson, 145 B.R. 108, 112 (Bankr. S.D. Ga. 1992). Section 506(a) of the Code provides in relevant part that:

Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting the creditor's interest.

(Emphasis added) 11 U.S.C. §506(a) (1993). In accordance with the underscored statutory language, courts determine the value of allowed secured claims on a case-by-case basis in light of the purpose for valuation and proposed disposition of the subject property. In re Landing Associates, Ltd., 122 B.R. 288, 293 (Bankr. W.D. Tex. 1990) (quoting S. Rep. No. 989, 95th Cong., 2d Sess. 68 (1978) reprinted in 1978 U.S. Code Cong. & Admin. News 5787, 5854); In re Melgar Enterprises, Inc., 151 B.R. at 39; In re Johnson, 145 B.R. at 112. A ruling that the value of collateral is conclusively fixed on the date a bankruptcy petition is filed would disregard the underscored language of 11 U.S.C. §506(a) quoted above. In re Seip, 116 B.R. 709, 711 (Bankr. D. Neb. 1990).

For purposes of passing on plan confirmation issues, secured claims are valued at the time of Plan confirmation. Dewsnup v. Timm, 112 S.Ct. 773, 778 (1992); Ahlers v. Norwest Bank Worthington (In re Ahlers), 794 F.2d 388, 399 (8th Cir. 1986) ("[f]or purposes of a reorganization plan, the value of the collateral is to be determined at the time for confirmation of that plan"), rev'd in part, 108 U.S. 964 (1988) (reversed solely on an unrelated issue regarding the absolute priority rule) ; In re Melgar Enterprises, Inc., 151 B.R. at 3; In re Seip, 116 B.R. 709, 711 (Bankr. D. Neb. 1990).

As valuation is ascertained dependent on the purpose for evaluation and case circumstances, value of the property securing a claim, and thus the allowed amount of the secured claim, may change during the course of a bankruptcy case. 3 King, Collier on Bankruptcy, ¶506.04, pp. 506-26 (15th ed. 1993) citing Bray v. Shenandoah Federal Savings and Loan Ass'n. (In re Snowshoe Co.), 789 F.2d 1085, 1088-9 (4th Cir. 1989). In event the property is actually sold, regardless of the purpose for valuation, valuation of the collateral should normally be based on the sale price, provided that such consideration is fair and was arrived at by parties at arm's length. 3 King, Collier on Bankruptcy ¶506.04 at 506-27.

Ms. Schreiber maintains that all secured claims must be valued as of the bankruptcy petition filing date at a time when the liens exceeded property value. She cites several cases that assertedly support her position. ³ However, those cases are all distinguishable in that they either involved property that was merely valued but not sold, or involved claims based on judgment liens rather than tax liens.

Here, in contrast, we have a property that was actually sold, and the sale was pursuant to a Plan providing for distribution at that time based on priorities under non-bankruptcy law.

Moreover, here a tax lien is involved, not a judgment lien. Tax liens are distinct from judgment liens and are accorded preferred treatment. Taxing authorities are granted such treatment because they are involuntary creditors; they can neither choose their debtors nor take security in advance of the time the taxes become due. In re New England Carpet Co., Inc., 26 B.R. 934, 941 (Bankr. S.D.N.Y. 1983).

Plaintiff also relies on In re Reilly, 88 B.R. 906 (Bankr. W.D. Wis. 1987). Reilly is factually similar to the case at hand, as the Reilly residence was sold after Plan confirmation. Id. at 909. The court there held that tax liens may be avoided under §506(d) to the extent they are under-collateralized when the bankruptcy petition was filed. Id. at 912. However, the court used the proceeds from the sale of the debtor's residence, sold two years after confirmation, to determine the amount of the allowed secured claims of the taxing authorities. Id. at 909, 915. That suggested that there was no difference in value at the different dates. Consequently, there was no need to reach the timing issue and the weight of Reilly's reasoning is doubtful. Moreover, that case focused on the issue of when to value the property because that value determined whether the lien in issue had value. It did not involve the unusual circumstance present here where one of the mortgage liens was reduced by agreement after the petition filing, thus resulting in equity after the two mortgages were paid. Finally, terms of the confirmed Plan there were not analogous.

In re Cuisinarts, 115 B.R. 744 (Bankr. D. Conn. 1990), was also cited by Plaintiff. There, the bankruptcy court rejected the argument that allowed secured claims should be valued as of the petition filing date. Instead, the court used the actual sales price of the debtor's assets to determine the extent of the relevant allowed secured claims. Id. at 748.

Plaintiff's attempt to establish the amount of the IRS allowed secured claim as of the petition filing date is contrary to the holding of Dewsnup v. Timm, 112 S.Ct. at 778, as applied to Chapter 11 proceedings by In re Bloomingdale Partners, 160 B.R. 93, 97 (Bankr. N.D. Ill. 1993). In Dewsnup, the Supreme Court refused to limit the amount of the allowed secured claim to the collateral value on the bankruptcy filing date, under §506(a), holding that "[a]ny increase over the judicially determined valuation during the bankruptcy rightly accrues to the benefit of the creditor, not to the benefit of the debtor." Dewsnup, 112 S.Ct. at 778.

In Bloomingdale, the Bankruptcy Judge reasoned that the Dewsnup analysis applied as well to Chapter 11 proceedings. The opinion suggests that, since Dewsnup requires that increases in the value of collateral accrue to the secured creditor, then the "best interests" test of 11 U.S.C. §1129(a)(7)(A)(ii) ⁴ must be interpreted to entitle a creditor at least to the present value of its secured claim at time of confirmation, as increased during the pendency of the case. In re Bloomingdale, 160 B.R. at 97. Bloomingdale found no reason why increases in value should accrue to creditors in Chapter 7 cases but not in Chapter 11 cases. Id.

Ms. Schreiber points out that the secured residential property was sold long after title had revested in Debtors by Plan confirmation. The Chapter 11 Plan was confirmed in May 1992 and the residence sold in April 1993. Therefore, Plaintiff contends that the sale date of the property is irrelevant, as that sale occurred after the residence was no longer property of the estate. It follows, she argues, that the only question to be determined is whether Debtors had equity in the property as of the petition date.

However, this argument does not give proper weight either to the reasoning in Dewsnup and Bloomingdale or to Article 8 of the confirmed Plan. Article 8 provided that, "in the event of the sale of the residence, the net proceeds shall be distributed in accordance with the priorities under local law to the allowed secured claims with any balance retained by the Debtors." The confirmed Plan thus looked prospectively to distribution of sale proceeds post-confirmation. A confirmed plan is a contract, and the parties to a plan are bound by its terms. In re Cook, 126 B.R. 575, 583 (Bankr. D.S.D. 1991). As a result, Ms. Schreiber is bound by the terms of the Plan as confirmed. Pursuant thereto, sale proceeds were subject to the IRS lien as of the date of sale, for that is what Plan Article 8 requires.

After the residence was sold, the Schreibers had equity available to satisfy the IRS lien. The Schreibers' Plan looked forward to the possibility of that happening after sale. Therefore, after distributing sale proceeds to the senior claims, the remaining proceeds, to the extent necessary, must be applied to satisfy the IRS allowed secured claim.

B. The Qualified Individual Retirement Annuity.

Plaintiff also argues that the IRS lien should not attach to Mr. Schreiber's rights in his pension plan because of the "spendthrift trust" clause in that plan. A "spendthrift trust" or "anti-alienation" clause prevents ordinary creditors from attaching pension payments. Such classes are statutorily required for a plan to "qualify" under ERISA. ⁵ In order for a corporation to obtain the federal tax benefits of providing a pension plan, the plan must "qualify" under ERISA. Ms. Schreiber relies on In re Taylor, 91-2 USTC ¶50,534 (Bankr. D. MD. 1991) and her reading of Treas. Reg. §1.401(a)-13(b)(2) to support her argument.

Treasury Regulation §1.401(a) -13(b)(2) provides that anti-alienation clauses are not effective to block tax judgments or tax levies. ⁶ If it applies, Plaintiff's point is clearly lost. The Taylor court, however, distinguished between tax judgments and levies and tax liens. That court interpreted this Treasury Regulation as providing that anti-alienation clauses, despite not being effective to preclude tax judgments and levies, are nonetheless effective against tax liens because tax liens were not expressly listed in the regulation. In re Taylor, 91-2 USTC at ¶50,534 [50,354].

This court declines to follow Taylor . One who fails to pay a tax assessment or levy after notice and demand is subject to a lien, in the amount of the unpaid tax, which attaches "to all property and rights to property, whether real or personal belonging to" the delinquent taxpayer. 26 U.S.C. §6321 . The Bankruptcy Code, in 11 U.S.C. §6334 , provides a list of property exempt from levy. However, even assets exempt from levy under §6334 are secured by a federal tax lien. United States v. Barbier [90-1 USTC ¶50,107 ], 896 F.2d 377, 378 (9th Cir. 1990). Tax liens remain enforceable in rem against the property after discharge of personal liability in bankruptcy. In re Isom [90-1 USTC ¶50,216 ], 901 F.2d 744 (9th Cir. 1990).

In interpreting §6321 , the Supreme Court found that Congress, when creating this lien, selected strong and clear words to reveal a purpose to assure collection of taxes. Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267-68 (1945). The language in this statute "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-20 (1985). As Mr. Schreiber's beneficial interest in his IRA is property or rights to property, it is subject to a tax lien. Mere anti-alienation or spendthrift trust language cannot override §6321 and prevent a lien from attaching. In re Raihl [93-1 ustc ¶50,290 ] , 152 B.R. 615, 618 (9th Cir. BAP 1993), citing Leuschner v. First Western Bank and Trust Co. [58-2 ustc ¶9723 ], 261 F.2d 705 (9th Cir. 1958).

Finally, §514(d) of ERISA provides that "nothing in this title shall be construed to alter, amend, modify, invalidate, impair or supersede any law of the United States ... or any rule or regulation issued under any such law." 29 U.S.C. §1144(d) (1993); In re Jacobs, 147 B.R. 106, 107-8 (Bankr. W.D. Pa. 1992).

Accordingly, most courts addressing this issue have ruled that an IRS lien attaches to taxpayer's interest in an IRA. In re Palmore, No. 92-C-899-C, 1993 U.S. Dist. WL 246301 (N.D. Okla. 1993); In re Raihl [93-1 USTC ¶50,290 ], 152 B.R. at 619; In re Cook, 159 B.R. 439 (E.D. Ark. 1993); In re Jacobs, 147 B.R. at 108.

C. Post-petition Interest

Section 506(b) provides in relevant part: "To the extent that an allowed secured claim is secured by property the value of which ... is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim." This provision plainly entitles the holder of an oversecured claim to post-petition interest. United States v. Ron Pair Enterprises, Inc. [89-1 USTC ¶9179 ], 489 U.S. 235, 241 (1989). The right to such post-petition interest is unqualified. Id. ; Rake v. Wade, 113 S.Ct. 2187, 2193 (1993).

The total amount of post-petition interest to be added to principal due is limited by the collateral value. United States Ass'n v. Timbers of Inwood Forest, 484 U.S. 365, 372 (1988). Post-petition interest pursuant to §506(b) is measured from the date of petition filing until payment of the secured claim, or until the effective date of the plan. Rake v. Wade, 113 S.Ct. at 2190; 3 King, Collier on Bankruptcy, ¶506.05, pp. 506-44 (15th Ed. 1993).

Accordingly, in this case, after valuing the IRS allowed secured claim as of the date the Schreiber residence sold and including net sale proceeds therefrom, then also including Mr. Schreiber's qualified IRA and other available assets, the total property available to the IRS totals $84,729.46. ⁷ This is more than enough to satisfy the pre-petition IRS lien in the amount of $41,486.92. Therefore, the IRS is oversecured and entitled to all post-petition interest under §506(b) from the date the petition was filed until the secured claim is fully paid.

D. Ownership of Marital Property

In Plaintiff Linda Schreiber's Motion for Summary Judgment, she argues that, because Debtors are now divorced (subsequent to filing of the bankruptcy), the lien as applied to herself is limited to the value of her individual portion of those properties. For purposes of this argument, she seems to ask that the IRS lien be valued at the time of the divorce rather than at the time of the bankruptcy filing.

Ms. Schreiber contends that her individual portion of the properties described in note 1 above is equal to $6,800.00. Of this amount, $6,000.00 represents her contended interest in those joint properties. The remaining $800.00 represents a claim owned solely by Ms. Schreiber. Consequently, Ms. Schreiber requests that this Court determine under 11 U.S.C. §506(a) that the IRS lien as applied to her is limited to this $6,800.00. She did not demonstrate by affidavit that the $6,000.00 value was all of the joint properties in which she retained an interest.

Other than referring generally to the legislative history of 11 U.S.C. §302 , she does not provide any case authority or other specific support for this position. Nor did the government respond to this point. Her legally unsupported request to limit the IRS lien to the value of property later apportioned to her (evidently through the divorce) is denied. A lien applies to whatever property it attaches to, no matter who holds that property. Absent authority to the contrary, it appears evident that the government may not be deprived of a part of its lien through or because of divorce proceedings.

CONCLUSION

 

For the foregoing reasons, Plaintiff's motion for summary judgment will be denied. The IRS motion for summary judgment will be allowed, and Ms. Schreiber's complaint will be dismissed. The government will be asked to submit a proposed judgment in accord with this ruling.

¹ The following property, excluding the Debtors' residence and Mr. Schreiber's IRA, is listed in the Debtors' schedules:

                                                           Value Per Debtors'

Property                                                       Schedules

Checking Account .........................................     $   350.00

Misc. Household Goods and Furniture ......................       5,000.00

Jewelry, Sporting Goods, and Clothing ....................      12,000.00

Contingent and Unliquidated Claim *  .....................         800.00

1985 Cadillac ............................................       5,700.00

                                                           ------------------

Total ....................................................     $23,850.00

                                                           ------------------------------------

United States

' Statement of Uncontested Facts at p. 6; Linda Schreiber's

Local Rule 12(m) Statement of Material

Facts at p. 2.

 *  The Debtors' schedules of claims lists this $800.00 claim as belonging to

Mrs. Schreiber for a claim against Hello World Travel.

 

² The summary judgment papers filed by both sides demonstrate only one value for the home--the actual price at which it was sold. Debtors' scheduled estimate of higher value at the time the bankruptcy was filed is merely an opinion unsupported by any affidavit demonstrating knowledge of the home market and comparable sales in the area of their home. Thus, there is nothing in the record (nothing at least that should be considered under Fed. R. Civ. P. 56 (Fed. R. Bankr. P. 7056)) that establishes any value of the home as of any of the dates in issue, other than the actual sale price. Debtors' scheduled value upon filing stands in this record as a mere estimate or a representation of value to the creditors, not as evidence or establishment of value under summary judgment requirements.

³ These citations include: In re Brager, 39 B.R. 441 (Bankr. E.D. Pa. 1984); In re Wells, 52 B.R. 368 (Bankr. E.D. Pa. 1985); In re Richardson , 82 B.R. 872 (Bankr. S.D. Ohio 1987); In re Flager-At-First Associates, Ltd., 101 B.R. 372 (Bankr. S.D. Fla. ); and In re Beard, 108 B.R. 322 (Bankr. N.D. Ala. 1989).

⁴ Each holder of a claim or interest . . . will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less then the amount. . . .

(emphasis added) 11 U.S.C §1129(a)(7)(A)(ii) (1993).

⁵ Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§1001 -1461.

⁶ Treas. Reg. §1.401(a)-13(b)(2) (as amended in 1990) provides as follows:

(2) Federal tax levies and judgments. A plan provision satisfying the requirements of subsection (1) of this paragraph shall not preclude the following:

(i) The enforcement of Federal tax levy made pursuant to Section 6331 .

(ii) The Collection by the United States in a judgment resulting from an unpaid tax assessment.

⁷ The Debtors' equity subject to the IRS lien of $44,772.28 consists of the following:

$23,850.00 Property of Debtors concededly subject to the IRS lien. (See supra

           n.1.)

$45,022.59 Net Proceeds from sale of Debtors' residence.

$15,856.87 Mr. Schreiber's IRA

----------

$84,729.46 Total available equity.

 

 

 

In re CS Associates, d/b/a University Nursing & Rehabilitation Center , Debtor

U.S. Bankruptcy Court, East. Dist. Pa., 88-12842S, 11/4/93

[Code Sec. 6321 ]

Liens: Bankruptcy: Post-petition property: Secured claim: Insurance proceeds: Pennsylvania law.--

Under state (Pennsylvania) law, a bankrupt debtor's interest in real property is separate from an interest in the insurance proceeds arising from damage to that property. Although the IRS's pre-petition lien for unpaid taxes attached to the realty when the lien was recorded, which occurred pre-petition, the lien did not attach to insurance proceeds received for vandalism damage to the property until the debtor acquired its rights, which occurred post-petition. Because the insurance policy was determined to be a new policy (rather than a renewal) acquired post-petition, it represented post-petition property. Consequently, the IRS's pre-petition lien did not attach to post-petition property because of the automatic stay.

OPINION

A. INTRODUCTION

SCHOLL, Bankruptcy Judge:

Before the court for resolution is an Objection ("the Objection") of MITCHELL W. MILLER, ESQUIRE, the Chapter 7 Trustee ("the Trustee") of the Debtor, CS ASSOCIATES, d/b/a University Nursing & Rehabilitation Center ("the Debtor"), to Proof of Claim Number 6, filed by the Internal Revenue Service ("the IRS"), which incorporates secured tax liens totalling $575,241.79. The Objection presently apparently seeks only a determination by this court that the IRS' otherwise undisputed claim is not a secured claim against insurance proceeds ("the Proceeds") recovered by the Trustee post-petition for post-petition damages to the Debtor's insured real property. ¹ Specifically, the Trustee objects to the alleged secured status of the IRS' claim on the basis that the insurance proceeds are the product of a post-petition policy and, as such, are post-petition property of the Debtor to which the automatic stay prevents the IRS' pre-petition lien from attaching.

Adhering to findings made in this court in a prior decision in the Debtor's case, In re CS Associates, 121 B.R. 942, 948-49 (Bankr. E.D. Pa. 1990) ("CS I"), we agree that the IRS' lien does not attach to the proceeds because they arise as the result of a "new" policy acquired by the Debtor post-petition. Consequently, they represent post-petition property of the Debtor to which the IRS' pre-petition lien cannot attach by virtue of the automatic stay.

B. FACTUAL AND PROCEDURAL HISTORY

This matter arises in connection with the voluntary bankruptcy case of the Debtor, a Pennsylvania limited partnership which, at the time of the filing of this case under Chapter 11 of the Bankruptcy Code on August 15, 1988, owned and operated a nursing home. This case was subsequently converted to a Chapter 7 case on April 18, 1990, and the Trustee was appointed on April 25, 1990. A more detailed history of the case is set forth in this court's decision in CS I, supra, 121 B.R. at 944-45, in which we held that United Jersey Bank ("UJB"), the Indenture Trustee of a bond issue to build the nursing home, was entitled to modify a liability insurance policy to include its coverage; and In re CS Associates, Miller v. Spitz, 1993 WL 431206, slip op. at *1-*2 (Bankr. E.D. Pa., Oct. 21, 1993) ("CS II"), in which we found that the Trustee was entitled to recover a substantial deficiency against one of the Debtor's doctor-partners pursuant to 11 U.S.C. §723 . The instant dispute is one of the last outstanding matters which must be resolved prior to a continued Final Audit hearing of November 18, 1993, in this case. See id. at *12-*13.

The Objection at issue was initially filed by the Trustee as one of many claims objections on June 17, 1993, and recited merely generalized objections to the IRS' claim. On July 17, 1993, the Trustee filed an Amended Objection setting forth the specific bases for same. The Amended Objection stated, most prominently, that the IRS' claim was not secured and was therefore not entitled to that status in the distribution process.

A hearing on the Motion was initially scheduled on July 27, 1993, but it was ultimately continued to September 23, 1993. On the latter date, the parties appeared by counsel, who agreed in open court that a Stipulation of Facts ("the Stipulation") would be prepared and submitted as the record for the Motion. In addition, the IRS submitted a substantial Pre-trial Memorandum, and the parties agreed to submit further Briefs in support of their respective positions, a process which ended on October 22, 1993.

The Stipulation recited that the IRS had duly filed several pre-petition tax liens against the Debtor for failure to pay its federal taxes. It further stated that, at the time of the Debtor's bankruptcy filing, its real property was insured by a policy written by Pennsylvania Millers Mutual Insurance Co. ("PMMI"). Thereafter, it noted that the Debtor, via the Trustee, obtained a renewal of insurance in the form of a policy which was dated for May 16, 1989, and covered the period from May 3, 1989, to May 3, 1990.

The Stipulation further recited that, in December, 1989, the Debtor's real property was vandalized by unknown assailants. As a result thereof, the Trustee made a claim against the PMMI policy. ² The claim was disputed and the Trustee initiated suit against PMMI. The claim was ultimately settled for $750,000 in December, 1992.

C. DISCUSSION

The Internal Revenue Code, 26 U.S.C. §1 , et seq. ("the IRC"), at 26 U.S.C. §6321 , provides as follows:

§6321 . Lien for taxes

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) 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.

Thus, §6321 gives the federal government a very broad lien, covering "all property and rights to property" of the taxpayer. Unfortunately, the IRC does not include a definition of the phrase "all property and rights of property." Furthermore, it does not specify whether the property referred to is to be defined by federal or state law.

In determining the extent to which §6321 applies to "property" and "rights to property," the Supreme Court has found that state law controls. Thus, the Court has repeatedly held that §6321 will attach to the interest which the taxpayer has in property as defined by state law. See United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683 (1983); United States v. Durham Lumber Co. [60-2 USTC ¶9539 ], 363 U.S. 522, 526 (1960); Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960); and United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 53-54 (1958). See also 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516 ], 790 F.2d 354, 356 (3rd Cir. 1986).

In addition to relying on state law for determining a taxpayer's "interest" in property, the courts have found that a taxpayer's interest is not limited to property which existed at the time that a lien is filed by the IRS, but also includes contingent or future interests and after-acquired property of the taxpayer. See United States v. McDermott [93-1 USTC ¶50,164 ], 113 S. Ct. 1526, 1527 (1993). In connection with insurance proceeds, the Court has held that, if a taxpayer has a valid state defined interest therein, then the IRS' lien attaches to the proceeds. Bess, supra, 357 U.S. at 54; Cf. In re Reed, 94 B.R. 48, 52-53 (Bankr. E.D. Pa. 1988) (a debtor's bankruptcy estate includes post-petition insurance proceeds, pursuant to 11 U.S.C. §541(a)(6) ). See also 46A C.J.S. 261 (1993); and Note, Property Subject to the Federal Tax Lien, 77 HARVARD L. REV. 1485, 1485-86 (1964).

It is these decisions and the broad reach of §6321 upon which the IRS relies for support in its claim of a security interest in the Proceeds. The IRS contends that, since its lien must have attached to the Debtor's real property, the lien necessarily attached to the insurance proceeds because they represent a payment to the Debtor for the loss of that real property. Consequently, the IRS contends that the insurance proceeds represent the same property upon which the IRS lien originally attached, but in a different form. We find that, under the instant facts and applicable state law, the IRS' position is incorrect.

In the instant matter, the court must look to Pennsylvania law, the state where the Debtor's realty and all of its assets are located, to determine the Debtor's interest in the Proceeds. Under Pennsylvania law, an interest in the Debtor's real property and an interest in the insurance proceeds arising from damages to that Property are two distinct things. Specifically, Pennsylvania courts have consistently held that insurance contracts are personal contracts of indemnity and that they protect the insured's interest in the property, but that they are not an indemnity on the property itself. See In re Gorman's Estate, 321 Pa. 292, 295, 184 A. 86, 87 (1936) (an insurance policy is a personal contract that exists between the insurer and insured; the building itself is not insured); Mutual Benefit Ins. Co. v. Goschenhoppen Mut. Ins. Co., 392 Pa. Super. 363, 368, 572 A.2d 1275, 1277 (1990) (a fire insurance policy is a personal contract of indemnity on the insured's interest in the property and not on the property itself); McDivitt v. Pymatunig Mut. Fire Ins. Co., 303 Pa. Super. 130, 135, 449 A.2d 612, 615 (1982) (a husband who owned property as a tenant by the entireties with his wife had no interest in proceeds from insurance covering a property since the contract was a personal contract between the wife and the insurer and did not pertain directly to the insured property). See also 43 C.J.S. 489 (1978). Consequently, in determining a third party's interest in or rights to proceeds from an insurance policy, this court must assess the parties' interest in the contract, not their interest in the property which it insures.

In McDivitt, the court found that the husband had no right to insurance proceeds covering entireties' property because he had no interest in the insurance policy. 303 Pa. Super. at 135, 449 A.2d at 615. The court, quoting with approval the language in Forsyth County v. Plemmons, 2 N.C. App. 373, 375, 163 S.E. 2d 97, 99 (1968), stated

"Under this contract the [fire] insurance company, in consideration of the premium paid to it, has assumed specified risks and has agreed to pay money to the parties insured upon the happening of certain events. Such a policy is a personal contract, appertaining to the parties to the contract and not to the thing which is subject to the risk insurance against. 29 Am. Jur., Insurance, §183 , p. 575. Proceeds payable thereunder when an insured loss occurs take the place of the building destroyed only in the sense of being a thing of like value, not necessarily of like ownership." (Emphasis added).

303 Pa. Super. at 135, 449 A.2d at 615.

Applying the rationale and holding of the Pennsylvania courts in Gorman's Estate, Mutual Benefit Ins., and McDivitt to the instant matter, it is clear that the IRS' claim to the insurance proceeds attached separately to the property of the Debtor and to any rights which it may have had under the insurance policy. Therefore, any claim of the IRS against the Proceeds must be assessed separately from the IRS' claim against the property. Specifically, the IRS' interest in the Proceeds attached when the Debtor acquired its rights to same. The Debtor's right to the Proceeds matured, at the earliest, post-petition, in December, 1989, when its property was vandalized. On the other hand, the IRS' lien in the property was effective on the date that the lien was duly recorded, which occurred pre-petition.

Outside of the bankruptcy context the date upon which a taxpayer's interest in property matured would be inconsequential, since the tax lien normally attaches to all after-acquired property. However, in bankruptcy, the time that an interest matures may have great significance. As noted by the Debtor, and apparently conceded by the IRS, a pre-petition tax lien does not attach to property acquired by the Debtor post-petition. See Makaroff v. City of Lockport, N.Y., 916 F.2d 890, 897 (3rd Cir. 1990), cert. denied sub nom. City of Lockport, N.Y. v. United States, 111 S.Ct. 1640 (1991); In re Parr Meadows Racing Ass'n, Inc., 880 F.2d 1540, 1543 (2nd Cir. 1989); and In re Sundale Associates, Ltd., 23 B.R. 230, 232 (Bankr. S.D. Fla. 1982). Therefore, the issue which must be resolved is whether the insurance policy is property which the Debtor owned pre-petition or post-petition.

In deciding this question, this court notes that the parties' Stipulation characterizes the policy covering the loss flow which the Proceeds were derived as a "renewal" of a prior policy. While this characterization may suggest that the policy was a continuation of the prior insurance policy, this description does not comport with findings made in the court of our prior decision in CS I, supra, 121 B.R. at 948-49. There, in our Findings of Fact, we concluded as follows:

9. On May 3, 1987, the Debtor first acquired insurance on the Facility [the Debtor's real property] from PMMI. The annual policy was renewed on the same terms on May 3, 1988.

10. In late 1988 or early 1989, the reinsurer of the policies first discovered that the Facility was vacant and that the Debtor had filed a petition of bankruptcy, and it so notified PMMI. As a result, PMMI sent a notice of non-renewal of its policy to the Debtor on March 3, 1989.

11. Nevertheless, thereafter, PMMI entered into negotiation with BCA for a new insurance policy. Ultimately, new policy terms were negotiated. The terms of the new 1990 Policy included an increase in premiums, a higher deductible limit, and an imposition of specific requirements relating to the security of the Facility (emphasis added).

This court's decision in CS I is the law of the case and must be applied to the matter herein. See In re River Village Associates, Bankr. No. 92-15503S, slip op. at 17 (Bankr. E.D. Pa. Oct. 29, 1993); and In re Cole, 89 B.R. 433, 436 (Bankr. E.D. Pa. 1988) (court's previous decisions in the same case should be followed unless the prior determination is found to be "clearly erroneous" or "work a manifest injustice" upon an interested party). Since this court has determined that the insurance policy covering the loss in issue was a "new policy," contracted for post-petition, it is clear that the IRS' pre-petition lien cannot attach to this post-petition property.

While the IRS relies on several cases for the proposition that its lien applies to post-petition proceeds, those cases are all distinguishable. White v. United States, 89-2 USTC ¶9622 , 1989 WL 146417 (Bankr. N.D. Iowa 1989), is distinguishable because the crops at issue were planted pre-petition and the court found that, under applicable nonbankruptcy law, the proceeds from the program covering their damage attached to the crops. Slip op. at *4. As we noted at pages 7-8 supra, Pennsylvania law regarding the proceeds of insurance policies does not so provide.

The facts of the other two cases cited by the IRS are easily distinguished from the instant facts. Specifically, all of the proceeds recovered by the IRS in those cases were the products of property owned by the Debtor pre-petition. Thus, the insurance proceeds at issue in In re Napier, Bankr. No. 88-00106, slip op. at 1, 3 n. 1 (Bankr. E.D. Ky. Dec. 11, 1991 ), arose from not only a policy written pre-petition, but a loss which occurred pre-petition. Similarly, the issuance of the policy and the loss to the property at issue in In re Key West Restaurant & Lounge, Inc., 54 B.R. 978, 981 (Bankr. N.D. Ill. 1985), occurred pre-petition.

Accordingly, there is no authority contrary to the conclusion that, since the Proceeds in issue are post-petition property of the Debtor, the IRS' pre-petition lien does not attach thereto.

D. CONCLUSION

On the basis of the foregoing, the court will enter an Order sustaining the Trustee's Objection to the secured status of the IRS' claim.

¹ The Trustee's Objection and Amended Objection also argues that the amount of the claim has not been established. However, the Trustee has presented no evidence that the amount of the claim is excessive or otherwise erroneous. Therefore, the claim must stand as filed as to amount. See In re Allegheny Int'l, Inc., 954 F.2d 167, 173 (3rd Cir. 1992); In re Resyn Corp. v. United States [88-2 USTC ¶9420 ], 851 F.2d 660, 663 (3rd Cir. 1988); In re Kirnie, 93-2 USTC ¶50,434 , 1993 WL 128158, slip op. at *3 (Bankr. E.D. Pa. April 23, 1993); and In re Compass Marine Corp., 146 B.R. 138, 144-45 (Bankr. E.D. Pa. 1992) (objector has the burden of producing evidence that a claim is erroneous or excessive). Furthermore, the Trustee did not express any opposition to the amount of the IRS' claim in his post-trial briefing.

² The Trustee's claim was separate from that of UJB described in CS I.

 

 

 

In re Francis Quillard, Lucia Quillard, Debtors. Francis Quillard, Lucia Quillard, Plaintiffs v. United States of America, Defendant

U.S. Bankruptcy Court, Dist. R.I., BK 92-10388, 1/15/93, 150 BR 291

[Code Secs. 6321 , 6871 and 7402 ]

Bankruptcy: Jurisdiction: District Court: Sovereign immunity.--

The bankruptcy court did not have jurisdiction to avoid an IRS lien on a debtor's IRA because the government had not waived its sovereign immunity. The IRA funds sought by the debtor were in the physical custody of the IRS, and Sec. 106(c) of the Bankruptcy Code does not impair government immunity in actions for monetary recovery. The bankruptcy court did have authority to order injunctive relief against the government in regard to other IRA funds not in the possession of the IRS. However, such relief was not granted because the debtor failed to demonstrate that the IRS received more by the levy than it would have received in a Chapter 7 liquidation. The IRS would have been entitled to the funds in a Chapter 7 liquidation because it had acquired a perfected security interest by filing its notice of federal tax lien two years prior to the bankruptcy.

[Code Sec. 6871 ]

Bankruptcy: Lien for taxes: Avoidance.--

The IRS's tax lien was valid despite the possibility that the underlying debt had been discharged in the bankruptcy proceeding. Although discharge may have relieved the debtor of personal liability, the property secured by the tax lien remained available to satisfy the debt to the IRS. In addition, even after discharge was entered, property claimed as exempt under Sec. 522 of the Bankruptcy Code and Rhode Island state law remained available to satisfy the debt to the IRS, since notice of the tax lien had been properly filed.

Russell D. Raskin, Raskin & Berman, 116 E. Manning St., Providence, R.I. 02906, for debtors/plaintiffs. Everett C. Sammartino, Assistant United States Attorney, Providence, R.I. 02903, Scott H. Harris, Department of Justice, Washington, D.C. 20530, for defendant.

DECISION AND ORDER

VOTOLATO, Bankruptcy Judge:

The Chapter 7 Debtors, Francis and Lucia Quillard, filed an adversary proceeding seeking to avoid as preferential transfers, two pre-petition Internal Revenue Service tax levies on Lucia Quillard's individual retirement accounts (IRA's). Before us is the United States' motion to dismiss the Debtors' complaint.

TRAVEL AND BACKGROUND

The IRS has filed two federal tax liens against the Quillards, one in the amount of $32,902.63 on September 10, 1990, and the other in the amount of $47,903.92 on September 18, 1990, for the years 1981, 1984, and 1987. On January 23, 1992, the IRS placed levies on IRA accounts in two banks in which Lucia Quillard had money, with instructions to the banks to pay over, within 21 days, the funds in said accounts. At the time of the levies, the Debtor had $4,100 on deposit with Shawmut Bank, and $10,760 with Hampden Savings Bank. The Quillards filed their Chapter 7 petition on February 10, 1992. Hampden Bank paid to IRS the $10,760 in Quillard's account, and on February 21, 1992 that amount was applied against the Debtors' outstanding tax liability. Shawmut Bank still has possession of the funds in Quillard's Shawmut IRA account. The IRS has not filed a proof of claim in this bankruptcy case.

DISCUSSION

IRS advances four reasons in support of its motion to dismiss. First, that jurisdiction is lacking because the Debtors failed to serve the United States Attorney General, as required by Bankruptcy Rule 7004(b)(4). Second, that the Debtors are seeking a monetary judgment against the United States, in violation of its sovereign immunity. In this regard the Government also argues that the Bankruptcy Code may not cause a waiver of immunity in bankruptcy proceedings where a money judgment is sought against it. Third, that the Debtors do not have standing to bring the instant preference action, ¹ and fourth, that even if the adversary proceeding survives procedurally, the Debtors cannot meet their burden of proof under 11 U.S.C. §547(b)(5), because the IRS did not recover more via the levy than it would have received in a Chapter 7 liquidation. We will discuss each levy separately, because there are factual differences between them that affect our analysis of the issues presented.

I. The Hampden Savings Bank IRA.

We begin by addressing the sovereign immunity argument, because the resolution of this issue renders the other arguments moot.

The United States may not be sued unless it waives its sovereign immunity. United States v. Sherwood, 312 U.S. 584, 586 (1941). But Bankruptcy Code 11 U.S.C. §106 entitled "Waiver of sovereign immunity," provides:

(a) A governmental unit is deemed to have waived sovereign immunity with respect to any claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which such governmental unit's claim arose.

(b) There shall be offset against an allowed claim or interest of a governmental unit any claim against such governmental unit that is property of the estate.

(c) Except as provided in subsections (a) and (b) of this section and notwithstanding any assertion of sovereign immunity--

(1) a provision of this title that contains "creditor", "entity", or "governmental unit" applies to governmental units; and

(2) a determination by the court of an issue arising under such a provision binds governmental units.

11 U.S.C. §106 . The parties agree that if immunity is deemed to have been waived, such waiver would be pursuant to §106(c) , since IRS has not filed a proof of claim in the case. The Supreme Court in the case of United States v. Nordic Village, Inc. [92-1 USTC ¶50,109 ], 503 U.S. --, 112 S.Ct. 1011 (1992) has recently discussed the scope of the waiver created by §106(c) . There, four months after the company filed a Chapter 11 case, an officer and shareholder of the debtor withdrew $26,000 from the corporate account. The officer took $20,000 of that money and paid it to IRS to apply against his individual tax liability, and the trustee sued IRS to recover the $20,000 post-petition payment. Id. [92-1 USTC ¶50,109 ], at --, 112 S.Ct. at 1013. The Court held that the transfer could not be avoided under §§549(a) and 550(b), since the Government had not expressly waived its sovereign immunity. Id. at 1013-16. The Court emphasized that a waiver of sovereign immunity must be unequivocally expressed to be an effective waiver, id. [92-1 USTC ¶50,109 ], at --, 112 S.Ct. at 1014 (citing Irwin v. Veterans Admin., 498 U.S. --, --, 111 S.Ct. 453, 457 (1990)), and that "§106(c) nor any other provision of law establishes an unequivocal textual waiver of the Government's immunity from a bankruptcy trustee's claims for monetary relief." Id. [92-1 USTC ¶50,109 ], at --, 112 S.Ct. 1017. The Court stated as dictum, however, that §106(c) may create a waiver of government immunity as to requests for injunctive and declaratory relief. Id. [92-1 USTC ¶50,109 ], at --, 112 S.Ct. at 1015.

Here, the United States argues that Nordic Village prohibits the Debtors' suit because they are seeking a money judgment against the Government. The Debtors argue that they are not requesting monetary relief, but rather that they seek only declaratory and injunctive relief, "since the IRS never was in possession of the funds in question." The Debtors' argument is factually incorrect because, upon the Court's inquiry of the parties, it was determined that as to the Hampden Bank funds, IRS does have physical possession of the money. This brings the instant dispute squarely within the scope of Nordic Village, because, no matter how you slice it, as to this account the Debtors are seeking to recover money from the United States. Both cases involve §106(c) of the Bankruptcy Code, and Nordic Village clearly holds that §106(c) does not impair Government immunity in actions for monetary recovery, even in bankruptcy. See id. [92-1 USTC ¶50,109 ], at --, 112 S.Ct. at 1013-16. Accordingly, we conclude that this Court lacks jurisdiction over the adversary proceeding as it relates to the Hampden Savings Bank IRA.

II. The Shawmut Bank IRA

Before addressing the merits of the United States' request for dismissal as to this account, we must first be satisfied that IRS has waived its sovereign immunity, since waiver is prerequisite to jurisdiction over this dispute. See United States v. Mitchell, 463 U.S. 206, 212 (1983); University Medical Ctr. v. Sullivan (In re Univ. Medical Ctr.), 973 F.2d 1065, 1085 (3d Cir. 1992). The United States maintains that Nordic Village is applicable here also, because the Debtors are seeking monetary relief in a case where the Government has not waived its sovereign immunity. The Debtors argue that the immunity argument does not apply in this instance because they merely wish to avoid a levy on funds still on deposit with Shawmut Bank, and that the specific relief they seek is to require Shawmut to release the funds in question to the Debtors. In this instance, we agree with the Debtors.

It is undisputed that Shawmut Bank is still in possession of the funds in question, and this is what distinguishes this situation from the one involving Hampden Bank. Here, since IRS is not in possession of the funds, this Court is not required to render a money judgment against the Government to grant the relief requested by the Debtors, and we have previously noted that in Nordic Village the Court stated that 11 U.S.C. §106(c) authorizes the bankruptcy court to order injunctive and declaratory relief against the Government. Id. [92-1 USTC ¶50,109 ], at --, 112 S. Ct. at 1015 (citing Hoffman v. Connecticut Dept. of Income Maintenance, 492 U.S. 96, 102 (1989)).

Section 106(c) of the Bankruptcy Code provides that "a provision of [the Bankruptcy Code] that contains 'creditor', 'entity', or 'governmental unit' applies to governmental units," and the United States is included in the definition of governmental unit. 11 U.S.C. §101(27) . Section 547 of the Bankruptcy Code, dealing with avoidance of preferences, is applicable to the United States because §547 includes the term "creditor". See 11 U.S.C. §§106(c) , 547 . This analysis, coupled with the holdings in Hoffman and Nordic Village, authorizes this Court to determine, on the merits, whether the pre-petition levy by IRS on debtor's bank account is a preference. While this conclusion may be momentarily uplifting to the Debtors, their hopes should not rise too high, because they cannot demonstrate that IRS received more by the levy than it would have received in a Chapter 7 Liquidation. See 11 U.S.C. §547(b)(5).

The United States argues, and we are compelled to agree, that by filing its Notice of Federal Tax Lien two years prior to the bankruptcy, it thereby acquired a perfected security interest in all of Debtors' property, which included the Debtor's IRA, and that in a Chapter 7 liquidation the IRS would have been entitled to the funds in question.

The Debtors also argue that the IRS claim is dischargeable pursuant to 11 U.S.C. §523(a)(1), because said taxes became due and payable in excess of three years prior to the date of filing the petition. The Debtors then argue that with the debt discharged, the lien cannot survive without an underlying obligation. Under the Internal Revenue Code, IRS has a valid lien when a tax deficiency is determined. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719 (1985). Section 6321 says, "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . 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." 26 U.S.C. 6321 (1989). The lien is perfected against most entities when the IRS files its notice in the proper office. See In re Hanson [91-2 USTC ¶50,485 ], 132 B.R. 406, 408 (Bankr. E.D. Mo. 1991); 26 U.S.C. §6323(a) (1989). Section 6323 states in part, "The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof . . . has been filed by the Secretary." 26 U.S.C. 6323(a) (1989). The lien remains in effect until the taxpayer's liability "is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. 6322 (1989). When the IRS filed its notice of tax lien with the City Clerk of the City of Cranston, it acquired a perfected security interest in all of the Debtors' property, including both IRAs. 26 U.S.C. §§6321 -6323. IRS's lien creditor status as to both IRAs remained unchanged as a result of the Debtors' bankruptcy, since a discharge in bankruptcy does not affect valid prebankruptcy liens. Long v. Bullard, 117 U.S. 617 (1886); Estate of Lellock v. Prudential Ins. Co. of America, 811 F.2d 186 (3d Cir 1987). The fact that the debt upon which the lien was based may have been discharged is of no consequence, because "[t]he liability for the amount assessed remains legally enforceable even where the underlying tax debt is discharged in the bankruptcy proceeding." Isom v. United States (In re Isom) [90-1 USTC ¶50,216 ], 901 F.2d 744, 745 (9th Cir. 1990); see also Dillard v. United States (In re Dillard), 118 B.R. 89 (Bankr. N.D. Ill. 1990), and although a discharge may relieve a debtor of personal liability, the property secured by a valid tax lien remains available to satisfy the debt. In re Isom at 745; 11 U.S.C. §524(a)(2). ² See National Bank of Commerce at 720.

Finally, the Debtors argue, §522 of the Bankruptcy Code affords debtors certain avoiding powers as to liens on exempt property, and as to transfers of property which could have been claimed as exempt. See 11 U.S.C. §§522(f) and 522(h). Here, the Debtors elected the Rhode Island state exemptions pursuant to 11 U.S.C. §522(b), and under Rhode Island law, "[a]n individual retirement account of individual retirement annuity as defined in section 408 of the Internal Revenue Code [26 U.S.C. §408 ] and the payments or distributions from such an account or annuity" are exempt. R.I. Gen. Laws §9-26-4(11) (Supp. 1992). However, the Debtors' avoiding powers with respect to IRS tax liens are limited by 11 U.S.C. §522(c)(2)(B). In re Henderson, 133 B.R. 813, 817 (Bankr. W.D. Tex. 1991). Section 522(c)(2)(B) provides:

(c) Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose, or that is determined under section 502 of this title as if such debt had arisen, before the commencement of the case, except--

. . .

(2) a debt secured by a lien that is--

. . .

(B) a tax lien, notice of which is properly filed.

11 U.S.C. §522(c)(2)(B) (emphasis added).

Therefore, even after discharge is entered, property claimed as exempt under §522 remains available to satisfy any pre-petition debt secured by a valid tax lien, when notice of the lien has been properly filed. ³ In re Braddock, 3 Bankr. L. Rep. (CCH) ¶75,000 (Bankr. D. Mont. 1992); Rench v. United States (In re Rench), 129 B.R. 649, 651 (Bankr. D. Kan. 1991); 11 U.S.C. §522(c)(2)(B). Any other construction would render the plain language of §522(c)(2)(B) meaningless. Perry v. United States (In re Perry), 90 B.R. 565, 566 (Bankr. S.D. Fla. 1988); In re Mattis, 93 B.R. 68, 70 (Bankr. E.D. Pa. 1988).

CONCLUSION

For the foregoing reasons, we find and conclude that:

(1) This Court lacks jurisdiction over Debtors' complaint to avoid the United States government levy on their IRA in the Hampden Savings Bank and accordingly, United States' motion to dismiss with respect to this levy is GRANTED;

(2) This Court has jurisdiction over Debtors' complaint as to their IRA in the Shawmut Bank;

(3) The Debtors are unable to satisfy their burden under 11 U.S.C. §547(b)(5) with respect to the Shawmut Bank levy, and for the reasons stated above, the United States' Motion to Dismiss is GRANTED;

(4) The IRS lien remains on the Shawmut Bank funds, even though the underlying debt is discharged;

(5) The IRS lien remains on the Shawmut Bank funds, even though Debtors have claimed said funds as exempt.

Enter Judgment consistent with this opinion.

¹ We do not address the arguments regarding service of process or standing, since, even were we to find for the Debtors on those issues, our findings and conclusions on the merits render these arguments moot.

² Section 524 is entitled "Effect of discharge" and provides in pertinent part:

(a) A discharge in a case under this title--

. . .

(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived;

11 U.S.C. §524(a)(2) (emphasis added).

³ What should be clear to all of us by now is the difficulty of winning the game, where your opponent's big brother is the one who makes up the rules

 

 

 

In re: Norman H. Bates and Beverly Ann Bates, Debtors. Norman H. Bates and Beverly Ann Bates, Appellants v. United States of America, Appellee

(CA-10), U.S. Court of Appeals, 10th Circuit, 92-8005, 8/17/92, 974 F2d 1234, Affirming an unreported District Court decision

[Code Sec. 6321 ]

Bankruptcy: Tax liability: Pre-petition tax lien: Status.--Debtors who owned a lumber business and failed to pay all federal employment taxes, both trust taxes and non-trust fund taxes, could not change the classification of their tax liability from secured, where full payment was required, to unsecured, where less than full payment was required. The full amount of the tax was secured because the IRS properly and timely filed pre-petition notices of tax lien under Code Sec. 6321 . The IRS tax claims were not dischargeable in bankruptcy and had priority status over the general unsecured creditors pursuant to Section 507(a)(6) of the Bankruptcy Code. Finally, the penalties and interest assessed for the nonpayment of the taxes were also given priority when the IRS filed its notice of federal tax lien.

Dennis K. Ridley, Janet L. Tyler, Dennis K. Ridley & Assocs., 300 E. 18th St., Cheyenne, Wyo., for Appellants. Richard A. Stacy, United States Attorney, Cheyenne, Wyo., James A. Bruton III, Acting Assistant Attorney General, Gary D. Gray, Annette M. Wietecha, Department of Justice, Washington, D.C. 20530, for Appellee.

Submitted on the briefs. ^*

Before MOORE, TACHA and BRORBY, Circuit Judges.

BRORBY, Circuit Judge:

Mr. and Mrs. Bates (Debtors) filed a Chapter 13 bankruptcy petition. Their pre-petition federal tax liability was classified into secured and priority status. Debtors challenge this classification. We affirm.

The facts are neither complicated nor disputed. Debtors owned a lumber business and failed to pay all federal employment taxes that were due and owing. Debtors owed the government $61,212.89. Of this amount, $39,714.72 were trust fund taxes and $21,498.17 were non- trust fund taxes. ¹ The Internal Revenue Service perfected its lien for the full amount due against Debtors' property by timely and properly filing notices of lien.

Debtors then filed a petition seeking Chapter 13 bankruptcy relief. Only two creditors were listed: the mortgagee of Debtors' residence, ² and the IRS. Various unencumbered personal property was listed subject to the bankruptcy, which had an undisputed fair market value of $21,950.

Debtors ultimately presented an amended Chapter 13 plan whereby they proposed to classify the amount of the unpaid trust fund tax ($17,591.25), exclusive of interest, as a class two priority claim that would be paid in full and the balance of their federal tax liability as an unsecured claim that would be satisfied only to the extent of available income, which would amount to "at least $1,000."

The government challenged this plan asserting: It was a secured creditor by virtue of filing the notices of tax liens; the non-trust fund tax liability ($21,498.17) is completely secured as the amount owed was less than the fair market value of the property ($21,950); and the balance of the tax liability should be classified as a priority claim. Debtors then filed a "Motion to Determine Characterization of Tax Claims as Secured or Priority Claims."

The bankruptcy court classified the pre-petition non-trust fund tax liability (including the tax, associated interest, and the penalties thereon) as a secured claim against Debtors' personal property as it had a higher value. The bankruptcy court classified the balance of the tax liability, being the amount of the trust fund liability including the actual taxes plus the associated interest, as a priority claim.

I

Chapter 13 of the Bankruptcy Code mandates the debtor submit a plan dedicating future income to the payment of existing debts. Generally speaking, the debts are then classified into three general categories: secured, priority, and general unsecured debts. For a plan to be confirmed, secured debts must be paid to the extent of the value of the property securing the debt. Priority debts must be paid in full. General unsecured debts must be paid only to the extent of the available future income dedicated to this purpose. This appeal involves the questions of whether the debtor or the bankruptcy court has the power to classify a debt; how federal tax claims must be classified; and how the unsecured balance of a secured claim is classified.

II

Debtors assert a debtor in a Chapter 13 reorganization plan has the right to direct the IRS application of payments made under the plan. They argue the payments to be made should be applied to the payment of trust fund taxes only.

Given the posture of this case, Debtors' assertions are inapposite. Debtors are not seeking to direct payments first to one category of debt and then to another. Rather, Debtors seek to change the classification of debts from one category, where full payment is required, to another category where less than full payment is required. Stated differently, Debtors seek to change the classification of the tax liability from priority to unsecured.

Debtors cite United States v. Energy Resources Co. [90-1 USTC ¶50,281 ], 495 U.S. 545 (1990) as supportive of their position. Debtors are wrong. Energy Resources involves a Chapter 11 reorganization where the debtor proposed to pay all taxes, both trust fund and non-trust fund. The Supreme Court held a bankruptcy court may order the IRS to apply payments to the trust fund taxes if doing so is necessary to reorganization. Furthermore, although the Supreme Court held the bankruptcy court possessed broad authority to designate payments, it did not necessarily require the bankruptcy court to order payments first be applied to trust fund taxes before satisfying non-trust fund taxes. The Court specifically noted the designation would not compromise the government's right to be assured of full payment of its tax claim. Id. at 549-51. However, in the case before us, Debtors propose to pay only a portion of their tax liability. Energy Resources is inapposite. In short, the issue of designation of payments is not presented by the facts in this case.

III

The resolution of this case is dependent upon the proper classification of Debtors' federal employment tax liability.

We commence our analysis by noting Debtors owed federal employment taxes, both trust fund and non-trust fund. It is also significant to note the IRS properly and timely filed pre-petition notices of tax lien pursuant to 26 U.S.C. §6321 , ³ and this action had the effect of impressing upon Debtors' property a lien in favor of the United States in the amount of $61,212.89. Pursuant to this statute, the amount of the lien included the amount of unpaid taxes, interest and penalties. This tax lien is a security established by statute which the government may avail itself in the event of default in payment. United States v. Phillips [59-1 USTC ¶9457 ], 267 F.2d 374, 377 (5th Cir. 1959).

Having established this necessary background, we turn now to the bankruptcy law. The IRS asserted its full claim of $61,212.89 was secured by virtue of its filing of the notices of tax lien. Section 506 of the Bankruptcy Code provides this claim will be considered a secured claim only to the extent of the value of the property securing the debt. In re Dewsnup, 908 F.2d 588, 590 (10th Cir. 1990), aff'd, 112 S.Ct. 773 (1992). Section 506(a) of the Bankruptcy Code (11 U.S.C. §506(a)) provides the balance of this secured claim is an allowed unsecured claim.

Section 507 of the Bankruptcy Code (11 U.S.C. §507 ) establishes a priority for the payment of specified unsecured claims. The sixth priority includes "allowed unsecured claims" to the extent the claim is for "a tax required to be collected or withheld" (trust fund taxes), §506(a)(6)(C), ⁴ or "an employment tax on a wage . . . earned from the debtor" (non-trust fund taxes), §507(a)(6)(D). ⁵ The IRS is an unsecured claimant who has been granted priority status ahead of the general unsecured creditors, thus this claim is a priority claim. Under 11 U.S.C. §1322(a)(2), the plan must provide for full payment of all unsecured priority claims. The net effect of this mandatory plan provision is to deny discharge of priority tax claims in Chapter 13 bankruptcy plans. Tax claims entitled to priority under §507(a)(6) are not dischargeable in Chapter 13 bankruptcy.

IV

Included in the allowed unsecured claim is an amount representing a penalty for the failure to pay the trust fund portion of the taxes. Debtors contend that penalties assessed for nonpayment of federal taxes can be classified only as a general unsecured claim and cannot be classified a priority claim.

As a general rule, penalties and the interest thereon are not in compensation for pecuniary loss and are not entitled to priority. Pre-petition tax penalties that are punitive in nature and not evidenced by recorded federal tax liens encompassing otherwise unencumbered properties of debtor are unsecured, nonpriority claims. Exceptions exist as to all general rules, and this rule carries an exception The IRS perfected its lien upon debtors' property by filing the required notice. 26 U.S.C. §6321 defines the lien to include both penalties and interest. A federal tax lien secures both the trust fund portion and the nontrust fund portion including penalties and interest. In the case before us, the lien is secured only to the extent of the value of the property. Section 507(a)(6)(C) and (D) of the Bankruptcy Code, which specifies the claims entitled to priority as well as the order of priority, then dictates the unsecured balance of this claim must be treated as a priority claim when it directs a sixth priority for certain taxes constituting "allowed unsecured claims of governmental units."

V

Debtors had pre-petition tax debt, which was secured by virtue of a tax lien. Debtors paid the actual amount of taxes due for three of the six quarters. Debtors did not pay the interest accumulated prior to payment of the actual taxes. Debtors assert this interest cannot be accorded secured or priority status.

Pre-petition interest on federal employment taxes is a priority claim. In re Garcia, 955 F.2d 16, 18-19 (5th Cir. 1992); In re Larson [88-2 USTC ¶9590 ], 862 F.2d 112, 119 (7th Cir. 1988). Pre-petition interest has the same priority as the underlying tax providing the interest accrued pre-petition. Accordingly, Debtors' argument lacks merit.

AFFIRMED.

^* After examining the briefs and appellate record, this panel has determined unanimously that oral argument would not materially assist the determination of this appeal. See Fed. R. App. P. 34(a); 10th Cir. R. 34.1.9. The cause is therefore ordered submitted without oral argument.

¹ Trust fund taxes are those monies Debtors withheld from the employees' wages to pay the employees' income taxes and the employees' share of the social security tax. Although no penalties are included in the trust fund tax amount, interest is included to the date Debtors filed their Chapter 13 bankruptcy petition. Non-trust fund taxes represent Debtors' (as employers) share of the social security tax and federal unemployment taxes, including interest and penalties.

² Neither the residence nor mortgagee are relevant to the issues presented. Debtors represented the value of the residence was greater than the amount owed and apparently elected to pay this debt in accordance with its terms outside the bankruptcy.

³ 26 U.S.C. §6321 reads:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) 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.

⁴ Formerly designated as the seventh priority under former §507(a)(7)(C).

⁵ Formerly §507(a)(7)(D).

 

 

 

In re Roger G. Connor, Debtor. Roger G. Connor, Plaintiff v. United States of America, Defendant

U.S. Bankruptcy Court, Dist. Alas., A88-00262-001, 9/26/91

[Code Secs. 6321 and 6322 ]

Lien for taxes: Bankruptcy.--

A federal tax lien against the pension of a former associate justice of the Alaska Supreme Court was not avoidable in bankruptcy. The justice's right to his pension benefits constituted a right to payment attachable by a federal tax lien. His right was not so speculative as to defeat the lien. Also, a levy was not required to perfect the lien. However, certain claims of the government were stipulated by the IRS and the justice to be discharged in bankruptcy.

MEMORANDUM AND ORDER REGARDING SUMMARY JUDGMENT

MACDONALD IV, Bankruptcy Judge:

This is an action by a former associate justice of the Alaska Supreme Court to avoid a federal tax lien against his pension. There are no disputed facts. I find that the lien of the United States is not avoidable in bankruptcy.

Factual Background and Jurisdiction

Roger Connor (Connor) retired from the Alaska Supreme Court in May of 1983. He received income of $4,350.00 a month after retirement. The IRS assessed Connor in excess of $65,000.00 in taxes in 1985. A notice of federal tax lien was recorded in the Anchorage Recording District on November 13, 1986. After a levy, Connor entered into a monthly payment arrangement with the IRS for $1,000.00 a month for approximately a one year period. He made those payments until filing bankruptcy on March 23, 1988. The parties agree that Connor's pre-petition tax obligations have been discharged.

This court has jurisdiction over this action as a core proceeding pursuant to 28 U.S.C. §157(b)(2)(I), (K) and (O). In re Miranda, -- A.B.R. --, adversary no. 3-87-00716-001 (Bankr. D. Alaska 1991).

Analysis

Connor has raised a number of reasons why the IRS lien should be avoided, none of which have merit. His primary arguments are that future retirement income is not subject to a lien, that a levy is required to perfect a lien against his retirement benefits, and that a bankruptcy discharge terminates the IRS lien.

Connor receives retirement pay in accordance with A.S. 22.25.020 which provides that retired justices receive 5% per year to a maximum of 75% of their salary for retirement purposes, from the date of eligibility until death. Connor argues that his right to property is so speculative that he has no property interest to which a tax lien can attach.

26 U.S.C.A. §6321 provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, any amount, addition to tax, or assessable penalty together with any costs that may accrue in addition thereto) 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.

"Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, at 267 (1945).

To analyze the appropriate attachment of a federal tax lien, I must first determine if the debtor possesses "property and rights to property" arising under state law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-513 (1960). Roger Connor is the vested beneficiary of a statutorily mandated retirement plan. He has been receiving benefits pursuant to that plan since 1983. He will continue to receive such benefits until death. Connor's right to his pension benefits constitutes a right to payment attachable by a federal tax lien. As pointed out in United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-720 (1985), the language of §6321 is broad "and reveals on its face that Congress meant to reach every interest in property that a taxpayer may have."

Moreover, Connor's right to payment does not even rise to the level of a beneficiary's interest in a spendthrift trust. This court held in In re Anderson, -- A.B.R. --, adversary no. 3-87-00859-001 (Bankr. D. Alaska 1991) that a federal tax lien attaches to the debtor's interest as the beneficiary of a valid ERISA spendthrift trust. When such a remote interest is subject to a federal tax lien, it certainly follows that Connor's unequivocal statutory right to payment is subject to the lien.

Connor lamely alleges that the tax lien is unperfected without levy. He simply ignores 26 U.S.C.A. §6322 which allows perfection as to the taxpayer upon assessment. His argument has no basis.

Connor argues that his discharge in bankruptcy terminated the IRS lien because the payments he now receives are after-acquired property. The IRS had a valid lien on the debtor's pension rights several years before the bankruptcy petition was filed. Pension rights are not after-acquired property. They were earned prior to the filing of the petition. Nor is a chapter 7 stripdown of the IRS's secured claim allowed. In re Miranda, -- A.B.R. --, adversary no. 3-87-00716-001 (Bankr. D. Alaska 1991).

I have reviewed the remaining arguments presented by Connor, and find them without merit.

Conclusion

The debtor and the IRS have stipulated that the IRS's claims have been discharged in bankruptcy. Therefore, Connor is entitled to partial summary judgment in that regard. Connor's pension rights with the State of Alaska are subject to the defendant United States of America 's federal tax lien and summary judgment for the United States is appropriate.

Therefore, IT IS HEREBY ORDERED:

1. Partial summary judgment shall be entered for Roger G. Connor finding his debt for income taxes, penalties and interest for the tax years 1977, 1978, 1979 and 1980 has been discharged;

2. Insofar as plaintiff's motion for summary judgment seeks a determination that the federal tax lien of the Internal Revenue Service upon Roger G. Connor's interest in a judicial pension with the State of Alaska to be avoided, it is denied;

3. The defendant's motion for summary judgment is granted and judgment shall be entered in favor of the United States of America finding that pension rights of Roger G. Connor with the State of Alaska to be subject to a valid, enforceable federal tax lien and not avoided or limited through discharge; and

4. Each party shall pay their own costs and attorney's fees.

Let Judgment be entered and docketed accordingly.