In re Edgar Ballard, In re Beulah H. Ballard,
Debtors. Jeffrey Fairfield, Trustee, Plaintiff-Appellant v.
United States of America
U.S. Court of Appeals, 4th Circuit, 94-2199, 9/20/95, 65 F3d 367,
Affirming an unreported District Court decision
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
) 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
, 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.
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
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
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.
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
. 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
, 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,
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
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
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
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
, 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
, 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
, 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.
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
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).
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
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 (
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.
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.
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
. Pitts v.
, 408 S.E.2d 901, 903 (
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 (
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.
; 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
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.
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.
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.
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.
The Ballards were the sole stockholders in Ballene Services, Inc.
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).
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.
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.
filing, all property of the debtors came into their respective estates.
11 U.S.C. §541(a)(1)
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.
would agree that, had the sale occurred outside bankruptcy, there is
law for finding a new tenancy by the entireties in the proceeds. See
Oliver v. Givens, 129 S.E.2d 661, 663 (
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.
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)
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
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
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.
would vacate the judgment below and remand with directions to determine
whether Mrs. Ballard was liable on the tax claims.
A trustee was not appointed until after the cases were converted to
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
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--
, Ragsdale, Martin and Reid (see majority
op. at 8)--the debtor(s) had in fact claimed the exemption.
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.
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
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
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.
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,
, for appellant. Richard C. Wallace, Evans & Mullinix, P.A. 15301 W.
87th St., Pkwy., Lenexa, Kan. 66219-1428, for appellee. William H.
433 Kansas Ave.
-3527, for trustee.
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
. 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
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
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
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
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.
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
If an entity, be it Hammond
or Hammond's estate, is to receive the payments in question,
must abide by the agreement. We cannot force
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
is therefore performing a service which is not 'sufficiently rooted' in
the bankruptcy past so as to render the payments property of the estate.
The support for
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
,, but later distinguished it in an addendum to the opinion.
Many cases, however, have
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.
, 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
, 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
'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
'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
'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
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
was erroneously decided because the particular facts of this case are
readily distinguishable from
. 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.
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
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.
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
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."
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.
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,
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
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.
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
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
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
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.
United States of America
, Department of the Treasury, Internal Revenue Service, Defendant
Bankruptcy Court, No.
, East. Div., 91 B 16970, 1/21/94, 163 BR 327, 163 BR 327
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.
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.
Bankruptcy and receivership: Interest on tax: Post-petition
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.
Bankruptcy and receivership: Lien for taxes: Property transferred
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,
, for defendant.
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
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
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.
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
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
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).
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,
at 255; Matsushita, 475
at 586; Billups v. Methodist Hosp. of
, 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
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
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.
1987) (Shadur, J.); In re
Assoc. I, Inc., 120 B.R. 436, 442 (Bankr. N.D.
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.
Casualty, 617 F.Supp. 456, 458 (S.D.
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
will be allowed.
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.
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
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.
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.
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
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
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.
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
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.
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.
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
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.
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)
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.
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.
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
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.
§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
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
. 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.
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).
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.
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.
; 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
Ass'n v. Timbers of Inwood Forest, 484
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
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.
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.
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.
The following property, excluding the Debtors' residence and Mr.
Schreiber's IRA, is listed in the Debtors' schedules:
Value Per Debtors'
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
' 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.
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
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
, 82 B.R. 872 (Bankr. S.D.
1987); In re Flager-At-First Associates, Ltd., 101 B.R. 372
); and In re Beard, 108 B.R. 322 (Bankr. N.D.
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
Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§1001
§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
(ii) The Collection by the
in a judgment resulting from an unpaid tax assessment.
The Debtors' equity subject to the IRS lien of $44,772.28 consists of
$23,850.00 Property of Debtors concededly subject to the IRS lien. (See supra
$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
Nursing & Rehabilitation
Bankruptcy Court, East.
Dist. Pa., 88-12842S, 11/4/93
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.
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
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
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.
FACTUAL AND PROCEDURAL HISTORY
This matter arises in
connection with the voluntary bankruptcy case of the Debtor, a
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,
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.
The Internal Revenue Code,
26 U.S.C. §1
, et seq. ("the IRC"), at 26 U.S.C. §6321
, provides as follows:
. Lien for taxes
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.
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
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
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
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
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
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
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,
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
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
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
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.
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."
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
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:
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.
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.
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),
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.
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.
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.
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
Bankruptcy Court, Dist. R.I., BK 92-10388, 1/15/93, 150 BR 291
6321 , 6871
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.
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.
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'
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.
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.
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:
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.
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.
Except as provided in subsections (a) and (b) of this section and
notwithstanding any assertion of sovereign immunity--
provision of this title that contains "creditor",
"entity", or "governmental unit" applies to
governmental units; and
determination by the court of an issue arising under such a provision
binds governmental units.
. 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.
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
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.
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
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)
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)
. 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
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
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--
. . .
tax lien, notice of which is properly filed.
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).
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
(2) This Court has
jurisdiction over Debtors' complaint as to their IRA in the Shawmut
(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
Enter Judgment consistent
with this opinion.
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.
Section 524 is entitled "Effect of discharge" and provides in
(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)
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
In re: Norman H. Bates and Beverly Ann Bates,
Debtors. Norman H. Bates and Beverly Ann Bates, Appellants v. United
States of America, Appellee
U.S. Court of Appeals, 10th Circuit, 92-8005, 8/17/92, 974 F2d 1234,
Affirming an unreported District Court decision
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.
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
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.
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.
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
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.
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
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.
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.
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."
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
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.
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
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.
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.
26 U.S.C. §6321
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
Formerly designated as the seventh priority under former §507(a)(7)(C).
In re Roger G. Connor, Debtor. Roger G. Connor,
Plaintiff v. United States of America, Defendant
Bankruptcy Court, Dist. Alas., A88-00262-001, 9/26/91
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
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.
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).
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
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
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.
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
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.
I have reviewed the
remaining arguments presented by Connor, and find them without merit.
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
are subject to the defendant
United States of America
's federal tax lien and summary judgment for the
Therefore, IT IS HEREBY
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
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
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