Annotations: Disability Benefits- Levy
Exempt from Levy: Disability Benefits
[63-2 USTC ¶9596]Michael Kane,
Appellant v. Burlington Savings Bank, Fulton D. Fields, District
Director, Internal Revenue Service, Appellees
U. S. Court of Appeals, 2nd Circuit, Docket No. 27941, 320 F2d 545,
7/9/63, Affirming an unreported District Court decision
[1954 Code Sec. 6334(a)(4)]
Property exempt from tax levy: Federal disability insurance
benefits.--Monies received by a taxpayer as disability insurance
benefits under the Social Security Act and seized by the District
Director from the taxpayer's savings account in a bank are not analogous
to "unemployment benefits" and, therefore, are not exempt from
levy under 1954 Code Sec. 6334(a)(4).
551 Fifth Ave.
New York City
17, N. Y., for appellant. Louis F. Oberdorfer, Assistant Attorney
General, Lee A. Jackson, Joseph Kovner, Stephen B. Wolfberg, Department
of Justice, Washington 25, D. C. (Joseph F. Radigan, United States
Attorney, Rutland, Vt., of counsel), for appellees.
WATERMAN, FRIENDLY and SMITH, Circuit Judges.
appeals from a judgment of the United States District Court for the
District of Vermont dismissing his complaint for lack of jurisdiction
over the subject matter. Kane sought recovery of $275.91 seized by the
District Director of Internal Revenue from plaintiff's savings account
in the defendant Burlington Savings Bank. Kane alleged that the seized
monies had been received by him as disability insurance benefits under
Section 223 of the Social Security Act, 42 U. S. C. §423, and that, as
such, the monies were exempted from levy for collection of taxes under
Section 6334(a)(4) of the Internal Revenue Code.
waiting for responsive pleadings to be filed by the Bank, the district
judge dismissed the action on
July 10, 19
62, on the ground that the amount in controversy was not in excess of
$10,000, as is required for a diversity action brought under 28 U. S. C.
§1332. Plaintiff then made an application to join Fulton D. Fields, the
District Director of Internal Revenue, as a party defendant. On
July 31, 19
62 the district court, although granting plaintiff's application to join
the District Director, reaffirmed its ruling of dismissal for want of
jurisdiction. The district court erred, as the Government now concedes.
Jurisdiction over plaintiff's action, when commenced, rested upon 28
C. §1340 which contains no jurisdictional amount requirement. 1
contends, however, that the action was properly subject to dismissal for
failure to state a claim upon which relief may be granted. Although the
district judge did not rule upon this issue, the Government's contention
raises a question of statutory construction which, in the interest of
expedition, should be considered on this appeal. Accordingly, we affirm
the action of the court below in dismissing plaintiff's complaint, but
we do so on the ground that it failed to state a claim upon which relief
may be granted.
of the Internal Revenue Code of 1954, 26
C. §6334, provides:
exempt from levy
Enumeration.--There shall be exempt from levy--
Unemployment benefits.--Any amount payable to an individual with respect
to his unemployment (including any portion thereof payable with respect
to dependents) under an unemployment compensation law of the United
States, of any State or Territory, or of the District of Columbia or of
the Commonwealth of Puerto Rico.
* * *
No other property exempt.--Notwithstanding any other law of the United
States, no property or rights to property shall be exempt from levy
other than the property specifically made exempt by subsection
maintains that subsection (a)(4) is sufficiently broad to encompass not
only traditional unemployment compensation benefits, but also disability
insurance payments under the Social Security Act. 2
In support of this contention he advances three major arguments:
1. Section 223
of the Social Security Act, uncer which plaintiff received the monies in
dispute, defines "disability," for purposes of Disability
Insurance Benefit Payments, as
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to
result in death or to be of long-continued and indefinite
thus, is a necessary condition of eligibility for payments under §223.
Moreover, Section 6334(a)(4) of the Internal Revenue Code of 1954 does
not condition exemption from levy upon the causes of unemployment
for which compensation is payable. Section 6334(a)(4) should be read,
therefore, to cover benefits payable for unemployment due to disability
as well as unemployment benefits payable by reason of adverse economic
has expressly exempted from levy for collecton of taxes benefits paid
under the Federal Railroad Unemployment Insurance Act, 45
C. §352(e). Under that Act benefits are payable to individuals within
its coverage whether their unemployment is due to the unavailability of
work or to "physical, mental, psychological, or nervous injury,
illness, sickness or disease." 45 U. S. C. §351(k). Moreover,
several states have provided for compensation payments in the event of
unemployment due to disability as part of their state unemployment
compensation laws. Such disability payments would, presumably, be exempt
from tax levy under 26
C. §6334(a)(4). Exemption from levy of Social Security Disability
Insurance benefits, therefore, would be consistent with the
congressional policy of exempting disability payments paid under cognate
exempting unemployment benefits from tax levy, Congress evidently
believed that persons drawing such benefits were likely to be suffering
financial privation and to be unable to afford the further diminution of
their income through government seizure. Therefore, no reason exists for
so construing the statute as to exempt from levy benefits paid to one
unemployed because of economic conditions but to subject to levy similar
benefits when paid to a person unemployed because of disability.
appellant's arguments might prove persuasive to Congress, they take
insufficient account, we believe, of the narrow wording of the statute
itself, of the congressional policies underlying §6334 exemptions
generally, and of the legislative history of subsection (a)(4), enacted
We turn first
to the language of §6334(a)(4) which exempts from levy amounts
"payable to an individual with respect to his unemployment * * *
under an unemployment compensation law of the
* * *." The fact that the monies here in issue were paid to
appellant pursuant to certain provisions of the Social Security Act does
not preclude the relief he seeks, for that Act includes provisions for
the making of federal grants to the several states for the
administration of state unemployment compensation systems, and state
unemployment compensation payments are clearly exempt from tax levy. The
fact that appellant's funds were received under the Act does not insure
their exemption from levy, however, because the Act also includes within
its provisions the well-known program of federal old age and survivors
benefits, which benefits are concededly outside the scope of §6334(a)(4).
Appellant urges that his disability benefits should be analogized to
unemployment compensation because, for both, unemployment is a condition
of eligibility. The argument is insufficient, however, for the federal
old age insurance program, the disability insurance program, and the
state unemployment compensation programs are all based upon the
underlying fact that old age, disability, and temporary unemployment
deprive an individual of the power to earn his own living. As the
Supreme Court said in Helvering v. Davis, 301 U. S. 619, 641
(1937), "But the ill is all one, or at least not greatly different,
whether men are thrown out of work because there is no longer work to do
or because the disabilities of age make them incapable of doing
viewing federal disability insurance benefit under 42 U. S. C. §423 as
a type of unemployment compensation, we are inclined to view them, in
relation to Old Age and Survivors Insurance, as a program to give
benefits to persons who have been retired from the labor pool and whose
retirement has been brought about prematurely by reason of physical or
mental disability. 3
Consistent with this approach is the requirement under §423 that its
benefits be limited to persons whose inability to work is the result of
"physical or mental impairment which can be expected to result in
death or to be long-continued and indefinite duration."
We turn next
to appellant's suggestion that the contressional policy implicit in the
exemption provisions of §6334 requires that subsection (a)(4) be read
with sufficient breadth to cover federal disability insurance benefits.
It is clear,
as appellant contends, that humanitarian considerations underlie the §6334
exemptions from tax levy granted by Congress. It is equally clear that
until the 1958 amendment, at least, Congress chose to effectuate these
considerations by §6334 exemptions based not on the source of
assets in the hands of the taxpayer, but on the nature of the
property sought to be seized. Subsection (a)(1), thus, exempts from
levy wearing apparel and school books, subsection (a)(2), fuel,
provisions, furniture, and personal effects not exceeding $500 in value,
and subsection (a)(3), books and tools of the trade not exceeding $250
in value. Appellant's argument proves too much, therefore. The gain to
the Treasury of such small amounts as can be seized from the unemployed
by reason of disability is, indeed, likely to be outweighed by the
hardship imposed upon them as a consequence of levy upon their benefits.
The same may be said, however, of old age and survivors benefits under
the Social Security Act or of relief payments under state welfare laws,
yet both of the latter are concededly subject to seizure unless they
have been used by the taxpayer to purchase commodities exempt
under §6334(a)(1) to (a)(3). No such exemption can be claimed by
appellant in this case, for the District Director's levy was upon monies
found in appellant's savings account in the Burlington Savings Bank.
6334(a)(4) departs, of course, from this statutory pattern by exempting
assets at, or by virtue of, their source in unemployment compensation
agencies. The legislative history of the subsection, however, to which
we now turn, lends no support to the suggestion that Congress,
dissatisfied with the pattern of use or commodity exemptions, has sought
to exempt from levy all governmental welfare or insurance benefits which
are customarily received only by persons suffering economic privation.
enactment of the Internal Revenue Code of 1954, Congress had granted
immunity from levy to old age and survivors insurance benefits paid
under the Social Security Act, 42 U. S. C. §407 (1952). Although the
Act made no express provision for exemption of unemployment compensation
benefits, the Commissioner of Internal Revenue ruled, Rev. Rul. 54-171,
1954-1 Cum. Bull. 282, that state unemployment compensation commissions
should be exempt from notices of levy on the ground that funds in
approved state plans were, by federal statute, to be paid out by the
states solely for unemployment compensation. Similar exemptions from
levy were granted, inter alia, to benefits under the Railroad
Unemployment Insurance Act, 45
C. §352(e) (1952), the Railroad Retirement Act, 45
C. §228(1) (1952), and the Civil Service Retirement Act, 5
C. §729 (1952).
pattern of particular exemptions from tax levy was eliminated by
Congress in the Internal Revenue Code of 1954. While retaining the
exemptions from levy upon specified types of property under §6334(a),
Congress added the previously quoted pre-emptive subsection (c):
Other Property Exempt.--Notwithstanding any other law of the
, no property or rights to property shall be exempt from levy other than
property specifically made exempt from subsection (a)."
the legislative history of the 1954 Code sheds no light on the purposes
underlying this provision, its effect was to eliminate all
previously-enacted exemptions based upon source, leaving in their
place only the property-type exemptions of §6334(a).
consistency of the scheme of exemptions from levy under the 1954 Code
did not long remain, however. In 1955 the Railroad Retirement Act and
the Railroad Unemployment Act were amended to restore the prior
exemption of their benefits from tax levy. 45 U. S. C. §228(1) (1958);
45 U. S. C. §352(e) (1958). Although no similar restoration of
exemption for Social Security Old Age and Survivors benefits was made,
in 1958 the Interstate Conference of Employment Security Agencies sought
restoration of the exemption from benefits payable under state
unemployment compensation plans. In House and Senate Committee hearings,
Conference representatives stated that, since enactment of the Internal
Revenue Code of 1954, levies had repeatedly been made upon their state
unemployment compensation agencies for amount payable as unemployment
compensation to named individuals. They urged that express provision be
made to preclude levies by this "easiest method of collection"
upon state agencies. 4
response to these requests, Congress enacted subsection (a)(4) of 26
C. §6334 in 1958. The provision included the very language urged by the
Interstate Conference of Employment Security Agencies, exempting from
levy "Any amount payable [to an individual] with respect to his
unemployment * * * under an unemployment compensation law * * *." 5
Federal, as well as state, unemployment compensation laws were included,
but at the legislative hearings no reference was made of a possibility
of exempting benefits awarded under the federal disability insurance
plan, for it, of course, was a separate program of no concern to the
Conference of State Unemployment Compensation Commissioners.
As neither the
language of §6334(a)(4), the congressional policy underlying its
enactment, nor the legislative history of the provision gives support to
appellant's contention that federal disability insurance benefits are
exempt from tax levy, the judgment of the district court dismissing
appellant's complaint is affirmed for failure of the complaint to state
a claim upon which relief may be granted.
indebted to Geoffrey M. Kalmus, Esq., of the New York Bar, who, at our
request after the district court declined to issue a certificate of
probable cause, represented appellant most ably in this in forma
Appellant does not contend on this appeal that his complaint stated a
sufficient cause of action against the Burlington Savings Bank, the sole
defendant in the original complaint.
As an alternative ground of reversal, appellant urges that the monies
received by his as disability insurance benefits under 42 U. S. C. §423
were exempt from tax levy under 42 U. S. C. §407 which provides that
"none of the monies paid * * * under this subchapter shall be
subject to execution, levy, attachment, garnishment, or other legal
process." It is clear, however, that 42
C. §423 has been superseded by 26
C. §6334(c), supra, enacted in 1954. Contrary to appellant's
suggestions, the fact that new substantive benefits, including certain
disability insurance benefits of 43
C. §423, have been added since 1954 to the chapter covered by 43
C. §407 does not revive the operative force of the latter provision.
Disability benefits were first added to the Old Age and Survivors
insurance program in 1956 by the Social Security Amendments of that
year. 70 Stat. 807, §103(a). As the House Committee which initiated the
legislation explained, H. Rep. No. 1189, 84th Cong., 1st Sess., p. 3:
"* * *
retirement protecting for the 70 million workers under old-age and
survivors insurance is incomplete because it does not now provide a
lower retirement age for those who are demonstrably retired by reason of
a permanent and total disability."
See Senate Hearings,
Aug. 8, 11
, 12 and 13, 1958, on H. R. 13549, pp. 87, 170-179; House Hearings on
All Titles of the Social Security Act,
June 16, 20
, 23-27, 30, 1958, pp. 411-414; Hearnings before a Subcommittee of the
House Committee on Government Operations, 85th Cong., 2d Sess.,
June 24, 26
, 27, 1958, pp. 1-50.
As an alternative ground for affirming the dismissal of appellant's
complaint on the merits, appellee maintains that the exemption from tax
levy granted by 26 U. S. C. §6334(a)(4) extends, by its terms, only to
benefits payable, and not to those already paid, under
federal or state unemployment compensation laws. Because of our
favorable decision upon appellee's other ground of affirmance, we do not
reach, and expressly reserve decision upon, this contention of the
[94-1 USTC ¶50,035] In re James R.
Morris, Debtor. James R. Morris, Plaintiff v.
United States of America
, Internal Revenue Service, Defendant and George W. Stevenson, Chapter 7
Trustee, Intervening Defendant
Bankruptcy Court, West. Dist.
, West. Div., 92-33141-B,
[Code Secs. 6321 and
Tax liens: Property exempt from levy: Disability benefits.--
Social security disability payments received by a debtor in bankruptcy
proceedings on behalf of his deceased spouse were subject to a prior
recorded tax lien. Although the money was exempt from claims of other
creditors under state (
) exemption laws and his tax liabilities for the tax years were
dischargeable as personal obligations, this had no effect on the
applicability of the federal tax lien. Further, the fact that the
disability payments may have been considered part of his deceased
spouse's probate estate was without consequence because the lien
attached to any property actually owned by the taxpayer and to any
property to which he had an ownership right.
P.O. Box 1468
, for plaintiff. George W. Stevenson,
200 Jefferson Ave.
, for trustee. William W. Siler, Assistant United States Attorney, 200
Jefferson Ave., Memphis, Tenn. 38103, Carol C. Priest, Department of
Justice, Washington, D.C. 20530, for defendant. Madalyn C. Scott,
200 Jefferson Ave.
Trustee. James Morris, 4141 Mimosa Hill,
, for debtor.
OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT ON COMPLAINT TO
DETERMINE DISCHARGEABILITY OF DEBT AND FOR DECLARATORY JUDGMENT
This cause is
before the Court on cross motions for summary judgment filed by the
debtor and the Internal Revenue Service ("IRS"). At issue is
whether the debtor may exempt Social Security disability benefits due
his wife but not paid until after her death from the federal tax lien
asserted by the defendant. The following constitutes findings of fact
and conclusions of law pursuant to F.R.B.P. 7052 and 7056.
are in agreement that no genuine issues of material fact exist in this
proceeding. The following is a brief summary of these undisputed facts.
filed his voluntary Chapter 7 petition for relief on
December 19, 1992
. Prior to that time he and his wife jointly owed federal income tax,
interest and penalties in the cumulative amount of $26,146.36 for the
tax years 1987, 1988 and 1989. Assessment of the 1987 tax in the amount
of $12,500.00 was made against the debtor and his wife on
May 28, 1990
. Notice of the federal tax lien for this liability was filed in Shelby
County, Tennessee on
December 17, 1990
. The debtor filed joint tax returns for 1988 and 1989 in November,
1990. These returns established tax liabilities of $2,507.00 and
$7,327.00 respectively. Assessments of these amounts were made on
November 26, 1990
, and notice of a tax lien was filed on
August 20, 1992
wife died in August, 1990. Before her death, she had filed a claim for
disability compensation with the Social Security Administration
("SSA"). The SSA originally denied her claim and she appealed
that decision. After her death, the denial was reversed and five days
after the debtor's Chapter 7 petition was filed, on
December 24, 1992
, the SSA issued a check for accrued disability benefits in the amount
of $27,741.00. The check was made payable to "James R. Morris on
behalf of Katherine Morris, deceased." Response of the [U.S.A.] . .
January 14, 1993
, the IRS served a levy upon the debtor for the collection of funds
belonging to Mrs. Morris or her estate that were subject to the federal
tax liens. On
January 24, 1993
, the debtor delivered the SSA check to the Chapter 7 Trustee, Mr.
Stevenson ("Trustee") who deposited it in the debtor's
bankruptcy estate account.
subsequently filed a motion to require the Trustee to abandon any
asserted interest in the funds. The motion was later withdrawn and this
adversary proceeding filed. The Chapter 7 Trustee subsequently
intervened in order to protect any interest that the bankruptcy estate
might have in the funds.
acknowledges that the debtor's 1987 and 1988 tax liabilities are
dischargeable pursuant to §§727 and 523(a)(1) of the Bankruptcy Code.
However, the effect that this discharge might have on the asserted IRS
lien is contested by the parties.
the Internal Revenue Code, 26 U.S.C. §101
, et. seq., reveals that a federal tax lien is triggered when
"any person liable to pay any tax neglects or refuses to pay the
same after demand." 26 U.S.C.§6321. Demand may be satisfied by
mailing notice of the liability to the taxpayer. 26 U.S.C. §6303(a)
. Such a lien is in the amount of the unpaid tax, penalty and
interest, if any, and is "upon all property and rights to property,
whether real or personal, belonging to [the taxpayer]." 26 U.S.C. §6321
. (Emphasis added). See also U.S. v. National Bank of Commerce
¶9482 ], 472 U.S. 713, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985). State
law defines the extent of the taxpayer's interest in property but the
tax lien arises under federal law and will, to the extent of its value,
attach to the debtor's property interest. Id., U.S. v. Brosnan [60-2
USTC ¶9516 ], 363 U.S. 237, 80 S.Ct. 1008, 4 L.Ed.2d 1192 (1960).
commences "at the time the assessment [of tax liability] is
made" and continues until it is satisfied or "becomes
unenforceable by reason of lapse of time." 26 U.S.C. §6322
. Such a lien becomes effective against subsequent third party
creditors upon registration of the notice of lien by the IRS in the
appropriate governmental office located in the taxpayer's resident
state. 26 U.S.C. §6323(f)
, this is the county register's office located in the taxpayer's county
Code Ann. §66 -21-201.
registered, the lien is effective against and, with limited exceptions
not applicable here, has priority over subsequent judgment lien
creditors, purchasers, and security interest holders. 26 U.S.C. §6323(a)
and (b) . As
such, even the status of a bankruptcy trustee, which encompasses such
capacities pursuant to the strong arm powers of 11 U.S.C. §544
, is subject to the priority of a recorded tax lien.
as a creature of federal law, the federal tax lien is not affected by
state law exemptions. 26 U.S.C. §6334(c)
; U.S. v. Mitchell [71-1
USTC ¶9451 ], 403 U.S. 190, 91 S.Ct. 1763, 29 L.Ed.2d 406 (1971); Knox
v. Great West Life Assur.
, 212 F.2d 789 (6th Cir. 1954). Only those property interests
or rights thereto enumerated by 26 U.S.C. §6334(a)
are exempt from the operation of a federal tax lien. This is
significant for purposes of this proceeding because at least in the
bankruptcy context, Tennessee has opted out of the federal exemption
scheme of 11 U.S.C. §522 and provides its own list of property
interests that are exempt from the claims of creditors, which list
includes disability benefits. Tenn. Code Ann. §26
-2-112 ("opt out" provision) and §26
-2-111(C). Neither disability benefits nor the right to receive them
are counted among the property interests that are exempt from the
operation of a federal tax lien. 26 U.S.C. §6334(a)
; Kane v. Burlington Savings Bank [63-2
USTC ¶9596 ], 320 F.2d 545 (2d Cir. 1963).
of a federal tax lien may be accomplished by payment of the amount due,
by the surrender of property with a value equal to the amount of the
lien, or by levy, which may include seizure and distraint, upon property
subject to the lien. 26 U.S.C. §6331
and §6332 .
In the instant
proceeding, the debtor argues that the IRS is not entitled to the Social
Security disability funds at issue because they are exempt from the
claims of creditors under state law made applicable by 11 U.S.C. §522(b).
Were this a creditor other than the federal government, the debtor would
be correct. However, as discussed above and unfortunately for the
debtor, the power to tax granted to Congress by the United States
Constitution and implemented through the above named statutes, preempts
these otherwise applicable state ex- emption laws and renders these
funds subject to the tax lien and levy.
Const. art. I, §8 ; U.S.
Const. amend. XVI; 26 U.S.C. §6334(c)
This is true
even though the 1987 and 1988 tax liabilities are unquestionably
dischargeable as a personal obligation of the debtor. It is well settled
that the discharge of personal liability has no effect on a lien against
the debtor's property. See, In re Isom [90-1
USTC ¶50,216 ], 901 F.2d 744 (9th Cir. 1990); In re Victor,
1991 WL 268038 (Bankr. W.D. Tenn. 1991).
discussed above, the effectiveness of such a lien against a taxpayer's
"right to property" operates to render these funds subject to
the lien prior to issuance of the SSA check. 26 U.S.C. §6321
; U.S. v. National Bank of Commerce, supra. Thus, whether the
funds were to be property of the debtor or of Mrs. Morris' probate
estate is of no importance because, at least to the extent of the amount
of the federal tax lien, the funds are subject thereto and were so
subject upon commencement of this bankruptcy case.
From the above
findings and conclusions, the Court concludes that as a matter of law,
the plaintiff is entitled to a discharge of his personal liability for
1987 and 1988 taxes and the defendant is entitled to receipt of the
funds at issue to the extent necessary to satisfy its lien.
IS THEREFORE ORDERED THAT:
1. The debtor
is granted a discharge of his personal tax liabilities for 1987 and
Internal Revenue Service is entitled to payment in an amount necessary
to satisfy its federal tax lien from the social security disability
funds presently held by the Chapter 7 Trustee.
[99-1 USTC ¶50,526] Ramon and Nazzari
Hughes, Plaintiffs v. Internal Revenue Service, Defendant Ramon and
Nazzari Hughes, Plaintiffs v. The
District Court, East. Dist. N.Y., 98-CV-4079
(JS) (MLO), 98-CV-4081 (JS) (MLO), 4/22/99, 62 FSupp 2 d 796, 62 FSupp2d
Levy and distraint: Seizure of property: Property exempt from claim:
Disability benefits: Social security payments.--Married taxpayers' pro
se suit seeking a refund of social security disability benefits that
were collected by the IRS by means of a levy on their bank account was
dismissed for failure to state a justiciable claim. The funds were not
exempted from levy as amounts that were "payable" to the
taxpayers; the act of the levy against the account signified that the
funds had already been paid and, thus, were no longer
"payable." The determination that the funds were not exempt
from levy was a reasonable reading of the tax code.
Jurisdiction: Suits against the IRS: Sovereign immunity.--To the
extent that married taxpayers' suit seeking a refund of social security
benefits seized from their bank account was against the IRS, the
government had not waived its immunity from suit. Further, with regard
to their claims against the
, the taxpayers failed to allege any basis for a waiver of sovereign
immunity. They were granted leave to replead in order to assert a waiver
of sovereign immunity, if appropriate.
Secs. 7402 , 7432 and
Tax liens: Failure to release: IRS conduct: Civil damages:
Unauthorized collection activities: Constitutionality: Due process
violations: Failure to state justiciable claim.--Married taxpayers'
claims for damages under Code
Sec. 7432 , dealing with improper failure by IRS employees to
release a lien, and under Code
Sec. 7433 , regarding the improper collection of tax by IRS
employees, were dismissed without prejudice because they failed to state
a claim on which relief could be granted. They did not allege that IRS
employees acted knowingly, recklessly, negligently, or in disregard of a
statutory or regulatory provision. Finally, the taxpayers' bare
allegation of a violation of their due process rights, without more,
could not survive the government's motion to dismiss.
Plaintiffs: Ramon Hughes, pro se, Nazzari Hughes, pro se,
930 Merrick Road, Unit #18, Baldwin, NY 11510-3338. For Defendants:
Wendy J. Kisch, Esq., U.S. Department of Justice, Tax Division, Post
Office Box 25, Ben Franklin Station, Washington, DC 20044.
Ramon and Nazzari Hughes ("plaintiffs"), proceeding pro se,
initiated these actions alleging that the Internal Revenue Service
("IRS") and its agents, particularly Lawrence R. Engel, have
wrongfully levied on their bank account. Pending before the Court are
United States of America
and the IRS's motion to dismiss these actions under Fed. R. Civ. P.
12(b)(1) and (6) for lack of jurisdiction and for failure to state a
claim upon which relief may be granted. For the reasons set forth below
the motion is granted.
In April 1998,
plaintiffs commenced two actions in small claims court in the
, Second Department, Hempstead Part, seeking to recover $572.72, plus
interest, from the IRS or IRS revenue officer Lawrence R. Engel. On
June 5, 1998
removed these actions to this Court pursuant to 28 U.S.C. §1441(a). The
requested consolidation of these actions on
June 17, 1998
complaints arise from revenue officer Engel's collection of unpaid
federal income tax, by means of an IRS levy on plaintiffs' bank account
at the European American Bank ("EAB"), from which $572.72 was
collected. The plaintiffs claim the funds in the bank account were
exempt from levy because the seized monies were Social Security
Disability funds. Plaintiffs thus argue that the defendants' actions in
levying on this account was improper, and that their money should be
refunded with interest.
contend that the government's levy of the funds was proper because the
funds were not exempt from levy, as provided for in the Internal Revenue
Code ("Code"). Defendants also argue that there is no subject
matter jurisdiction because the
is entitled to sovereign immunity.
court should grant a motion to dismiss under Rule 12(b) of the Federal
Rules of Civil Procedure only if " 'it is clear that no relief
could be granted under any set of facts that could be proved consistent
with the allegations.' " H.J. Inc. v. Northwestern Bell Tel. Co.,
229, 249-50 (1989) (quoting Hishon v. King & Spalding, 467
69, 73 (1984)). In applying this standard, a district court must
"read the facts alleged in the complaint in the light most
favorable" to the plaintiff, and accept these allegations as true.
at 249; see also Scheuer v. Rhodes, 416
232, 236 (1974); Leatherman v. Tarrant County Narcotics Intelligence
and Coordination Unit, 113
1160, 1163 (1993) (citing Fed. R. Civ. P. 8(a)(2) to demonstrate liberal
system of 'notice pleading' employed by the Federal Rules of Civil
Procedure). The issue on a motion to dismiss "is not whether a
plaintiff will ultimately prevail but whether the claimant is entitled
to offer evidence to support the claims." Chanayil v. Gulati,
169 F.3d 168, 1999 WL 104578, at *3 (2d Cir.
March 2, 1999
) (quoting Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996)).
plaintiffs' complaints in both 98-CV-4079 and 98-CV-4081 are very
sparse. Both complaints read as follows:
On the date of
June 17, 1996
the defendant, Lawrence R. Engel, a revenue officer, representing the
Internal Revenue Service, SEIZED and removed from the European American
Bank account of the plaintiff's [sic]. The defendant, Agent Engel, was
informed of the exempt status of the Social Security Disability funds,
which amounted to $572.72.
cite no authority in their complaints for the proposition that the IRS
and Engel were not entitled to seize the funds in question.
Court recognizes that it is required to construe this pro se
complaint liberally, and must hold allegations found in pro se
complaints to "less stringent standards" than those drafted by
counsel. Haines v. Kerner, 404
519, 520 (1972) (per curiam). Moreover, on a motion to dismiss,
the Court must accept as true all the facts in the complaint. H.J.
at 249. With these standards in mind, the Court proceeds to an analysis
of the claims.
appear to have alleged in their complaint that the IRS, acting through
Engel, unlawfully seized or levied upon certain of their assets which
were located in an account at EAB. Plaintiffs claim that these funds, in
the amount of $572.72, were exempt from levy as Social Security
Disability payments, and that Engel was notified of this exemption. The
defendants accept these claims as the thrust of the complaints, but
argue that the complaints nevertheless fail to state a claim on which
relief may be granted, and therefore the complaints should be dismissed.
In response to
the defendants' motion, plaintiffs have submitted a three-page
memorandum of law indicating that their opposition to the motion is
based on due process and the unauthorized seizure of property.
Plaintiffs' Memorandum in Opposition ("Opp. Memo."), at 1.
Plaintiffs claim that they have filed timely tax returns every year; the
returns have never been challenged or audited; they themselves declared
the tax due amounts, not the IRS; they have diligently sought a
resolution through the IRS's procedures; and they were denied
"Small Case Hearings."
Plaintiffs also claim that due to an error in the Nassau County District
Court Clerk's Office, their complaint named the IRS instead of naming
Alan Pratesi, apparently an IRS agent. 2
at 2. Plaintiffs further indicate that they sought and were denied
reconsideration through the IRS's Problem Resolution Office in
last page of plaintiffs' memorandum appears to argue that Pratesi and
Engel violated §§6334(a)(10) and (b)(3) of the Code.
at 3. By citing to Section 6334(a)(10), plaintiffs appear to be making a
claim that the IRS unlawfully seized "service-connected"
disability payments. Plaintiffs also cite, without discussion, Sections
7432 and 7433 of the Code. 3
These sections are entitled "Civil damages for failure to release
lien" and "Civil damages for certain unauthorized collection
respond that there has been no denial of due process, and in fact, it is
well-settled law that the tax levy procedure outlined in the Code does
not violate due process.
' Reply Brief ("
Reply"), at 3. Defendants also deny that they ever were on notice
that the funds seized were "service-connected" disability
payments, and contend that even if they were, §6334(a)(10) exempts from
levy only amounts "payable"--not amounts that already have
Defendants further assert that plaintiffs' citation of §6334(b), which
refers to appraisals, has no relevance to this case.
Finally, defendants indicate that neither §7432 nor §7433 operate to
provide plaintiffs with any relief, because the necessary elements of a
cause of action under these sections are not pled.
Court is aware that plaintiffs are proceeding pro se in this
matter, and that these cases were originally brought in a state small
claims forum, the Court agrees with the defendants' contention that the
complaints must be dismissed. It is axiomatic that on a motion to
dismiss, the Court must evaluate the sufficiency--not the merits--of a
complaint. See Chanayil, 169 F.3d 168, 1999 WL 104578, at *3.
However, even this minimum threshold has not been met here.
The Court has
determined that the complaints are patently insufficient to state a
claim of a violation of due process, or a violation of I.R.C. §§7432
and 7433. First, plaintiffs make no claim in their complaints that their
due process rights were violated. This claim is made for the first
time--in one conclusory sentence--in their memorandum of law in
opposition to the defendants' motion. Even if the Court were to consider
the due process claim as if it were pled in the complaint, it would
still fail because there is no mention of how the defendants'
tax-collecting procedure violated plaintiffs' constitutional rights.
This bare allegation, without more, cannot survive the motion to
dismiss. However, this dismissal will be without prejudice, to allow
plaintiffs an opportunity to allege additional specific facts that may
support the claim of a denial of due process.
The Court also
holds that plaintiffs have failed to state a claim for a violation of
§§7432 and 7433 of the Code. Section 7432 states, in relevant part,
that "[i]f any officer or employee of the Internal Revenue Service
knowingly, or by reason of negligence, fails to release a lien under
section 6325 on property of the taxpayer, such taxpayer may bring a
civil action for damages against the United States." I.R.C. §7432.
In similar fashion, section 7433 provides, in relevant part, that
connection with any collection of Federal tax with respect to a
taxpayer, any officer or employee of the Internal Revenue Service
recklessly or intentionally, or by reason of negligence disregards any
provision of this title, or any regulation promulgated under this title,
such taxpayer may bring a civil action for damages against the
§7433. It is clear from the statutory language that these two sections
authorize suit only against the
--not against the Internal Revenue Service or against individual IRS
agents. See Kersting v. United States [93-1 USTC ¶50,159], 818
F. Supp. 297, 302 (D. Haw. 1992) (holding that §§7432 and 7433 allow
suit only against the
of the complaints indicate that plaintiffs have failed to allege a
violation of either of these two sections. For example, there is no
allegation that defendants acted knowingly, recklessly or negligently,
nor that any agent or employee of the IRS disregarded a section of the
Code or a regulation promulgated thereunder. In regard to §7432, there
is no allegation that defendants failed to release a lien, only an
allegation that defendants seized property from plaintiffs' bank
account. Thus, any claims purportedly brought under either of these two
sections must be dismissed for failure to state a claim on which relief
may be granted. Again, however, such dismissal will be without
prejudice, such that plaintiffs may have the opportunity to correct
The Court also
holds that plaintiffs have failed to state a cause of action pursuant to
I.R.C. §6334(a)(10) and §6334(a)(11). Section 6334 of the Code
provides that certain property is exempt from levy under the IRS's
collection procedures. Among other things, the statute exempts from levy
property such as clothing and school books; fuel, furniture and personal
effects; books and tools of a trade or profession; undelivered mail; and
unemployment benefits. I.R.C. §§6334(a)(1-5). Relevant to this motion
are the exemptions found in §§6334(a)(10) and 6334(a)(11).
6334(a)(10) provides an exemption for "[a]ny amount payable to an
individual as a service-connected . . . disability benefit,"
subject to certain statutory limitations. Section 6334(a)(11) exempts
from levy "[a]ny amount payable to an individual as a recipient of
public assistance . . . relating to supplemental security income for the
aged, blind, and disabled . . . or State or local government public
assistance of public welfare programs for which eligibility is
determined by a needs or income test." The key word in each of
these exemptions is "payable."
any case of statutory construction, [the] analysis begins with the
language of the statute. And where the statutory language provides a
clear answer, it ends there as well." Hughes Aircraft Co. v.
Jacobson, 119 S. Ct. 755, 760 (1999) (citations omitted).
Additionally, "courts must presume that a legislature says in a
statute what it means and means in a statute what it says there."
Nat'l Bank v. Germain, 503
249, 253-54 (1992). When the words of a statute are clear and unambigu
ous on their face, no further inquiry is necessary. See, e.g.,
Tennessee Valley Auth. v. Hill, 437
153, 185 (1978).
argue that §§6334(a)(10) and (11) exempt from levy only amounts
"payable," that is, amounts "not yet paid" to
eligible disabled persons. Memorandum in Support of
' Motion to Dismiss ("
Memo."), at 3. In other words, defendants argue that Congress has
distinguished between funds that are "payable" and funds that
In support of this proposition, defendants cite to I.R.C. §6334(a)(9),
where Congress provides an exemption for amounts "payable to or
received by" an individual.
; see also 26 I.R.C. §§6334(a)(4), 6334(a)(7), 6334(a)(10)
(exempting amounts "payable" for unemployment benefits,
workers compensation, and military disability, respectively).
meaning of the word "payable" is an amount "[c]apable of
being paid" or "suitable to be paid." Black's Law
Dictionary 1128 (6th ed. 1990). The term may also "signify an
obligation to pay at a future time."
The Court holds, after an examination of the plain language of the
statute, that §§6334(a)(10) and (11) exempt from levy only amounts
that are payable--that is, amounts that are not yet paid. In this case,
the funds in plaintiffs' bank account, which were levied upon by the
defendants' were no longer capable of being paid. The funds, by
plaintiffs' own admission, were taken from their bank account--they were
not garnished at the source. Thus, the very act of the levy--directly
from the plaintiffs' account--signifies that the funds already had been
paid, and therefore were no longer "payable." See Fredyma
v. United States of America, Dep't of the Treasury [98-1 USTC ¶50,166],
No. 96-477-SD, 1998 WL 77993, at *4 (D.N.H.
Jan. 9, 1998
) (holding that under §6334(a)(7), the plain meaning of the word
"payable" does not include amounts already paid).
To that end,
plaintiffs' claims that the levied funds were exempt from seizure must
be dismissed. The seized funds were not exempt from levy under the plain
language of the Code's exemption provisions in §§6334(a)(10) and (11).
Because these exemptions, as a matter of law, do not apply to the
seizure of plaintiffs' funds, these claims will be dismissed with
prejudice, the Court having determined that no relief is available under
any set of facts that could be proved consistent with the allegations. See
H.J., Inc., 492
at 249-50. 5
defendants raise a meritorious argument that certain of these claims
cannot be maintained on sovereign immunity grounds.
Memo., at 5. In regard to the suit against the Internal Revenue Service,
the defendants argue that Congress has not authorized suit against the
agency in its own name.
In regard to the suit against the
, defendants assert that plaintiffs have failed to allege any basis for
a waiver of sovereign immunity.
waiver, sovereign immunity shields the Federal Government and its
agencies from suit." F.D.I.C. v. Meyer, 510
471, 475 (1994) (citing Loeffler v. Frank, 486
549, 554 (1988) and Federal Hous. Admin. v. Burr, 309
242, 244 (1940)). As a sovereign, the
may not be sued without its consent.
v. Mitchell, 445
535, 538 (1980). A waiver of sovereign immunity cannot be implied, but
must be expressed explicitly by Congress. United States v. Nordic
Village, Inc. [92-1 USTC ¶50,109], 503 U.S. 30, 33-34 (1992).
plaintiffs have failed to set forth any basis for a waiver of sovereign
immunity. Regardless of whether any basis for waiver exists, the absence
of any allegation of waiver in the complaints mandates dismissal of
these actions. However, plaintiffs will be granted leave to replead in
order to assert a waiver of sovereign immunity, if appropriate.
defendants' motion to dismiss the complaints in 98-CV-4079 and
98-CV-4081 is GRANTED. Plaintiffs' claim of a violation of due
process, along with the claims of violation of I.R.C. §§7432 and 7433,
are DISMISSED without prejudice to replead. Plaintiffs' claims of
a violation of I.R.C. §§6334(a)(10), 6334(a)(11), and 6334(b)(3) are DISMISSED
shall have forty-five days from their receipt of this Memorandum and
Order to file and serve an amended complaint which cures the defects
noted herein. Failure to make such an amendment within the time frame
allotted will result in the dismissal of this case.
[95-1 USTC ¶50,028] In the Matter of
Mitchell W. Voelker, Debtor-Appellant
Court of Appeals, 7th Circuit, 94-2271,
, 42 F3d 1050, 42 F3d 1050. Affirming and remanding a District Court
[Code Secs. 6321 and
Lien for taxes: Bankruptcy: Property exempt from levy--An IRS tax
lien extended to a Chapter 13 debtor's personal property even though
that property was exempt from levy under Code Sec.
6331 . The plain language of Code Sec.
6321 unambiguously states that a federal tax lien attaches to all of
a debtor's property, without exception. Further, the protection that
Code Sec. 6331 affords
a debtor's personal property relates specifically to levies, not liens.
Finally, the attachment of an IRS lien to the taxpayer's property did
not undermine the goal of allowing the debtor to retain some minimal,
yet necessary, personal effects because the IRS could not have summarily
seized the property. The lien simply determined the amount that the
taxpayer had to pay the IRS, while allowing the taxpayer to retain
possession of the property.
Byrne, 115 Forest St., Wausau, Wis. 54402, George Goyke, P.O. Box 1566,
Wausau, Wis. 54402, for appellant. Gary R. Allen, Bruce R. Ellisen,
William S. Estabrook, Raymond R. Mulera, Alice L. Ronk, Department of
Justice, Washington, D.C. 20530, for appellee.
CUMMINGS, FLAUM, and ROVNER, Circuit Judges.
Mitchell Voelker, appealed from a decision of the District Court holding
that the Internal Revenue Service's ("IRS") tax lien extended
to his personal property exempt from levy under 26 U.S.C. sec.
6331 . We affirm.
Voelker filed a voluntary Chapter 13 bankruptcy petition on
July 29, 1992
November 19, 1992
, the IRS filed a proof of a secured claim for delinquent taxes in the
amount of $27,736, covering the years 1984 through 1989. Voelker
objected to this claim, contending that the IRS had a secured claim only
in the amount of $2,471, the value of his unencumbered assets less
$825.00 worth of personal property, including clothing, hand tools, a
lawnmower, a weedeater, and a bow and arrows, which were exempt from
levy under 26 U.S.C. sec.
6331 . Voelker argued that because this property was exempt from
levy, it was likewise exempt from the federal tax lien. The IRS
objected, claiming that under 26 U.S.C. sec.
6321 it had a lien on all of Voelker's property. Voelker then
amended his chapter 13 plan to provide that he would surrender the
property at issue to the IRS if a court determined that the lien
extended to the property.
court held that the IRS's lien did not attach to Voelker's exempt
property. In Re Voelker [94-1
USTC ¶50,122 ], 164 B.R. 308 (Bkrtcy. W.D. Wis. 1993). It noted
that "[p]ersonal property exemption statutes should be liberally
construed in order to carry out the legislature's purpose in enacting
them--to protect debtors."
at 312 (citations omitted). It reasoned that sec.
6331 's definition of levy as including "the power of distraint
and seizure by any means" precluded the lien from attaching to the
court, however, reversed the bankruptcy court's decision. In an
unpublished opinion, the district court found that the plain language of
sec. 6321 led to
the conclusion that the federal tax lien did attach to property exempt
questions of law de novo. Matter of West, 22 F.3d 775, 777 (7th
Cir. 1994). When interpreting a statute, "[i]f the statute is
unambiguous, we must enforce the plain meaning of the language enacted
by Congress." Family & Children's Center, Inc. v.
, 13 F.3d 1052, 1060 (7th Cir.), cert. denied, 115 S. Ct. 420
(1994). This court "will look beyond the express language of a
statute only where that statutory language is ambiguous or where a
literal interpretation would lead to an absurd result or thwart the
purpose of the overall statutory scheme." United States v. Real
Estate Known as 916 Douglas Ave., 903 F.2d 490, 492 (7th Cir. 1990),
cert. denied sub nom. Born v.
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging
to such person.
U.S.C. sec. 6321 (emphasis
added). The Supreme Court has noted that this language "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). "Stronger language
could hardly have been selected to reveal a purpose to assure the
collection of taxes." Glass City Bank v. United States [45-2
USTC ¶9449 ], 326 U.S. 265, 267 (1945). The language of the statute
unambiguously shows that the federal tax lien attaches to all of a
debtor's property, without exception. Thus, we agree with the district
court, and the majority of other courts addressing the issue, that the
lien attached to Voelker's $825.00 worth of personal property. 1
See, e.g., United States v. Barbier [90-1
USTC ¶50,107 ], 896 F.2d 377 (9th Cir. 1990); Matter of King
¶50,553 ],137 B.R. 43, 46 (D. Neb. 1991); United States v. Stowe
¶50,559 ], 121 B.R. 549, 552-53 (N.D. Ind. 1990); In Re
USTC ¶50,202 ], 163 B.R. 327, 334 (Bkrtcy. N.D.
1994); In Re
, 148 B.R. 88, 92 (Bkrtcy. D. D.C. 1992); In Re Krahn, 124
B.R. 78, 82 (Bkrtcy. D.
1990); In Re Hall, 118 B.R. 671, 672 (Bkrtcy. S.D. Ind. 1990); Matter
of Beard [90-1
USTC ¶50,260 ], 112 B.R. 951, 953-54 (Bkrtcy. N.D. Ind. 1990); In
Re Bates [88-1
USTC ¶9124 ], 81 B.R. 63, 64 (Bkrcty. D.
1987); In Re Ridgley, 81 B.R. 65, 69 (Bkrtcy. D.
1987); In Re
USTC ¶9186 ], 80 B.R. 213, 214-15 (Bkrtcy. D.
Voelker's assertions, 26 U.S.C. sec.
6331 does not alter this result. That section provides:
Authority of Secretary--If any person liable to pay any tax neglects or
refuses to pay the same within 10 days after notice and demand, it shall
be lawful for the Secretary to collect such tax . . . by levy upon all
property and rights to property (except such property as is exempt under
section 6334 )
belonging to such person or on which there is a lien provided in this
chapter for the payment of such tax.
The term "levy" as used in this title includes the power of
distraint and seizure by any means. 3
6331 says nothing about protecting this property from a lien, but
merely from levy. Congress exempted this property from levy and has the
capacity to do the same with the tax lien. It has chosen not to do so.
dissimilarity in treatment makes sense, for as the Ninth Circuit
discussed in Barbier, a lien and levy are different things.
"A levy forces debtors to relinquish their property. It operates as
a seizure by the IRS to collect delinquent income taxes." [90-1
USTC ¶50,107 ], 896 F.2d at 379. On the other hand, "a lien .
. . is merely a security interest and does not involve the immediate
seizure of property. A lien enables the taxpayer to maintain possession
of protected property while allowing the government to preserve its
claim should the status of [the] property later change."
Thus, if a debtor later sells the exempt property, the IRS could move to
collect the proceeds from the sale.
Having the IRS
lien attach to exempt property does not, as Voelker contends, undermine sec.
6334 's goal of allowing the debtor to "retain some minimal
personal effects necessary for living in our society," because the
IRS cannot summarily seize the property. The debtor retains possession
and the lien simply determines the amount he has to pay the IRS. 4
Thus, the effect of our holding that the IRS's lien attaches to
Voelker's personal property will require him to pay the IRS $825.00 more
than if the lien did not attach, either through larger monthly payments
or through payments over a longer time period. As noted previously,
however, Voelker has amended his plan to provide for the surrender of
this property to the IRS, should we hold, as we do today, that the lien
attaches. This action is not necessary, see 11 U.S.C. sec. 1325(a)(5),
and does not alter our conclusion.
IRS's lien to property exempt from levy accomplishes both of Congress's
goals: it increases the payment of delinquent taxes and allows the
debtor to protect his property from summary, non-judicial seizure.
Because it is not absurd that Congress would extend the lien to personal
property yet preclude the levy of that property, we will not manufacture
a different understanding of the "all property and rights in
property" language in sec.
6321 and the exemption from levy in sec.
foregoing reasons, the decision of the district court is affirmed and
the case remanded for further action. AFFIRMED.
Voelker asserts that should we hold that the lien attaches, it must be
released under 26 U.S.C. sec.
6325 , which states that a lien must be released when "the
liability for the amount assessed, together with all interest, has
become unenforceable." We read this to mean that the underlying
liability, not the lien securing it, must have become unenforceable in
order to require releasing the lien. See MICHAEL L. SALTZMAN, IRS
PRACTICE AND PROCEDURE para. 15.04 (2d ed. 1991) (the question is
whether "the tax assessed is unenforceable as a matter of
law (e.g., by the expiration of the period of limitations).")
(emphasis added); WILLIAM T. PLUMB, JR., FEDERAL TAX LIENS 43 (3d ed.
1972) ("unenforceability as a matter of law (e.g., the
statute of limitations), not of fact" requires release) (emphasis
in original). In any event, we do not decide whether the lien is
unenforceable because we express no view as to whether the IRS can
enforce it through other procedures, such as judicial foreclosure under
26 U.S.C. sec. 7034.
Like the district court, we do not find the cases to the contrary, cited
by the appellant, persuasive. See Matter of Riley, 88 B.R. 906,
912 (Bkrtcy. W.D. Wis. 1987) (no analysis of issue); Matter of
Driscoll, 57 B.R. 322, 327 n.6 (Bkrtcy. W.D. Wis. 1986) (Analysis
consisting only of the sentence: "The debtor does receive a much
smaller personal property exemption under IRC sec.
6334 (26 U.S.C. sec.
6334 ) which constitutes the sole exemption which may be claimed
against a valid federal tax lien."); In Re Ray, 48 B.R. 534,
537-38 (Bkrtcy. S.D. Ohio 1985) (no analysis).
A lien does not itself act as a distraint and seizure so we do not, as
Voelker contends we should, equate a lien with levy. We express no view
as to whether this definition of levy prohibits other methods of
collection, such as judicial foreclosure under 26 U.S.C. sec. 7034.
A chapter 13 debtor must satisfy the full amount of secured claim, 11
U.S.C. 1325(a), which amount is determined by "the creditor's
interest in the estate's interest in such property." 11 U.S.C. sec.
506(a). The debtor pays for this secured claim in monthly installments
over three years. However, the bankruptcy court can, for cause, extend
the repayment period by an additional two years, 11 U.S.C. sec. 1322(c),
so that the debtor does not have to make larger monthly payments.
opinion today is a succinct and true application of the law and in that
respect I join it without hesitation. This case has led me to question
whether the law makes much sense, however. The problem is one for
Congress to fix, of course, and my view of the practicalities may matter
little. Some cases nonetheless cry out for comment, and I believe this
is one of them.
Central to the
framework of personal bankruptcy is the notion of a "fresh
start": the opportunity for a debtor to pool his resources, pay
what he can of his debts, and move on. See, e.g., In re Smith,
848 F.2d 813, 816-17 (7th Cir. 1988); In re LeMaire, 898 F.2d
1346, 1357-58 n.16 (8th Cir. 1990) (en banc) (dissenting op.). But a
fresh start ought not be a naked start. A debtor should not be made to
surrender the clothes on his back or the food in his cupboard in
exchange for the protection of bankruptcy. Common sense as well as
compassion dictates as much: a bankrupt deprived of life's necessities
will merely have to reallocate a portion of his future income to
reacquire those items (in all likelihood at a greater cost), defeating
the purpose of the fresh start bankruptcy purports to provide. It makes
far more sense to leave these items in the debtor's hands. Consistent
with that notion, section
6334(a) exempts a category of personal property from the power of
administrative levy that the IRS otherwise enjoys.
But, as the
IRS is quick to point out, the statute says nothing about a lien. And
because the statutory exemption indeed refers only to levies, and the
levy and the lien are distinct legal concepts, the court correctly
concludes that the exemption does not deprive the IRS of the lien that
it enjoys on all property owned by the debtor.
IRS to retain a lien on personal property may make some sense given the
possibility that a debtor could decide to sell it. If Mr. Voelker
decides to give up his weed eater or his bow and arrows, it only seems
fair that the IRS lay claim to the cash he gains from the sale. And yet
it would seem unrealistic to expect that the government will realize
substantial remuneration from the sale of these second-hand items.
Notably, for example, the statute currently imposes a cap of $1,650 on
the value of "fuel, provisions, furniture, and personal
effects" which may be exempted from levy. sec.
6334(a)(2) . Moreover, many of these and other items falling within
the exemption can hardly be considered luxuries that a person can do
without--e.g., food, clothing, fuel, and school books. sec.
6334(a)(1) , (2) .
Thus, the likelihood that the debtor will (short of desperation) convert
these modest belongings to cash appears low, and the prospect that the
proceeds will be significant if he does even lower. Perhaps there is a
forgotten Armani original hanging in Mr. Voelker's closet, but I doubt
Of far more
concrete benefit to the IRS in recognizing a lien on such property is
the fact that the value of the property must be included in the total
amount the debtor is obligated to repay the government. Ante at 5-6
& n.4. Thus, in the event that the debtor "chooses" to
keep the property (and what real "choice" is there with
respect to items like food, clothing, and fuel?), he must either make
higher monthly payments over the life of his payment plan or make these
payments over a longer period of time, beyond the usual three-year
maximum if need be. See 11 U.S.C. sec. 1322; ante n.4. Neither of
these scenarios is consistent with the purpose of bankruptcy. A higher
monthly payment raises the probability that the debtor will default on
his obligations, particularly when he has a limited income. The latter
option postpones the fresh start that the debtor has sought to achieve
in filing for bankruptcy protection.
happen if Mr. Voelker elects to keep his personal property but cannot
make good on the increased financial obligation that decision would
impose on him? The government reassured us at oral argument that it does
not want Mr. Voelker's clothing. I take that to mean that although the
IRS enjoys a lien on the $825 worth of personal property Mr. Voelker
possesses, it would never go so far as to seek to enforce that lien in
foreclosure proceedings. Thus, Mr. Voelker need not worry about having
the clothes taken from his back, literally. Yet, he ought not have to
rely on a wink and a nod in assessing his prospects, either. We assume
that debtors, like any other citizens, will take their financial
obligations seriously. So if Mr. Voelker wishes to keep his personal
effects, he will no doubt do his best to scrape among meager resources
to pay for them. Again, this seems to me to be contrary to the purpose
of bankruptcy protection. If the government either will not or cannot
enforce the lien on Mr. Voelker's personal property, then arguably it
should never be recognized in the first instance.
amended Chapter 13 plan provides that in the event the lien on his
personal property is upheld, he will surrender these goods to the
government in lieu of increased payment obligations. No one disputes
that this is his right, and by putting the government in the business of
conducting a rummage sale Mr. Voelker may be doing the one thing that
best exposes the folly in permitting the IRS a lien on this category of
property. Surely the cost of liquidating these items (if the government
even tries) far outmeasures any income that the IRS can hope to attain
from their sale. To say nothing of the cost to Mr. Voelker's dignity
and, in the final analysis, our own.
[96-2 USTC ¶50,423] In re Beverly A.
Straight and Milton L. Straight, Debtors. Beverly A. Straight and Milton
L. Straight, Plaintiffs v. First Interstate Bank of Commerce and
Internal Revenue Service, Defendants
Bankruptcy Court, Dist. Wyo., 95-10007, 6/20/96, 200 BR 923
[Code Secs. 6323 and
Bankruptcy: IRS lien: Perfected: Avoidability: State law: Uniform
An IRS lien on the proceeds of a bankrupt individual's business account
receivable was properly filed and could not be avoided as an unperfected
lien. Under state (
) law, the IRS properly filed its notice of tax lien in the office of
county clerk of the county where the property was located. The IRS did
not have to comply with the Uniform Commercial Code (UCC) when filing a
notice of tax lien since, by its terms, the UCC does not apply to
statutory liens. Further, the tax lien did not arise out of a commercial
transaction but rather occurred by operation of federal law. Also, the
court rejected the taxpayer's contention that the Bankruptcy Code's
hypothetical bona fide purchaser was effective under Code Sec.
6323 to avoid the tax lien on several specific items of property.
[Code Sec. 6323 ]
Bankruptcy: IRS lien: Priority of claim: Failure to perfect lien:
Avoidable prepetition transfer.--
An IRS perfected tax lien on the proceeds of a bankrupt individual's
business account receivable had priority over a bank's alleged security
interest in the receivable. The bank based its priority over the tax
lien on a security agreement filed before the IRS's notice of tax lien.
However, the bank's security agreement did not take a security interest
in any accounts receivable or contract rights except those arising out
of a sale, lease, or other disposition of business equipment, mobile
office or tools listed. The account receivable at issue was created from
services performed by the taxpayer's business as a subcontractor on a
road construction project, not by a sale, lease, or other disposition of
equipment. Even if the bank had included the account receivable in its
collateral, it failed to properly file a financing statement. Therefore,
a payment made to the bank from the proceeds during the 90 days prior to
the taxpayer's bankruptcy filing was a payment on an unsecured debt,
which was an avoidable transfer.
[Code Sec. 6334 ]
Bankruptcy: IRS lien: Exempt assets.--
Property of a bankrupt individual was not exempt from a IRS lien under
Code Sec. 6334 because
it was not among the property specifically exempted from the process of
levy by that section.
Winship, Donald R. Winship & Assocs., P.C., 100 N. Center St.,
Casper, Wyo. 82602, for debtor. Beverly A. Straight, Milton L. Straight,
1709 Meade, Clearmont, Wyo. 82835, pro se. Sharon A. Dunivent,
P.O. Box 265, Cheyenne, Wyo. 82003, for trustee.
ON MOTIONS FOR SUMMARY JUDGMENT
This case came
before the court on the amended complaint of the plaintiffs/debtors,
Milton L. and Beverly Ann Straight, and the motions for summary judgment
filed by the Straights and both defendants, the Internal Revenue Service
(IRS) and the First Interstate Bank of Commerce (FIB). On
February 13, 1996
, the court held a hearing on the motions. After a review of the record
and pleadings on file, and upon consideration of the arguments of the
parties, the court finds and rules as set forth herein.
The court has
jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§157
and 1334. This is a core proceeding within the meaning of 28 U.S.C. §157(b)(2)(F)
and (K). The motions are brought pursuant to Fed. R. Civ. P. 56(a) and
(b), made applicable in adversary proceedings by Fed. R. Bankr. P. 7056.
amended complaint states claims for a declaratory judgment under 28
U.S.C. §2201 and to
avoid liens. The IRS argues that this court is without jurisdiction
under the Declaratory Judgment Act to determine those issues on which
the debtors seek a declaratory judgment. The court disagrees. Even if
the remedy of a declaratory judgment were necessary to resolve this
case, an actual controversy exists and the matters which the debtors
seek to have resolved fall within the provisions of 11 U.S.C. §505
. As such, they are excluded from the restrictions of §2201(a). See
In re Border, 116 B.R. 588, 590 (Bankr. S.D.
are residents of
. For the purposes of this case, the property of the Straights has at
all times been located in
is engaged in the road construction flagging business under the dba
Centerline Traffic Control and Flagging. She borrowed funds from the
First Interstate Bank of Commerce in
, to operate the business. On
May 7, 1993
, she gave FIB a promissory note for $35,000. The note was secured by
collateral identified in a Commercial Security Agreement signed the same
date. The Security Agreement was filed by FIB, in lieu of a financing
May 12, 1993
in the Office of the Sheridan County Clerk.
Agreement granted FIB a security interest in items of collateral
identified as equipment and inventory, which were listed in the attached
Schedules A through D. The lists were of various tools, traffic signs
and traffic control devices, and a mobile office. The equipment is
valued in the debtors' schedules at $84,239.36 (office equipment and
business operations, Mrs. Straight entered into at least two
subcontracts with general highway construction contractors. One of these
March 23, 1993
contract with Nicholls & Lewis, Inc. On
May 27, 1993
, Mrs. Straight entered into a Standard Sub-contract Agreement with
another highway contractor, Lobo, Inc. and Carr Construction, Inc., A
Joint Venture (Lobo/Carr). The parties do not dispute that Mrs. Straight
assigned the subcontract payments to FIB, although the assignments were
not provided to the court as FIB indicated.
under both contracts was completed. Payments due under the Lobo/Carr
contract are valued in the debtors' chapter 13 plan at $144,500.
According to Mrs. Straight's affidavit however, Lobo/Carr owes Mrs.
credit to Mrs. Straight under a number of promissory notes dated from
June 8, 1993
October 25, 1994
. The amount of the FIB claim as of the date the Straights filed their
chapter 13 voluntary petition,
January 13, 1995
, is $150,351.21.
September 13, 1994
, the IRS filed a Notice of Federal Tax Lien in the Office of the
Sheridan County Clerk for unpaid employment taxes totaling $79,134.23.
The IRS claim as of the date of the bankruptcy filing is $119,990.62.
The IRS did
not file its Notice of Federal Tax Lien in the office of the Secretary
of State of Wyoming. FIB did not file an assignment of either
subcontract in any location. FIB did not file its
May 6, 1993
security agreement or a financing statement with the Secretary of State
property other than the rights to contract payments and equipment, which
is subject to the federal tax lien, including their home. There is a
first lien on the residence of $15,113, but some equity exists.
December 30, 1994
, FIB was paid $16,605.04 from the Lobo/Carr contract payments. The
payment was made upon stipulation of the parties from funds held by the
District Court for the Fourth Judicial District of Wyoming. On
January 13, 1995
, the Straights filed their voluntary petition for relief under chapter
13. The payment was within 90 days of the filing of the bankruptcy
for entry of summary judgment are frequently stated. Summary judgment is
appropriate when there are no issues of material fact in dispute and the
moving party is entitled to judgment as a matter of law. In re Baum,
22 F.3d. 1014, 1016-1017 (10th Cir. 1994). A fact is material if it
could affect the outcome of the claim. An issue is genuine if it
presents sufficient disagreement to be submitted to the trier of fact,
and the trier of fact could return a verdict for the nonmoving party. Farthing
City of Shawnee
, 39 F.3d. 1131, 1135 (10th Cir. 1994). The court must review the
record and make all reasonable inferences in favor of the party opposing
issue is whether a chapter 13 debtor has standing and/or the requisite
statutory authority to assert the avoiding powers of a trustee found in
various provisions of the bankruptcy code. In their original complaint,
the Straights sought a determination of the relative priorities of the
FIB consensual lien and the IRS tax lien. The action was necessary for
the debtors to value the secured claims in a chapter 13 plan. In this
court's view, a chapter 13 debtor has standing to pursue claim valuation
and to bring an action for a determination of the relative priorities of
competing liens for plan payment purposes.
the debtors amended their complaint to include claims for lien avoidance
under §§544 &
545 and the recovery of an alleged preferential transfer under §547
103(a) makes the avoiding powers of chapter 5 applicable in cases
under chapter 13. Nonetheless, who will exercise these powers in chapter
13 is anything but clear. The power to avoid a lien or transfer under §§544
, 545 , or 547
is granted to the "trustee." In chapter 13, the trustee's
specific duties do not include using the lien avoiding powers of chapter
5. Nor does the enumerated list of the debtor's powers which is set
forth in §1303 .
decisions, relying on statutory construction, reach different
conclusions. Early decisions were split into at least two camps. Some
courts held that only a chapter 13 trustee could use the avoiding
powers. In re Walls, 17 B.R. 701 (Bankr. S.D.W. Va. 1982). Others
held that the debtor could exercise these powers. In re Ware, 99
B.R. 103 (Bankr. M.D. Fla. 1989); In re Ottaviano, 68 B.R. 238
1986); In re Hall, 26 B.R.10 (Bankr. M.D. Fla. 1982) (case
receded from and position reversed by same author in In re Tillery,
124 B.R. 127 (Bankr. M.D. Fla. 1991)).
majority rule holds that debtors may use the avoiding powers for their
own benefit only within the narrow limits of §522(h), i.e., if the
property would have been exempt but for the transfer and the trustee
does not act. Otherwise, the majority holds that the strong arm powers
belong exclusively to the chapter 13 trustee. In re Hill, 152
B.R. 204, 206 (Bankr. S.D.
1993); In re
, 148 B.R. 165 (Bankr. E.D.N.Y. 1992), aff'd, 169 B.R. 285
In addition to
statutory construction, most of the decisions are also supported by
policy considerations. For example, given the trustee's reluctance in
most cases to pursue transfers, the debtor should be able to redress any
On the other
hand, the strong arm powers are obviously intended to enhance the
estate, not to increase the personal assets of the debtor. This policy
supports a rule that only a trustee can use the avoiding powers outside
of §522(h). Some courts have stated that if a debtor is authorized to
exercise avoiding powers, the debtor must do so for the benefit of the
estate. In re Jernigan, 130 B.R. 879 (Bankr. N.D.
A number of
factors are important in this case. In some respects, the case is more
similar to a chapter 11 case. The debtor has made no plan payments since
the beginning of the case and, as the IRS points out, that alone could
make these issues moot.
chapter 13 trustee has refused to pursue this litigation, having no
apparent motivation to recover preferential transfers or to avoid liens.
Obviously, if the court rules against the debtors on this question, they
can convert their bankruptcy case to a chapter 11 or chapter 7 case. The
adversary proceeding will likely go forward. And finally, the court
believes it is inequitable for a creditor with an unperfected lien or as
the recipient of a preferential transfer to retain an advantage over the
court holds that the Straights may prosecute these claims so long as any
recovery is deposited with the chapter 13 standing trustee for
distribution to and for the benefit of the unsecured creditors. As to
the claims brought pursuant to §522(h), the court holds that the
statutory language of that section grants the debtors' standing to avoid
liens which impair their exemptions.
of the parties with regard to the lien priorities should first be
summarized. FIB argues that its lien in the Lobo/Carr proceeds is
perfected, is first in time, and is, therefore, prior to the IRS. The
debtors argue that FIB did not properly file its financing statement
and, therefore, does not have a perfected lien in the Lobo/Carr
proceeds. The debtors also argue that the IRS lien is improperly filed,
making it avoidable as to some items of property. The IRS contends that
the FIB lien in the Lobo/Carr proceeds is not perfected and, therefore,
the IRS lien has priority.
The IRS lien:
The debtors allege that the IRS lien may be avoided under §545(2)
which states that "the trustee may avoid the fixing of a
statutory lien on property of the debtor to the extent that such lien
... is not perfected or enforceable at the time of the commencement of
the case against a bona fide purchaser ..." First, Straights
contend that the IRS lien is not perfected as to the debtors' vehicles
and accounts receivable (Lobo/Carr contract payments) because the IRS
did not comply with the filing requirements of the Uniform Commercial
Code, found in Wyo. Stat. §§39.1-9-302 & 39.1-9-401 (1991).
and priority of a federal tax lien are determined in accordance with
federal law. Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 513 (1960). A federal tax lien arises
when a tax is unpaid after demand. 26 U.S.C. §6321
. Under §6323(a) of
the Internal Revenue Code (IRC), a federal tax lien becomes valid
against third parties when notice is filed in accordance with §6323(f)
. To perfect a tax lien, the IRC defers to state law to designate
the place and manner of filing. In re
, 133 B.R. 813, 815 (Bankr. W.D. Tex. 1991). In this case, the
parties agree that the applicable law is the law of
, the state in which the personal property at issue is situated. 26
has enacted the Uniform Federal Lien Registration Act which requires
that, excluding persons not deceased, corporations, partnerships or
trusts, a federal tax lien is filed in the office of the county clerk of
the county where the person against whose interest the lien applies
resides at the time of filing of the notice of lien.
Stat. §29 -6-201 et
seq. (Supp. 1994). One determines whether or not the IRS has properly
filed its notice of tax lien in accordance with this statute.
disagrees with the debtors' position. The IRS is not required to comply
with the Uniform Commercial Code when filing its notice of federal tax
lien. By its terms, the UCC does not apply to statutory liens. Wyo.
Stat. §§34.1-9-102(b) & 34.1-9-104(a)(I) (even assuming that a
federal tax lien is a consensual "security interest" under the
UCC). Frontier Federal Sav. & Loan Ass'n v. Commercial Bank,
806 P.2d. 1140, 1142 (
policy arguments are not convincing. The IRC protects the very vehicle
purchasers about whom the debtors express concern. A federal tax lien
does not arise out of a commercial transaction as implied by the
debtors, but rather occurs by operation of federal law. Finally, the
case law cited by the debtors, even if correct, is applying the law of
other states and as such, is inapposite.
In this case,
the IRS properly filed its notice of federal tax lien in the Office of
, the residence of the Straights at the time the notice was filed.
Stat. §29 -6-204(c)(iv).
The IRS tax lien was properly filed and cannot be avoided under §545(2)
as an unperfected lien.
Straights allege that the status of a §545
hypothetical bona fide purchaser is effective under 26 U.S.C. §6323(b)
to avoid the lien on some specific items of property. That section
of the IRC provides exceptions to the validity of the tax lien by
protecting a "person who, for adequate and full consideration in
money or money's worth" and without knowledge of the lien,
purchases property from the taxpayer. 26 U.S.C. §6323(h)(6)
. In response, the IRS did not confront this issue head on, but
argued only the standing issue.
In the case of
In re Walter [95-1
USTC ¶50,072 ], 45 F.3d 1023 (6th Cir. 1995), the court addressed
this question in the context of motor vehicles. The IRC requires that
the bona fide purchaser also have possession of the vehicles to be
protected. The Walter court rejected the same cases cited by the
debtors here and held that the hypothetical bona fide purchaser under §545(2)
does not in all circumstances satisfy the stricter standard of a
bona fide purchaser under §6323(b)(2)
at 1034. That court also refused to impute the necessary element of
hypothetical possession to a trustee under §545(2)
as a hypothetical bona fide purchaser.
The court in In
re Berg [95-2
USTC ¶50,634 ], 188 B.R. 615 (Bankr. 9th Cir. 1995) adopted and
elaborated on the decision in In re Walter [95-1
USTC ¶50,072 ],
at 619-620. That court held that the IRC requires a higher standard
for a bona fide purchaser than does §545
. Therefore, the status of a hypothetical bona fide purchaser under
the bankruptcy code is never effective to avoid IRS liens through §6323(b)
, whether or not possession is an issue. §6323(b)(1)
; See also
v. Weissing [95-2
USTC ¶50,449 ], 1995 W.L. 579928 (M.D. Fla. 1995), reversing
In re Southern Transfer & Storage Co., 157 B.R. 691 (Bankr.
M.D. Fla. 1993) (cited by debtors here).
decisions are not without their critics, however. In In re Guyana
Development Corp. [96-1
USTC ¶50,061 ], 189 B.R. 393 (Bankr. S.D. Tex. 1995), the court
rejected the reasoning in Walter. That court held that a trustee
is deemed to have paid full and adequate consideration as a bona fide
purchaser, thereby satisfying the definition of §6323(h)(6)
. That court found no distinction between a purchaser for value and
a purchaser for adequate consideration in money or money's worth.
finds the reasoning in United States v. Weissing persuasive. A
trustee standing in the shoes of a bona fide purchaser is not the
purchaser without knowledge that §6323
is intended to protect. The specific language of §6323
does set forth a stricter standard than §545
. And finally, with regard to motor vehicles, hypothetical
possession is a legal fiction not addressed, contemplated or created by §545
. United States v. Weissing [95-2
USTC ¶50,449 ], 1995 W.L. 579928 at p. *4-5.
avoidance of the tax lien on these grounds exceeds the scope of the
standing to which this court has found a chapter 13 debtor is entitled;
that is, to recover property for the benefit of the creditors. The
decisions adopting In re Walter will be followed by this court.
The FIB lien:
To resolve which lien has priority in the Lobo/Carr funds, the court
must determine the status of the alleged FIB lien in the Lobo/Carr
contract payments. A properly filed federal tax lien is valid and has
priority over a prior security interest which is not protected under
local law against a subsequent judgment lien creditor. 26 U.S.C. §6323(h)
. The validity of a prior recorded security interest must be
determined pursuant to state law.
v. FDIC, 1987 W.L. 43096 at p. *2 (N.D.
interest asserted by FIB was created by a security agreement executed
May 7, 1993
and filed on
May 12, 1993
in the Office of the Sheridan County Clerk. To determine the intent of
the parties to an unambiguous contract, the court must give effect to
the plain meaning of its language. Killer v. Citicorp Mortg., Inc.,
860 P.2d. 1165, 1167 (
1993). If the contract is ambiguous, the contract is construed against
the drafter. Deepwater Investments, Ltd. v. Jackson Hole Ski Corp.,
938 F.2d. 1105, 1111 n.9 (10th Cir. 1991). General terms, if
conflicting, give way to the more specific. Flora Const. Co. v.
Bridger Valley Elec. Ass'n, Inc., 355 P.2d. 884, 885 (
The UCC states
that a description of the collateral in the security agreement is
"sufficient whether or not it is specific if it reasonably
identifies what is described."
Stat. §34.1-9-110. In this case the FIB asserts its security interest
in the contract rights under the following language:
The word "Collateral" means the following described property
equipment and inventory on the attached Schedules "A",
"B", "C", & "D".
addition, the word "Collateral" includes all the following,
whether now owned or hereafter acquired, whether now existing or
hereafter arising and wherever located: ...
All accounts, contract rights, general intangibles, instruments, rents,
monies, payments, and all other rights, arising out of a sale, lease,
or other disposition of any of the property described in this
Collateral section. (Emphasis provided).
language is clear and unambiguous that the FIB did not take a security
interest in any accounts or contract rights except those arising out of
a sale, lease, or other disposition of the flagging equipment, mobile
office and tools listed. The terms sale and lease have ordinarily
understood meanings. Disposition is defined by Blacks Law Dictionary as
transferring, alienating or giving up property. No sale, lease, or
transfer of the flagging equipment has occurred, and no contracts or
accounts related to a sale, lease, or other disposition exist.
contract payments at issue were not created by a sale, lease, or other
disposition of the equipment. The contract payments are from services
performed by Mrs. Straight as a subcontractor on a road construction
project. Consequently, by its terms, the security agreement does not
grant FIB a security interest in the Lobo/Carr contract payments.
In a previous
case, this court had occasion to determine the rights of the debtor in
possession vis-a-vis the junior lien holder when the first priority lien
was avoided. In re Double J Cattle Co., Double J Cattle Co. v. Geis
et al., No. 95-2012, slip opinion at 11 (Bankr. D.
Nov. 2, 1995
). The status of the lien to which the trustee succeeds is not enhanced
by §551 . The trustee
preserves only the rights to which he has succeeded. In re Kors,
Inc., 819 F.d. 19, 23 (2nd Cir. 1987).
The court must
law to determine the relative priority of competing liens. In
re Van De Kamp's Dutch Bakeries, 908 F.2d. 517, 519 (9th Cir. 1990).
Under Wyoming Statute §34.1-9-301(a) an unperfected security interest
is subordinate to the rights of a person who becomes a lien creditor
before the security interest is perfected. In this case, the IRS,
pursuant to both the IRC and the UCC, has priority over the nonexistent
lien of the FIB. The IRS lien has first priority position on the
property unencumbered by the FIB lien, and is prior to any interest of
the debtors or the estate.
court concludes that the FIB security interest does not encumber the the
Lobo/Carr payments, the court does not need to determine whether the FIB
filed in the proper location(s), nor whether the good faith filing
provision of §39.1-9-401(b) is applicable to the IRS. Suffice it to say
that in this court's opinion, the Lobo/Carr contract payments are
accounts within the meaning of the UCC. They are contract payments for
services performed, falling squarely into the definition of an account,
i.e., a "right to payment for ... services rendered which is not
evidenced by an instrument or chattel paper ..." Wyo. Stat. §39.1-9-106.
The FIB argument that the written contract between Mrs. Straight and
Lobo/Carr is an indispensable writing as described in the comments to
the UCC is unconvincing. In the court's view, an indispensable writing
includes promissory notes, certificates of deposit and the like.
interest in accounts must be perfected by filing a financing statement
with the Secretary of State. Even if FIB had included the Lobo/Carr
account in its collateral, the FIB failed to properly file the security
holds that the IRS tax lien has priority over the alleged security
interest of the FIB in the Lobo/Carr contract.
Transfer to FIB
to avoid, as a preferential transfer under §547
, the payment to FIB of $16,605.04. This payment was made on
December 30, 1994
, pursuant to a stipulation and court order from the District Court for
the Fourth Judicial District of Sheridan County,
. The funds from which the payment was made were part of the Lobo/Carr
contract payments which this court has determined were not encumbered by
a FIB lien.
, the trustee may avoid any transfer of an interest of the debtor in
property to or for the benefit of a creditor; for or on account of an
antecedent debt owed by the debtor before the transfer was made; made
while the debtor was insolvent within 90 days before the date of the
filing of the petition; and that enables the creditor to receive more
than the creditor would receive if the case were a chapter 7 case.
547 provides a presumption of insolvency during the 90-day
prepetition period. In this case, insolvency was not disputed and no
evidence was presented to rebut that presumption or to raise a question
A transfer is
defined by §101(54) as
"every mode ... of disposing of or parting with property or with an
interest in property." This broad definition encompasses the
payment of money on an unsecured or undersecured debt. In this case, FIB
is an unsecured creditor and was paid funds upon which it did not have a
lien. FIB received more by that payment than it would have received in a
chapter 7 liquidation. In re Alper-Richman Furs, Ltd., 147 B.R.
140 (Bankr. N.D.
of a preferential transfer are satisfied. But FIB defends this claim by
contending that the payment was made pursuant to stipulation with the
debtor and by court order.
cannot agree that such circumstances somehow create a defense. A
judicially ordered transfer within the preference period is still a
transfer. If the other elements of a preference are met, such a transfer
can be avoided just as a judicially created lien is avoidable. In re
Waxman, 128 B.R. 49 (Bankr. E.D.N.Y. 1991).
concludes that the payment of Lobo/Carr contract funds to FIB during the
90 days prepetition was a payment on an undersecured debt which is an
avoidable preferential transfer under §547
of the code.
Exempt under the IRC
contend that some specific items of property are exempt from the
attachment of the IRS lien pursuant to the provisions of 26 U.S.C. §6334(a)
. Section 6334
provides a specific list of property exempt from levy,
including the furniture, clothing and tools listed by the Straights.
mistake the attachment of a tax lien with the process of levy, a
distinction with a material difference. The federal tax lien attaches to
all of a debtor's property, without exception. 26 U.S.C. §6321
. Under §6331(b) ,
a levy includes "the power of distraint and seizure by any
means." Even if a debtor retains possession of property under §6334
, the lien continues. The debtor must still pay the amount of the
secured tax claim. In re Sills [96-1
USTC ¶50,282 ], 82 F.3d 111, 114 (5th Cir. 1996); In re Voelker
¶50,028 ], 42 F.3d. 1050, 1053 (7th Cir. 1994). If the debtor
voluntarily disposes of the property subject to the lien, the property
is liable for the lien even though exempt from levy while in the
debtor's possession. In re Jackson [88-1
USTC ¶9186 ], 80 B.R. 213, 215 (Bankr. D.
cite the case of In re Barbier, 84 B.R. 190 (D. Nev. 1988) in
support of their argument. This decision was reversed by the Ninth
Circuit Court of Appeals in United States v. Barbier [90-1
USTC ¶50,107 ], 896 F.d. 377 (9th Cir. 1990). That court held that
in a "Chapter 13 plan, the IRS's tax lien may be secured by
property that is exempt from levy under section
at 380. Accordingly, the Straights may not exempt property from the lien
by application of §6334 .
money security interest under 522
remaining legal issue is whether, through §522(f), the debtors can
avoid the FIB lien on tools which they have claimed exempt as tools of
the trade. The debtors allege that the lien is a nonpossessory,
nonpurchase-money security interest which impairs valid exemptions. The
court is not advised as to the method or source of the values placed on
the tools by the debtors. FIB responds that this claim presents genuine
issues of material fact that cannot be determined on summary judgment,
but did not present any opposing evidence.
As the court
finds there may be a factual dispute as to the value of the tools and
whether or not the lien is a nonpurchase-money lien, summary judgment on
this issue is inappropriate. Regardless, a trial in this adversary
proceeding is not necessary. The debtors may bring this matter before
the court for resolution on motion in the underlying bankruptcy case.
FIB will have ample opportunity to contest the motion and the asserted
values. Fed. R. Bank. P. 4003(d).
debtors seek a determination of the secured claims of the FIB and the
IRS under §506(a). Valuation is not a proper summary judgment issue.
Further, the debtors' own sworn pleadings create discrepancies over the
value of their residence. Last but not least, until a chapter 13 plan is
proposed, this issue is certainly premature. The value of the collateral
securing the claims will be presented and determined in a valuation
hearing held immediately prior to the confirmation hearing on any
proposed chapter 13 plan.
rulings herein have resolved all of the legal issues which must be
determined in this adversary proceeding. The remaining disputes between
the parties, valuation and the §522(f) claim against the First
Interstate Bank, will be decided in the underlying bankruptcy case. This
case is fully adjudicated by the Summary Judgment which the court enters
simultaneously with this Decision.
came before the court on the motions of the plaintiffs, Milton L. and
Beverly Ann Straight, for summary judgment, and the separate motions for
summary judgment of the defendants, the
United States of America
on behalf of its agency the Internal Revenue Service and the First
Interstate Bank of Commerce,
. The court held a hearing on the motions on
February 13, 1996
, at which all parties were represented by counsel. Now the court,
having considered the affidavits and other documents filed by the
parties, the elements of all the claims in the complaint, the pleadings
of record, the applicable law and the arguments of counsel, and in
accordance with the Decision on Motions for Summary Judgment entered
this day, the court finds that there are no genuine issues of material
fact that must be resolved for disposition of this case. Therefore,
summary judgment is proper as a matter of law on all but two matters
which are more properly reserved for resolution in the underlying
bankruptcy case. It is, therefore,
the debtors/plaintiffs, Milton and Beverly Straight, are entitled to
judgment against the First Interstate Bank on Count I of the amended
complaint: any alleged lien of the First Interstate Bank on the
Lobo/Carr contract payments is void pursuant to 11 U.S.C. §544
; and, further
the plaintiffs' motion for summary judgment on the claim to avoid the
transfer of $16,605.04 to First Interstate Bank as a preferential
transfer pursuant to 11 U.S.C. §547
is granted and the estate shall have judgment against the First
Interstate Bank in the amount of $16,605.04, any recovery to be
immediately deposited with the chapter 13 standing trustee; and, further
the Internal Revenue Service's motion for summary judgment is granted in
all respects and the motion of the plaintiffs for summary judgment is
denied on the claims against the Internal Revenue Service stated in
Count III, Count IV, and Count V of the amended complaint; and, further
the First Interstate Bank's motion for summary judgment is denied,
except as to Count IV of the amended complaint, which matter is reserved
for ruling in the underlying bankruptcy case should the debtors choose
to pursue it.
[97-1 USTC ¶50,374] In re Beverly A.
Straight, doing business as Centerline Traffic Control & Flagging;
and Milton L. Straight, also known as Milton Lloyd Straight, also known
as Milton Straight, also known as Mickie Straight, Debtors. In re
Beverly A. Straight, doing business as Centerline Traffic Control &
Flagging, Debtor. Beverly A. Straight and Milton L. Straight,
Plaintiffs-Counter-Defendants-Appellees and Cross-Appellants. Randy
Royal, Chapter 7 Trustee, Appellee and Cross-Appellant v. First
Interstate Bank of Commerce,
Defendant-Counter-Claimant-Cross-Claimant-Appellant and Cross-Appellee.
Internal Revenue Service, Defendant-Cross-Defendant-Appellee and
Bankruptcy Appellate Panel, 10th Circuit,
, 207 BR 217, 207 BR 217. Affirming a Bankruptcy Court decision, 96-2
Liens: Tax liens: Security interests: Subject property.--
An IRS tax lien had priority on the proceeds of a bankrupt individual's
business account receivable because a bank did not have a security
interest in the account receivable. The description of the collateral
covered by the security agreement did not encompass any accounts except
those arising from a disposition of the debtor's equipment or inventory.
Moreover, the security interest was not perfected by filing in the
appropriate recording office.
Bankruptcy: Tax Claims: Avoidance of liens: Proper filing place.--
Under state (Wyoming) law, the IRS properly filed its notice of tax lien
in the office of the county clerk of the county where a bankrupt
individual's business account receivable, cash, security deposit, and
vehicles were located. The IRS did not have to comply with the Uniform
Commercial Code (UCC) when filing the notice of tax lien since, by its
terms, the UCC does not apply to statutory liens.
Liens: Tax liens: Avoidance: Purchaser without notice: Securities:
Tangible personal property.--
A bankruptcy trustee could not avoid a tax lien on an account receivable
or a security deposit as a purchaser without notice. The account
receivable did not qualify as tangible personal property, and the
security deposit did not qualify as a security.
Winship, Winship & Winship, P.C., 100 N. Center St., Casper, Wyo.
82601, for plaintiffs-counter-defendants-appellees and cross-appellants.
Stuart S. Healy,
49 S. Main St.
, for defendant-counter-claimant-cross-claimant-appellant and
cross-appellee. David D. Freudenthal, United States Attorney, Donald R.
Wrobetz, Assistant United States Attorney, Cheyenne, Wyo. 82008, Susan
A. Berson, Senior Trial Attorney, Jerome H. Fridkin, Department of
Justice, Washington, D.C. 20530, for defendant-cross-defendant-appellee
MCFEELEY, Chief Judge, and PUSATERI and CLARK, Bankruptcy Judges.
Interstate Bank of Commerce ("Bank") appeals a judgment of the
United States Bankruptcy Court for the District of Wyoming denying its
motion for summary judgment, granting a motion for summary judgment
filed by the Internal Revenue Service ("IRS"), and granting,
in part. a motion for summary judgment filed by the Chapter 13 Debtors,
Beverly A. Straight and Milton L. Straight (collectively the
"Debtors"). See Straight v. First Interstate Bank (In re
Straight) [96-2 USTC ¶50,423], 200 B.R. 923 (Bankr. D.
1996). The Debtors cross-appealed the Bankruptcy Court's judgment
denying a portion of their motion for summary judgment.
Debtors filed their cross-appeal, Milton L. Straight's Chapter 13 case
was dismissed. After the briefs were filed, Beverly A. Straight's
Chapter 13 case was converted to a case under Chapter 7 of the
Bankruptcy Code, the Chapter 7 case was assigned a new case number, and
Randy Royal was appointed Chapter 7 Trustee. The Chapter 7 Trustee has
been joined as a party to the appeals pursuant to Fed. R. App. P.
43(a)-(b) and 10th Cir. BAP L.R. 8018-1(e). We will refer to the Debtors
for matters which occurred before Mr. Straight's case was dismissed, but
will discuss the cross-appeal as being pursued by Ms. Straight since she
was the only cross-appellant when the appellate briefs were filed.
appeals, we are asked to determine whether the Bankruptcy Court erred in
concluding, in relevant part, that: (1) the Chapter 13 Debtors have
standing to commence avoidance actions under 11 U.S.C. §§544(a),
545(2), and 547(b); (2) the Bank does not have a security interest in a
certain account receivable; (3) a payment made to the Bank during the
ninety days prior to the filing of the Debtors' bankruptcy case is
avoidable as a preference under 11 U.S.C. §547(b); and (4) a tax lien
held by the IRS is not avoidable under 11 U.S.C. §545(2). We affirm the
Bankruptcy Court's judgment.
The Alleged Interests of the Bank
(a) The Security Agreements and Business Loan Agreement
Straight ("Straight") operated a road construction flagging
company doing business as Centerline Traffic Control and Flagging. On
May 7, 1993
, Straight executed a promissory note in the amount of $35,000 and a
Security Agreement in favor of the Bank. On
May 12, 1993
, the Bank filed the Security Agreement in the Office of the Sheridan
County Clerk, the county where all of the Debtors' property is located.
The Bank extended additional credit to Straight pursuant to a number of
promissory notes executed between June 1993 and October 1994. Although
not part of the record on appeal, the parties agree that these notes
were accompanied by security agreements, all of which were filed with
the Office of the Sheridan County Clerk in November of 1994. The
definition of "collateral" in these later security agreements
is apparently identical to the definition of "collateral"
contained in the Security Agreement executed on
May 7, 1993
, which is part of the record on appeal.
with a loan made on
June 8, 1993
, Straight also executed a Business Loan Agreement. This Agreement
contains a different definition of the word "collateral" than
the one used in the Security Agreement. The Business Loan Agreement was
not filed with the Office of the Sheridan County Clerk, the Secretary of
State of Wyoming, or in any other place.
Assignment of Subcontract Proceeds
obtaining credit from the Bank, Straight entered into a Subcontract
Agreement with a joint venture comprised of Lobo, Inc.
("Lobo") and Carr Construction, Inc. ("Carr"). In
June 1993, Straight purportedly assigned payments due to her from the
Subcontract Agreement ("Lobo Carr account") to the Bank.
Notice of this alleged assignment was given to Lobo and Carr by the
Bank. However, proof of the assignment was not recorded by the Bank with
the Office of the Sheridan County Clerk, the Secretary of State of
Wyoming, or in any other place.
Payment to the Bank During the 90-Day Pre-Petition Period
documents submitted on appeal, a company called Safetymaster Corporation
("Safetymaster") obtained a default judgment against Straight
state court. In July 1994, Safetymaster (or perhaps the court clerk)
served writs of continuing garnishment on Lobo and Carr. On
December 12, 1994
, the state court held a hearing involving the Bank, Safetymaster, Lobo,
and Carr; the Bank and Safetymaster presented a stipulation to the
December 30, 1994
, the state court entered an order as a result of that hearing, ordering
Lobo and Carr to pay $26,605.04 immediately into the court's registry
and directing the court clerk to disburse $10,000 of that money to
Safetymaster and the balance to the Bank. The Bank does not dispute that
it received, in December 1994, $16,605.04 paid into state court by Lobo
and Carr (the "Stipulation Payment").
of the facts is based on a copy of Safetymaster's default judgment
("Default Judgment"), copies of writs of continuing
garnishment served by Safetymaster on Lobo and Carr ("Writs of
Continuing Garnishment"), and a copy of the state court's order
December 30, 1994
("State Court Order"), all of which were supplied to this
Court as "evidence" as part of the appellate record. The
documents, however, are not supported by affidavits attesting to their
authenticity and showing them to be admissible under the Federal Rules
of Evidence. See Fed. R. Bankr. P. 7056: Fed. R. Civ. P. 56(e).
Moreover, because the parties have not provided us with their statements
of facts and supporting materials. or their memoranda in support of
their respective summary judgment motions, it is impossible to discern
whether the Default Judgment, Writs of Continuing Garnishment or the
State Court Order were part of the record below.
What we do
know is that in its recitation of the facts, the Bankruptcy Court said:
December 30, 1994
, [the Bank] was paid $16,605.04 from the Lobo/Carr contract payments.
The payment was made upon stipulation of the parties from funds held by
the [state court]. . . . The payment was within 90 days of the filing of
the bankruptcy petition." Straight [96-2 USTC ¶50,423], 200
B.R. at 927. 1
In discussing the preference claim, the Bankruptcy Court noted that the
Bank contended that "the debtor" (apparently referring to
Straight alone) had been involved in the stipulation that led to the
Stipulation Payment being made.
at 932. On appeal, the Bank repeats its assertion that Straight
participated in getting the money paid to the Bank. So it is clear the
parties informed the Bankruptcy Court that the Bank received $16,605.04
through the state court proceeding, and that the money came from Lobo
The IRS Tax Lien
1994, the IRS filed a Notice of Federal Tax Lien in, among other places,
the Office of the Sheridan County Clerk for unpaid employment taxes.
This lien ("Tax Lien") extends to "all property and
rights to property, whether real or personal," belonging to
Straight, 26 U.S.C. §6321.
The Debtor's Bankruptcy Case and Chapter 13 Plan
January 13, 1995
, the Debtors filed a petition seeking relief under Chapter 13 of the
Bankruptcy Code. The Bank filed a proof of claim asserting a secured
claim in the amount of $150,351.21 as of the petition date. The IRS
filed a proof of claim asserting a claim in the total amount of
$119,990.62 as of the petition date, of which $87,389.96 is classified
as secured. $26,624.36 as an unsecured priority claim. and $5,976.30 as
a general unsecured claim.
filed a Chapter 13 plan with the Bankruptcy Court providing, in relevant
part, that the Lobo/Carr account would be surrendered to the Bank. The
IRS objected to the proposed plan because it did not provide for the
IRS's secured claim. The IRS asserted that the Tax Lien covered the
Lobo/Carr account and had priority over the Bank's lien. claims which
the Bank contested. Due to this dispute, the Bankruptcy Court granted
the Debtors' motion to continue the hearing on confirmation of their
proposed plan, requiring the parties to "independently resolve the
disputes which affect confirmation, or to initiate proper pleadings with
The Adversary Proceeding Commenced by the Debtors
After the Bank
and the IRS were unable to resolve their dispute regarding their
respective lien interests, the Debtors brought an adversary proceeding
against them, seeking, in relevant part, to: (1) avoid the Bank's lien
in the Lobo/Carr account under 11 U.S.C. §544(a) and Wyo. Stat. Ann. §34.1-9-401(a)(i);
(2) avoid the Stipulation Payment to the Bank as a preference under 11
U.S.C. §547(b); and (3) avoid the IRS Tax Lien under 11 U.S.C. §545(2).
The Bank and the IRS answered the Debtors' Complaint, and the Bank
asserted ten affirmative defenses, including that the Debtors did not
have standing to commence avoidance actions. The Bank also filed a
counterclaim against the Debtors and a cross-claim against the IRS. The
Bank's counterclaim against the Debtors was subsequently dismissed by
the Bankruptcy Court. and the propriety of that dismissal has not been
raised on appeal.
motions for summary judgment, the Bankruptcy Court concluded, in
pertinent part, that: (1) the Debtors had standing to pursue avoidance
actions under 11 U.S.C. §§544(a), 545(2), and 547(b); (2) the Bank did
not have a lien on the Lobo/Carr account and, even if it did, its lien
was unperfected and void under 11 U.S.C. §544(a); (3) the Stipulation
Payment made to the Bank was avoidable as a preference under 11 U.S.C.
§547(b); and (4) the IRS Tax Lien was not avoidable under 11 U.S.C. §545(2).
Straight [96-2 USTC ¶50,423], 200 B.R. at 927-32. These appeals
followed. We have jurisdiction over the appeals pursuant to 28 U.S.C. §158(a)(1)
Standard of Review
are from a judgment of the Bankruptcy Court on opposing motions for
summary judgment. The United States Court of Appeals for the Tenth
Circuit has stated:
We review the
grant or denial of summary judgment de novo, applying the same legal
standard used by the [trial] court pursuant to Fed. R. Civ. P. 56(c).
Summary judgment is appropriate if the pleadings depositions, answers to
interrogatories, and admissions on file, together with the affidavits,
if any, show that there is no genuine issue as to any material fact and
that the moving party is entitled to judgment as a matter of law. When
applying this standard, we examine the factual record and reasonable
inferences therefrom in the light most favorable to the party opposing
summary judgment. If there is no genuine issue of material fact in
dispute, then we next determine if the substantive law was correctly
applied by the [trial] court.
v. Prudential Ins. Co. of America,
50 F.3d 793, 796 (10th Cir. 1995) (citations and internal quotation
exceptions discussed below, the facts material to these appeals are
undisputed. Accordingly, we must determine upon de novo review whether
the substantive law was correctly applied by the Bankruptcy Court.
Chapter 13 Debtors' Standing To Commence Avoidance Actions
Court held, in pertinent part, that the Chapter 13 Debtors had standing
to commence avoidance actions under 11 U.S.C. §§544(a), 545(2), and
547(b), provided that they deposit any recovery obtained with the
Chapter 13 Trustee "for distribution to and for the benefit of the
unsecured creditors." Straight [96-2 USTC ¶50,423], 200
B.R. at 928. Since the Bankruptcy Court entered its judgment, however,
Straight's husband's case has been dismissed, her Chapter 13 case has
been converted to a case under Chapter 7 of the Bankruptcy Code, a
Chapter 7 Trustee has been appointed, and the Chapter 7 Trustee has been
joined as a party to these appeals. The Chapter 7 Trustee clearly has
standing to pursue the avoidance actions asserted in this proceeding.
Accordingly, issues related to the Debtors' standing under Chapter 13
are moot and shall not be considered by this Court.
The Bank's Interest in the Lobo/Carr Account
Court held that the Bank's Security Agreement does not create a security
interest in the Lobo/Carr account because the Agreement does not
describe it as collateral. Straight [96-2 USTC ¶50,423], 200
B.R. at 930. Whether the Bank has an interest in the Lobo/Carr account
requires us to interpret the Bank's Security Agreement. The Security
Agreement states that it shall be construed in accordance with the laws
of the State of
. Accordingly, we begin our analysis with a review of the relevant
portions of the Uniform Commercial Code ("UCC") as it has been
"security interest" is "an interest in personal property
or fixtures which secures payment or performance of an obligation."
Wyo. Stat. Ann. §34.1-1-201(a)(xxxvii). It is not disputed that Article
9 of the Wyoming UCC applies to the Lobo/Carr account. See
Stat. Ann. §34.1-9-102(1)(a). Under Article 9, a security interest is
"not enforceable against the debtor or third parties with respect
to . . . collateral and does not attach unless: (i) . . . the debtor has
signed a security agreement which contains a description of the
Stat. Ann. §34.1-9-203(a)(i). A "security agreement" is
"an agreement which creates or provides for a security
interest." Wyo. Stat. Ann. §34.1-9-105(a)(xii). The description of
collateral in a security agreement need not be specific, but it must
"reasonably identif[y]" the collateral in question. Wyo. Stat.
Ann. §34.1-9-110; see Wyo. Stat. Ann. §34.1-9-105(a)(iii)
(" '[C]ollateral' means the property subject to a security
interest. . . ."); New Oil, Inc. v. First Interstate Bank,
895 P.2d 871, 873 (
1995) (description of collateral sufficient if it makes it possible to
identify items with reasonable effort and inspection); Wailes v.
Rocky Mountain Pre-Mix Concrete, 783 P.2d 1138, 1140 (
1989) (must have a reasonable identification of collateral).
Security Agreement states. in relevant part:
The word "Collateral" means the following described property
equipment and inventory on the attached Schedules . . .
the word "Collateral" includes all of the following, whether
now owned or hereafter acquired, whether now existing or hereafter
arising and wherever located:
. . . .
accounts. contract rights. . . . monies, payments, and all other rights,
arising out of a sale, lease or other disposition of any of the property
described in this Collateral section.
Schedules attached to the Security Agreement do not mention any type of
account, much less the Lobo/Carr account. Nor is the Lobo/Carr account
included in the "accounts" or "contract rights . . .
arising out of a sale, lease or other disposition of any of the property
described" in the Collateral section of the Security Agreement.
Accordingly, the Bankruptcy Court correctly concluded that the Bank's
Security Agreement does not create a security interest in the Lobo/Carr
account as a matter of law because the description of the collateral
covered by the Agreement does not encompass any accounts except those
arising from a disposition of Straight's equipment or inventory.
contends all of the parties assumed that the definition of the word
"collateral" in the Security Agreement embraced the Lobo/Carr
account and, therefore, the Bankruptcy Court acted improperly when it
unilaterally decided that the Bank's interest did not extend to it. The
Bank argues that this interpretation was inappropriate on summary
judgment because parol evidence would prove that the parties intended
the Lobo/Carr account to be encompassed within the definition of the
word "collateral" set forth in the Security Agreement.
well-settled that parol evidence is admissible only if a contract is
ambiguous. See, e.g., Patel v. Harless, 926 P.2d 963, 965 (
1996); Brockway v. Brockway, 921 P.2d 1104, 1106 (
1996); Ames v. Sundance State Bank, 850 P.2d 607, 609 (
1993); see also Mid-West Conveyor Co. v. Jervis B. Webb Co., 92
F.3d 992. 995 (10th Cir. 1996). "'An ambiguous contract is an
agreement which is obscure in its meaning, because of indefiniteness of
expression, or because a double meaning is present. Ambiguity justifying
extraneous evidence is not generated by the subsequent disagreement of
the parties concerning its meaning.' " Brockway, 921 P.2d at
1106 (quoting Carlson v. Water Unlimited, Inc., 822 P.2d 1278,
1991) (internal quotation marks omitted)). The Security Agreement
contains no language that might cover the Lobo/Carr account, so under
this test, parol evidence would not be admissible, and the Bankruptcy
Court was correct in interpreting the Agreement as a matter of law in
the context of a summary judgment proceeding. See, e.g., Mid-West
Conveyor, 92 F.3d at 995 (citing Teton Exploration Drilling, Inc.
v. Bokum Resources Corp., 818 F.2d 1521, 1526 (10th Cir. 1987))
(question of whether contract is clear or ambiguous is a question of
law); Brockway, 921 P.2d at 1106 (interpretation of contract is a
question of law); Sannerud v. First Nat'l Bank, 708 P.2d 1236,
Straight intended to grant the Bank a security interest in the Lobo/Carr
account, the Bank's reliance on parol evidence misses the point. A
third-party creditor or a bankruptcy trustee exercising avoiding powers
is entitled to rely on the clear. unambiguous terms of a security
agreement to be informed of what collateral is covered without regard to
the intent of the parties. Sannerud, 708 P.2d at 1241. As
discussed above, the Bank's Security Agreement does not inform third
parties that the Bank's security interest might extend to the Lobo/Carr
The Bank also
maintains that notwithstanding the terms of the Security Agreement, its
interest in the Lobo/Carr account is evidenced by the notice of
assignment given to Lobo and Carr and the description of collateral
contained in the Business Loan Agreement. This argument is flawed for
The notice of
assignment served by the Bank on Lobo and Carr does not constitute a
"security agreement" because it is not an "agreement
which creates . . . a security interest." Wyo. Stat. Ann. §34.1-9-105(a)(xii).
Moreover, even if it somehow created one, the security interest would
not be enforceable because the notice of assignment was not signed by
Stat. Ann. §34.1-9-203.
assignment agreement between the Bank and Straight might be deemed to
create a security interest, no such agreement was provided to the
Bankruptcy Court as part of the summary judgment proceedings. 3
The only evidence in the record on appeal which shows that Straight
assigned her interest in the Lobo/Carr account to the Bank is the Bank's
notice of assignment, and a letter from Straight to Lobo and Carr
stating that they would be receiving an assignment of contract proceeds.
For the reasons discussed, such documents are simply not sufficient to
create a security interest in the Lobo/Carr account.
the Business Loan Agreement does not create a security interest with
respect to any collateral, much less the Lobo/Carr account. The
Agreement defines the word "collateral" as:
and assets granted as collateral security for a Loan, whether real or
personal property, whether granted directly or indirectly whether
granted now or in the future, and whether granted in the form of a
security interest, mortgage, deed of trust, assignment. . . . or any
other security or lien interest whatsoever, whether created by law,
contract, or otherwise.
Agreement assumes that a separate contract exists which creates a
security interest in Straight's property. As discussed above, the
Security Agreement and the notice of assignment do not create a security
interest in the Lobo/Carr account. There simply is no security agreement
in the record on appeal which contains a description of the Lobo/Carr
account as collateral. Thus, the Bankruptcy Court was correct in
determining that the Bank does not have a security interest in the
alternative, if the notice of assignment and the Business Loan Agreement
could somehow be construed to create a security interest in the
Lobo/Carr account, it is undisputed that no document perfecting such an
interest was ever filed in the appropriate state and local recording
offices and, therefore, the Bank's interest has not been perfected.
Stat. Ann. §§34.1-9-302 & 34.1-9-401(a)(i). Accordingly, any
interest created by these documents is avoidable under 11 U.S.C. §544(a)
and we would affirm the Bankruptcy Court's order on this basis.
Avoidance of the Stipulation Payment
Court held that the Stipulation Payment made to the Bank was a
preferential transfer avoidable under 11 U.S.C. §547(b). While, as we
noted above, it is unclear what was asserted before the Bankruptcy
Court, we do know the Bank argued that the Stipulation Payment was not
avoidable under section 547(b) because it was made pursuant to a
stipulation with Straight and the State Court Order. Straight
[96-2 USTC ¶50,423], 200 B.R. at 932. The Bankruptcy Court correctly
concluded that these assertions did not create a defense under section
Both voluntary and involuntary transfers may be avoided under section
547(b), so neither Straight's agreement, if any, to the Stipulation
Payment, nor the fact the state court ordered it to be made has any
bearing on its avoidability. See 11 U.S.C. §101(54)
("transfer" includes voluntary and involuntary dispositions of
P. King, Collier on Bankruptcy ¶547.03 at 547-14 (15th ed. rev.
1996) ("The debtor's intent or motive is not material in the
consideration of an alleged preference under section 547.")
On appeal, the
Bank claims the transfer was made by Safetymaster, not Straight, because
Safetymaster had garnished Lobo and Carr. Under
law, the Bank says, a garnishment "dispossess[es] the judgment
debtor from his (her) interest in the property in the hands of the
garnishee from the date that the garnishee is served with the writ of
First, we note
we could reject the Bank's argument simply because it failed to provide
an adequate record for us to determine the state of the parties' factual
and legal presentation to the Bankruptcy Court. See, e.g.,
Tele-Communications, Inc., v. Commissioner [97-1 USTC ¶50,155], 104
F.3d 1229, 1232-33 (10th Cir. 1997) (an appellate court has discretion
to consider new issues on appeal, but ordinarily will not consider them,
so that parties will be encouraged to present all issues at the trial
level); Magnum Foods, Inc., v. Continental Casualty Co., 36 F.3d
1491, 1502 n.12 (10th Cir. 1994) (although appellate court may
appropriately take judicial notice of developments that are a matter of
public record and are relevant to the appeal. review of summary judgment
is limited to the record before the trial court: documents submitted in
appendix on appeal not presented to the trial court were stricken); John
Hancock Mut. Life Ins. Co. v. Weisman, 27 F.3d 500, 506 (10th Cir.
1994) (in reviewing summary judgment, appellate court will not consider
evidence not before the trial court) (citing Allen v. Minnstar, Inc.,
8 F.3d 1470, 1475 (10th Cir. 1993)). Without the Debtors' and the Bank's
statements of uncontroverted facts and supporting materials, and all
their memoranda in support of their positions, we cannot tell whether
anyone informed the Bankruptcy Court of the facts concerning
Safetymaster's state court proceeding which have been presented to us on
appeal but which the Bankruptcy Court did not mention in its decision.
However, we find that even when we consider all of the facts and legal
arguments the Bank has now asserted, the Bank's defense to the
preference action still fails because it is based on a misreading of the
cited case law and a misunderstanding of the effect of a lien obtained
argument begins with the decision in Platte County State Bank v.
Frantz, 239 P. 531 (
1925). That case involved a creditor's suit to collect a debt and its
pre-judgment attachment of property the debtor had transferred,
allegedly in fraud of his creditors.
at 532. Rejecting the argument that the attachment was premature, the
court held that a creditor should be allowed to obtain an attachment
lien on property alleged to have been fraudulently conveyed without
waiting until it has reduced its debt to judgment, although the
conveyance should not be set aside until the debt has been established
at 535. Obviously, the decision has nothing to say about the effect of
the creditor's attachment lien on the debtor's interest in the property
attached, because the debtor had already conveyed his interest to a
the Bank moves to United States v. Hunt [74-1 USTC ¶9481], 373
F. Supp. 1079 (D. Wyo. 1974). aff'd in part, rev'd in part [75-1
USTC ¶9327], 513 F.2d 129 (10th Cir. 1975). As stated by the district
court. its published decision addressed the single question whether a
federal tax lien takes priority over a prior unrecorded judgment lien
when the government had actual knowledge of the announcement of the
judgment. [74-1 USTC ¶9481], 373 F. Supp. at 1080. In the course of its
decision. the court said:
Bank v. Frantz, 33
326, 239 P. 531 (1925), the Supreme Court of Wyoming held that a writ of
attachment created a lien as of the date of service. See Great Falls
Transfer & Storage Co. v. Pan Am. Petroleum Corp., 353 F.2d 348
(10th Cir. 1965). "The Wyoming Supreme Court decision has never
been reversed and its conclusion does not appear to be clearly
erroneous. As such it is entitled to substantial weight. A garnishment
is virtually a process of attachment and under
law, a garnishee is bound from the time of service, Wyo. Stat. §1-243
(1957). It gives the creditor a paramount right, although not
necessarily title, to such property as a security for his demand.
at 1081. On appeal, the Tenth Circuit
affirmed the district court's decision on the priority question. [75-1
USTC ¶9327 ], 513 F.2d at 133-39. The Circuit also reversed part of
the district court's judgment, but that part concerned claims the IRS
was asserting against the taxpayer, not the creditor.
at 139. Except for the dicta quoted above, this decision did not
directly address the question whether the eventual judgment debtor
retained any interest in the money that was paid into court after it was
although these cases directly concern only the interest a creditor
obtains through an attachment or garnishment, their description of that
interest as a "lien" rather than "ownership" or
"title" makes clear that Straight retained some interest in
the Lobo/Carr account even after Safetymaster garnished it. The
statutes governing the continuing garnishments employed here specify
that such garnishments become liens on the garnished earnings to the
extent they are not exempt. Wyo. Stat. Ann. §1-15-502; see Barnhill
v. Johnson, 503
393, 398 (1992) (absent controlling federal law, state law defines
property and interests in property). The statutes also give some
substance to the interest the judgment debtor retains: (1) some earnings
are exempt from continuing garnishment, §§1-15-503(b) and 511: (2)
notice of the garnishment is to be given to the debtor, §§1-15-505 and
506; (3) the debtor may object to the calculation of the amount of
exempt earnings, §1-15-507; (4) the debtor may apparently claim the
property is otherwise exempt, §1-15-107; and (5) although a debtor
would not likely do so to recover garnished earnings, the debtor can
obtain the release of garnished property by posting a bond, §1-15-105.
Clearly, the Bank's argument that Safetymaster's garnishment immediately
dispossessed Straight of all her interest in the garnished money is
cases the Bank cites offer it no help, either. The cases all involved a
garnishment, attachment, or similar procedure which a creditor obtained
before the 90-day preference period, followed by payment to or entry of
a judgment for the creditor during the preference period. Freedom
Group v. Lapham-Hickey Steel Corp. (In re Freedom Group), 50 F.3d
408 (7th Cir. 1995); Battery One-Stop v. Atari Corp. (In re Battery
One-Stop), 36 F.3d 493 (6th Cir. 1994); Wind Power Systems v.
Cannon Financial Group (In re Wind Power Systems), 841 F.2d 288 (9th
Cir. 1988); Phillips v. Mbank Waco (In re Latham), 823 F.2d 108
(5th Cir. 1987) (per curiam); Askin Marine Co. v. Conner (In re
Conner), 733 F.2d 1560 (11th Cir. 1984); Butler v. Grimminger (In
re Carlson), 177 B.R. 645 (Bankr. D.
1995). The question faced by all these courts was whether transfers to
the creditors were made, within the meaning of 11 U.S.C. §547(e)(2),
when the garnishment or attachment procedure occurred, or only later
when the payment or judgment occurred. All but the Freedom Group
court concluded such a transfer occurred at the earlier time. Although
some of the opinions at least imply that the later payment or judgment
was not a transfer at all under section 547, we believe these events
were also transfers, see 11 U.S.C. §101(54), but they were not
avoidable as preferences because they did not enable the creditors to
receive more than they would have without them if the debtor were
liquidated in chapter 7. See 11 U.S.C. §547(b)(5); Aspen Data
Graphics v. Boulton (In re
Data Graphics), 109 B.R. 677, 680-82 (Bankr. E.D. Pa. 1990) (where
pre-preference period garnishment gave lien under Pennsylvania law,
payment of money from garnished bank account during preference period
was a transfer but was not avoidable because secured, unavoidable
garnishment lien would be paid in chapter 7 liquidation); see also
Barnhill v. Johnson, 503 U.S. at 396-98 (for purposes of §547, what
constitutes a transfer and when it is complete is a matter of federal
law). The earlier garnishments or attachments were the transfers
accomplishing that for the creditors. None of these decisions hold that
the debtors retained no interest at all in the garnished or attached
property after those transfers.
allows a trustee to avoid only a "transfer of an interest of the
debtor in property." The Bankruptcy Court concluded the materials
presented to it showed the Bank received a transfer of Straight's
interest in the garnished portion of the Lobo/Carr account on
December 30, 1994
. While the record on appeal shows some of her interest had been
transferred earlier when Safetymaster obtained its garnishment lien,
nothing the Bank has presented shows that Straight's remaining interest
in the garnished portion of the account was extinguished before the
state court ordered Lobo and Carr to pay that portion into court for
distribution to Safetymaster and the Bank. Since, as we have already
determined, the Bank's other claims to the Lobo/Carr account were
ineffective or unperfected and therefore properly avoided, the Bank has
not shown that the Bankruptcy Court erred when it ruled the Stipulation
Payment was an avoidable preference. 4
Avoidance of the IRS Tax Lien
Court gave three reasons for rejecting the Debtors' attempt to avoid the
Tax Lien under 11 U.S.C. §545(2). First, it concluded the lien was
properly perfected under Wyo. Stat. Ann. §29-6-204(c)(iv) and was not
subject to Article 9 of the Wyoming UCC. Second, the Court ruled that a
hypothetical bona fide purchaser under section 543(2) does not qualify
as a "purchaser" with the power to invalidate an otherwise
perfected tax lien under 26 U.S.C. §6323(b). Finally, it determined
that the Debtors did not have standing to avoid the Tax Lien because
they were trying to do so for their own benefit, not for their
creditors. Straight, 200 B.R. at 928-30. Although this Court
cannot agree with all the reasoning employed by the Bankruptcy Court, we
are convinced that the result reached was correct.
various provisions of Article 9 of the Wyoming UCC. Straight contends
the Tax Lien is unperfected with respect to: (1) two vehicles because
the lien was not noted on their titles: (2) $30 in cash and a $175
security deposit which she refers to as "securities," because
the IRS did not possess them: and (3) the Lobo/Carr account because the
IRS's notice of lien was not filed in the proper office for perfecting a
lien in accounts. However, as correctly determined by the Bankruptcy
Court. Article 9 of the UCC does not apply to statutory liens like the
one the IRS obtains under 26 U.S.C. §6321. See
Stat. Ann. §34.1-9-102(b). Perfection of a federal tax lien is instead
governed by the Uniform Federal Lien Registration Act, Wyo. Stat. Ann.
§29-6-201, et seq. To perfect the lien in personal property owned by
anyone other than a corporation, partnership, trust, or estate of a
decedent, the IRS need only file notice of the lien with the county
clerk in the county of the taxpayer's residence.
Stat. Ann. §29-6-204(c)(iv). Indeed, a state cannot require the IRS to
file its lien notice in more than one location. 26 U.S.C. §6323(f)(1).
argues that even if the Tax Lien is perfected, it is avoidable under 11
U.S.C. §545(2) because of certain provisions of 26 U.S.C. §6323(b).
Section 6323(b) invalidates otherwise valid tax liens in certain
property as against, among others, a "purchaser" without
notice of a tax lien. For purposes of that subsection, a
"purchaser" is defined to be a "person who, for adequate
and full consideration in money or money's worth, acquires an interest .
. . in property which is valid under local law against subsequent
purchasers without actual notice." 26 U.S.C. §6323(h)(6).
According to Straight, a trustee relying on the status of a hypothetical
bona fide purchaser under section 545(2) could use the status afforded
to a "purchaser" under section 6323(b) to avoid the Tax Lien
on the security deposit, Lobo/Carr account, motor vehicles and $30 cash.
6323(b), however, does not apply to the security deposit or the
Lobo/Carr account. The security deposit Straight calls a
"security" does not qualify as such under section 6323(b)(1)
because it does not satisfy the definition contained in section
6323(h)(4). Although she has not identified the specific subsection on
which she relies, she apparently contends that the Lobo/Carr account is
"personal property" covered by section 6323(b)(3), (4) or (5).
These provisions, however, apply only to "tangible personal
property." 26 U.S.C. §6323(b)(3)-(5). The Lobo/Carr account, of
course, is intangible property, so a "purchaser" of the
account would not be protected under section 6323(b).
6323(b) could apply to the two vehicles, and since "money,"
oddly enough, is defined to be a "security" under the statute,
it could also apply to the $30 cash. See 26 U.S.C. §6323(b)(1)-(2)
and (h)(4). In a ruling that would cover any trustee as well, the
Bankruptcy Court concluded that the Debtors were precluded from avoiding
the Tax Lien because a bona fide purchaser under 11 U.S.C. §545(2) does
not qualify as a "purchaser" for "adequate and full
consideration" under section 6323(b). Straight, 200 B.R. at
929-30. The phrase "bona fide purchaser" is not defined by the
Bankruptcy Code. A "bona fide purchaser" is ordinarily one
who, among other things, gives "value" for property. See
Black's Law Dictionary 161 (5th ed. 1979). While "value" would
not necessarily amount to "adequate and full consideration,"
as required under section 6323(b) and (h)(6), it could reach that level.
Consequently, a section 545(2) bona fide purchaser is not necessarily
precluded from qualifying as a "purchaser" under section 6323.
For the reasons set forth below, we find it unnecessary to resolve this
issue. However, we note that something more than general definitions is
required to determine which level of bona fide purchaser Congress
intended to create under section 545(2). But see
v. Hunter (In re Walter) [95-1 USTC ¶50,072], 45 F.3d 1023, 1030
(6th Cir. 1995) (because a bona fide purchaser is not necessarily a
purchaser for purposes of §6323(b), it follows the purchaser under §545(2)
amended complaint makes clear that to avoid the IRS's interest in the
vehicles, they were relying on 11 U.S.C. §522(g) and (h), which
generally permit a debtor to exempt certain property a trustee recovers
through use of the avoiding powers, and under certain circumstances
where the trustee has not done so, to exercise the avoiding powers to
the extent the debtor could have exempted the property recovered if the
trustee had done so. Even if the Chapter 7 Trustee could avoid the Tax
Lien on the vehicles under section 545(2), the Debtors cannot. Section
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--
a debt secured by a lien that is--
a tax lien, notice of which is properly filed. . . .
specific provision overrides the general exemption and avoidance powers
granted in section 522(g) and (h), and precludes Straight from avoiding
the Tax Lien in this case. DeMarah v.
(In re DeMarah), 62 F.3d 1248, 1250-52 (9th Cir. 1995). Although the
Trustee is now a party to this proceeding. it seems unlikely he will
attempt to avoid the lien on the vehicles since Straight and her husband
had exempted them.
The record on
appeal does not make clear whether the Debtors had claimed the cash as
exempt, but if they did, section 522(c)(2)(B) precludes their attempt to
avoid the Tax Lien on it as well. If not, but for the Bankruptcy Court's
ruling about the hypothetical bona fide purchaser under 11 U.S.C. §545(2),
it appears the Trustee could attempt to avoid the Tax Lien on the cash
under section 545(2) and 26 U.S.C. §6323(b)(1). However, it seems
unlikely the Trustee would go to that trouble for a mere $30, and we
decline to consider such an important issue when it is doubtful the real
party in interest would pursue the matter.
reasons set forth herein, the Court concludes that: (1) whether the
Chapter 13 Debtors had standing to pursue avoidance actions is moot in
light of the joinder of the Chapter 7 Trustee to this appeal: (2) the
Bank does not have an interest in the Lobo/Carr account; (3) the
Stipulation Payment is avoidable under 11 U.S.C. §547(b); and (4) the
Tax Lien has been properly perfected and may not be avoided with respect
to the vehicles, the security deposit, or the Lobo/Carr account. Under
the circumstances, we decline to determine whether the Trustee could
avoid the lien on the cash under section 545(2). Accordingly, the
judgment of the Bankruptcy Court is hereby affirmed.
The State Court Order indicates that as of
December 12, 1994
, Lobo and Carr had not yet paid any garnished money into the state
court registry, and on that day, they were ordered to do so. For the
Bank to have received the Lobo and Carr money on
December 30, 1994
, as the Bankruptcy Court stated, Lobo and Carr must have paid the money
into the registry on or after December 12 but not later than December
30. Even if the Bank got some interest in the money as soon as it was
paid in, the earliest day that might have happened, December 12, is
still well within the 90-day preference period, since the Debtors filed
for bankruptcy in January 1995.
The parties have raised several arguments regarding the Bank's
perfection of its alleged interest in the Lobo/Carr account. The Bank
maintains that the Lobo/Carr account is a "contract right" and
its purported interest therein is properly perfected because it filed
its Security Agreement with the Office of the Sheridan County Clerk,
and, even if the account is not a "contract right," its
interest is nonetheless perfected under the "good faith
exception" to filing set forth in Wyo. Stat. Ann. §34.1-9-401.
These arguments, however. are irrelevant. Since the Bank does not have
any interest in the Lobo/Carr account under the unambiguous terms of the
Security Agreement, perfection is not an issue.
While the Bank
does not have an interest in the Lobo/Carr account, it seems to have an
interest in other property of Straight identified as
"Collateral" in the Security Agreement. Whether the Bank's
interest in this property is perfected by an unavoidable lien was not
raised before the Bankruptcy Court and has not been raised on appeal.
The Bankruptcy Court noted that "[t]he parties do not dispute that
Mrs. Straight assigned the subcontract payments to the Bank], although
the assignments were not provided to the court as [the Bank]
indicated." Straight [96-2 USTC ¶50,423], 200 B.R. at 927.
On appeal, the Debtors state that "[d]espite the Bank's references
to an assignment of the Lobo/Carr account . . . no such assignment was
executed by Straights [sic]."
The Debtors' amended complaint does not assert a cause of action under
11 U.S.C. §550 to recover the avoided Stipulation Payment from the
Bank, and the application of section 550 does not appear to have been
raised before the Bankruptcy Court. The Bankruptcy Court entered
judgment against the Bank for the amount of the Stipulation Payment and
stated that "any recovery [was] to be immediately deposited with
the chapter 13 standing trustee." Straight [96-2 USTC ¶50,423],
200 B.R. at 933. Since the issue of recovery of the avoided transfer
under section 550 was not raised below, we will not address it even
though the parties mentioned it at oral argument.
[2001-1 USTC ¶50,387] In re Virginia
L. Jeffrey, Debtor. Virginia L. Jeffrey, Plaintiff v.
United States of America
, Internal Revenue Service, Defendants
Bankruptcy Court, West. Dist.
, 99-26533-JFK, 4/12/2001, 2001 Bankr. LEXIS 337.
Secs. 6321 , 6334 and
Bankruptcy: Collection of taxes: Levy v. lien: Exempt property:
Federal tax liens attached to, and the IRS had a secured interest in, a
debtor's personal property. The debtor unsuccessfully argued that,
because her personal property was exempt from levy under Code
Sec. 6334 , the IRS's tax liens were unsecured. A tax lien may be
secured by property of a debtor that is exempt from levy. While certain
specified property is exempt from IRS levy, tax liens generally can
attach to all of the property of a delinquent taxpayer. A levy involves
the immediate seizure of property, while a lien is merely a security
interest in property. Thus, the limitation on the IRS's ability to seize
the taxpayer's property did not bar the IRS from asserting a security
interest in such property.
Tax liens: Bankruptcy: Tort claims: Future proceeds: State
A federal tax lien attached to a debtor's unliquidated medical
malpractice claim and would also attach to the proceeds ultimately
realized with respect to the claim. Pursuant to state (
) law, a tax lien can attach to the proceeds of a personal injury action
where the IRS has filed liens against a debtor's property for unpaid
taxes. Moreover, the Bankruptcy Code provides an extremely broad
definition of "property" that includes debtors' interests in
causes of action.
Tax liens: Bankruptcy: Pension plans.--
A federal tax lien attached to all of a debtor's rights in her pension
benefits, including the right to future payments. Her right to receive
future payments qualified as a "right to property." Thus, the
government was secured to the extent of the present value of the
debtor's retirement benefits.
Druzisky, for debtor. Richard Bedford, for Ronda J. Winnecour,
Pittsburgh, Pa., Chapter 13 Trustee., D. Brian Simpson, Julia L. Wahl,
Special Assistant to the United States Attorney, Paul Skirtich,
Assistant United State Attorney, Pittsburgh, Pa., for I.R.S.
Chief Bankruptcy Judge:
Court are Cross-Motions for Summary Judgment on Debtor's Amended
Adversary Complaint to Determine the Secured Status of the Internal
Revenue Service ("IRS") in Virginia L. Jeffrey's
("Debtor") property. Debtor asserts that the IRS' federal tax
lien cannot attach to various items because the items are not
"property" B or because she has no equity in the property. The
Debtor filed a voluntary petition under Chapter 13 of the Bankruptcy
September 2, 1999
. The IRS filed its original proof of claim on
October 8, 1999
, and an amended proof of claim on
November 3, 1999
. The amended proof of claim was for two tax liens totaling $37,988.65
for taxes, penalties, and interest resulting from unpaid taxes for 1991,
1992, 1993, and 1995. The IRS filed Notice of Tax Lien on
November 6, 1995
, for the 1991--1993 deficiencies ($29,619.97) in Beaver,
, and on
February 27, 1998
, for the 1995 deficiency ($8,368.68) in
. The Amended Complaint seeks to determine the secured status of the IRS
tax liens on Debtor's residence, automobile, household goods,
unliquidated medical malpractice claim and pension.
stipulated to the existence and present value of the Debtor's assets on
July 31, 2000
: residence, $38,000 2;
1997 Dodge Neon, $5,560; 401(k) pension plan, $6,291.09; personal
property, $2,630.00; and a medical malpractice claim no value
stipulated. On her Schedule B, the Debtor listed the approximate value
of her medical malpractice claim as $10,000 and the IRS did not dispute
this figure. However, the parties agreed that if the IRS is secured in
the medical malpractice asset, its lien would attach to whatever Debtor
collects on that claim During oral arguments on
November 3, 2000
, the IRS conceded that there is no equity in Debtor's residence or
vehicle to support its lien, but continued to assert its secured
position through a lien attached to her personal property, medical
malpractice claim and pension. There was no dispute between the parties
as to whether the liens were perfected.
Complaint, the Debtor states that she has no equity in the household
goods to which the IRS lien can attach. Additionally, the Debtor argues
that her medical malpractice claim is contingent and unliquidated and,
law is not property to which the IRS lien can attach. Furthermore, the
Debtor claims that the terms of her ERISA-qualified pension do not
subject it to attachment by creditors, including the IRS.
In order to
determine the secured status of the IRS in Debtor's property the court
must first determine to what property the IRS lien can attach. Section
6321 of the Internal Revenue Code states that one who fails to pay
taxes shall have a lien placed "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.A. §6321. The United States Supreme
Court ruled that the extent to which a taxpayer has "property"
or "rights to property" to which a tax lien can attach is
determined by state law. Aquilino v. U.S. [60-2 USTC ¶9538], 363
U.S. 509, 512-513, 4 L.Ed.2d 1365, 80 S.Ct. 1277 (1960), citing Morgan
v. Commissioner [40-1 USTC ¶9210], 309 U.S. 78, 82, 84 L.Ed. 585,
60 S.Ct. 424 (1940). Upon assessment, the lien survives until it is
"satisfied or becomes unenforceable by reason of lapse of
time," 26 U.S.C. §6322, and may attach "to all the property
that the tax debtor subsequently acquired." Glass City Bank v.
U.S. [45-2 USTC ¶9449], 326 U.S. 265, 268, 90 L.Ed. 56, 66 S.Ct.
108 (1945), quoting Graves v. Commissioner [CCH Dec. 4001], 12
B.T.A. 124, 133, 1928 WL 482 (1928).
Code defines a "lien" as a "charge against or interest in
property to secure payment of a debt or performance of an
obligation." 11 U.S.C. §101(37). Additionally, in determining the
secured status of a lien the Bankruptcy Code provides that "an
allowed claim of a creditor secured by a lien on property in which the
estate has an interest . . . is a secured claim 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). In order for Debtor to have her
Chapter 13 plan confirmed by the court the plan must provide that
"with respect to each allowed secured claim provided for by the
plan . . . the value, as of the effective date of the plan, of property
to be distributed under the plan on account of such claim is not less
than the allowed amount of such claim . . ." 11 U.S.C. §1325(a)(5)(B)(ii).
The IRS is secured to the extent of the present value of the property
and Debtor must pay the entire amount through her Chapter 13 Plan. 3
Personal Property 4
that the IRS is unsecured in her personal property. The parties
stipulated that Debtor's personal property has a value of $2,630.00.
Debtor asserts that her personal property includes: household goods, 5
furniture, books, clothes, jewelry, pets, and a swimming pool. She
acknowledges in her Brief in Support of Motion for Summary Judgment that
exemptions provided in the Bankruptcy Code are irrelevant to the secured
status of the IRS' tax lien in her personal property, but argues that
the property is protected by the exemptions from levy provided in the
Internal Revenue Code. Section 6334 of the Internal Revenue Code
details property that is exempt from levy by the IRS. Specifically,
subparts (a)(1) and (a)(2) exempt "Wearing apparel and school
books" and "Fuel, provisions, furniture, and personal
effects" from levy.
The Court of
Appeals for the Ninth Circuit explained:
between a levy and a lien also suggests why a lien should still attach
to property exempt from levy. A levy forces debtors to relinquish their
property. It operates as a seizure by the IRS to collect delinquent
income taxes. . . . The IRS's levying power is limited because a levy is
an immediate seizure not requiring judicial intervention. . . . A levy
connotes compulsion or a forcible means of extracting taxes from a
recalcitrant taxpayer.' . . . A taxpayer subject to an IRS levy is
provided certain protections such as notice and an opportunity to pay
the taxes due before the seizure. . . .
however, is merely a security interest and does not involve the
immediate seizure of property. A lien enables the taxpayer to maintain
possession of protected property while allowing the government to
preserve its claim should the status of property later change. If, for
instance, the debtor later sells his exempt personal property for cash,
the IRS would be entitled to obtain such proceeds.
v. Barbier [90-1 USTC ¶50,107],
896 F.2d 377, 379 (9th Cir. 1990) (citations omitted). See also In re
Blackerby, 208 B.R. 136, 141 (Bankr. E.D. Pa. 1997) (prepetition
liens remain enforceable against property after personal liability is
discharged). While Debtor is correct that §6334 exempts certain
property from levy, it does not preclude attachment of a valid tax lien,
nor does it preclude payment of the claim through the bankruptcy. The
only way Debtor's property will be released from the lien is through
Debtor's payment to the IRS of the value of the encumbered goods.
II. Medical Malpractice Claim
an unliquidated medical malpractice claim valued at approximately
$10,000 on her Schedule B. She argues that it is exempt under 11 U.S.C.
or, in the alternative, that Debtor's medical malpractice claim is not
property under applicable Pennsylvania law and, therefore, the IRS
cannot attach a tax lien.
that the medical malpractice claim is exempt from attachment by a tax
lien has no merit under federal bankruptcy law. Section 522(c)(2)(B) of
the Bankruptcy Code states, in part:
(c) Unless the
case is dismissed, property exempted under this section is not liable
during or after the case for any debt of the debt or that arose, . . .
before the commencement of the case, except B (2) a debt secured by a
lien that is B . . . (B) a tax lien, notice of which is properly filed .
of the tax liens were filed in the Beaver County Prothonotary's Office
for the 1991, 1992, and 1993 tax deficiencies on
November 6, 1995
, and in the Office of the Recorder of Cuyahoga County for the 1995 tax
February 27, 1998
, and Debtor does not assert that these filings are improper.
case law dealing with divorces to support her argument that the medical
malpractice claim is not property to which the IRS lien can attach. The
Debtor asserts the Pennsylvania Superior Court ruled on this issue in DeMasi
v. DeMasi, 366
Super. 19, 530 A.2d 871 (Pa. Super. 1987), appeal denied, 539
A.2d 811 (
1988), and in Hurley v. Hurley, 342
Super. 156, 492 A.2d 439 (
Super. 1985). 7
These cases stand for the proposition that, under the Pennsylvania
Divorce Code as it existed at the time, property acquired after
separation is not marital property. In Hurley, the wife's
personal injury cause of action arose before the parties separated, but
the action was tried and the claim liquidated after separation. Under
the Pennsylvania Divorce Code, then in effect, only property acquired
before separation constituted marital property. 23 P.S. §401(e)
law generally provides that "[a] right of action strictly personal
is not assignable" and the right is "not . . . a property
right, capable of assignment, prior to liquidation", the court
found the proceeds of the action not to be marital property. Hurley
at 441, quoting Sensenig v Pa. Railroad Co., 229
168, 78 A. 91, 92 (
1910). In DeMasi, also a divorce case, the wife sought a
determination that insurance proceeds acquired after separation were
marital property because they were paid pursuant to a contract. The wife
distinguished Hurley, arguing that it applied only to tort causes
of action. The Superior Court agreed with the wife. Debtor's reliance on
these cases is misapplied.
In 1988, §401
of the Divorce Code was replaced by 23 Pa.C.S. §3501(a)(8) and now
provides that the relevant time for determining whether a cause of
action is marital property is when the cause of action accrues. Nuhfer
v. Nuhfer, 410
Super. 380, 599 A.2d 1348, 1349 (
Super. 1991). Thus, the cases upon which Debtor relies do not reflect
the current state of
although state law governs the nature of the interest which a taxpayer
has in property, whether the right or interest created under state law
constitutes "property" or a "right to property"
subject to a §6321 tax lien is a matter of federal law. Drye Family
1995 Trust v. U.S. [98-2 USTC ¶50,651], 152 F.3d 892, 894 (8th Cir.
1998), aff'd. [99-2 USTC ¶51,006], 528 U.S. 49, 145 L.Ed.2d 466,
120 S.Ct. 474 (1999). In Simon v. Playboy Elsinore Associates,
1991 U.S. Dist. LEXIS 5729, 1991 WL 71119 (E.D. Pa. 1991), an IRS lien
was held to have attached to the proceeds of a personal injury action
where the IRS had filed liens against the debtor's property for unpaid
taxes. "State and federal courts outside of Pennsylvania have
recognized that, for federal tax purposes, the right to assert a tort
claim is a chose in action,' constituting intangible personal property
subject to the federal tax lien."
at *2. Furthermore, §541 of the Bankruptcy Code provides an extremely
broad definition of property which includes Debtor's interests in causes
of action. We find that the unliquidated medical malpractice cause of
action is property in which the Debtor has an interest under
law and under the Bankruptcy Code. Thus, the tax lien attaches to the
cause of action and will attach to its proceeds.
on U.S. v. Dallas Nat. Bank [46-1 USTC ¶9117], 152 F.2d 582 (5th
Cir. 1945), in support of her assertion that the IRS lien does not
attach to her pension because she cannot sell her interest in it nor
does she have the right to receive a distribution from it at this time.
She argues in her brief that the pension is "never fully her
property" until it becomes payable to her. In Dallas Nat. Bank the
IRS sought to lien the taxpayer's interest in a testamentary trust.
Under the terms of the will the taxpayer did not have legal title to the
trust corpus, she had only an income therefrom The court held that even
though the testator's intent was to create an estate immune from
seizure, the IRS' lien still attached to the income to which the
taxpayer was entitled at the time the income became payable to her.
recognized in In re Fuller, 204 B.R. 894, 900 (Bankr. WD. Pa.
1997), "that a federal tax lien attaches to the Debtor's right to
receive future pension plan payments from an ERISA qualified plan at the
time such payments are distributed or become due." The court
further held: "The IRS is a secured creditor to the extent of the
present value of the Debtor's right to lifetime pension benefits."
In In re
Wesche [96-1 USTC ¶50,265], 193 B.R. 76 (Bankr. MD.
1996), the debtor did not dispute that the tax lien attached to the
right to receive pension benefits, but questioned the extent of the
liens on those payments. The court held that the lien attached to all
post-petition future payments. "The IRS claim is valued as the
present value of the future payments over Debtor's lifetime."
[Debtor] has a
present right to receive payments in the future, which is a 'right to
property' to which the tax lien attaches. . .. The right to future
benefits exists in the present, and, most importantly, existed on the
date of the filing of the petition in bankruptcy. Accordingly, the
federal tax lien attached to all of [Debtor's] rights in the pension
benefits, including the right to future payments. The
, thus, is secured to the extent of the present value of [Debtor's]
have stipulated that the present value of the Debtor's pension is
$6,291.09. Therefore, the IRS lien attaches to this value for purposes
of this Chapter 13.
finds the IRS liens attach to Debtor's personal property to the extent
of her equity in same, to the value of the medical malpractice claim and
to the present value of her right to receive future payments from her
pension. The IRS liens are secured to the extent of Debtor's equity in
her personal property, valued at $2,630.00 and $6,291.09 in the Debtor's
pension. Because the parties have stipulated as to the value of
household goods as $2,630.00, this opinion assumes the IRS' lien in
those assets is secured to that extent. The court will adjust the
calculation, however, as explained in note 5, supra, if this
assumption is in error. The Debtor must pay these amounts to the IRS
through the plan in order to terminate the lien in those assets.
Additionally, the IRS is secured in the Debtor's medical malpractice
claim to the extent that she receives a damage award from the action,
but not to exceed $28,437.56. 8
By agreement of the parties, the IRS' lien shall remain attached to the
cause of action and shall not be paid through the Chapter 13 Plan, since
its exact value cannot be determined until the Debtor's claim is
order will be entered.
to-wit, this 12th day of April, 2001, for the reasons expressed in the
foregoing Memorandum Opinion,
It is ORDERED,
ADJUDGED, and DECREED that plaintiff's Motion for Summary Judgment is
DENIED and the Internal Revenue Service's Cross-Motion for Summary
Judgment is GRANTED.
It is FURTHER
ORDERED that the Internal Revenue Service's claim is secured to the
extent of $6,291.09 in the Debtor's pension.
It is FURTHER
ORDERED that the IRS's claim is secured to the extent of $2,630 in
Debtor's household goods. However, within 20 days hereof the Debtor
and/or the Internal Revenue Service shall file a stipulation as to the
value of the IRS' secured claim in the Debtor's personal property and
the value of the IRS' lien in the medical malpractice cause of action in
accordance with this court's memorandum opinion. See notes 5 and
8 of the memorandum opinion and accompanying text therein.
It is FURTHER
ORDERED that the Internal Revenue Service is secured in the Debtor's
medical malpractice claim to the extent that she receives a damage award
from the action, but not to exceed $28,437.56. This amount will be
adjusted upward by any decrease in the IRS' secured claim on household
It is FURTHER
ORDERED that Debtor shall amend her Chapter 13 plan on or before
May 21, 2001
, and serve the U.S. Trustee, the Internal Revenue Service, and any
other creditor affected thereby. Objections to the amended plan shall be
filed and served on or before
June 11, 2001
. A conciliation conference is scheduled for
June 19, 2001
, at 9:00 a.m in Courtroom A, 54th
600 Grant Street
15219. If the parties are not able to resolve the confirmation dispute,
a contested hearing will be held on
June 26, 2001
, at 1:30 p.m in Courtroom A, 54th
600 Grant Street
The court's jurisdiction was not at issue. This Memorandum Opinion
constitutes our findings of fact and conclusions of law.
This value was determined in an appraisal obtained by the Debtor on
March 8, 2000
, by order of this Court.
If Debtor completes all plan payments and receives a discharge, her
personal liability for the remaining tax debt will be discharged.
However the lien remains viable until the obligation is paid in full. In
re Blackerby 208 B.R. 136, 141 (Bankr. E.D. Pa. 1997).
During oral argument on
November 3, 1999
, the court granted the IRS' request to file a supplemental brief
concerning household goods. The IRS filed a supplemental brief within
the two weeks granted by the court, but the Debtor did not file a
response to the IRS' brief.
In an answer to the IRS' Interrogatory #8, Debtor disclosed that some of
her household goods are encumbered by a purchase money security interest
to Heilig-Meyers, leaving no equity to the extent of that loan. She also
conceded in her answer to the IRS' Interrogatory that the lien attaches
to property not encumbered by the purchase money security interest. This
statement was not discussed in the briefs of either party or in any
other proceeding before the court. Debtor separately itemized certain
household goods (mattress, bed, lamps, and shelves) with a claimed value
of $860.00 in her Schedule B. These items are over-encumbered by
Heilig-Meyers' purchase money security on a total claim of $1542.00.
Thus, Heilig-Meyers has an unsecured claim of $682.00. As we understand
the parties' stipulations, the IRS' lien attaches to different household
goods as also separately itemized in Schedule B worth $2,630.00. If the
$2,630.00 actually includes the $860 value of goods subject to the
secured claim by Heilig-Meyers, then the IRS' lien attaches only to the
value of $1,768.00. See note 3, supra.
11 U.S.C. §522(d)(11)(D) states, in part: "The following property
may be exempted under subsection (b)(1): . . . (11) The debtor's right
to receive, or property that is traceable to B (D) a payment, not to
exceed $16,150, on account of personal bodily injury, not including pain
and suffering or compensation for actual pecuniary loss, of the debtor
or an individual of whom the debtor is a dependent . . ." Effective
April 1, 2001
, that amount increases to $17,425.00. 11 U.S.C. §104(b). However, the
lesser amount was in effect when Debtor filed this case.
The above cases did not determine 'what is property,' but determined
'what is marital property' under the Pennsylvania Divorce Code. Hurley,
which DeMasi used as a basis for its decision on this point, began its
analysis by asking the question: "Did the legislature intend to
require that a spouse's unliquidated claim for personal injuries in tort
be deemed marital property?" Hurley at 442.
This figure was calculated by subtracting the IRS' security interest in
Debtor's household goods ($2,630.00) and pension ($6,291.09) from the
total amount of the IRS' liens ($37,988.65). This figure will be
adjusted upward if the assumption as to the extent of the IRS' lien in
household goods is in error. See, note 5, supra.
[98-1 USTC ¶50,369] American Trust,
Plaintiff v. American Community Mutual Insurance Company, Defendant
American Community Mutual Insurance Company, Plaintiff v. United States
of America, Internal Revenue Service, Defendant-Appellee. Edgar F.
Bradley II, Defendant-Appellant, Richard A. Davidson, Defendant
U.S. Court of Appeals, 6th Circuit, 97-3385,
, 142 F3d 920, Affirming a District Court decision, 97-2
Secs. 6321 , 6332 and
Lien for taxes: Attachment: Interpleader action: Property subject to
lien: Administrative levies: Exemption from levy: Judicial proceedings:
Statutory authority: Collection process.--A tax lien that the
government sought to enforce against an insurance agent's commissions in
an interpleader action attached to all of his property, including
amounts that would have been exempt from the IRS's administrative levy
that preceded the interpleader action. Rather than complying with the
levy, the insurance company with which the agent was affiliated and the
trust to which he assigned his commissions filed suit to determine
ownership of the commissions. Thus, the lien arose from judicial, rather
than administrative, proceedings. Accordingly, its scope was determined
by Code Sec.
6321 , and the exemptions from administrative levy were
Donovan, Richard J. Donovan & Assocs.,
, for defendant-appellant. Pamela C. Berry, William S. Estabrook,
Department of Justice,
, for defendant-appellee.
KENNEDY and SILER, Circuit Judges; COHN, District Judge. *
Edgar F. Bradley, II, appeals the District Court's order granting
summary judgment in favor of the
in these consolidated breach of contract and interpleader actions. In
its complaint in the interpleader action, the
sought enforcement of tax liens against insurance sales commissions
attributable to defendant. The District Court held that the Government
had valid tax liens under 26 U.S.C. §6321 and that these liens gave the
the first priority claim to the commissions. On appeal, defendant
contends he is entitled to the exemptions allowed taxpayers during
administrative levy proceedings under 26 U.S.C. §6331. For the
following reasons, we affirm the District Court.
underlying this case are undisputed. Between 1988 and 1992 Bradley, an
agent authorized to sell insurance policies for American Community
Mutual Insurance Company (hereinafter, "American Community"),
entered into agreements with three other American Community insurance
agents. Under these agreements, the three other agents assigned to
Bradley their rights to the commissions that resulted from their sales
of American Community policies. On
December 4, 1992
, Bradley assigned the rights to all of the commissions, including his
own, to a trust identified as "American AMB 06044 Irrevocable
Trust" (the "Trust"). From this date, American Community
paid all monthly commissions directly to the Trust. 1
August 9, 1993
, the Internal Revenue Service ("IRS") issued assessments
against Bradley for deficiencies in income tax for his 1987, 1988, and
1989 taxable years. In October of 1993, the IRS, claiming a lien for tax
deficiencies, penalties, and statutory additions totaling $85,617.55,
issued a Notice of Levy to American Community. Through this notice, the
IRS asked American Community to pay over to the IRS all property or
rights to property belonging to Bradley. American Community responded by
stating that it had no funds in its possession payable to Bradley, and
that all commissions had been assigned to the Trust. In April of 1994,
the IRS issued a second Notice of Levy to American Community, claiming a
lien for taxes and statutory additions owed by Bradley in the amount of
$90,406.74. American Community continued to pay Bradley's commissions,
as well as the commissions assigned to him by the other agents, to the
Trust, until June of 1994, when the IRS issued a Final Demand to
American Community for payment of all "property, rights to
property, money, credits, and bank deposits . . . to the credit of,
belonging to, or owned by [Bradley]" and in American Community's
possession or owed to Bradley as of the first Notice of Levy.
payment to the Trust represented commissions earned through
March 31, 1994
. Upon receiving this Final Demand, American Community withheld payment
of additional commissions to the Trust. The insurance agents and
representatives of the Trust told American Community that the liens
asserted by the IRS were invalid. Rather than comply with the Final
Demand to pay the commissions to the IRS, American Community withheld
the commissions from both claimants, and eventually deposited them,
along with interest earned thereon, in the registry of the Clerk of the
Court of Common Pleas in
embodies two separate actions that were filed in the Court of Common
. First, the Trust brought a breach of contract claim against American
Community, asserting that American Community had a contractual
obligation to pay the commissions to the Trust. Second, American
Community filed an action in interpleader to determine ownership of
accumulated commissions. The defendants named in the second action
included the Trust, the IRS, Bradley, and the other agents. The Court of
Common Pleas consolidated the cases, and the
removed the consolidated case to the United States District Court for
the Southern District of Ohio. The funds in question were transferred to
the registry of the Clerk of the District Court.
District Court, American Community moved for summary judgment on the
breach of contract claim, and the
moved for summary judgment in the interpleader action, asserting that,
by virtue of its tax lien, the
had a superior claim to the funds in dispute. On
March 11, 1997
, the District Court granted summary judgment in favor of American
Community on the contract claim and the
on the interpleader action.
We review de
novo the District Court's grant of summary judgment in favor of the
Government. E.g., Roush v. Weastec, Inc., 96 F.3d 840, 843 (6th
Cir. 1996). The facts underlying this case are undisputed and Bradley's
appeal raises a single question of law: whether an exemption from levy
that is listed in Internal Revenue Code ("I.R.C.") §6334, 26
U.S.C. §6334, applies when the IRS seeks enforcement of a tax lien in
an interpleader action.
To answer this
question we look to the relationship of several sections of the Internal
Revenue Code. Section 6321 of the I.R.C. provides that the amount of
unpaid taxes, interest, and penalties that any person neglects or
refuses to pay "shall be a lien in favor of the
upon all property and rights to property, whether real or personal,
belonging to such person." 26 U.S.C. §6321. The Supreme Court has
stated that "[t]he statutory language all property and rights to
property, appearing in §6321. . . 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). This tax lien arises at the time
the unpaid taxes are assessed and persists until the liability for the
amount assessed is satisfied. 26 U.S.C. §6322.
has several separate procedures through which it can recover the tax
deficiency. As the Supreme Court explained in United States v.
Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 682 (1983), the Government
is authorized under 26 U.S.C. §7403 to file a lien-foreclosure suit in
a district court of the
to enforce the tax lien. In other cases, the Government may decide
simply to sue for the amount of unpaid taxes, "and, on getting a
judgment, exercise the usual rights of a judgment creditor." 461
at 682 (citing 26 U.S.C. §§6502(a), 7401, 7402(a)). Section 6331 of
the I.R.C., 26 U.S.C. §6331, provides an additional, administrative
avenue for recovery:
any person liable to pay any tax neglects or refuses to pay same within
10 days after notice and demand, it shall be lawful for the Secretary to
collect such tax (and such further sum as shall be sufficient to cover
the expenses of the levy) by levy upon all property and rights to
property (except such property as is exempt under section 6334)
belonging to such person or on which there is a lien provided in this
chapter for the payment of such tax.
U.S.C. §6331(a). As the Court explained, "[t]he common purpose of
this formidable arsenal of collection tools is to ensure the prompt and
certain enforcement of the tax laws in a system relying primarily on
"[a]dministrative levy, unlike an ordinary lawsuit, and unlike the
procedure described in §7403, does not require any judicial
intervention, and it is up to the taxpayer, if he so chooses, to go to
court if he claims that the assessed amount was not legally owing."
Rodgers [83-1 USTC ¶9374], 461
at 682-83. Third parties who may have been aggrieved by an
administrative levy against a recalcitrant taxpayer also must wait until
a post-seizure proceeding to assert their rights to disputed property. See
National Bank of Commerce [85-2 USTC ¶9482], 472
at 731. "In contrast to the lien-foreclosure suit, the levy does
not determine whether the Government's rights to the seized property are
superior to those of other claimants; it, however, does protect the
government against diversion or loss while such claims are being
at 721. In sum, §6331 provides the Government with a mechanism to
secure expeditiously property that might satisfy tax deficiencies and
postpones the resolution of property rights until after the seizure. See
Code authorizes the IRS to execute an administrative levy without prior
judicial approval, it also provides some protection to the taxpayer.
Internal Revenue Code §6334, 26 U.S.C. §6334, exempts specific types
of property from attachment by levy. Most relevant to the instant case,
§6334(a)(9) provides that the following income is exempt from levy:
amount payable to or received by an individual as wages or salary for
personal services, or as income derived from other sources, during any
period, to the extent that the total of such amounts payable to or
received by him during such period does not exceed the amount determined
under subsection (d).
exemption prevents the IRS from seizing all of a taxpayer's paycheck
through a purely administrative proceeding, and allows the taxpayer to
retain from his wages or salary an amount that is determined in relation
to the sum of the standard personal income tax deduction and the
taxpayer's aggregate number of personal income tax exemptions. See
26 U.S.C. §6334(d).
In the instant
case, the IRS first selected the administrative levy from its arsenal of
collection tools and demanded that American Community pay over any of
Bradley's property or rights to property that it had in its possession.
Instead of complying, American Community filed an interpleader action to
resolve the competing claims to the withheld commissions. After removing
the interpleader to the District Court, the Government successfully
filed a claim for enforcement of its tax lien against the accumulated
commissions. Bradley now contends that the judgment in favor of the
should have been reduced by the amount of money that, pursuant to §6334(a)(9),
he would have been entitled to claim as exempt from the original levy.
In response, the
argues that the judicial enforcement of a lien is independent of and
distinct from an administrative levy, and that a valid tax lien may
attach property that is exempted from levy.
We have yet to
decide whether the Government may enforce a tax lien created by 26
U.S.C. §6321 against property that §6334 would exempt from levy. 2
The United States Courts of Appeals that have considered the
relationship between administrative levies and tax liens have recognized
that a tax lien under §6321 can attach to property that would be exempt
from a §6331 administrative levy. In United States v. Barbier
[90-1 USTC ¶50,107], 896 F.2d 377 (9th Cir. 1990), the Ninth Circuit
considered an appeal from a bankruptcy proceeding in which
debtor-taxpayers argued that §6334 prohibited the attachment of a
federal tax lien on property that was exempt from an administrative
levy. The court rejected the taxpayers' argument, holding that "for
the purposes of the Barbiers' Chapter 13 plan, the IRS's claim against
the Barbiers for their income tax deficiencies, including interest and
penalties, may be secured by a lien on property exempt under section
6334(a)." [90-1 USTC ¶50,107], 896 F.2d at 378. It reasoned that
restricting the scope of a tax lien's reach would be inconsistent with
both Supreme Court precedent and the statutory purpose of promoting tax
at 378-79 (citing National Bank of Commerce [85-2 USTC ¶9482],
at 720-21). It also reasoned that "[t]he IRS's levying power is
limited because a levy is an immediate seizure not requiring judicial
at 379. The court, however, confined its opinion to the determination of
the scope of a tax lien in a bankruptcy proceeding, stating in a
footnote that they "need not consider here whether exempt assets
are subject to judicial foreclosure and express no view on that
at 380 n.3.
Circuit has also considered, in a case arising out of bankruptcy,
whether a tax lien can reach property exempt from levy. See In re
Voelker [95-1 USTC ¶50,028], 42 F.3d 1050 (7th Cir. 1994). Relying
heavily on the Ninth Circuit's analysis in Barbier, the Seventh
Circuit held that "[t]he language of the statute unambiguously
shows that the federal tax lien attaches to all of a debtor's property,
without exception. Thus, we agree with the district court, and the
majority of the other courts addressing the issue, that the lien
attached to Voelker's [exempt personal property]." [95-1 USTC ¶50,028],
42 F.3d at 1051.
Fifth Circuit has considered this issue, again in the context of a
bankruptcy proceedings, in Sills v.
(In re Sills) [96-1 USTC ¶50,282], 82 F.3d 111 (5th Cir. 1996). In Sills,
the taxpayers purchased a house with workers' compensation proceeds. In
the bankruptcy proceeding, they sought to insulate that house from a tax
lien, arguing that property purchased with workers' compensation
benefits is exempt from levy under 26 U.S.C. §6334(a)(7). The Fifth
Circuit rejected their arguments and held that tax liens may reach
property exempt from levy. Although the court did not decide if the
taxpayers' house actually qualified under §6334(a)(7), it reasoned as
if the Sills' house were exempt from levy, the tax lien still may be
valid and enforceable. For example, the IRS may enforce the lien by
foreclosure action under I.R.C. §7403; it may seek to have its lien
satisfied in proceeding brought by third parties, in which the IRS is
brought pursuant to 28 U.S.C. §2410; or it may exercise redemption
rights provided by I.R.C. §7425(d) if another party forecloses on the
USTC ¶50,282], 82 F.3d at 114. This reasoning emphasizes the myriad of
mechanisms that the IRS can employ to collect taxes through the
enforcement of tax liens that reach property that would be exempt from
attachment by levy.
heavily on Don King Productions, Inc. v. Thomas [90-2 USTC ¶50,524],
749 F. Supp. 79 (S.D.N.Y. 1990), rev'd in part [91-2 USTC ¶50,474],
945 F.2d 529 (2d Cir. 1991), a case in which the court reached the
opposite conclusion. There, the District Court held, in an interpleader
action, that "a lien cannot attach to child support monies that are
exempt from levy." [90-2 USTC ¶50,524], 749 F. Supp. at 84. The
court based its decision purely on policy grounds, reasoning that
"exemption allows the delinquent taxpayer to fulfil his court
ordered obligation to support his children."
Bradley acknowledges that exemptions under §6334 would not apply if the
had sought enforcement of its tax lien by instituting judicial
proceedings under §7403, he argues that this case is different because
was responding to an interpleader action that resulted from its levies.
He asserts that it is unfair to allow third parties to negate taxpayers'
claims to exemptions from levy under §6334 whenever third parties
refuse to surrender property that is the object of an IRS levy and then
bring an interpleader action to determine the priority of rights to that
property. Appellant's argument can be distilled to the claim that once
the IRS files a levy, the taxpayer is entitled to claim exemptions under
§6334, unless it is the IRS that initiates the action for judgment on
its lien under §7304.
argument conflicts with the statutory scheme of the Internal Revenue
Code, which has created a "number of distinct enforcement tools
available to the
for the collection of delinquent taxes." Rodgers [83-1 USTC
at 682. An administrative levy, one such tool, is a "provisional
remedy," without judicial intervention, in which the Government
seeks to secure quickly and inexpensively property to satisfy a tax
deficiency. See National Bank of Commerce [85-2 USTC ¶9482], 472
at 720-21. Although administrative recovery may be relatively quick and
inexpensive, the IRS's powers to levy are limited by the exceptions in
26 U.S.C. §6334. These exemptions make sense in an administrative
proceeding, where no court has found that taxes are even due.
Enforcement of a tax lien is another distinct mechanism for tax
collection. Such a proceeding has different characteristics: it requires
judicial intervention, but the lien created by 26 U.S.C. §6321 "is
broad and reveals on its face that Congress meant to reach every
interest in property that a taxpayer might have." National Bank
of Commerce [85-2 USTC ¶9482], 472
at 719-20. The statute exempts certain property from a levy but not from
a lien, and we decline to alter this allocation.
argument also relies heavily on the order in which the Government uses
its distinct enforcement tools. In this case, although the Government
first sought to recover tax deficiencies by administrative levy, the
interpleader action changed the nature of the proceedings. The parties
were then in court, and the remedy the
sought was no longer "provisional" in nature. Bradley fails to
explain why it should make a difference whether the
seeks to enforce a tax lien in a proceeding that it initiated or whether
it seeks enforcement of the lien in an action that was initiated by
another party. The scope of the lien remains the same in either
instance. If we were to adopt Bradley's arguments, we would create the
odd situation where a tax lien created under §6321 would reach all of
Bradley's commissions if the Government had immediately sought
enforcement by filing suit under §7403, but the same lien would be
subject to certain exemptions if the Government sought judicial
enforcement of the lien after the quicker and less expensive levy
procedure had failed and led to an interpleader. To do so would not only
re-write the broad language of §6321, it would also lessen the
incentive of taxpayers to comply with an administrative levy. This would
conflict with "the policy inherent in the tax statutes in favor of
the prompt and certain collection of delinquent taxes."
foregoing reasons we affirm the District Court's order granting summary
judgment in favor of the United States.
District Judge for the Eastern District of Michigan, sitting by
The District Court found that the Trust, which named the four agents as
its beneficiaries, was created to evade income taxation.
In Woods v. Simpson [95-1 USTC ¶50,079], 46 F.3d 21 (6th Cir.
1995), we considered a case with the same procedural history as the
instant case: the IRS sought to enforce a tax lien against interpleaded
funds that the taxpayer inherited, and the taxpayer's former wife argued
that her child support claims were exempted under §6334(a)(8) from the
federal tax lien. In considering their claims, we explicitly declined to
reach the question before us today: "Given our conclusion that 26
U.S.C. §6334(a)(8) does not exempt an inheritance from levy, we need
not decide whether 26 U.S.C. §6334 also operates to exempt certain
property from a 26 U.S.C. §6321 federal lien for taxes." [95-1
USTC ¶50,079], 46 F.3d at 24. Thus, despite his assertions to the
contrary, Woods does not provide any support for Bradley's
argument that exemptions under §6334 should provide him some protection
from federal tax liens.
[99-1 USTC ¶50,368]
United States of America
, Plaintiff v. Lee D. Wight, et al., Defendants
District Court, East. Dist. Calif., Civ.
Jurisdiction: Subject matter: Federal tax collection actions: Liens
and levies: Exemption from.--Taxpayers' motion to dismiss the
government's complaint seeking to reduce their tax liabilities to
judgment, to set aside fraudulent conveyances and to foreclose federal
tax liens on grounds that the property was exempt from levy was denied.
Regardless of whether the taxpayers' residence was exempt from levy, Code
Sec. 6334(a) did not exempt that property or a dental office from
federal tax liens.
Jurisdiction: Subject matter: Federal tax collection actions: Who is
the taxpayer: Sham entities: Service of summons: Proper parties: Venue:
Failure to state a justiciable claim.--Taxpayers' motion to dismiss
the government's foreclosure complaint was denied because they failed to
prove a variety of procedural and jurisdictional defects. The taxpayers
were properly served with a summons as the alleged principals of the
beneficiary entity of trust deeds recorded on their property. The court
had subject matter jurisdiction over the federal tax collection action
and personal jurisdiction over the taxpayers, who were served while
voluntarily present in the state. Also, the court had venue over the
action because the taxpayers and their property were located within the
judicial district. Finally, the taxpayers' unsupported arguments that
the complaint failed to state a justiciable claim and did not name the
real parties in interest were rejected. However, the complaint was
dismissed as to the trustee of the trust deeds recorded by the taxpayers
since the government alleged no basis for serving the taxpayers on the
Paul L. Seave,
United States Attorney, Sacramento, Calif. 95814, G. Patrick Jennings,
Department of Justice, Washington, D.C. 20530, for plaintiff. Herber C.
Leney, Jr., Wells Fargo Bank, 111 Sutter St., San Francisco, Calif.
94163, Dean A. Christopherson, Christopherson and Alexander, 1111 Civic
Dr., Walnut Creek, Calif. 94596 for defendants.
This action is
before the court on plaintiff the
United States of America
's Motion to Strike and Request for Order to Show Cause. The United
states moves to strike certain documents filed by defendants Lee D.
Wight and Marjorie A. Wight ("the taxpayers") 1
in response to the United States' Complaint. The
also moves for an order entering default against the taxpayers in the
event they fail to answer the Complaint within ten days after the
hearing on this motion. For the reasons set forth below, the court
construes the documents filed by the taxpayers in response to the
Complaint as a motion to dismiss under Fed. R. Civ. P. 12(b) and grants
the motion is part and denies the motion in part. 2
will not be dismissed under Fed. R. Civ. P. 12(b)(6), "unless it
appears beyond doubt that plaintiff can prove no set of facts in support
of [its] claim that would entitle [him or] her to relief." Yamaguchi
v. Department of the Air Force, 109 F.3d 1475, 1480 (9th Cir. 1997)
(quoting Lewis v. Telephone Employees Credit Union, 87 F.3d 1537,
1545 (9th Cir. 1996)). "All allegations of material fact are taken
as true and construed in the light most favorable to the nonmoving
party." Cahill v.
Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996).
seeks to reduce federal tax assessments against the taxpayers to
judgment, to set aside fraudulent conveyances or transfers of real
property, and to foreclose federal tax liens upon real property. The
real property that is the subject of this action is a residence located
and a dental office located in
. The residence was purchased by the taxpayers in 1965 and has been
occupied by them as their personal residence at all times pertinent
hereto. The dental office property was purchased by the taxpayers in
1969 and has been used as a dental office by Lee D. Wight at all times
In response to
the complaint, on
August 26, 1998
the taxpayers filed an "Actual Notice and Constructive
Notice/Demand to Quash Service of Summons" ("Notice and Demand
to Quash"). 4
Although the Notice and Demand to Quash is unclear, the court reasonably
construes the taxpayers to argue that: (1) the taxpayers are not proper
entities for service of summons "on behalf of a corporate or
deceased entity unknown to them;" (2) the court lacks subject
matter jurisdiction; (3) the court lacks personal jurisdiction; (4)
venue is improper; (5) the complaint fails to state a claim upon which
relief may be granted; and (6) the complaint fails to name the real
parties in interest.
February 1, 1999
, the United States noticed the instant Motion to Strike the Notice and
Demand to Quash and a "Cover Letter" dated
December 21, 1998
, which it contends was filed with the court, 5
on the grounds that these documents do not constitute an answer to the
Complaint, argue insufficient defenses and are immaterial. The
also requests that the court issue an order entering default against the
taxpayers if they fail to answer the Complaint within ten days after the
hearing on this motion. The taxpayers did not file a formal opposition
to the motion. Rather, on
February 4, 1999
, defendant Lee D. Wight submitted a "Cover Letter" to the
court arguing that the real property that is the subject of this action
(the residence and the dental office) are exempt from levy.
Service Of Summons On The Taxpayers
the United States' proof of service, Lee D. Wight and Marjorie A. Wight
were served "[a]s individual defendants and for Sky Island Group,
Republique Trust Company, Ltd., and W.A.G./N.C.E. Company." 6
The taxpayers contend that they were improperly served "on behalf
of a corporate or deceased entity unknown to them." The court
construes this to mean they were served improperly on behalf of Sky
Island Group, Republique Trust Company, Ltd., and W.A.G./N.C.E. Company.
Complaint, the United States alleges that: (1) Sky Island Group is a
sham entity and fraudulent transferee of the Wight residence and dental
office property and may claim an interest in; (2) W.A.G./N.C.E. Company
is a sham entity and the beneficiary of trust deeds recorded on or about
September 12, 1984
against the Wight residence and the dental office property; (3) Sky
Island Group and W.A.G./N.C.E. Company are nominees and alter egos of
the taxpayers and may claim an interest in the Wight residence and the
dental office property; (4) Republique Trust Company, Ltd. is the
trustee of the trust deeds mentioned in connection with W.A.G./N.C.E.
Company; (5) on
September 12, 1984
, Lee D. Wight recorded a deed of trust against the Wight residence
showing W.A.G./N.C.E. Company as beneficiary, allegedly securing a
notice in the amount of $145,000; (6) the address of W.A.G./N.C.E.
Company was a mailbox rented by Lee D. Wight and Marjorie A. Wight; (7)
December 2, 1987
, the taxpayers recorded a quitclaim deed of the Wight residence to Sky
Island Group; (8) the mailing address of Sky Island Group was a mailbox
rented by Lee D. Wight and Marjorie A. Wight; (9) W.A.G./N.C.E. Company
and Sky Island are sham entities which have no legal or factual
existence by which they may be distinguished from the taxpayers Lee D.
Wight and Marjorie A. Wight; and (10) in the alternative, W.A.G./N.C.E.
Company and Sky Island were and are nominees, alter egos or agents of
the taxpayers. Complaint ¶¶10-12, 34-35, 41-42. For purposes of this
motion, said allegations must be taken as true and construed in the
light most favorable to the
as the non-moving party. Cahill, 80 F.3d at 337-38.
Based on the
allegations contained in the Complaint, the taxpayers were properly
served on behalf of W.A.G./N.C.E. Company and Sky Island Group. See,
e.g., Direct Mail Specialists, Inc. v. Eclat Computerized Technologies,
Inc., 840 F.2d 685, 688 (9th Cir. 1988). 7
It is not clear, however, from the Complaint or the
' moving papers on what basis the
served the taxpayers on behalf of Republique Trust Company, Ltd. Thus,
the taxpayers' motion to dismiss is granted as to Republique Trust
Company, Ltd., Fed. R. Civ. P. 12(b)(5), and the
is granted leave to amend as set forth below.
Subject Matter Jurisdiction
This court has
jurisdiction over federal tax collection actions pursuant to 28 U.S.C.
§§1340 and 1345 and 26 U.S.C. §§7402 and 7403.
This court has
personal jurisdiction over the taxpayers because they were served while
voluntarily present in the forum state, Burnham v. Superior Court,
495 U.S. 604, 610-11 (1990), appear to be domiciled in the forum state, Milliken
v. Meyer, 311 U.S. 457, 462 (1940) and have sufficient minimum
contacts with the forum state, International Shoe Co. v. Washington,
326 U.S. 310, 316 (1945).
proper in the Eastern District of California because the taxpayers
reside and the subject real property is located within this judicial
district. 28 U.S.C. §§1391(b) and 1396.
Failure To State A Claim
contend without any argument or citation to authority that the complaint
fails to state a claim upon which relief can be granted. The court
declines to guess the basis of the taxpayers' contention.
Failure To Name The Real Parties In Interest
any argument or citation to authority, the taxpayers contend that the
complaint fails to name the real parties in interest. In addition to the
taxpayers, the complaint names Sky Island Group, Republique Trust
Company, Ltd., W.A.G./N.C.E. Company, American Securities Company, Wells
Fargo Bank, IMCO Realty Services, Inc., and Tahoe Title Guaranty Company
as defendants. 8
The alleged interests of Sky Island Group, Republique Trust Company,
Ltd., W.A.G./N.C.E. Company are set forth above. Wells Fargo Bank is the
beneficiary of a deed of trust recorded with the Placer County Recorder
on or about
December 29, 1983
against the Wight residence. Complaint ¶13. IMCO Realty Services, Inc.
is the assignee-beneficiary of a deed of trust recorded with the Placer
County Recorder on
August 11, 1978
against the Wight residence.
at ¶14. American Securities Company is the trustee of the deeds of
trust mentioned in connection with Wells Fargo Bank and IMCO Realty
at ¶15. Tahoe Title Guaranty Company is the trustee of the deed
of trust recorded on or about
July 16, 19
69 against the Wight residence and naming Guy H. Wight and Florence D.
Wight as the beneficiaries thereof.
at ¶17. The taxpayers do not state who they contend the real parties in
interest are. Accordingly, their argument that the complaint fails to
name the real parties in interest is wholly without merit.
In a document
entitled "Cover Letter" filed with the court on
February 4, 1999
, defendant Lee D. Wight argues that "the items enclosed and
attached herewith are accepted for value and are exempt from levy."
Copies of the
' moving papers are attached to said letter. Lee D. Wight does not cite
to any legal authority or offer any argument in support of her
property is exempt from levy by the government. See 26
U.S.C. §6334. Absent approval of the district court, a taxpayer's
principal residence is exempt from levy. See 26 U.S.C. §6334(a)(13).
contends, however, that the exemptions set forth in §6334 are
inapplicable to the present situation as the present situation involves
a lien, not a levy. Indeed, the
brings this action to, among other things, "foreclose federal tax
liens upon real property." Complaint ¶1.
lien may be attached to all of the taxpayer's property, including
property exempt from IRS levy." United States v. Barbier
[90-1 USTC ¶50,107], 896 F.2d 377, 379 (9th Cir. 1990); see also
American Trust v. American Community Mutual Ins. Co. [98-1 USTC ¶50,369],
142 F.3d 920, 925 (6th Cir. 1998); In re Voelker [95-1 USTC ¶50,028],
42 F.3d 1050, 1051 (7th Cir. 1994); In re Sills [96-1 USTC ¶50,282],
82 F.3d 111, 114 (5th Cir. 1996). Here, on
March 2, 1993
November 2, 1993
March 6, 1995
, the IRS filed Notices of Federal Tax Liens against defendants Lee D.
Wight, Marjorie A. Wight and the Sky Island Group as nominee, transferee
and alter ego of the taxpayers for the income tax assessments set forth
in the Complaint. Complaint ¶29. Neither the residence nor dental
office is exempt from such a lien under §6334(a).
' Motion to Strike and Request for Order to Show Cause is DENIED.
2. The court
construes the "Actual Notice and Constructive Notice/Demand to
Quash Service of Summons" filed by defendants Lee D. Wight and
Marjorie A. Wight as a motion to dismiss under Rule 12(b).
Lee D. Wight's and Marjorie A. Wight's motion to dismiss is GRANTED as
to defendant Republique Trust Company, Ltd. The United States shall have
fifteen (15) days from the date of this order to file an amended
complaint setting forth the relationship between defendants Lee D. Wight
and Marjorie A. Wight and Republique Trust Company, Ltd. such that Lee
D. Wight and Marjorie A. Wight are properly served on behalf of
Republique Trust Company, Ltd.
Lee D. Wight's and Marjorie A. Wight's motion to dismiss is DENIED
in all other respects.
Guy H. Wight and Florence D. Wight are DISMISSED.
Lee D. Wight and Marjorie A. Wight shall file an answer or other
appropriate responsive pleading within ten days from the date on which
said defendants are served with the amended complaint.
IT IS SO
In addition to Lee D. Wight and Marjorie A. Wight, the Complaint also
names Sky Island Group, Republique Trust Company, Ltd., W.A.G./N.C.E.
Company, American Securities Company, Wells Fargo Bank, IMCO Realty
Services, Inc., Tahoe Title Guaranty Company, Guy H. Wight and Florence
D. Wight as defendants. The alleged role of each defendant is set forth
Because oral argument will not be of material assistance, the court
orders this matter submitted on the briefs. E.D. Cal. Local Rule
The action was stayed from
June 29, 1998
July 27, 1998
during the pendency of a related bankruptcy proceeding.
Defendants Wells Fargo Bank and American Securities Company filed a
Verified Claim and Answer to Complaint on
June 9, 1998
. First American Title Insurance Company, the successor in interest to
defendant Tahoe Title Guaranty Company, filed a Declaration of
Non-Monetary Status and Disclaimer of Interest on
September 30, 1998
. Defendant IMCO Realty Services, Inc. has not responded to the
Complaint. Defendants Guy H. Wight and Florence D. Wight have not been
served and are dead. See
' Scheduling Conference Statement filed
November 24, 1998
seeks leave to dismiss Guy H. Wight and Florence D. Wight.
Leave is granted, and said defendants are dismissed.
December 21, 1998
"Cover Letter" referred to by the
is not contained in the court's file or noted on the court's docket.
February 4, 1999
, defendant Lee D. Wight filed a "Cover Letter" which appears
to raise the same argument as that alleged to have been raised in the
December 21, 1998
cover letter, namely that the real property that is the subject of this
action is exempt from levy. This argument is addressed below.
According to the summons, however, Marjorie A. Wight was served only as
Attached to the taxpayers' Notice and Demand to Quash are copies of the
Summons and Complaint stamped "REFUSAL FOR CAUSE WITHOUT DISHONOR
UCC-3501." Section 3-501 of the Uniform Commercial Code governs the
dishonor of negotiable instruments and is wholly inapplicable to this
As set forth above, the Complaint also names Guy H. Wight and Florence
D. Wight as defendants. However, these defendants are dead, and the
' request to dismiss these defendants is granted.