Annotations- Disability Benefits

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6334 Annotations: Disability Benefits- Levy

 

Property 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

(CA-2), 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).

Geoffrey M. Kalmus, 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.

Before WATERMAN, FRIENDLY and SMITH, Circuit Judges.

[ Lower Court Decision]

WATERMAN, Circuit Judge:

Michael Kane 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.

Without 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 U. S. C. §1340 which contains no jurisdictional amount requirement. ¹

[Statutory Construction Issue]

The Government 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.

[Statutory Provisions]

Section 6334 of the Internal Revenue Code of 1954, 26 U. S. C. §6334, provides:

"Property exempt from levy

(a) Enumeration.--There shall be exempt from levy--

* * *

(4) 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.

(b) * * *

(c) 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 (a)."

[Taxpayer's Contentions]

Appellant 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

"inability 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 duration."

Unemployment, 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 conditions.

2. Congress has expressly exempted from levy for collecton of taxes benefits paid under the Federal Railroad Unemployment Insurance Act, 45 U. S. 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 U. S. 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 compensation schemes.

3. In 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.

[Language of Statute]

Although 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 in 1958.

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 United States * * *." 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 it."

Rather than 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."

[Congressional Policy]

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.

Section 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.

[Legislative History]

Prior to 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 U. S. C. §352(e) (1952), the Railroad Retirement Act, 45 U. S. C. §228(1) (1952), and the Civil Service Retirement Act, 5 U. S. C. §729 (1952).

This jigsaw 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):

"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 property specifically made exempt from subsection (a)."

Although 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).

The 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

In direct response to these requests, Congress enacted subsection (a)(4) of 26 U. S. 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.

[No Exemption]

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.

We are 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 pauperis appeal.

¹ 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.

² 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 U. S. C. §423 has been superseded by 26 U. S. 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 U. S. C. §423, have been added since 1954 to the chapter covered by 43 U. S. C. §407 does not revive the operative force of the latter provision.

³ 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."

⁴ 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.

⁵ 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 District Director.

 

[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

U.S. Bankruptcy Court, West. Dist. Tenn. , West. Div., 92-33141-B, 12/17/93

[Code Secs. 6321 and 6334 ]

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 ( Tennessee ) 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.

Christian Goeldner, P.O. Box 1468 , Southaven , Miss. 38671-1468 , for plaintiff. George W. Stevenson, 200 Jefferson Ave. , Memphis , Tenn. 38103 , 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. , Memphis , Tenn. 38103 , for U.S. Trustee. James Morris, 4141 Mimosa Hill, Bartlett , Tenn. 38135 , for debtor.

MEMORANDUM OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT ON COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT AND FOR DECLARATORY JUDGMENT

BROWN, Bankruptcy Judge:

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.

FACTUAL SUMMARY

The parties are in agreement that no genuine issues of material fact exist in this proceeding. The following is a brief summary of these undisputed facts.

The debtor 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 .

The debtor's 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.] . . . On 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.

The IRS 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.

The government 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.

DISCUSSION

Examination of 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 [85-2 USTC ¶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).

The lien 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) . In Tennessee , this is the county register's office located in the taxpayer's county of residence. Tenn. Code Ann. §66 -21-201.

Once 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.

Furthermore, 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. Co. , 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).

Satisfaction 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 .

CONCLUSION

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. U.S. 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).

As further 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.

IT IS THEREFORE ORDERED THAT:

1. The debtor is granted a discharge of his personal tax liabilities for 1987 and 1988; and

2. The 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.

SO ORDERED.

 

 

 

 

 

[99-1 USTC ¶50,526] Ramon and Nazzari Hughes, Plaintiffs v. Internal Revenue Service, Defendant Ramon and Nazzari Hughes, Plaintiffs v. The United States , Defendant

U.S. 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 796

[Code Sec. 6334 ]

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.

[Code Sec. 7402 ]

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 United States , 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.

[Code Secs. 7402 , 7432 and 7433 ]

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.

For 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.

MEMORANDUM & ORDER

SEYBERT, District Judge:

Plaintiffs 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 defendants 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.

FACTS

In April 1998, plaintiffs commenced two actions in small claims court in the District Court of Nassau County , 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 , the United States removed these actions to this Court pursuant to 28 U.S.C. §1441(a). The United States requested consolidation of these actions on June 17, 1998 . ¹

Plaintiffs' 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.

Defendants 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 United States is entitled to sovereign immunity.

LEGAL STANDARD

A district 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., 492 U.S. 229, 249-50 (1989) (quoting Hishon v. King & Spalding, 467 U.S. 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. Id. at 249; see also Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 113 S. Ct. 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)).

DISCUSSION

The 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.

Plaintiffs cite no authority in their complaints for the proposition that the IRS and Engel were not entitled to seize the funds in question.

However, the 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 U.S. 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. Inc., 492 U.S. at 249. With these standards in mind, the Court proceeds to an analysis of the claims.

Plaintiffs 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." Id. 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 Id. at 2. Plaintiffs further indicate that they sought and were denied reconsideration through the IRS's Problem Resolution Office in Brooklyn . Id.

Finally, the last page of plaintiffs' memorandum appears to argue that Pratesi and Engel violated §§6334(a)(10) and (b)(3) of the Code. Id. 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 actions," respectively.

Defendants 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. United States ' Reply Brief (" U.S. 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 been paid. Id. Defendants further assert that plaintiffs' citation of §6334(b), which refers to appraisals, has no relevance to this case. Id. 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. Id. at 4.

While the 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

[i]f, in 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 United States .

I.R.C. §7433. It is clear from the statutory language that these two sections authorize suit only against the United States --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 United States ).

An examination 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 these deficiencies.

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).

Section 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."

"As in 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." Connecticut Nat'l Bank v. Germain, 503 U.S. 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 U.S. 153, 185 (1978).

The defendants 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 United States ' Motion to Dismiss (" U.S. Memo."), at 3. In other words, defendants argue that Congress has distinguished between funds that are "payable" and funds that are "paid." Id. 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. Id. ; 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).

The plain 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." Id. 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). ⁴ 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 U.S. at 249-50. ⁵

Finally, defendants raise a meritorious argument that certain of these claims cannot be maintained on sovereign immunity grounds. U.S. 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. Id. In regard to the suit against the United States , defendants assert that plaintiffs have failed to allege any basis for a waiver of sovereign immunity. Id.

"Absent a waiver, sovereign immunity shields the Federal Government and its agencies from suit." F.D.I.C. v. Meyer, 510 U.S. 471, 475 (1994) (citing Loeffler v. Frank, 486 U.S. 549, 554 (1988) and Federal Hous. Admin. v. Burr, 309 U.S. 242, 244 (1940)). As a sovereign, the United States may not be sued without its consent. United States v. Mitchell, 445 U.S. 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).

Here, 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.

CONCLUSION

The 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 with prejudice.

Plaintiffs 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.

SO ORDERED.

 

 

[95-1 USTC ¶50,028] In the Matter of Mitchell W. Voelker, Debtor-Appellant

(CA-7), U.S. Court of Appeals, 7th Circuit, 94-2271, 12/12/94 , 42 F3d 1050, 42 F3d 1050. Affirming and remanding a District Court decision, 94-2 USTC ¶50,299

[Code Secs. 6321 and 6334 ]

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.

Terrence J. 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.

Before CUMMINGS, FLAUM, and ROVNER, Circuit Judges.

FLAUM, Circuit Judge.

The debtor, 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.

I.

Mitchell Voelker filed a voluntary Chapter 13 bankruptcy petition on July 29, 1992 . On 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.

The bankruptcy 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." Id. 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 exempt property. Id.

The district 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 from levy.

II.

We review 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. School City of Mishawaka , 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. United States , 498 U.S. 1126 (1991).

Section 6321 states:

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.

26 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 [91-2 USTC ¶50,553 ],137 B.R. 43, 46 (D. Neb. 1991); United States v. Stowe [90-2 USTC ¶50,559 ], 121 B.R. 549, 552-53 (N.D. Ind. 1990); In Re Schreiber [94-1 USTC ¶50,202 ], 163 B.R. 327, 334 (Bkrtcy. N.D. Ill. 1994); In Re Lyons , 148 B.R. 88, 92 (Bkrtcy. D. D.C. 1992); In Re Krahn, 124 B.R. 78, 82 (Bkrtcy. D. Minn. 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. Ore. 1987); In Re Ridgley, 81 B.R. 65, 69 (Bkrtcy. D. Ore. 1987); In Re Jackson [88-1 USTC ¶9186 ], 80 B.R. 213, 214-15 (Bkrtcy. D. Colo. 1987). ²

Contrary to Voelker's assertions, 26 U.S.C. sec. 6331 does not alter this result. That section provides:

(a) 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.

(b) The term "levy" as used in this title includes the power of distraint and seizure by any means. ³

Section 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.

This 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." Id. 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.

Extending the 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. 6331 .

For the foregoing reasons, the decision of the district court is affirmed and the case remanded for further action. AFFIRMED.

¹ 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[2] (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.

² 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).

³ 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.

⁴ 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.

ROVNER, Circuit Judge

The court's 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.

Permitting the 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 it.

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.

What will 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.

Mr. Voelker's 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

U.S. Bankruptcy Court, Dist. Wyo., 95-10007, 6/20/96, 200 BR 923

[Code Secs. 6323 and 6871 ]

Bankruptcy: IRS lien: Perfected: Avoidability: State law: Uniform Commercial Code.--

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 ( Wyoming ) 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.

Stephen R. 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.

DECISION ON MOTIONS FOR SUMMARY JUDGMENT

MCNIFF, Bankruptcy Judge:

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.

JURISDICTION

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.

The debtors' 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. Ohio 1990).

UNDISPUTED FACTS

The Straights are residents of Sheridan County , Wyoming . For the purposes of this case, the property of the Straights has at all times been located in Sheridan County , Wyoming .

Mrs. Straight 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 Sheridan , Wyoming , 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 statement, on May 12, 1993 in the Office of the Sheridan County Clerk.

The Security 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 machinery).

In her business operations, Mrs. Straight entered into at least two subcontracts with general highway construction contractors. One of these was a 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.

Performance 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. Straight $115,536.

FIB extended credit to Mrs. Straight under a number of promissory notes dated from June 8, 1993 to 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.

On 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 of Wyoming.

Straights own 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.

On 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 petition.

DISCUSSION

The standards 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 v. City of Shawnee , Kan. , 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 the motion. Id.

Standing

The threshold 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.

Subsequently, the debtors amended their complaint to include claims for lien avoidance under §§544 & 545 and the recovery of an alleged preferential transfer under §547 . Section 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 .

The reported 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 (Bankr. D. Conn. 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)).

The present 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. Ohio 1993); In re Davis , 148 B.R. 165 (Bankr. E.D.N.Y. 1992), aff'd, 169 B.R. 285 (E.D.N.Y. 1994).

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 alleged wrongs.

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. Okla. 1991).

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.

Also, the 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 other creditors.

Therefore, 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.

Perfection and Priorities

The positions 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).

The existence 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 Henderson , 133 B.R. 813, 815 (Bankr. W.D. Tex. 1991). In this case, the parties agree that the applicable law is the law of Wyoming , the state in which the personal property at issue is situated. 26 U.S.C. §6323(f)(1)(A)(ii) .

Wyoming 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. Wyo. 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.

The court 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 ( Okla. App. 1990).

The debtors' 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 County Clerk of Sheridan County , the residence of the Straights at the time the notice was filed. Wyo. Stat. §29 -6-204(c)(iv). The IRS tax lien was properly filed and cannot be avoided under §545(2) as an unperfected lien.

Second, 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) . Id. 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 ], Id. 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 United States 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).

These 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.

This court 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.

Additionally, 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. United States v. FDIC, 1987 W.L. 43096 at p. *2 (N.D. Tex. 1987).

The security 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 ( Wyo. 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 ( Wyo. 1960).

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." Wyo. Stat. §34.1-9-110. In this case the FIB asserts its security interest in the contract rights under the following language:

Collateral. The word "Collateral" means the following described property of Grantor:

All equipment and inventory on the attached Schedules "A", "B", "C", & "D".

In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising and wherever located: ...

(c) 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).

The specific 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.

The Lobo/Carr 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. Wyo. 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 turn to Wyoming 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.

Because the 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.

A security 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 agreement.

The court holds that the IRS tax lien has priority over the alleged security interest of the FIB in the Lobo/Carr contract.

Preferential Transfer to FIB

Straights seek 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, Wyoming . 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.

Under §547 , 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.

Section 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 of fact.

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. Ill. 1992).

All elements 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.

The court 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).

The court 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.

Property Exempt under the IRC

Straights also 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.

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 [95-1 USTC ¶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. Colo. 1987).

The Straights 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 6334(a) ." Id. at 380. Accordingly, the Straights may not exempt property from the lien by application of §6334 .

Nonpurchase money security interest under 522

The one 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).

Valuation

Finally, the 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.

CONCLUSION

The court's 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.

SUMMARY JUDGMENT

THIS MATTER 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, Sheridan , Wyoming . 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,

ORDERED that 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

ORDERED that 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

ORDERED that 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

ORDERED that 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 Cross-Appellee

U.S. Bankruptcy Appellate Panel, 10th Circuit, WY-96-1, WY-96-3, 4/14/97 , 207 BR 217, 207 BR 217. Affirming a Bankruptcy Court decision, 96-2 USTC ¶50,423

[Code Sec. 6323 ]

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.
[Code Sec. 6871 ]

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.

[Code Sec. 6332 ]

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.

Stephen R. 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. , Sheridan , Wyo. , 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 and cross-appellee.

Before: MCFEELEY, Chief Judge, and PUSATERI and CLARK, Bankruptcy Judges.

OPINION

PUSATERI, Bankruptcy Judge:

First 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. Wyo. 1996). The Debtors cross-appealed the Bankruptcy Court's judgment denying a portion of their motion for summary judgment.

After the 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.

In these 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.

I. Background

1. The Alleged Interests of the Bank

(a) The Security Agreements and Business Loan Agreement

Beverly A. 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.

In connection 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.

(b) Assignment of Subcontract Proceeds

Prior to 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.

2. Payment to the Bank During the 90-Day Pre-Petition Period

According to documents submitted on appeal, a company called Safetymaster Corporation ("Safetymaster") obtained a default judgment against Straight in Wyoming 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 court. On 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").

This statement 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 entered on 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: "On 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. Id. 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 and Carr.

3. The IRS Tax Lien

In September 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.

4. The Debtor's Bankruptcy Case and Chapter 13 Plan

On 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.

The Debtors 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 court."

5. 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.

On opposing 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) and (c).

II. Standard of Review

These appeals 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.

Wolf v. Prudential Ins. Co. of America, 50 F.3d 793, 796 (10th Cir. 1995) (citations and internal quotation marks omitted).

With certain 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.

III. Discussion

1. Chapter 13 Debtors' Standing To Commence Avoidance Actions

The Bankruptcy 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.

2. The Bank's Interest in the Lobo/Carr Account

The Bankruptcy 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 Wyoming . Accordingly, we begin our analysis with a review of the relevant portions of the Uniform Commercial Code ("UCC") as it has been adopted in Wyoming .

A "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 Wyo. 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 collateral." Wyo. 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 ( Wyo. 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 ( Wyo. 1989) (must have a reasonable identification of collateral).

The Bank's Security Agreement states. in relevant part:

Collateral. The word "Collateral" means the following described property of [Straight]:

All equipment and inventory on the attached Schedules . . .

In addition, the word "Collateral" includes all of the following, whether now owned or hereafter acquired, whether now existing or hereafter arising and wherever located:

. . . .

(c) All 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.

The 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.

The Bank 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.

It is well-settled that parol evidence is admissible only if a contract is ambiguous. See, e.g., Patel v. Harless, 926 P.2d 963, 965 ( Wyo. 1996); Brockway v. Brockway, 921 P.2d 1104, 1106 ( Wyo. 1996); Ames v. Sundance State Bank, 850 P.2d 607, 609 ( Wyo. 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, 1281 ( Wyo. 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, 1240 ( Wyo. 1985) (same).

Even if 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 account. ²

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 several reasons.

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 Straight. See Wyo. Stat. Ann. §34.1-9-203.

While an 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.

In addition, 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:

[A]ll property 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.

This 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 Lobo/Carr account.

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. Wyo. 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.

3. Avoidance of the Stipulation Payment

The Bankruptcy 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 547, Id. 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 property): 5 Lawrence 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 Wyoming 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 garnishment."

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 through garnishment.

The Bank's argument begins with the decision in Platte County State Bank v. Frantz, 239 P. 531 ( Wyo. 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. Id. 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 by judgment. Id. 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 third party.

From Frantz, 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:

In State Bank v. Frantz, 33 Wyo. 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 Wyoming 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.

Id. 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. Id. 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 garnished.

Nevertheless, 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 Wyoming 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 U.S. 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 wrong.

The preference 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. Neb. 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 Aspen 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.

Section 547(b) 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

4. Avoidance of the IRS Tax Lien

The Bankruptcy 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.

Relying on 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 Wyo. 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. Wyo. 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).

Straight 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.

Section 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).

Section 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 United States 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) is not).

The Debtors' 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 522(c) provides:

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

. . .

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

. . .

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

This 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. United States (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.

IV. Conclusion

For the 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.

¹ 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.

² 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.

³ 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]."

⁴ 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

U.S. Bankruptcy Court, West. Dist. Pa. , 99-26533-JFK, 4/12/2001, 2001 Bankr. LEXIS 337.

[Code Secs. 6321 , 6334 and 6871 ]

Bankruptcy: Collection of taxes: Levy v. lien: Exempt property: Personal 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.
[Code Sec. 6321 ]

Tax liens: Bankruptcy: Tort claims: Future proceeds: State (Pennsylvania) law.--

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 ( Pennsylvania ) 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.

[Code Sec. 6321 ]

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.

Robert R. 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.

MEMORANDUM OPINION ¹

Background

FITZGERALD, Chief Bankruptcy Judge:

Before the 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 Code on 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, Pennsylvania , and on February 27, 1998 , for the 1995 deficiency ($8,368.68) in Cuyahoga , Ohio . 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.

The parties 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.

In her 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, therefore, under Pennsylvania 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.

Discussion

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).

The Bankruptcy 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

I. Personal Property ⁴

Debtor argues 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:

The difference 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. . . .

A lien, 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.

U.S. 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

Debtor listed 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. §522(d)(11)(D) ⁶ 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.

The argument 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 . . .

Notice 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 deficiency on February 27, 1998 , and Debtor does not assert that these filings are improper.

The Debtor relies on Pennsylvania 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 Pa. Super. 19, 530 A.2d 871 (Pa. Super. 1987), appeal denied, 539 A.2d 811 ( Pa. 1988), and in Hurley v. Hurley, 342 Pa. Super. 156, 492 A.2d 439 ( Pa. 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) (repealed). Because Pennsylvania 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 Pa. 168, 78 A. 91, 92 ( Pa. 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 Pa. Super. 380, 599 A.2d 1348, 1349 ( Pa. Super. 1991). Thus, the cases upon which Debtor relies do not reflect the current state of Pennsylvania law.

Furthermore, 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." Id. 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 Pennsylvania law and under the Bankruptcy Code. Thus, the tax lien attaches to the cause of action and will attach to its proceeds.

III. Pension Plan

Debtor relies 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.

This court 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." Id. at 902.

In In re Wesche [96-1 USTC ¶50,265], 193 B.R. 76 (Bankr. MD. Fla. 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." Id. at 79.

[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 United States , thus, is secured to the extent of the present value of [Debtor's] retirement benefits.

Id. at 79.

The parties 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.

Conclusion

This court 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 liquidated.

An appropriate order will be entered.

ORDER

AND NOW 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 goods.

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 Floor USX Tower , 600 Grant Street , Pittsburgh , PA. 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 Floor USX Tower , 600 Grant Street , Pittsburgh , PA. 15219.

¹ The court's jurisdiction was not at issue. This Memorandum Opinion constitutes our findings of fact and conclusions of law.

² This value was determined in an appraisal obtained by the Debtor on March 8, 2000 , by order of this Court.

³ 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).

⁴ 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.

⁵ 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.

⁶ 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.

⁷ 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.

⁸ 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

(CA-6), U.S. Court of Appeals, 6th Circuit, 97-3385, 4/27/98 , 142 F3d 920, Affirming a District Court decision, 97-2 USTC ¶50,759

[Code Secs. 6321 , 6332 and 6334 ]

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 inapplicable.

Richard John Donovan, Richard J. Donovan & Assocs., Worthington , Ohio , for defendant-appellant. Pamela C. Berry, William S. Estabrook, Department of Justice, Washington , D.C. 20530 , for defendant-appellee.

Before: KENNEDY and SILER, Circuit Judges; COHN, District Judge. ^*

OPINION

KENNEDY, Circuit Judge:

Defendant Edgar F. Bradley, II, appeals the District Court's order granting summary judgment in favor of the United States in these consolidated breach of contract and interpleader actions. In its complaint in the interpleader action, the United States 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 United States 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.

I. Facts

The facts 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

On 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.

The final 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 Hamilton County , Ohio .

This case embodies two separate actions that were filed in the Court of Common Pleas in Hamilton County , Ohio . 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 United States 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.

In the District Court, American Community moved for summary judgment on the breach of contract claim, and the United States moved for summary judgment in the interpleader action, asserting that, by virtue of its tax lien, the United States 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 United States on the interpleader action.

II. Discussion

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 United States 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.

The Government 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 United States 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 U.S. 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:

If 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.

26 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 self-reporting." 461 U.S. at 683.

The "[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 U.S. 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 U.S. 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 resolved." Id. 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 id.

Although the 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:

Any 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).

This 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 United States 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 United States 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 collection. Id. at 378-79 (citing National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 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 intervention." Id. 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 question." Id. at 380 n.3.

The Seventh 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.

Finally, the Fifth Circuit has considered this issue, again in the context of a bankruptcy proceedings, in Sills v. United States (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 follows:

Even 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 property.

[96-1 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.

Bradley relies 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." Id.

Although Bradley acknowledges that exemptions under §6334 would not apply if the United States had sought enforcement of its tax lien by instituting judicial proceedings under §7403, he argues that this case is different because the United States 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.

Bradley's argument conflicts with the statutory scheme of the Internal Revenue Code, which has created a "number of distinct enforcement tools available to the United States for the collection of delinquent taxes." Rodgers [83-1 USTC ¶9374], 461 U.S. 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 U.S. 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 U.S. at 719-20. The statute exempts certain property from a levy but not from a lien, and we decline to alter this allocation.

Bradley's 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 United States sought was no longer "provisional" in nature. Bradley fails to explain why it should make a difference whether the United States 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." Id. at 694.

III. Conclusion

For the foregoing reasons we affirm the District Court's order granting summary judgment in favor of the United States.

^* The Honorable Avern Cohn , United States District Judge for the Eastern District of Michigan, sitting by designation.

¹ The District Court found that the Trust, which named the four agents as its beneficiaries, was created to evade income taxation.

² 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

U.S. District Court, East. Dist. Calif., Civ. S-98-0442 FCD/DAD, 3/10/99

[Code Sec. 6334 ]

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.

[Code Sec. 7402 ]

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 trustee's behalf.

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.

MEMORANDUM AND ORDER

DAMRELL, JR., District Judge:

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 United States 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

STANDARD

A complaint 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. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996).

BACKGROUND

The United States 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 in Rocklin , California and a dental office located in Colfax , California . 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 pertinent hereto.

In response to the complaint, on August 26, 1998 , ³ 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.

On 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 United States 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.

ANALYSIS

1. Service Of Summons On The Taxpayers

According to 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.

In its 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) on 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 United States 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 United States ' moving papers on what basis the United States 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 United States is granted leave to amend as set forth below.

2. 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.

3. Personal Jurisdiction

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).

4. Venue

Venue is 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.

5. Failure To State A Claim

The taxpayers 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.

6. Failure To Name The Real Parties In Interest

Again, without 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. Id. at ¶14. American Securities Company is the trustee of the deeds of trust mentioned in connection with Wells Fargo Bank and IMCO Realty Services, Inc. Id. 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. Id. 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.

7. Exemption

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 United States ' 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 contention.

Certain 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). The United States 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 United States brings this action to, among other things, "foreclose federal tax liens upon real property." Complaint ¶1.

"[A] tax 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 and 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).

CONCLUSION

1. The United States ' 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).

3. Defendants 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.

4. Defendants Lee D. Wight's and Marjorie A. Wight's motion to dismiss is DENIED in all other respects.

5. Defendants Guy H. Wight and Florence D. Wight are DISMISSED.

6. Defendants 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 ORDERED.

¹ 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 below.

² Because oral argument will not be of material assistance, the court orders this matter submitted on the briefs. E.D. Cal. Local Rule 78-230(h).

³ The action was stayed from June 29, 1998 to July 27, 1998 during the pendency of a related bankruptcy proceeding.

⁴ 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 United States ' Scheduling Conference Statement filed November 24, 1998 . The United States seeks leave to dismiss Guy H. Wight and Florence D. Wight. Id. Leave is granted, and said defendants are dismissed.

⁵ The December 21, 1998 "Cover Letter" referred to by the United States is not contained in the court's file or noted on the court's docket. However, on 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.

⁶ According to the summons, however, Marjorie A. Wight was served only as an individual.

⁷ 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 case.

⁸ As set forth above, the Complaint also names Guy H. Wight and Florence D. Wight as defendants. However, these defendants are dead, and the United States ' request to dismiss these defendants is granted.