Purchaser Page2

---

 

There are additional itemized costs/expenditures submitted by the Blanches ⁷ ; however the evidence is unclear whether these additional costs were merely projections or had been undertaken at the time of trial. These costs include heating and air conditioning repairs for $2500.00, roof repairs for $7500.00, fence repairs for $2000.00 dollars, and ceiling and other consequential damage repairs stemming from the roof damage for $2500.00.

(24) Hewitt testified that he and Mrs. Hewitt purchased the property by way of assumption using combined funds in June of 1988. They lived in the home for approximately one year before they moved and rented the property out. Hewitt stated that he has no intention of returning to live and claim the property as his homestead.

(25) Hewitt testified that he never ratified or consented to the assumption of the property by the Blanches. There is no admissible evidence to contradict this statement. While the Court, as finder of fact, is entitled to disbelieve Hewitt's testimony, other evidence leads the Court to believe that Mrs Hewitt, in fact, attempted to convey the property without her husband's consent.

(26) Hewitt separated from his wife in August of 1991 but he says that Mrs. Hewitt knew how to contact him at any time. However, he admits that there was no contact between himself and Mrs. Hewitt between May 1992 and September 1992. He testified that he first found out about the foreclosure proceedings in a conversation with his wife in September of 1992, after she had already made the attempted conveyance of the property. He does not admit to approving or ratifying the sale at that time. Subsequently, he found out about the assumption by the Blanches from the recorded deed at the Guadalupe County courthouse.

(27) Any findings of fact above should be construed as conclusions of law to the extent necessary.

CONCLUSIONS OF LAW

(1) The income tax assessment against William S. Hewitt is correct and should be reduced to judgment.

(2) The IRS tax lien is valid and attaches to the property in question. However, the lien may be ineffective as to the Blanches if they qualify as "purchasers" under 26 U.S.C. §6323(a). A "purchaser" is:

... 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).

(3) If the Blanches have a valid interest in the property, that interest attached at the time of the assumption deed and the later filing of the tax lien is ineffective as to that interest. 26 U.S.C. §6323.

(4) As an initial matter, the question of what rights and/or interests the Blanches have in the property must first be determined under applicable Texas law before federal law can be used to impose and enforce a tax lien on the property at issue. See Medaris v. United States [89-2 USTC ¶9565], 884 F.2d 832, 833 (5th Cir. 1989); 26 U.S.C. §6323(a) (interests must be determined under local law).

(5) There are no homestead claims to the property. Hewitt unequivocally stated that he has no intention of returning to live and claim the homestead exemption guaranteed under the Texas Constitution Art. XVI §50. See e.g., Sims v. Beeson, 545 S.W.2d 262, 263 (Tex.Civ.App.--Tyler 1976, writ ref'd n.r.e); Prince v. North State Bank of Amarillo, 484 S.W.2d 405, 409 (Tex.Civ.App.--Amarillo 1972, writ ref'd n.r.e.) (following well-settled law in Texas that in order to have abandonment of a homestead right owner must not occupy and intend to claim as homestead).

(6) The Hewitts acquired the property during their marriage using combined funds; therefore, it must be characterized as joint-managed community property under Texas law. See Tex. Fam. Code §§5.01(b), 5.22(c). Section 5.22(c) provides in relevant part that the community property "... is subject to the joint management, control, and disposition of the spouses, unless the spouses provide otherwise by power of attorney in writing or other agreement (emphasis added)." In the instant case, there is no admissible evidence to show that Hewitt gave any consent or authorization to Mrs. Hewitt, either in writing or orally, which would allow her to control or dispose of the property at any time either before or after the attempted conveyance of the assumption deed to the Blanches.

(7) Because it is clear under Tex. Fam. Code §5.22(c) that Mrs. Hewitt alone could not convey the entire property, the next issue presented is whether Mrs. Hewitt conveyed her undivided, one-half interest in this joint-managed, non-homestead community property by entering into an assumption agreement and assumption deed to convey the property to the Blanches. ⁸

(8) The Texas courts of appeals are split on whether one spouse may convey his or her undivided interest in joint-managed community property to a third person without first obtaining the other spouse's consent. Compare Vallone v. Miller, 663 S.W.2d 97, 98-99 (Tex. App.--Houston [14th Dist.] 1983, writ ref'd n.r.e) (holding conveyance invalid only because the instrument purported to convey entire interest not just one-half undivided interest held by spouse); ⁹ Williams v. Portland State Bank, 514 S.W.2d 124, 127 (Tex.Civ.App.--Beaumont 1974, writ dism'd) (finding that §§5.22 & 5.24 of the Texas Family Code do not foreclose one spouse from encumbering his or her one-half, undivided community property interest without first receiving consent from the other spouse) with Dalton v. Don J. Jackson, Inc., 691 S.W.2d 765, 768 (Tex. App.--Austin 1985, no writ) (declining to follow rule that would allow for one spouse to "unilaterally effect a partition of joint management community property").

(9) In light of the fact that the Texas Supreme Court has not yet spoken on this issue, this Court finds the better rule in accordance with Texas law to be that from the Dalton court. As Dalton points out, §5.22(c) of the Texas Family Code is very specific in its language concerning the disposition of joint management community property. Dalton , 691 S.W.2d at 767 and commentaries cited therein. Section 5.22(c) unequivocally states that the property must be managed, controlled and disposed of jointly unless there is written or some other authorization by either spouse to do otherwise. Furthermore, there are both constitutional and statutory procedures that must be followed to partition a community property interest, which would be circumvented if a partial conveyance by one spouse were allowed under the law. See Tex. Const. Art. XVI §15; Tex. Fam. Code §5.54; Dalton , 691 S.W.2d at 768. Accordingly, this Court finds that the attempted conveyance of the entire property by Mrs. Hewitt did not transfer her one-half, undivided interest to the Blanches.

(10) Alternately, the Blanches contend that Mrs. Hewitt could convey not only her interest but that of her husband because under unusual circumstances, such as abandonment, Mrs. Hewitt could manage, control and dispose of the community property as she saw fit. Tex. Fam. Code §5.25. This argument, however, does not lend itself to the facts of this case. Hewitt gave uncontradicted testimony to the effect that although he did not speak to his wife for a period of time, she still knew how to contact him. Assuming, without deciding, that Hewitt abandoned his wife, Mrs. Hewitt did not comply with the statutory procedures of §5.25 that would have entitled her to the sole management, control and disposition of the community property under Texas law. Id. The Court has not found nor has it been cited any other authority under which Mrs. Hewitt would have the right to convey the property without her husband's consent solely on the basis of abandonment.

(11) The Blanches argue that they are entitled to specific performance in light of Hewitt's failure to meet his obligations under the earnest money contract. The earnest money contract is unambiguous on its face. The contract gives the Blanches the option of leasing before the closing date of August 31, 1991, not an option to buy. The plain meaning of the contract binds the Hewitts to sell and the Blanches to buy by the closing date. This is evidenced by the terms of the agreement requiring that in the event of default on the buyer's part, the seller can either sue for specific performance or take earnest money as liquidated damages. Texas law is clear that a contract for sale exists when the buyer has both these remedies. See, e.g., Gala Homes, Inc. v Fritz, 393 S.W.2d 409, 410 (Tex.Civ.App.--Waco 1965, writ ref'd n.r.e.) (citing to Paramount Fire Ins. Co v. Aetna, 163 Tex. 250, 253, 353 S.W.2d 841, 843 (Tex. 1962) and Moss v. Wren, 102 Tex. 567, 570, 120 S.W. 847 (Tex.1909)); Tabor v. Ragle, 526 S.W.2d 670, 675 (Tex.Civ.App.--Ft. Worth 1975, writ ref'd n.r.e.); Broady v. Mitchell, 572 S.W.2d 36, 40 (Tex.Civ.App.--Houston [1st Dist.] 1978, writ ref'd n.r.e.).

(12) Although the Blanches had the remedy of specific performance under the initial earnest money contract, they forfeited that right when they did not meet their end of the bargain to secure outside financing to purchase the property. See Cowman v. Allen Monuments, Inc., 500 S.W.2d 223, 226 (Tex.Civ.App.--Texarkana 1973, no writ) (ruling that a party who has materially breached the contract by failing to meet contract requirement cannot claim specific performance) (recognized in Hudson v. Wakefield, 645 S.W.2d 427, 430 (Tex.1983)). Although the Blanches argue that outside financing was unavailable, the Blanches merely approached certain mortgage companies and decided not to apply based on their belief that the property would not meet city codes. The Court has insufficient evidence on which to find that the Blanches were prevented from obtaining financing by Hewitt's failure to repair. Thus the Court finds that the Blanches are not entitled to specific performance on the contract for sale of the property.

(13) Further, as previously discussed, the Blanches have never offered to perform their part of the earnest money contract by tendering the contract price. The Blanches are not entitled to specific performance where they are not willing to abide by the terms of the contract they seek to enforce. ¹⁰

(14) The Blanches also appear to allege in the alternative that they should be granted specific performance because Hewitt refused to recognize their option to purchase the property by way of the assumption deed and agreement. This contention fails for two reasons. First, even assuming the initial agreement was an option contract rather than a contract for sale, the contract failed or expired by its own terms on June 30, 1991, and therefore had no continuing effect on the subsequent agreement between the Blanches and Mrs. Hewitt. Second, assuming the contract could be construed to allow the Blanches the option of purchasing, as opposed to leasing, and that option could have been extended past the expiration date of June 30, 1991, the Blanches would still have failed to strictly adhere to the conditions of the option under the contract by failing to securing outside financing or otherwise tendering the contract price by the 'option' date. See Scott v. Vandor, 671 S.W.2d 79, 84 (Tex.Civ.App.--Houston [1st. Dist.] 1984, writ ref'd n.r.e) (applying rule that option can only be accepted if purchaser complies with terms of the agreement). Thus the Court finds that the Blanches are not entitled to specific performance of the contract as an option contract.

(15) The Blanches also make a vague claim of estoppel alleging that the IRS, through the Hewitts, is estopped from denying them title to the property because the Blanches detrimentally relied on the earnest money contract to give them title to the property. In order to assert equitable estoppel, the party raising this defense must prove all of the following elements: (1) a false representation or concealment of material facts (2) made with knowledge, actual or constructive, of those facts, (3) with the intention that it should be acted on, (4) to a party without knowledge, or the means of acquiring knowledge of those facts, (5) who detrimentally relied upon the misrepresentation. Casa El Sol-Acapulco, S.A. v. Fontenot, 919 S.W.2d 709, 717 (Tex. App.--Houston [14th Dist.] 1996, writ dism'd by agr.) (citing Schroeder v. Texas Iron Works, 813 S.W.2d 483, 489 ( Tex. 1991)).

(16) The Blanches' estoppel argument fails because there is no evidence in the record that Hewitt falsely represented to the Blanches that they were the owners of the property or that he concealed material facts leading the Blanches to believe that they had acquired title to the property. See Barfield v. Howard M. Smith Co., 426 S.W.2d 834, 838 (Tex.1968) (finding that failure to prove one or more of elements is fatal); see also Heckler v. Community Health Serv., 467 U.S. 51, 59-60 (1984) (at minimum, elements of estoppel must be proven). On the contrary, the evidence supports a finding that the Blanches knew there were problems in their dealings with Hewitt early on, evidenced by their admission of Hewitt's comment that he was thinking of putting the property up for sale in the summer of 1991 and their admitted failure to make sure that Hewitt consented to the assumption. Barfield, 426 S.W. 2d at 838 (party must use due diligence to ascertain the truth of matters upon which they rely). Moreover, if the Blanches relied on the contract to give them equitable title to the property, their reliance was misplaced and unreasonable since they did not fulfill the terms of the contract by obtaining or seeking to obtain outside financing nor did they tender the full purchase price. See Heckler, 467 U.S. at 59 (using the defense of equitable estoppel requires a reasonable reliance in addition to a change of position which makes the party worse off).

(17) The Blanches also claim estoppel because the Hewitts knew and did not object to the investments and valuable improvements made to the property by the Blanches. Estoppel by silence maybe a valid defense in cases where one party leads another to act by the first party's silence; however, there must be a fiduciary duty or a confidential relationship which gives rise to a duty to speak. Barfield, 426 S.W.2d at 838; Casa El Sol-Acapulco , S.A. v. Fontenot, 919 S.W.2d at 719.

(18) The evidence in this case does not support a claim of estoppel by silence. First, there is no evidence that Hewitt induced the Blanches by his silence to make improvements or investments to the property, nor is there evidence that Hewitt knew such improvements or investments were being made. Second, no confidential or fiduciary relationship exists in this case that would warrant such a claim. These parties were dealing at arms length as purchaser and seller. Therefore, this Court finds no support for the Blanches' claim of estoppel.

(19) Since this Court finds the property has not been conveyed nor may specific performance be compelled, the Blanches fail as "purchasers" pursuant to 26 U.S.C. §6323. Under Texas law, the Blanches have no valid interest in the property which would have attached before the tax lien was filed.

(20) The Blanches also raise vague affirmative defenses of laches and waiver against the IRS. The Blanches assert that the IRS waited too long to file its tax lien on the property. This contention is not applicable in the context of this case. The tax lien arises at the time of the assessment. The lien is only notice. The Tax Code itself provides a kind of laches protection for persons who acquire an interest in property before the notice provided by a tax lien is filed. Those persons receive protection as "purchasers." Here, however, the Blanches did not acquire any interest in the property. The doctrine of laches does not provide them with any interest in the property. Similarly, waiver does not give rise to rights that never existed. The conveyance of the property was invalid and any delay by the IRS is irrelevant to the question of whether the Blanches acquired an interest in the property.

(21) Finally, this Court finds that the doctrine of unjust enrichment should be applied in this case. It would be unconscionable to allow Hewitt to keep his interest in the property as well as the substantial benefits conferred to him by the Blanches. The purpose of restitution under this remedy is to do what justice demands. See generally, RESTATEMENT OF RESTITUTION, Introductory Matters p.11 (1937). This theory of recovery provides that "[a] person who has been unjustly enriched at the expense of another is required to make restitution to the other." RESTATEMENT OF RESTITUTION §1. The doctrine places the person conferring the benefit back to the position he or she formerly occupied by reimbursing him or her for the benefit conferred on another. Id. at 12. Although restitution is given when one "... wrongfully secure[s] a benefit or has passively received one which would be unconscionable for him to retain," Barrett v. Ferrell, 550 S.W.2d 138, 143 (Tex.Civ.App.--Tyler 1977, writ ref'd n.r.e.), the remedy does not depend on whether the person receiving the benefit committed a wrongful act. Fun Time Centers, Inc. v. Continental Nat'l Bank, 517 S.W.2d 877, 884 (Tex.Civ.App.--Tyler 1974, writ ref'd n.r.e.). Recovery under principles of unjust enrichment is also appropriate when an agreement is "... unenforceable, impossible, not fully performed, thwarted by mutual mistake or void for other legal reasons." Harker Heights v. Sun Meadows Land, Ltd., 830 S.W.2d 313, 319 (Tex. App.--Austin 1992, no writ).

(22) The Court cannot find, based upon the minimal admissible evidence presented at trial, that the Blanches were reasonable in relying on the assumption deed combined with the representations from Mrs. Hewitt indicating that her husband consented to the conveyance. However, the Court finds that the Blanches honestly and with good faith believed that they were actually purchasing the property by assumption. The Blanches expended a great deal of money in fixing the property and making improvements in order to provide a comfortable and safe home for themselves and their children. In addition, the Blanches prevented this property from being foreclosed upon while Hewitt passively let the situation develop. In the name of equity and fundamental fairness, this Court, pursuant to Fed. R. Civ. P. 54(c), holds that the Blanches must be recompensed for the expenditures and improvements to the property that were done in reliance upon the assumption agreement and which have been duly pled in this action.

(23) As to the amounts that should not be reimbursed to the Blanches, the money expended as payments under the earnest money contract are not recompensable since the Blanches failed to meet their obligations under the sales agreement. The Blanches did not confer a benefit, nor was Hewitt unjustly enriched, by the payments under the contract since the Blanches had a contractual duty to pay under the contract in order to purchase the property and there was a possibility that those monies would be forfeit if the Blanches did not meet their other contractual obligations. Further, the itemized expenses listed in Defendant's Exhibit Dl-17 that are mere projections are not to be reimbursed. Finally, the Court finds that the monthly payments to Mrs. Hewitt and to Lomas Mortgage U.S.A. constitute fair rental value for the Blanches' occupancy of the property after the expiration of the earnest money contract and during the time they believed they were assuming the property and will not be reimbursed.

(24) As to amounts that should be reimbursed to the Blanches, the amount that they expended to cure the mortgage default is recoverable since this expenditure was in addition to the fair market paid lease payments. Additionally, amounts spent to repair and improve the property constitute an unfair enrichment of Hewitt as he will retain title to the property with its now enhanced value. Thus, the Court finds that the Blanches should recover for the following:

$969.00 (plumbing repair)

$7,269.73 (Lomas Mortgage to cure default)

$15,650.00 (Pool improvements/repairs)

$293.50 (yard clearing/cleaning)

$3,186.08 (water heater replacement)

$637.00 (fence repair/replacement)

$580.00 (electrical repair)

$600.00 (Heating and air conditioning work)

$750.00 (Garage door repair)

Totaling: $29,935.31

(25) The Court further finds that the Blanches' reimbursement should take priority over the IRS's tax lien because the Blanches' expenditures were made prior to the notice filing of the tax lien.

(26) Any conclusions of law above should be construed as findings of fact to the extent necessary.

It is therefore ORDERED that JUDGMENT shall issue as follows:

(a) the United States shall have judgment against Defendant William S. Hewitt in the amount of twenty five thousand two hundred seventy six and 20/100 dollars ($25,276.20) along with additional interest and penalties accrued since March 1, 1996;

(b) the tax lien of the United States upon the property described in this Order and based upon the amount of the judgment awarded against William S. Hewitt above is valid and may be foreclosed with proceeds to be distributed as follows:

(i) first, to Lomas Mortgage , U.S.A. , any outstanding mortgage amount owed on the property;

(ii) second, to Andrew E. and Cynthia D. Blanche, twenty nine thousand nine hundred thirty five and 31/100 dollars ($29,935.31) as restitution for improvements and investments in the property;

(iii) third, to the United States, twenty five thousand two hundred seventy six and 20/100 dollars ($25,276.20) along with additional interest and penalties accrued since March 1, 1996, for the unpaid tax liability of William S. Hewitt; and

(iv) fourth, any remaining excess to William S. and Peggy L. Hewitt, jointly.

It is further ORDERED that if excess proceeds from the sale of the property do not satisfy the unpaid tax liability owed to the United States by William S. Hewitt, the deficiency may be collected directly from William S. Hewitt and any other property which may be subject to liability through him.

It is further ORDERED that the remaining cross-claim by William S. Hewitt alleging conspiracy by Lomas Mortgage and Andrew E. and Cynthia D. Blanche is hereby transferred to the United States Bankruptcy Court that it may be considered in light of the pending bankruptcy proceeding of Lomas Mortgage , U.S.A.

SIGNED and ENTERED.

¹ A letter dated January 3, 1991 , addressed to Mr. and Mrs. Hewitt in Tacoma , Washington , was submitted into evidence detailing the findings of the inspection report dated June 19, 1990 . Exhibit H. In addition, a letter dated June 4, 1991 from Mr. Blanche to Hewitt expressed concern about the needed repairs to be done before the Blanches could secure outside financing to purchase the property. Defendant's Exhibit D1-18.

² Paragraph 7B of earnest money contract.

³ The Blanches expended approximately $969.00 on plumbing repairs prior to the lease option expiration date, which falls below this $1,500.00 limitation.

⁴ There was a conversation sometime after June 30, 1991 , between Hewitt and Mr. Blanche. Mr. Blanche was upset at Hewitt because he still had not made the repairs to the property as promised. Mr. Blanche became even more infuriated because Hewitt told him that he was thinking of putting the property up for sale.

⁵ Mr. Blanche relied on information he received from Mrs. Hewitt indicating that Mr. Hewitt had left her, she did not know his whereabouts, and the lease payments were to be made in her name only.

⁶ The Court sustained an objection to hearsay testimony about what Mrs. Hewitt said her husband told her. This Court cannot presume what was actually said or not said by Mrs. Hewitt or Hewitt but must consider only what was allegedly relied or not relied upon by the Blanches. The Blanches obviously were under the impression that by assuming and curing the mortgage default on the property they were not only getting a good deal, they were also preventing the house from being foreclosed upon. However unreasonable they may have been, the Blanches believed Hewitt gave his consent to the assumption in order to prevent the imminent foreclosure of the property. However, the Court will not make such a finding because the only evidentiary support for this assertion is inadmissible hearsay testimony.

⁷ Defendant's Exhibit no. D1-17

⁸ The IRS states that it is unaware of any law that would allow for such a conveyance; however, it would nonetheless allow a partial conveyance to stand and concede the Blanches' one-half ownership of the property.

⁹ In fact, although Vallone would apparently allow a partial conveyance in some circumstances, Vallone would invalidate the assumption deed in the instant case because it purports to convey the entire property, not just Mrs. Hewitt's one-half interest.

¹⁰ In fact, the Court finds that the Blanches seek specific performance, not of the initial earnest money contract, but of the subsequent assumption agreement to which Hewitt himself was not a party. Specific performance for a subsequent contract cannot be based upon a party's default under a prior expired contract.

 

 

[98-1 USTC ¶50,185] Selma Taylor, Appellant v. Internal Revenue Service, Appellee

(CA-3), U.S. Court of Appeals, 3rd Circuit, 97-1428, 1/29/98, 141 F3d 1155, Affirming a District Court decision, 97-1 USTC ¶50,479

[Code Sec. 6323 ]

Tax liens: Validity of: Bona fide purchaser for value: Notice of sale or seizure: Sufficiency of: Wrong name.--The IRS's seizure of real property transferred by a delinquent taxpayer to an individual in order to satisfy the taxpayer's outstanding tax liabilities was valid. The transferee had lived with the delinquent taxpayer in the property for many years, paid mortgage and household expenses, and contributed a down payment for its purchase. The recording of the lien, which erroneously identified the taxpayer as a corporation, provided constructive notice, since the transferee acknowledged that she knew of the outstanding tax liabilities prior to the property transfer. Furthermore, the transferee failed to establish that she paid adequate and full consideration for the property and was, therefore, not a purchaser for value under Code Sec. 6323(b)(6) .

Rob ert L. Jones, 830 W. Springfield Rd. , Springfield , Pa. 19064 , for appellant. William S. Estabrook, Rob ert L. Baker, Department of Justice, Washington , D.C. 20530 , for appellee.

Before: BECKER and STAPLETON, Circuit Judges, and FEIKENS, District Judge. ^*

è Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.ç

MEMORANDUM OPINION

BECKER, Circuit Judge:

This is an appeal by plaintiff Selma Taylor from a judgment of the district court in favor of the defendant Internal Revenue Service in her action to quiet title to certain property in Cherry Hill, New Jersey on which the government held a tax lien, and to restrain the sale of the property seized to satisfy the federal tax liabilities of Louis Taylor ("taxpayer"), with whom plaintiff had lived for many years and whose name she had taken, but whom she never married. We affirm.

There is no dispute that Ms. Taylor, who lived in the property for 32 years, made mortgage payments and paid various household expenses (though she also paid no rent). There is also no dispute that Ms. Taylor made a down payment of $10,000 on the property (her mother's money) and that, after the IRS had dunned taxpayer, it filed in 1992 a notice of federal tax lien in Camden County, New Jersey for federal payroll taxes due which erroneously identified taxpayer as Louis Taylor a corporation (though it listed his new address), taxpayer conveyed the property to Ms. Taylor by quitclaim deed for $30,000.

Ms. Taylor acknowledged that taxpayer told her about his tax problems shortly before the transfer of the property. She also stated that she and her daughter performed a title search but did not find any liens filed against taxpayer. On April 13, 1994 , the IRS recorded a corrected notice of Federal Tax Lien that was identical to the notice at issue except for the deletion of the words "a corporation." In 1993 and 1994, the property was valued at $221,700 for purposes of the county property tax assessment. In this latter respect, the district court found that Ms. Taylor failed to prove that the amount of consideration she paid was full and adequate, in terms of having a reasonable relationship to the true value of the interest in property acquired.

Ms. Taylor's position, in a nutshell, is that the 1992 lien was invalid on its face, that she had no notice of it, and that she was a "purchaser" as defined by the Internal Revenue Code, 26 U.S.C. §6323(h)(c). However, as the IRS convincingly argues, these contentions cannot carry the day.

First, we agree with the district court that the IRS was in substantial compliance with the relevant statute, 26 U.S.C. §6323(a), and that the filed lien gave Ms. Taylor constructive notice and alerted her to the government's claim. More specifically, we agree that a reasonable and diligent search would have revealed the federal tax lien filed under taxpayer's full name and hence the lien is valid against Ms. Taylor's claim as a subsequent putative purchaser of taxpayer's property. Constructive notice is all the statute requires. Tony Thornton Auction Service, Inc. v. United States [86-1 USTC ¶9434], 791 F.2d 635, 639 (8th Cir. 1986).

We find support for this view in a plethora of reported cases. See e.g. Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F.2d 753, 755 (5th Cir. 1956); United States v. Sirico [66-1 USTC ¶9209], 247 F. Supp. 421 (S.D.N.Y. 1965); Pioneer National Title Ins. Co. v. United States, 81-2 U.S. Tax Cas. (CCH) ¶9482 (N.J. May 18, 1981); Weeks v. United States, 87-1 U.S. Tax Cas. (CCH) ¶9246 (D. Md. 1987); Hannus v. United States, 60-2 U.S. Tax Cas. (CCH) ¶9574, p. 77,487 (W.D. Was. July 24, 1958); Du-Mar Marine Service, Inc. v. State Bank & Trust Company of Golden Meadow, La., et al [89-2 USTC ¶9537], 697 F. Supp. 929, 935 (E.D. La. 1988). ¹

Second, we agree with the district court that Ms. Taylor was not a "purchaser" under §6323(b)(6). She failed to offer any evidence as to the value of the property and, therefore, failed to meet her burden of proving that she qualified as a purchaser, i.e., that she paid "adequate and full consideration" for the property. Moreover, Ms. Taylor admitted that neither she nor taxpayer performed a market analysis to determine the value of the property prior to the conveyance, and that the two never even discussed the subject of valuation during their negotiations.

Ms. Taylor has the burden of establishing that she was a "purchaser." In the face of the evidence that the assessed value of the home at the time of the conveyance was approximately $220,000, and that the New Jersey Constitution requires that all real property must be assessed at true value, i.e., the price that could be obtained for the property in money at a fair sale between a willing buyer and a willing seller, see Ford Motor Co. v. Township of Edison, 127 N.J. 290, 298-99, 604 A.2d 580, 584 (N.J. Sup. Ct. 1992), the district court, which correctly stated the applicable law, surely did not err in concluding that Ms. Taylor did not meet her burden.

For all the foregoing reasons, the judgment of the district court will be affirmed.

JUDGMENT

This case came on to be heard on the record from the United States District Court for the District of New Jersey and was submitted on January 20, 1998 . On consideration whereof, it is now here

ORDERED AND ADJUDGED by this court that the judgment of the district court of May 9, 1997 be and the same is hereby affirmed.

Costs taxed against appellant.

^* Honorable John Feikens, United States District Judge for the Eastern District of Michigan, sitting by designation.

¹ Even if actual notice was required, we could not find clearly erroneous the district court's finding that Ms. Taylor's "vague" uncorroborated testimony on the point was not credible.

 

 

[97-1 USTC ¶50,479] Selma Taylor v. Internal Revenue Service

U.S. District Court, East. Dist. Pa., Civ. 94-CV-5457, 5/8/97

[Code Sec. 6323 ]

Liens: Validity of: Purchaser.--An IRS tax lien on a residence was valid and defeated a claim by an individual who did not meet her burden of proving that she fit the statutory definition of "purchaser." Although the individual paid at least $60,000 toward the purchase of the home, she failed to prove that the amount of consideration paid for the property was full and adequate as a matter of law.

ORDER

RENDELL, Judge:

1. Plaintiff filed this complaint in order to prevent the Internal Revenue Service from proceeding with a sealed bid sale, to remove any claim made against the property by the IRS as a result of taxes owed by Louis Taylor. The subject property is at 1054 Dell Drive , Cherry Hill , New Jersey 08003 ("the Property"). Hereafter, plaintiff Selma Taylor will be referred to as "plaintiff" and Louis Taylor will be referred to as " Taylor ."

Findings of Fact

2. Plaintiff and Taylor lived in the Property together for nearly 30 years, but, despite having the same last name, were never married. Taylor had a drapery business, but plaintiff was not involved in the business, nor was plaintiff involved in Taylor 's business or other financial dealings.

3. On September 21, 1992, the Internal Revenue Service filed a notice of tax lien, indicating the name of taxpayer as "Louis Taylor, a corporation," indicating the "residence" as Dell Drive, Cherry Hill, New Jersey 08003, and listing numerous 941 and 948 taxes due aggregating $61,865.79 ("the Notice").

4. The Notice was filed at page 606389 of the Camden County records, immediately following a separate notice against "Louis Taylor" listing the same residence, and taxes due in the amount of $8,509.60.

5. On September 21, 1992 , Taylor was the record owner of the Property.

6. On December 28, 1993 , Taylor transferred title to the Property to plaintiff via a deed. At that time, plaintiff paid Taylor an amount in excess of $30,000.

7. Previously, plaintiff had made the mortgage payments and paid various expenses on the Property, and plaintiff's mother had given Taylor $10,000 toward purchase of the Property when they first moved in.

8. Dennis Nolan, the attorney for Taylor who prepared the deed, searched the indexing system at Camden County Courthouse under "Louis Taylor" and discovered the Notice. He alerted the IRS that it was improperly filed listing Taylor as a corporation, whereas Taylor was an individual. ¹

9. Although plaintiff and her daughter searched the records, they did not find either of the liens against Taylor . Moreover, there was little evidence as to exactly where and when they had searched. ²

10. Plaintiff had paid a total of not less than $60,000 to Taylor toward the Property at or prior to the conveyance, consisting of $10,000 paid by her mother, monies paid by herself to pay the $20,000 mortgage, and the $30,000 paid at the time of the conveyance.

Conclusions of Law

11. Despite the inclusion of "a corporation" after Louis Taylor's name, the Notice is valid as against him and a subsequent purchaser, because a reasonable inspection of the public records would have revealed the existence of the Notice. See Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F.2d 753, 755 (5th Cir. 1956) (finding notice of tax lien adequate where taxpayer's name was incorrectly listed as "Freidlander" instead of "Friedlander," and noting that the record affords constructive notice of its contents as well as those other facts which prudent "inquiries, duly prosecuted, would have disclosed"); United States v. Sirico [66-1 USTC ¶9209], 247 F. Supp. 421, 422 (S.D.N.Y. 1965) ("The essential purpose of the filing of the lien is to give constructive notice of its existence.").

12. Accordingly, the Notice is sufficient and therefore valid.

13. In light of the validity of the Notice, and, therefore, the lien, in order for plaintiff to prevail, she must show that she was a purchaser who took free and clear of the lien. See 26 U.S.C. §6323(a) (noting that a lien [under §6321] is invalid against "purchasers" of property until a notice of lien is filed pursuant to §6323(f)). See also Alexander Hamilton Life Ins. Co. of America v. Government of the Virgin Islands, 757 F.2d 534, 541 (3d Cir. 1985) (finding that "the burden of proof in a quiet title action rests with the complainant as to all issues which arise upon the essential allegations of his complaint").

14. In order to do so, she must show that pursuant to §6323(h)(6) of the Internal Revenue Code, she was "a person who, for adequate and full consideration in money or money's worth, acquire[d] an interest in [the] property." 26 U.S.C. §6323(h)(6).

15. Plaintiff bears the burden of proving that she fits the statutory definition of "purchaser." S.T.V. Engineers, Inc. v. Ash [86-1 USTC ¶9352], 57 A.F.T.R.2d 86-1137 (E.D. Pa.), aff'd, 806 F.2d 251 (3d Cir. 1986); Coventry Care Inc. v. United States [74-1 USTC ¶9163], 366 F. Supp. 497, 500-01 (W.D. Pa. 1973).

16. Adequate and full consideration must be an amount "having a reasonable relationship to the true value of the interest in property acquired." 26 C.F.R. §301.6323(h)-1(f)(3); see Alexander v. United States [94-2 USTC ¶50,415], 74 A.F.T.R. 2d 94-5590 (D. Minn. 1994).

17. Plaintiff has failed to prove that the amount of consideration paid for the Property by her was full and adequate as a matter of law.

18. Accordingly, the lien is valid as against plaintiff, and the sealed bid sale may proceed.

¹ In April 1994, the IRS filed an identical lien as to the Notice, except listing "Louis Taylor" without the words "a corporation." I find this fact not relevant to my decision here.

² I find that plaintiff's testimony as to the search was vague, and her ability to see was questionable, so that her testimony in this regard as to not finding the Notice is subject to question.

 

 

[98-1 USTC ¶50,344] A&B Steel Shearing and Processing, Incorporated, Plaintiff-Appellant v. The United States of America , Defendant-Appellee

(CA-6), U.S. Court of Appeals, 6th Circuit, 96-2236, 3/25/98, Affirming a District Court decision, 96-2 USTC ¶50,506 , 934 FSupp 254

[Code Secs. 6321 , 6323 and 7426 ]

Lien for taxes, validity of: Purchaser: Bona fide purchaser for value.--A company that acquired real property with improvements from a decedent's estate was not a purchaser because it did not pay adequate and full consideration for the property. Therefore, the tax lien on the property for delinquent federal estate tax liability was valid. Although the company argued that it paid adequate and fair consideration because the parties had verbally agreed to the purchase price, that price was substantially less than the amount indicated in the sales contract. The company was bound by the written contract because the terms of the contract were unambiguous. The company's admission that it engaged in a joint lie with the seller of the property did not suggest that the contract was ambiguous or unenforceable.

Before: GUY, DAUGHTREY, and GIBSON, Circuit Judges. ^*

è Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.ç

PER CURIAM:

A"EC & B STEEL SHEARING AND PROCESSING, INC. APPEALS FROM A SUMMARY JUDGMENT IN FAVOR OF THE UNITED STATES REFUSING TO ENJOIN THE UNITED STATES FROM ADMINISTRATIVELY LEVYING, SEIZING, OR SELLING REAL ESTATE PURCHASED BY A & B STEEL FROM THE ESTATE OF VED KAPILA, IN ORDER TO SATISFY ESTATE TAXES ASSESSED AGAINST THAT ESTATE. WE AFFIRM.

In 1981 Ved Kapila purchased both the east and west halves of Lot 76 in the Oak Hill Subdivision for a total price of $70,000. In 1983 Kapila built a building on the east half of the lot. Kapila died in 1989, leaving an estate which included Lot 76. In January 1990, Rajnish Kapila, Ved Kapila's son, was appointed independent personal representative. On September 10, 1990 , the estate was assessed over $97,000 in federal estate taxes.

On February 18, 1991 , Rajnish Kapila entered into a contract for the estate to sell Lot 76 to A & B Steel for $152,000. The sale closed in September 1991. Amarit Singh, the president and sole shareholder of A & B Steel, paid $39,510 to Rajnish Kapila, as personal representative of his father's estate, in cashier's checks, and A & B Steel asserts that it also forgave a judgment against Kapila Construction Company, a corporation owned by Ved Kapila, in the sum of $30,805 plus attorneys' fees of $6,000.00. Singh thus claimed A & B Steel paid a total consideration of $76,315 for Lot 76. A & B Steel explains that Rajnish Kapila and Singh verbally agreed that the actual price to be paid for Lot 76 would be $76,315, but that the contract listed a sale price of $152,000 because the parties wanted people to believe that $152,000 had been paid.

Rajnish Kapila filed documents with the state probate court stating that he had received $150,000 for the sale of Lot 76 and that the lot was worth $359,600 at the time of the sale. Rajnish Kapila filed a warranty deed listing the purchase price of $152,000. Shortly thereafter, the United States filed a Notice of Federal Tax Lien against the estate for the unpaid assessed federal estate taxes. In 1992 Michigan National Bank foreclosed on an underlying mortgage on Lot 76. The bank split Lot 76 and auctioned off the east half. As a result of the foreclosure, A & B Steel recovered $35,000 from its title insurance company.

A & B Steel then brought this action seeking to enjoin the United States from alleged wrongful levy, contending that the liens, which arose from 26 U.S.C. §§6321 and 6324 (1994), were invalid. Both sides moved for summary judgment. The district court ruled that A & B Steel was not a purchaser for adequate and full consideration, and therefore was not entitled to invalidate the lien under section 6321. The court further rejected arguments that the lien under section 6324(a)(1) should be removed because the proceeds of the sale of Lot 76 were used to satisfy a charge against the estate.

We review a district court's grant of summary judgment de novo. See Brooks v. American Broadcasting Cos., 932 F.2d 495, 500 (6th Cir. 1991). In doing so, we view the evidence in the light most favorable to the party opposing the motion. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). Summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c).

I.

A & B Steel argues that the district court erred in concluding that A & B Steel does not qualify as a "purchaser" of Lot 76 and that the property is therefore subject to a tax lien pursuant to 26 U.S.C. §6321. The government responds that A & B Steel was not a purchaser of Lot 76 because it did not pay full and adequate consideration for the lot.

Section 6321 states: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." This lien, however, "shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." 26 U.S.C. §6323(a) (West Supp. 1997).

Both parties agree that the tax lien against Lot 76 was not recorded until after the property was deeded to A & B Steel. Therefore, the lot is not subject to a lien if A & B Steel qualifies as a purchaser within the meaning of section 6323. The term "purchaser" is defined as "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).

The district court held that A & B Steel was not a purchaser under section 6323 because the lot's actual value was far greater than the roughly $76,000 paid by A & B Steel. The district court based this holding on evidence that Ved Kapila purchased the property in 1981 for $70,000 and subsequently constructed an office builing on the east half of it. Moreover, in 1991, the lot, in combination with the north thirty-two feet of an adjacent lot, was assessed by the City of Farmington Hills at $290,000. The court also referred to documents filed in the probate court by Rajnish Kapila, estimating the value of Lot 76 to be $350,000. In addition, the court viewed the contract between A & B Steel and Rajdish Kapila for the sale of property which stated a purchase price of $152,000, which coincided with the amount listed as the purchase price in the Warranty Deed and in the Amended Account of Fiduciary.

A & B Steel argues that it paid adequate and fair consideration because, despite the $152,000 purchase price reflected in the written contract, $76,000 was the actual price agreed to by the parties after bona fide, arms-length negotiation. A & B Steel explains that the parties agreed to record a higher than actual purchase price in the contract in hopes of making A & B Steel appear "healthier" to potential lending institutions.

The Treasury Department regulations define "adequate and full consideration in money or money's worth" as "a consideration . . . having a reasonable relationship to the true value of the interest in property acquired. . . Adequate and full consideration in money or money's worth may include the consideration in a bona fide bargain purchase." 26 C.F.R. §301.6323(h)-1(f)(3) (1997).

In this case, the written agreement states a purchase price of $152,000. Where the terms of a sales contract are unambiguous, the Commissioner of Internal Revenue can bind a contracting party to those terms, unless that party "can show that the terms of the contract are unenforceable due to mistake, undue influence, fraud, duress, etc." North American Rayon Corp. v. Commissioner [94-1 USTC ¶50,014], 12 F.3d 583, 589 (6th Cir. 1993). A & B Steel has produced no evidence supporting any of these traditional bases for rescinding or reforming a contract. Instead, it makes a bald assertion that it engaged in a joint lie with Rajdish Kapila. This assertion suggests neither the ambiguity nor the unenforceability of the written contract. Accordingly, we reject A & B Steel's argument and uphold the district court's determination that A & B Steel does not qualify as a purchaser for the purposes of section 6321.

II.

A & B Steel also contends that the district court erred in concluding, as a matter of law, that Lot 76 was not divested of the estate tax lien arising under 26 U.S.C. §6324(a)(1). A & B Steel maintains that Lot 76 should have been divested of the lien because proceeds from the sale of the property were used to pay charges against the estate and a court authorized the sale.

Section 6324(a)(1) provides:

Unless the estate tax imposed by chapter 11 is sooner paid in full, or becomes unenforceable by reason of lapse of time, it shall be a lien upon the gross estate of the decedent for 10 years from the date of death, except that such part of the gross estate as is used for the payment of charges against the estate and expenses of its admin istration, allowed by any court having jurisdiction thereof, shall be divested of such lien.

Thus, by the terms of the statute, divestiture requires both that the property be used to pay estate debts or expenses and that a court allow the use of the property in that manner. The district court concluded that the first requirement was not met because there was no evidence that any of the sale proceeds were used to pay estate expenses. The district court likewise held that the second requirement was not met because the court order offered as evidence by A & B Steel did not amount to court approval within the meaning of §6324.

As to the first requirement, A & B Steel argues that it produced evidence showing A & B Steel paid money to Rajdish Kapila in his capacity as personal representative of the estate and that, in holding such evidence to be insufficient, the district court improperly imposed a "tracing" requirement. A & B Steel complains that, under the district court's rationale, a purchaser of property must "obtain evidence of how funds were used by the personal representative of an estate before taking property purchased from the estate free and clear of any IRS tax liens."

Section 6324 states that divestiture occurs for such part of the gross estate that is "used for the payment of charges against the estate and expenses of its admin istration." 26 U.S.C. §6324(a)(1). The burden is on the plaintiff to prove that the proceeds of a sale of estate property were actually used to satisfy the obligations of an estate. See Northington v. United States [73-1 USTC ¶12.915], 475 F.2d 720, 723 (5th Cir. 1973). A & B Steel provides no evidence and indeed makes no assertion that this was done, at least with regard to the money proceeds from the sale. It has not carried its burden.

A & B Steel also argues that the property was used to compensate a charge against the estate in that partial consideration for the property was the forgiveness of the judgment debt owed by Kapila Construction Company to A & B Steel. A & B Steel points out that Rajnish Kapila listed the judgment as a charge against the estate in the 1993 Amended Account of Fiduciary. A & B Steel also cites 26 C.F.R. §20.2053-4 (1997), which provides that "[l]iabilities imposed by law or arising out of torts are deductible" as claims against a decedent's estate.

That same regulation, however, also states, "The amounts that may be deducted as claims against a decedent's estate are such only as represent personal obligations of the decedent existing at the time of his death. . ." Id. The judgment held by A & B Steel was against Kapila Construction Company, a corporation, and not against Ved Kapila as an individual. Under Michigan law, the debts of a corporation cannot be enforced against an individual shareholder, absent fraud, sham, or other improper use of the corporate form. See Gottlieb v. Arrow Door Co., 110 N.W.2d 767, 768 ( Mich. 1961). Because the judgment debt was not enforceable against Ved Kapila or his estate, it was not properly listed as a charge against the estate, and its forgiveness did not satisfy any debts of the estate.

Because we uphold the district court's determination that the first requirement for divestiture was not met, we need not address the second requirement that the use of estate property be allowed by a court.

Accordingly, we affirm the district court's grant of summary judgment.

^* The Honorable John R. Gibson, Senior Circuit Judge of the United States Court of Appeals for the Eighth Circuit, sitting by designation.

 

 

[96-2 USTC ¶50,506] A&B Steel Shearing & Processing, Inc., Plaintiff v. The United States of America , Defendant

U.S. District Court, East. Dist. Mich. , So. Div., Civ. 95-40249, 7/31/96, 934 FSupp 254, 934 FSupp 254

[Code Secs. 6323 and 7426 ]

IRS liens: Wrongful levy: Avoidance: Purchaser: Payment of full and adequate consideration: Sale contract: Parole evidence: Fair market value.--A company that purchased real property with improvements from a decedent's estate was not a purchaser for income tax purposes because it did not pay adequate and full consideration for the property. Thus, an IRS lien on the property for a delinquent federal estate tax liability could not be avoided, and the company's wrongful levy action was denied. The company was not a purchaser even though the amount it paid to purchase the property was agreed to orally between the parties but was less than the purchase price stated in the sale contract. The contract was clear concerning the amount of the purchase price, and there was no indication that the unambiguous price term was open to further negotiations. Accordingly, the writing was meant to be the complete expression of the parties' agreement with respect to the price, and the company could not use parole evidence to elude the clear provisions of the contract. Moreover, based on the record, the property was worth substantially more than what the company paid, and thus, it could not have been a purchaser.

Julie D. Abear, Keywell & Rosenfield, 2301 W. Big Beaver Rd. , Troy , Mich. 48084 , for plaintiff. John A. Lindquist III, Department of Justice, Washington , D.C. 20530 , for defendant.

ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

GADOLA, District Judge:

Plaintiff brought the present action, seeking to enjoin a wrongful levy, pursuant to 26 U.S.C. §7426(a)(1) . Both sides have moved for summary judgment. For the following reasons, this court will grant the defendant's motion for summary judgment and deny the plaintiff's motion for summary judgment.

I. Factual Background

In 1981, Ved Kapila purchased both the east and west halves of Lot 76, located in Oakland Hills Subdivision, for a total purchase price of $70,000.00. In 1983, Ved Kapila placed a building on the east half of the lot. In 1989, Ved Kapila died, leaving an estate which included Lot 76.

In January, 1990, Rajnish Kapila, the son of Ved Kapila, was appointed as Independent Personal Representative on behalf of his father's estate. On September 10, 1990 , the estate was assessed over $97,000 in estate taxes.

On February 18, 1991 , Rajnish Kapila, as representative of the estate, entered into a contract to sell Lot 76 to Amarjit Singh, sole shareholder of plaintiff corporation. ¹ The contract provided for a purchase price of $152,000. In September, 1991, a closing for the sale occurred. Mr. Singh paid a total of $39,510.30 to Rajnish Kapila, Personal Representative of the Estate of Ved Kapila, by way of cashier's checks. ² Further, plaintiff asserts that it forgave a judgment against Kapila Corporation Co. in the amount of $30,804.74, plus attorneys' fees of $6,000. ³ Accordingly, plaintiff asserts that it paid consideration of $76,315.04 for Lot 76. ⁴

Although the contract for the sale of Lot 76 provided for a payment of $152,000, plaintiff contends that Rajnish Kapila and plaintiff verbally agreed that the actual price to be paid for Lot 76 would be $76,315.04. According to plaintiff, the contract listed a price of $152,000 because, for whatever reason, ⁵ the parties wanted people to believe that $152,000, rather than $76,315.04 had been paid. In furtherance of this alleged ruse, Rajnish Kapila stated in documents provided to the state probate court that he had received $150,000 for the sale of Lot 76. Rajnish Kapila also indicated on the forms provided to the probate court that while he had received $150,000 for the sale of Lot 76, the lot was worth $359,600 at the time of the sale, incurring a net loss to the estate of $209,500. ⁶

On October 21, 1991, a warranty deed conveying Lot 76 from Rajnish Kapila to plaintiff was recorded. The deed lists a purchase price of $152,000. On October 30, 1991, the IRS recorded a Notice of Federal Tax Lien against the estate for its unpaid assessed federal estate tax liability.

In 1992, Lot 76 was split, with the east half of the lot being auctioned by Michigan National Bank. As a result of this foreclosure, plaintiff recovered $35,000 from a title insurance company.

II. Standard of Review

Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment may be granted "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." "A fact is 'material' and precludes grant of summary judgment if proof of that fact would have [the] effect of establishing or refuting one of the essential elements of the cause of action or defense asserted by the parties, and would necessarily affect [the] application of appropriate principle[s] of law to the rights and obligations of the parties." Kendall v. Hoover Co., 751 F.2d 171, 174 (6th Cir. 1984) (citation omitted). The court must view the evidence in a light most favorable to the nonmovant as well as draw all reasonable inferences in the nonmovant's favor. See United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); 60 Ivy Street Corporation v. Alexander, 822 F.2d 1432, 1435 (6th Cir. 1987). The court is not required or permitted, however, to make credibility determinations or weigh the evidence. Harris v. City of Akron , 20 F.3d 1396, 1403 (6th Cir. 1994).

The movant bears the burden of demonstrating the absence of all genuine issues of material fact. See Gregg v. Allen-Bradley Co., 801 F.2d 859, 861 (6th Cir. 1986). This burden "may be discharged by 'showing'--that is, pointing out to the district court--that there is an absence of evidence to support the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party discharges that burden, the burden shifts to the nonmoving party to set forth specific facts showing a genuine triable issue. Fed. R. Civ. P. 56(e); Gregg, 801 F.2d at 861.

To create a genuine issue of material fact, however, the nonmovant must do more than present some evidence on a disputed issue. As the United States Supreme Court stated in Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986),

There is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the [nonmovant's] evidence is merely colorable, or is not significantly probative, summary judgment may be granted.

(Citations omitted). See Catrett, 477 U.S. at 322-23; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). The evidence itself need not be the sort admissible at trial. Ashbrook v. Block, 917 F.2d 918, 921 (6th Cir. 1990). However, the evidence must be more than the nonmovant's own pleadings and affidavits. Id.

III. Analysis

A. 26 U.S.C. §6321

26 U.S.C. §6321 provides that "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount ... shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." This lien is limited however, and "shall not be valid as against any purchaser ... until notice thereof which meets the requirements of subsection (f) has been filed by the secretary." 26 U.S.C. §6323(a) . A "purchaser" is defined as follows:

The term "purchaser" means a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice. In applying the preceding sentence for purposes of subsection (a) of this section, and for purposes of section 6324 --

...

(B) a written executory contract to purchase or lease property ...

which is not a lien or security interest shall by treated as an interest in property.

26 U.S.C. §6323(h)(6) .

The parties agree that, due to the timing of the recordation of the deed to Lot 76 and the IRS lien, that plaintiff is not subject to the lien if it can demonstrate "purchaser" status. The Government contends that plaintiff, as a matter of law, is not a purchaser because it did not pay "adequate and full consideration" for Lot 76. Plaintiff asserts that the fair value of Lot 76 is the price that Singh and Rajnish negotiated for the sale and that, therefore, it did pay "adequate and full consideration."

The question of whether plaintiff is a purchaser who paid adequate and full consideration under §6323 is a question of federal law. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d 310, 330 (2nd Cir. 1994). The burden of proof is placed on the party seeking to attain purchaser status. Resolution Trust Corp. v. Gill [92-1 USTC ¶50,199 ], 960 F.2d 336, 344 (3d Cir. 1992); United States v. McCombs, 96-1 U.S.T.C. ¶50,194 ; 1995 WL 864106 at *6 (W.D.N.Y. June 13, 1995). 26 C.F.R. §301.6323(h)-1(f)(3) defines "adequate and full consideration in money or money's worth" as follows:

[A] consideration in money or money's worth having a reasonable relationship to the true value of the property acquired.... Adequate and full consideration in money or money's worth may include the consideration in a bona fide bargain purchase.

This requirement of adequate and full consideration must be strictly applied. United States v. Paladin [82-1 USTC ¶9360 ], 539 F.Supp. 11 [100], 103 (W.D.N.Y. 1982); Continental Oil Co. v. United States [71-1 USTC ¶9296 ], 326 F.Supp. 266, 270-71 (S.D.N.Y. 1971).

In the present case, plaintiff alleges to have paid $76,000 of consideration to purchase the land. This court agrees that one acceptable measure of the value of Lot 76 in 1991 is a price agreed upon between parties engaged in a bona-fide, arms-length negotiation. Using this standard, however, plaintiff loses.

The contract for the sale of the land between plaintiff and Rajnish Kapila provides for a sales price of $152,000. ⁷ Plaintiff cannot now argue that there was an oral agreement between the parties that was directly contradictory to the plain language of the contract in an attempt to vary the contract. That is classic parol evidence. "Where a contract is clear and unambiguous, parol evidence cannot be admitted to vary it. Central Transport, Inc. v. Freuhauf Corp., 139 Mich. App. 536, 544 (1984). Prerequisite to application of the parol evidence rule is a finding that the parties intended the writing to be a complete expression of their agreement. Id. " In re Skotzke Estate, 216 Mich. App. 247, 251 (1996). Extrinsic evidence may be viewed to determine whether a contract is meant to be the final expression of the parties on a particular issue. American Anodco, Inc. v. Reynolds Metals Co., 743 F.2d 417, 422 (6th Cir. 1984).

In the present case, the contract could not be more clear that the purchase price was $152,000. There is absolutely no indication that this unambiguous price term was open to further negotiation between the parties. Plaintiff's only claim is that the contract was a mutually agreed upon lie. This does not create an ambiguity in the contract. Therefore, this court holds that the writing was meant to be the complete expression of their agreement with respect to price and that plaintiff may not use parol evidence to elude the clear provisions of the contract. Otherwise, plaintiff would be able to undermine the clear language of the contract by unilaterally making the self-serving statement that the parties really did not mean to sell the property for $152,000 when they wrote $152,000. The only permissible evidence of the sales price of the land agreed upon between Mr. Singh and Rajnish Kapila is the contract, which lists a price of $152,000.

Given that plaintiff alleges to have paid only about $76,000 for Lot 76, and the sales contract for Lot 76 required consideration of $152,000, it is clear that plaintiff has not paid "full and adequate consideration" for the land. Plaintiff has, at most, paid half consideration for Lot 76. Accordingly, plaintiff may not attain "purchaser" status and is not exempt from the Government's lien.

The court notes further that, aside from plaintiff's impermissible parol evidence, there is not a shred of evidence in the record suggesting that the value of Lot 76 in 1991 was close to $76,900. To the contrary, although the record is not perfect, ⁸ this court believes that one could only conclude that Lot 76 was worth substantially more than the $76,000 plaintiff allegedly paid for it. In 1981, Lot 76 was purchased for $70,000. Then, an office building was constructed on the east half of Lot 76, which certainly would have greatly increased the value of Lot 76. In 1991, Lot 76, apparently in combination with the north 32 feet of an adjacent lot, was assessed by the city at about $290,000. In documents submitted to the Probate Court, Rajnish Kapila estimated the value of Lot 76 to be $359,600. Albeit after renovations, in 1995 the east half of Lot 76 alone was valued at $500,000. These figures demonstrate that Lot 76 was worth substantially more than $76,000 in 1991 and that plaintiff could not, therefore, be a "purchaser." See United States v. Mac Cement Finishing Corp. [83-1 USTC ¶9183 ], 546 F.Supp. 52, 53-54 (N.D.N.Y. 1982); United States v. McCombs [96-1 USTC ¶50,194 ], 1995 WL 864106 at *6 (W.D.N.Y. June 13, 1995) and cases cited therein.

B. 26 U.S.C. §6324

In addition to the general lien under §6321 , the Government has a lien under 26 U.S.C. §6324(a)(1) . §6324(a)(1) provides:

Unless the estate tax imposed by Chapter 11 is sooner paid in full, or becomes unenforceable by reason of lapse of time, it shall be a lien upon the gross estate of the decedent for 10 years from the date of death, except that such part of the gross estate as is used for the payment of charges against the estate and expenses of its admin istration, allowed by any court having jurisdiction thereof, shall be divested of such lien.

This lien has no recording requirement, and may therefore be enforced against innocent subsequent transferees. See United States v. Vohrland [82-1 USTC ¶13,468 ], 675 F.2d 1071, 1074 (9th Cir. 1974). This lien, by the terms of §6324 , does not apply to portions of the gross estate that (1) were used to pay charges and expenses of the estate (2) after a court allowed such use. "The express language of §6324(a)(1) manifests the intent of Congress to interpose an independent and neutral judicial evaluation of claims as a prerequisite to any divestiture of the special estate tax lien in order to protect the right and ability of the Service to collect the estate tax." Kleine v. United States [76-2 USTC ¶13,158 ], 539 F.2d 427, 431 (5th Cir. 1976) This means that there must be judicial approval before the §6324 lien will be divested. Id. at 431-32.

In the present case, plaintiff has failed to meet either of the two requirements of §6324 . First, there is no evidence that the money purportedly given to the estate was used for the payment of estate expenses. Plaintiff has produced a check for $30,331.93 made out to "Rajnish Kapila, Personal Representative of the Estate of Ved P Kapila" and a check for $9,178.37 made out to "City of Farmington Hills and Rajnish Kapila Personal Representative of the Estate of Ved P Kapila." Thus, while there is evidence that plaintiff paid this money, there is no evidence that the money was used to pay the expenses of the estate. To the contrary, defendant has produced an affidavit from the current representative for the estate of Mr. Kapila providing that there is no evidence that the estate received any money from the sale of Lot 76 to plaintiff. Accordingly, plaintiff has failed to properly trace the money it purportedly paid back to the estate.

Second, plaintiff has not demonstrated that there was the requisite court approval for the sale of Lot 76. Plaintiff has produced a court order that merely provides that Mr. Rajnish Kapila was authorized to sell real property of the estate without seeking court approval. This is not the same as actually receiving court approval, within the meaning of §6324 , however. Id. at 432. Mr. Rajnish Kapila did not obtain prior court approval of the sale. Consequently, the §6324 tax lien is not divested.

ORDER

Therefore, it is hereby ORDERED that plaintiff's motion for summary judgment be DENIED. It is hereby further ORDERED that defendant's motion for summary judgment be GRANTED and that this action be DISMISSED WITH PREJUDICE. It is hereby further ORDERED that the Government is not enjoined from admin istratively levying, seizing, or selling the subject property in this action.

SO ORDERED.

¹ Although the contract does not so indicate, it appears that Mr. Singh was acting on behalf of plaintiff corporation in purchasing the property.

² It is disputed whether these funds were ever actually paid into the estate.

³ It is unclear to this court that the judgment against Kapila Construction Co. included an award of attorneys' fees. The judgment provided by plaintiff provides, in part:

IT IS ORDERED THAT:

a. Judgment be entered against Kapila Construction Company, Inc., its successors and assigns, in the principal amount of $29,999 plus statutory interest, pursuant to MCLA 600.6013, from and after August 10, 1988 and costs in the amount of $709.

b. Counsel for Plaintiffs shall mail a copy of the Judgment to counsel for Defendant within one day after entry of this judgment.

The judgment, itself, does not provide for the award of attorneys' fees. For purposes of this motion, however, the court will assume that plaintiff was entitled to $6,000 in attorneys' fees from Kapila Construction Co.

⁴ It is questionable whether the forgiveness by plaintiff of a debt owed by Kapila Construction Co. may qualify as consideration paid to the estate of Ved Kapila. There is no evidence that plaintiff could have pierced the corporate veil and recovered its judgment against Ved Kapila personally. In other words, although plaintiff had a right of recovery against Kapila Construction Co, it very well may not have had a right of recovery against the estate of Ved Kapila. For purposes of this motion, however, the court will assume that plaintiff could have properly made a claim against the estate of Ved Kapila for the amount of its judgment against Kapila Construction Co. and that the forgiveness of that debt may serve as consideration paid to the estate for the purchase of Lot 76.

⁵ Plaintiff asserts that Mr. Singh suggested that the price of the sale be misrepresented so that plaintiff's corporate books would look healthier, making it easier to obtain a loan. Plaintiff does not seem concerned that it is admitting that it was hoping to fraudulently obtain a loan for its company, presumably from a federally insured institution.

⁶ This court is concerned by plaintiff's allegations that purposeful misrepresentations were made to the Oakland County Probate Court regarding the sale of Lot 76. Further, this court is surprised by the cavalier manner in which plaintiff not only admits to taking part in these misrepresentations, but also relies upon them as an integral part of its case.

⁷ Further, the deed for the land lists a purchase price of $152,000. Plaintiff listed the value of the property on its balance sheets at $152,000. Additionally, Rajnish Kapila listed the purchase price at $150,000 in documents submitted to the probate court. Ironically, in those same documents, Rajnish Kapila lists the value of Lot 76 at over $350,000, not $76,000.

⁸ Although there are various estimates given for the value of Lot 76 at various time periods, the parties were not able to submit an expert valuation of Lot 76 at the time that it was sold to plaintiff. This court does not understand why the Government did not submit the affidavit of a realtor concerning the value of Lot 76 during the relevant time period. Such an affidavit, this court believes, would most likely have conclusively shown that Lot 76 was worth substantially more than $76,000 at the time that it was sold.

 

 

[97-2 USTC ¶50,860] In re R. Eugene Janssen and Eunice Janssen, Debtors. R. Eugene Janssen and Eunice Janssen, Plaintiffs-Appellees v. United States of America , Defendant-Appellant

U.S. Bankruptcy Appellate Panel, 8th Circuit, 97-6010, 10/24/97, Reversing in part and affirming in part a Bankruptcy Court decision, 96-2 USTC ¶50,558

[Code Secs. 6323 and 6871 ]

Bankruptcy: Hypothetical bona fide purchaser: Tax liens: Purchaser: Avoidance of lien: Who is the taxpayer: Affirmative defense: Corporations: Alter ego.--

Bankrupt married taxpayers' status as hypothetical bona fide purchasers under the Bankruptcy Code did not rise to the level of that of a purchaser under Code Sec. 6323(h)(6); therefore, the taxpayers could not avoid the IRS's tax lien on their money and stock in their corporation. However, the lien was prevented from reaching the assets that the taxpayers had transferred to the corporation. The IRS's alter ego claim was not an affirmative defense; instead, it was a separate claim against the corporation. As a result, the IRS could not obtain a judgment against the corporation because the corporation was not made a party to the instant proceeding. Even if the corporation had been found to be the taxpayers' alter ego, that finding, absent jurisdiction over the corporation, would have been binding only upon the taxpayers.

Before: KOGER, Chief Judge, HILL, and DREHER, Bankruptcy Judges.

HILL, Bankruptcy Judge:

The Internal Revenue Service ("IRS"), through the United States , appeals from a judgment in favor of the debtors, R. Eugene Janssen and Eunice Janssen ("Janssens"). The bankruptcy court permitted avoidance of an IRS tax lien pursuant to Section 545(2) of the Bankruptcy Code. The court further held that the IRS lien did not reach property held in the name of REJ Farm Enterprises, Inc. ("REJ"), a corporation wholly owned by the Janssens. For the reasons set forth below we reverse, in part, and affirm, in part the rulings of the bankruptcy court.

I

The Janssens formed REJ as an Iowa corporation on December 27, 1983 . At that time, they personally held warranty deeds to nine parcels of real property located in Woodbury County , Iowa , consisting of both farmland and their homestead.

On January 2, 1984, the Janssens transferred by quitclaim deed their entire interest in the nine parcels of real property, as well as all interest in their farm machinery and livestock, to REJ, in exchange for stock in the corporation. Although they retained no residual interest in any of the transferred property, the Janssens continued to live on the homestead. Also on January 2, the Janssens, as directors of REJ, called its first organizational meeting, in the course of which R. Eugene Janssen was elected president and treasurer, Eunice Janssen was elected secretary, and the Janssens' son, Darloe Janssen, was elected vice-president. On December 27, 1985, the Janssens amended their timely filed federal income tax returns for the tax years of 1980 and 1981 to show previously unreported income. On February 10, 1986, the IRS assessed the Janssens' tax liability for the tax years of 1980 and 1981 at $275,359.22 and $140,157.98, respectively. On February 9, 1987, the IRS filed a Notice of Federal Tax Lien Under Internal Revenue Law with the Register of Deeds for Woodbury County against the Janssens in the amount of $245,725.38. The IRS renewed the notice on February 16, 1992.

In 1992, the IRS filed a complaint in the United States District Court for the Northern District of Iowa against the Janssens, their son Darloe, and REJ, in order to establish that REJ was effectively the alter ego of the Janssens, as well as to foreclose the federal tax liens on property formerly owned by the Janssens but which was subsequently titled in REJ. On October 28, 1993, the Janssens filed a petition for relief under Chapter 11 of the United States Bankruptcy Code. At the time of their filing, the Janssens' only non-exempt assets consisted of money and REJ stock.

On November 15, 1993, the IRS filed a Proof of Claim for Internal Revenue Taxes in the amount of $592,371.50, for the unpaid federal income tax, statutory penalties, and accrued interest owed by the Janssens as of the petition date. On April 14, 1995, the Janssens commenced this adversary proceeding against the IRS, in which they disputed both the amount and validity of the IRS' proof of claim, and additionally sought, inter alia, to determine the validity of, and to avoid, the lien claimed by the IRS on their money and REJ stock. The IRS answer to the Janssens' complaint raised an "affirmative defense," to wit, that REJ is the alter ego of the debtors, and further sought a determination that the IRS claim was both valid and wholly secured by the federal tax lien which attached to all property and rights to property held by the debtors in their own name and in the name of REJ, as their alleged alter ego. The IRS did not, however, take any steps to make REJ a party.

Both the Janssens and the IRS moved for summary judgment. The Janssens sought a judgment in their favor avoiding the IRS lien on their REJ stock and their money under both the Bankruptcy Code, 11 U.S.C. §545(2), and the Internal Revenue Code, 26 U.S.C. §6323(b)(1). They asserted that Section 545(2) of the Bankruptcy Code permits a trustee, and accordingly a debtor in possession, to avoid any statutory lien that is not enforceable at the commencement of a case against a bona fide purchaser. They further asserted that Internal Revenue Code Section 6323(b)(1) voids statutory tax liens asserted against purchasers of securities and that they, as debtors in possession, met the requirements of "purchaser," as defined in Internal Revenue Code Section 6323(h)(6). The IRS responded that the Janssens did not qualify as purchasers within the meaning of Section 6323(h)(6) even though they may have qualified as bona fide purchasers within the meaning of Section 545(2). Alternatively, the IRS asserted that REJ was the alter ego of the Janssens and, accordingly, the assets of REJ were assets of the estate, not of the Janssens.

On August 21, 1996, the bankruptcy court issued its Partial Summary Adjudication, in which it made two rulings which are now before us on this appeal. First, as to the matter of the alter ego status of REJ, the court, relying in part on Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 110-11, 89 S. Ct. 1562, 1569-70 (1969), held that "[a]s a matter of law, the alter ego claim is not a defense to the claims raised by the Janssens. It is a direct claim against the corporation. Moreover, the IRS cannot obtain an enforceable judgment against REJ in this adversary proceeding because REJ is not a party." On this basis, and as to this matter, the court granted the Janssens' motion for partial summary judgment and struck as insufficient the alter ego defense of the IRS.

Second, as to the issue of lien avoidance, the court found the Janssens' money and their shares of REJ stock to be securities within the meaning of 26 U.S.C. §6323(a), and found the purchasers of these securities to be protected from the enforcement of tax liens against them under 26 U.S.C. §6323(b)(1)(A). The court found the Janssens, as Chapter 11 debtors in possession, to be invested with the avoidance powers of a trustee, pursuant to 11 U.S.C. §1107(a), including the power to avoid statutory liens pursuant to 11 U.S.C. §545(2). Relatedly, the court determined that a federal tax lien is a statutory lien which is subject to avoidance under Section 545(2).

The court then weighed the Janssens' contention that the tax lien which attached to the stock in REJ and the money is avoidable because it would not be enforceable against hypothetical bona fide purchasers, against the argument by the IRS that the lien is not avoidable because the bankruptcy trustee's status as a bona fide purchaser under 11 U.S.C. §545(2) is not equivalent to status as a "purchaser" under 26 U.S.C. §6323. In doing so, the court considered case law which directly addresses this issue: Askanase v. United States (In re Guyana Dev. Corp.) [96-1 USTC ¶50,061], 189 B.R. 393 (Bankr. S.D. Tex. 1995), which found that "the trustee as a bona fide purchaser under 11 U.S.C. §545 meets the requirements of a purchaser under [26 U.S.C. §] 6323," id. at 397, and United States v. Hunter (In re Walter) [95-1 USTC ¶50,072], 45 F.3d 1023 (6th Cir. 1995), which found that the status of "hypothetical bona fide purchaser" under the Bankruptcy Code did not rise to that of "purchaser" under the Internal Revenue Code, id. at 1030.

The court was persuaded by the reasoning of Guyana Development, and made the following conclusions in accordance therewith:

The trustee acquires the highest status as a bona fide purchaser that there may be under the law. In re Rench, slip op. at 14. I see no reason to treat trustees as having given nominal or inadequate consideration in their capacity as bona fide purchasers solely because minimal consideration is sufficient, in some circumstances, to meet a definition of 'value.' The court is also persuaded by the Janssen's argument that the good faith element of bona fide purchaser status implies adequate consideration. . . . I conclude that a trustee's status as a bona fide purchaser, and thereby the Janssen's status as debtors-in-possession with all powers of a trustee, is sufficient to avoid the lien on the REJ stock.

On January 16, 1997, after having resolved remaining issues, the bankruptcy court entered a final judgment overruling the Janssens' objection to the IRS' claim, and ordering that the IRS' lien on the Janssens' money and REJ stock be avoided pursuant to 11 U.S.C. §545(2).

II

Two issues have been presented for our consideration on this appeal: first, whether the bankruptcy court erred in equating the status of "bona fide purchaser" under the Bankruptcy Code, with that of a "purchaser" under the Internal Revenue Code, thereby allowing the debtors to avoid the federal tax lien of the IRS pursuant to 11 U.S.C. §545(2) and 26 U.S.C. §6323(b)(1)(A); and second, whether the bankruptcy court erred in holding that it could not consider the alter ego status of REJ without REJ's presence as a party in this adversary proceeding.

III

On appeal, the bankruptcy court's findings of fact are reviewed for clear error and its legal determinations are reviewed de novo. O'Neal v. Southwest Missouri Bank of Carthage (In re Broadview Lumber Co.), 118 F.3d 1246, 1250 (8th Cir. 1997); Natkin & Co. v. Myers (In re Rine & Rine Auctioneers, Inc.), 74 F.3d 848, 851 (8th Cir. 1996); see also FED. R. BANKR. P. 8013. ¹

The facts as determined by the bankruptcy court in this matter are not in dispute. We turn to the legal issues which have been presented to us.

IV

Bankruptcy Code Section 545(2) grants the bankruptcy trustee the power to "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 that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists. . . ." 11 U.S.C. §545(2). Bankruptcy Code Section 1107 delineates the "rights, powers, and duties" of a debtor in possession, and provides in relevant part that "a debtor in possession shall have all of the rights . . . and powers, and shall perform all the functions and duties . . . of a trustee. . . ." 11 U.S.C. §1107(a). These sections, in tandem, allocate the bankruptcy trustee's avoidance powers as a hypothetical bona fide purchaser, to a debtor in possession.

Internal Revenue Code Section 6323(b)(1)(A) provides that, "[e]ven though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid . . . with respect to a security . . . as against a purchaser of such security who at the time of purchase did not have actual notice or knowledge of the existence of such lien . . . ." 26 U.S.C. §6323(b)(1)(A). Thus, a "purchaser" is empowered under Internal Revenue Code Section 6323(b)(1)(A) to avoid the fixing of a Section 6321 lien on securities. ²

The IRS possesses a statutory tax lien on money and REJ stock which the Janssens owned at the time of the filing of their bankruptcy petition, pursuant to Internal Revenue Code Section 6321. ³ The money and stock, which are the subjects of the Section 6321 lien, constitute securities within the definition of Internal Revenue Code Section 6323(h)(4).

The Section 6321 lien arose on February 10, 1986, pursuant to Internal Revenue Code Section 6322, ⁴ upon the IRS's assessment of the Janssens' tax liability for their deficient 1980 and 1981 tax returns. Pursuant to Internal Revenue Code Section 6323, subsections (a) and (f)(1)(A)(i), ⁵ the lien became valid as against purchasers, holders of security interests, mechanic's lienors and judgment lien creditors upon the IRS' filing of its Notice of Federal Tax Lien Under Internal Revenue Law with the Register of Deeds for Woodbury County, Iowa, on February 9, 1987.

The Janssens, as debtors in possession, possess the status of "hypothetical bona fide purchasers" under Bankruptcy Code Section 545(2). They contend that this status is sufficiently equivalent to that of a "purchaser" under Internal Revenue Code Section 6323(h)(6), so as to enable them to avoid the IRS' Section 6321 lien under 26 U.S.C. §6323(b)(1) and 11 U.S.C. §545(2). The nature of their avoidance power in this respect, if indeed any exists, turns entirely upon the scope and meaning of these two terms.

"Bankruptcy is a creature of statute [and] [a]pplications to the bankruptcy code must, therefore, be consistent with long established canons of statutory construction." Windsor on the River Assocs., Ltd. v. Balcor Real Estate Fin., Inc. (In re Windsor on the River Assocs., Ltd.), 7 F.3d 127, 130 (8th Cir. 1993). The Bankruptcy Code is silent as to the meaning of bona fide purchaser. "Unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning." Perrin v. United States, 444 U.S. 37, 42, S. Ct. 311, 314, 62 L.Ed.2d 199 (1979); accord United States v. Brummels, 15 F.3d 769, 773 (8th Cir. 1994); Groseclose v. Bowen, 809 F.2d 502, 505 (8th Cir. 1987). The ordinary meaning of bona fide purchaser is generally understood to be " '[o]ne who has purchased property for value without notice of any defects in the title of the seller.' " United States v. Hunter (In re Walter) [95-1 USTC ¶50,072], 45 F.3d 1023, 1030 (6th Cir. 1995) (quoting BLACK'S LAW DICTIONARY 177 (6th ed. 1990)); accord Internal Revenue Service v. Diperna [96-1 USTC ¶50,171], 195 B.R. 358, 361 (E.D.N.C. 1996); United States v. Battley (In re Berg) [95-2 USTC ¶50,634], 188 B.R. 615, 619 (B.A.P. 9th Cir. 1995); cf. Carrens v. Carrens (In re Carrens) [96-1 USTC ¶50,294], 198 B.R. 999, 1006 (Bankr. M.D.Fla. 1996) ("It is generally established that a bona fide purchaser for purposes of 11 U.S.C. §545(2) is a purchaser who takes for value without notice or knowledge of any adverse claim to the property.").

The Internal Revenue Code defines the term "purchaser" for purposes of Section 6323(b)(1)(A), under Internal Revenue Code Section 6323(h)(6), as "a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice." 26 U.S.C. §6323(h)(6).

A survey of recent case law addressing the interplay between the bona fide purchaser status contemplated under the Bankruptcy Code and the purchaser status defined under the Internal Revenue Code, for purposes of lien avoidance under Internal Revenue Code Section 6323 and Bankruptcy Code Section 545(2), reveals a variance of opinion. Two courts, including the bankruptcy court in this matter, equate the two terms so as to provide for lien avoidance. ⁶ The vast majority of courts, however, including the only two circuit courts to have ruled on this issue, do not equate the meaning of the terms, but rather, differentiate strongly between them. ⁷ Our own analysis of this issue leads us to conclude that the reasoning of these latter courts is correct.

Specifically, on a purely definitional basis, we find it untenable to equate the meaning of the term "bona fide purchaser" under the Bankruptcy Code with that of "purchaser" under the Internal Revenue Code, for the two are not one and the same. As the Court of Appeals for the Sixth Circuit noted in United States v. Hunter (In re Walter) [95-1 USTC ¶50,072], 45 F.3d 1023 (6th Cir. 1995):

'[V]alue' is a much lower standard than 'adequate and full consideration in money or money's worth.' Because a bona fide purchaser is not necessarily a purchaser for purposes of Internal Revenue Code §6323(b)(2), it follows that a trustee standing in the shoes of a hypothetical bona fide purchaser does not fall within the protection of this statute.

Id. at 1030 (footnotes omitted).

Moreover, equating the terms becomes even less palatable when considered in light of the substantial policy implications inherent to the Internal Revenue Code, generally, and thus, to the codal provisions at issue on this appeal. As the Ninth Circuit stated in Battley v. United States (In re Berg) [97-2 USTC ¶50,665], 121 F.3d 535 (9th Cir. 1997):

'[T]axes are the lifeblood of government.' Bull v. United States [35-1 USTC ¶9346], 295 U.S. 247, 259, 55 S. Ct. 695, 699, 79 L.Ed. 1421 (1935). A court will not lightly assume that Congress intended to subordinate the efficacy of the federal tax laws to other considerations. Here §6321 is general and peremptory. The exceptions permitted under §6323 are carefully crafted and narrowly limited. There is no reference whatsoever to a particular exception for a trustee in bankruptcy.

Giving §§6321 and 6323 the dominant position they deserve, we hold that the powers conferred by Bankruptcy Code §545(2) on the Trustee as a hypothetical [bona fide purchaser] are not sufficient to satisfy the conditions of [Internal Revenue Code] §6323. As the Sixth Circuit has held, a good faith purchaser is not necessarily a purchaser 'for adequate and full consideration.' In re Walter [95-1 USTC ¶50,072], 45 F.3d at 1030. The Trustee does not qualify for the exception provided by §6323(b)(1)."

Id. at 537. Each of these considerations, in isolation, leads us to conclude that the debtors must not prevail upon this issue. However, our determination is additionally supported by reasons quite apart from the definitional and policy considerations which factor into our independent analysis of this issue. The United States Bankruptcy Appellate Panel of the Ninth Circuit presaged our instant concerns in United States v. Battley (In re Berg) [95-2 USTC ¶50,634], 188 B.R. 615 (B.A.P. 9th Cir. 1995), when it stated that,

Unlike the bankruptcy judge, we find the interpretation of Internal Revenue Code section 6323(b) by the Sixth Circuit to be both reasonable and authoritative. Consistent application of federal law is an important goal, and a lower federal court should only deviate under compelling circumstances from the interpretation placed on a federal statute by the only Circuit to have spoken [thereon]. . . .

Id. at 620.

This issue is one of first impression for us, and one upon which the Court of Appeals for the Eighth Circuit has not yet spoken. ⁸ Absent precedential directive from the Eighth Circuit, and very mindful of the purpose and placement of the Bankruptcy Appellate Panels within the framework of the United States Courts, we are not therefore indifferent to the only decisions rendered on this issue by other Circuit Courts of Appeals. Indeed, in light of their unity of approach in addressing this matter, we afford them significant precedential weight.

Therefore, after careful consideration of the claims between the parties in the instant matter, the law upon which they rely to support their respective arguments, and the case law concerning this relatively novel issue, we will follow the well-reasoned decisions of the only other circuit courts to have ruled on this issue. We conclude, in accordance with the decisions rendered by the Courts of Appeals for the Sixth and Ninth Circuits, respectively, in Walter and Battley, as discussed herein, that the Janssens' status as hypothetical bona fide purchasers under the Bankruptcy Code does not rise to the level of that of a purchaser, as defined under Internal Revenue Code Section 6323(h)(6), so as to permit them to avoid the statutory tax lien of the IRS under 11 U.S.C. §545(2) and 26 U.S.C. §6323(b)(1)(A).

V

The IRS next urges us to overturn the bankruptcy court's ruling below which dismissed the "affirmative defense" of the IRS, thereby preventing the IRS lien from reaching the assets the Janssens had transferred to REJ. The bankruptcy court's reasoning was twofold. First, the court held that as a matter of law, the alter ego claim was not an affirmative defense, but rather a direct claim against the corporation. Second, the court reasoned that the IRS could not obtain a judgment against REJ in this adversary proceeding because REJ was not made a party to the adversary proceeding. On both counts, the bankruptcy court was correct. ⁹

First, the claim that REJ is the alter ego of the Janssens ¹⁰ so as to allow creditors of the Janssens to reach corporate assets to satisfy their claims was not an affirmative defense. An affirmative defense is a "matter asserted by a defendant which, assuming the complaint to be true, constitutes a defense to it." BLACK'S LAW DICTIONARY 60 (6th ed. 1990). In this case, the Janssens' complaint objected to the amount and validity of the IRS's claim and sought to avoid any tax lien the IRS might have against the Janssens' stock and the money. Regardless of whether REJ is the alter ego of the Janssens, we fail to see how such a determination would constitute a defense to either of the Janssens' claims. Accordingly, the IRS' alter ego claim was properly characterized by the bankruptcy court as being a separate claim against REJ. ¹¹

Second, the bankruptcy court correctly held that no such separate claim could be made against, or be binding upon, REJ in its absence as a party to this action. For this, we begin with an examination of Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 89 S. Ct. 1562, 23 L.Ed.2d 129 (1969), which the bankruptcy court cited in support of its ruling that it lacked jurisdiction over REJ. In this decision, the Supreme Court addressed circumstances in which Zenith Radio Corporation ("Zenith") had won, in part, a judgment for treble damages in the amount of $35,000,000.00 against its former patent licensor Hazeltine Research, Inc., (HRI), as well as against HRI's wholly owned subsidiary Hazeltine Corporation (Hazeltine), despite the fact that "Hazeltine was not named as a party, was never served and did not formally appear at the trial." Id. , 395 U.S. at 110, 89 S. Ct. at 1570. Addressing this failure to name Hazeltine as a party and to serve it with process, the Court made the following determinations:

The Court of Appeals was quite right in vacating the judgments against Hazeltine. It is elementary that one is not bound by a judgment in personam resulting from litigation in which he is not designated as a party or to which he has not been made a party by service of process. The consistent constitutional rule has been that a court has no power to adjudicate a personal claim or obligation unless it has jurisdiction over the person of the defendant.

Id. , 395 U.S. at 110, 89 S. Ct. at 1569; cf. Class Plaintiffs v. City of Seattle , 955 F.2d 1268, 1277 (9th Cir.) (citing Insurance Corp. of Ireland v. Campagnie des Bauxites de Guinee, 456 U.S. 694, 702, 102 S. Ct. 2099, 2104, 72 L.Ed.2d 492 (1982), and Hansberry v. Lee, 311 U.S. 32, 41, 61 S. Ct. 115, 117, 85 L.Ed.2d 22 (1940)) ("This general rule of constitutional fair play represents a restriction on judicial power that flows from the due process guarantees of the fifth and fourteenth amendments."), cert. denied sub nom. Hoffer v. City of Seattle, 506 U.S. 953, 113 S. Ct. 408, 121 L.Ed.2d 333 (1992), Id. at 1277. Pertinent to this appeal, the Zenith Court went on to address the impact of the potential alter ego status of the unnamed and unserved party upon the jurisdictional question before it, as follows:

Perhaps Zenith could have proved and the trial court could have found that HRI and Hazeltine were alter egos; but absent jurisdiction over Hazeltine, that determination would bind only HRI. If the alter ego issue had been litigated, and if the trial court had decided that HRI and Hazeltine were one and the same entity and that jurisdiction over HRI gave the court jurisdiction over Hazeltine, perhaps Hazeltine's appearance before judgment with full opportunity to contest jurisdiction would warrant entry of judgment against it. But that is not what occurred here.

Id. , 395 U.S. at 110, 89 S. Ct. at 1569-70.

Under the facts at hand, REJ has not been named a party, has not been served with process, and has not made an appearance before the bankruptcy court or this Panel. Under Zenith and its progeny, even had the bankruptcy court found REJ to be the Janssens alter ego, that finding alone, absent the court's jurisdiction over REJ, would be binding only upon the Janssens, and not upon REJ. Id.; Panther Pumps & Equip. Co. v. Hydrocraft, Inc., 566 F.2d 8, 23 (7th Cir. 1977), cert. denied sub nom. Beck v. Morrison Pump Co., Inc., 435 U.S. 1013, 98 S. Ct. 1887, 56 L.Ed.2d 395 (1978). Thus, we conclude that the IRS may not, as it claims, reach the assets titled in REJ in order to satisfy the individual tax liabilities of the Janssens, for the simple reason that REJ has not been named as a party in these proceedings.

VI

ACCORDINGLY, the judgment in favor of the Janssens, permitting them to avoid the IRS lien on their money and REJ stock, is REVERSED. In all other respects the judgement is AFFIRMED.

¹ Rule 8013 of the Federal Rules of Bankruptcy Procedure reads as follows:

On an appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.

FED R. BANKR. P. 8013.

² The term "security" is defined under Internal Revenue Code Section 6323(h)(4) as meaning, any bond, debenture, note, or certificate or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form, share of stock, voting trust certificate, or any certificate of interest or participation in, certificate of deposit or receipt for, temporary or interim certificate for, or warrant or right to subscribe to or purchase, any of the foregoing; negotiable instrument; or money.

26 U.S.C. §6323(h)(4).

³ Section 6321 provides:

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. §6321.

⁴ Section 6322 provides:

Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

26 U.S.C. §6322.

⁵ Section 6323(a) provides that, "The lien imposed by section 6321 shall not be valid as against any purchaser, holder of security interests, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." 26 U.S.C. §6323(a). Subsection (f)(1)(A)(i), in turn, provides as to real property that, "The notice referred to in subsection (a) shall be filed [i]n the case of real property, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated. . . ." 26 U.S.C. §6323(f)(1)(A)(i).

⁶ See Askanase v. United States (In re Guyana Dev. Corp.) [96-1 USTC ¶50,061], 189 B.R. 393, 397 (Bankr. S.D. Tex. 1995) ("This court . . . finds that the trustee as a bona fide purchaser under 11 U.S.C. §545 meets the requirements of a purchaser under section 6323."); In re Janssen [96-2 USTC ¶50,558], Bankr. No. 93-51776XS, 1996 WL 604226, at *8 (Bankr. N.D. Iowa Aug. 21, 1996) ("I conclude that a trustee's status as a bona fide purchaser, and thereby the Janssens' status as debtors-in-possession with all the powers of a trustee, is sufficient to avoid the lien on the REJ stock.").

⁷ See Battley v. United States (In re Berg) [97-2 USTC ¶50,665], No. 95-36205, 1997 WL 461564, at *2 (9th Cir. Aug. 14, 1997) ("The Trustee [as bona fide purchaser] does not qualify for the exception provided by §6323(b)(1)."), aff'g [95-2 USTC ¶50,634], 188 B.R. 615 (B.A.P. 9th Cir. 1995); 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 Internal Revenue Code §6323(b)(2), it follows that a trustee standing in the shoes of a hypothetical bona fide purchaser does not fall within the protection of this statute."); Internal Revenue Service v. Diperna [96-1 USTC ¶50,171], 195 B.R. 358 (E.D.N.C. 1996) ("Although the trustee steps into the shoes of a bona fide purchaser, this is all he or she does; the court will not assume that the trustee has characteristics beyond that which a hypothetical bona fide purchaser would have."); United States v. Weissing [95-2 USTC ¶50,449], No. 93-1507-CIV-T-17A, 1995 WL 579928, at *5 (M.D. Fla. July 20, 1995) ("This Court . . . distinguishes between a purchaser . . . and a trustee standing in the shoes of a bona fide purchaser. . . . trustees may not use the exceptions created under 26 U.S.C. §6323 to escape federal tax liens."); Straight v. First Interstate Bank of Commerce (In re Straight) [96-2 USTC ¶50,423], 200 B.R. 923, 929-30 (Bankr. D. Wyo. 1996) ("A trustee standing in the shoes of a bona fide purchaser is not the purchaser without knowledge that §6323 is intended to protect.") aff'd [97-1 USTC ¶50,374], 207 B.R. 217 (B.A.P. 10th Cir. 1997); Cleary v. United States (In re Cleary), 210 B.R. 741, 744-45 (Bankr. N.D. Ill. 1997) ("[A] trustee standing in the shoes of a hypothetical bona fide purchaser who has been deemed to have 'purchased' the debtor's estate for 'value' will not find protection under §6323 where a purchaser must have paid 'adequate and full consideration.' "); Mitchell v. United States (In re Mitchell) [97-1 USTC ¶50,268], No. 95-31553-B-11, 1997 WL 265716, at *3 (Bankr. E.D. Cal. Jan.17, 1997) ("[T]he status of a trustee as a 'bona fide purchaser' for purposes of 11 U.S.C. §545(2) may not be used in connection with 26 U.S.C. §6323(b) lien voidance rights."); In re Linn [97-2 USTC ¶50,791], No. 96-34634-BKC-SHF, 1997 WL 547844, at *2 (Bankr. S.D. Fla. Aug. 26, 1997) ("This Court . . . interprets Congress' definition of 'purchaser' in Section 6323 as a different entity than a bona fide purchaser as contemplated in Section 545 of the Bankruptcy Code. Because the Trustee does not have the characteristics of a 'purchaser', she cannot avoid the IRS lien on the Debtor's property."); Carrens v. United States (In re Carrens) [96-1 USTC ¶50,294], 198 B.R. 999, 1006 (Bankr. M.D. Fla. 1996) ("[T]he Bankruptcy Code does not grant hypothetical possession or other hypothetical characteristics to a bona fide purchaser. Since a purchaser must have these characteristics to satisfy the specific requirements of 26 U.S.C. §6323(b), the Trustee may not avoid the lien under 11 U.S.C. §545(2).").

⁸ The Eighth Circuit addressed a related issue in its decision in Drewes v. Carter (In re Woods Farmers Coop. Elevator Co.), 946 F.2d 1411 (8th Cir. 1991). In Woods Farmers, the court addressed the question of whether the status of a trustee as a hypothetical bona fide purchaser under Bankruptcy Code Section 545(2), and as further defined under North Dakota law, was coterminous with that of a buyer in the ordinary course of business, as defined under North Dakota law, for the purposes of statutory lien avoidance under N.D. CENT. CODE §60-02-25.1 (1985), which provided that:

The lien created under this section shall be preferred to any lien or security interest in favor of any creditor of the warehouseman regardless of the time when the creditor's lien or security interest attached to the grain. The lien created by this section is discharged as to grain sold by the warehouseman to a buyer in the ordinary course of business.

Id. Noting that the status of a buyer in the ordinary course of business required "something more than [that required of] a bona fide purchaser," the court disallowed the trustee, as a hypothetical bona fide purchaser, to avoid the statutory liens there in question under Bankruptcy Code Section 545(2). 946 F.2d at 1414.

⁹ We note that, by reason of our prior holding concerning the validity of the IRS lien, this issue has less significance. As the IRS lien on the REJ stock cannot be superseded, the IRS will be able to recover REJ assets by enforcing its lien.

¹⁰ The Eighth Circuit examined the alter ego doctrine in the context of bankruptcy in Constellation Dev. Corp. v. Dowden (In re B.J. McAdams, Inc.), 66 F.3d 931(8th Cir. 1995), cert. denied, -- U.S. --, 116 S. Ct. 2546, 135 L.Ed.2d 1067 (1996). The Eighth Circuit's discussion on this matter provides background context to the claims of the parties before us:

"[A] bankruptcy court has full power to inquire into the validity of any claim asserted against the estate and to disallow it if it is ascertained to be without lawful existence." Pepper v. Litton, 308 U.S. 295, 305, 60 S. Ct. 238, 244, 84 L.Ed. 281 (1939). . . .

"Under the alter ego doctrine, the legal fiction of the separate corporate entity may be rejected in the case of a corporation that (1) is controlled by another to the extent that it has independent existence in form only, and (2) is used as a subterfuge to defeat public convenience, to justify wrong, or to perpetrate a fraud." Lakota Girl Scout Council, Inc. v. Havey Fund-Raising Management, Inc., 519 F.2d 634, 638 (8th Cir. 1975). "The essence of the [alter ego] test is whether, under all the circumstances, the transaction carries the earmarks of an arm's length bargain. If it does not, equity will set it aside." Pepper, 308 U.S. at 307, 60 S. Ct. at 245.

Id. at 936-37.

¹¹ The IRS cites In re Velis, 133 B.R. 497 (D.N.J. 1991) and United States v. Charnock (In re Charnock), 97 B.R. 619 (M.D. Fla. 1989) for the proposition that Section 541 renders property of a corporation wholly owned by a debtor property of the debtor and does not require a separate adjudication on an alter ego claim. Neither case stands for this proposition. Indeed, both support the notion that a separate action which includes the corporation is a necessary prerequisite to piercing the corporate veil.

 

 

[97-2 USTC ¶50,791] In re Dwight L. Linn, Debtor

U.S. Bankruptcy Court, So. Dist. Fla. , 96-34634-BKC-SHF, 8/26/97

[Code Secs. 6323 and 6871 ]

Bankruptcy: Trustee: Tax liens: Avoidance of: Purchaser.--

A bankruptcy trustee could not avoid a perfected IRS tax lien against a debtor's real and personal property. Although the trustee held the status of a hypothetical bona fide purchaser of the property subject to the lien for purposes of the Bankruptcy Code, she did not qualify as a purchaser under Code Sec. 6323 .

Michael A. Frank, 626 N.W. 124th St. , N. Miami , Fla. 33161-5523 , for debtor. Jose Francisco De Leon, Department of Justice, Washington , D.C. 20530 , for I.R.S. Rob in R. Weiner, 1250 E. Hallandale Beach Blvd. , Hallandale , Fla. 33008 , trustee.

ORDER DENYING MOTION TO AVOID STATUTORY LIEN

FRIEDMAN, Bankruptcy Judge:

This matter came before the Court May 22, 1997 , for consideration of the Chapter 13 Trustee's motion to avoid the statutory lien of the Internal Revenue Service. The Court gave the parties until June 23, 1997 , to file memoranda in support of their legal positions. Having reviewed the memoranda and for the reasons set forth below, the Court denies the motion to avoid the statutory lien.

The Internal Revenue Service (the "IRS") through the United States of America contends that the Debtor, Dwight Linn (the "Debtor"), is indebted to the United States for federal income tax liabilities in the amount of $19,124.70. The issue of the validity of the IRS's claim is not before the Court. The Debtor and the Trustee do not dispute that the IRS filed a notice of federal tax lien with respect to the liability on May 4, 1995, in Palm Beach County , Florida . Pursuant to 26 U.S.C. §6321, all of the Debtor's real and personal property is subject to the tax lien. The Debtor has listed on his schedules that he owns an interest in a time share, a checking account, furniture, jewelry and a retirement plan. The Trustee seeks to avoid the lien of the IRS pursuant to 11 U.S.C. §545(2) and 26 U.S.C. §6323(b) and (c).

Section 545 of the United States Bankruptcy Code provides--

The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien--

****

(2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists.

There is no dispute that the IRS lien is a statutory lien or that the IRS lien is perfected. Thus, the Court directs its attention to the issue of whether the IRS lien was "enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case."

Section 6323 of the Internal Revenue Code provides, in pertinent part--

(b) Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid--

(1) With respect to a security (as defined in subsection (h)(4))--

(A) as against a purchaser of such property who at the time of purchase did not have actual notice or knowledge of the existence of such lien;

(B) as against a holder of a security interest in such security who at the time such interest came into existence, did not have actual notice or knowledge of the existence of such a lien.

****

(3) With respect to tangible personal property purchased at retail, as against a purchaser in the ordinary course of the seller's trade or business, unless at the time of such purchase such purchaser intends such purchase to (or knows such purchase will) hinder, evade, or defeat the collection of any tax under this title.

(4) With respect to household goods, personal effects, or other tangible personal property described in section 6334(a) purchased (not for resale) in a casual sale for less than $250, as against the purchaser, but only if such purchaser does not have actual notice or knowledge (A) of the existence of such lien, or (B) that this sale is one of a series of sales.

11 U.S.C. §6323.

In each of these subsections of Section 6323 a tax lien can be avoided only by a purchaser of the property subject to the tax lien. Section 6323(h)(6) defines purchaser as "a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property."

At least four courts that have considered a similar attempt to avoid an IRS lien have determined that a trustee as a bona fide purchaser is not equivalent to a purchaser as defined by Section 6323(h)(6). See, In re Walter [95-1 USTC ¶50,072], 45 F.3d 1023 (6th Cir. 1995); United States v. Weissing [95-2 USTC ¶50,449], 1995 WL 579928 (M.D. Fla. 1995); In re Carrens [96-1 USTC ¶50,294], 198 B.R. 999 (Bankr. M.D. Fla. 1996); In re Straight [96-2 USTC ¶50,423], 200 B.R. 923 (Bankr. D. Wyo. 1996). In Walter, the Sixth Circuit Court of Appeal stated--

Because a trustee may stand in the shoes of a bona fide purchaser for purposes of Bankruptcy Code §545(2), the issue becomes whether a bona fide purchaser meets the definition of a purchaser. Although the term "bona fide purchaser" is not defined in the Bankruptcy Code, it is generally understood to mean "[o]ne who has purchased property for value without notice of any defects in the title of the seller." Thus, "value" is a much lower standard than "adequate and full consideration in money or money's worth." [as purchaser is defined under §6323(h)(6)] Because a bona fide purchaser is not necessarily a purchaser for purposes of Internal Revenue Code §6323(b)(2), it follows that a trustee standing in the shoes of a hypothetical bona fide purchaser does not fall within the protection of the statute.

In re Walter [95-1 USTC ¶50,072], 45 F.3d at 1030 (citations omitted). Although the Trustee attempts to distinguish this case on a factual basis, it is the interpretaton of 26 U.S.C. §6323 that is determinative sub judice. The Sixth Circuit's interpretation of "purchaser" as used in Section 6323 has been rejected by a Texas bankruptcy court. In the case of In re Guyana Development Corp. [96-1 USTC ¶50,061], 189 B.R. 393 (Bankr. S.D. Tex. 1995), the court declined to follow Walker and found that a "trustee as a bona fide purchaser under 11 U.S.C. §545 meets the requirements of a purchaser under section 6323. The Court finds that the trustee is deemed to have paid full and adequate consideration in his capacity as a bona fide purchaser."

This Court agrees with the Sixth Circuit, the courts of the Middle District of Florida and the Bankruptcy Court for Wyoming and interprets Congress' definition of "purchaser" in Section 6323 as a different entity than a bona fide purchaser as contemplated in Section 545 of the Bankruptcy Code. Because the Trustee does not have the characteristics of a "purchaser", she cannot avoid the IRS lien on the Debtor's property. Accordingly, it is

ORDERED that the Trustee's motion to avoid the IRS lien is denied.

ORDERED.

 

 

[97-2 USTC ¶50,665] In re James Berg, Mary Berg, Debtors. Kenneth W. Battley, Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 95-36205, 8/14/97 , 121 F3d 535, 121 F3d 535. Affirming a Bankruptcy Appellate Panel

CA-9

95-2 USTC ¶50,634 , 188 BR 615.

[Code Secs. 6323 and 6871 ]

Bankruptcy: Promissory note: Tax liens: Avoidance of: Trustee: Bona fide purchaser.--A trustee in bankruptcy could not avoid federal tax liens against a promissory note that was payable to the debtors. Although the trustee was afforded the status of a hypothetical bona fide purchaser, he did not acquire an interest in the note for adequate and full consideration. Thus, the trustee was not a purchaser for purposes of the Code Sec. 6323 exception from liens against securities.

M. Gregory Oczkus, 430 W. 7th Ave. , Anchorage , Alas. , for plaintiff-appellant. Gary R. Allen, Rob ert J. Branman, Gary D. Gray, David A. Shuster, Department of Justice, Washington, D.C. 20530, for defendant-appellee.

Before: WALLACE, NOONAN and THOMPSON, Circuit Judges.

OPINION

NOONAN, Circuit Judge:

Kenneth W. Battley, Trustee in Bankruptcy (the Trustee), appeals the judgment of the Bankruptcy Appellate Panel (the BAP) in favor of the United States upholding the validity of the federal tax lien imposed on the bankrupt estate by the Internal Revenue Service (the IRS). The case is one of first impression in this circuit and requires us to decide the relation of Internal Revenue Code (IRC) §§6321 and 6323 to the Bankruptcy Code, 11 U.S.C. §545(2). Holding that Congress has understandably given protection to federal tax liens and therefore limited the powers conferred by §545 on the Trustee in Bankruptcy, we affirm.

FACTS

The IRS made income tax assessments against James and Mary Berg (the Bergs) for the tax years 1980, 1981 and 1982. The assessments were unpaid after notice and demand. In 1987 the IRS filed a notice of the resultant tax liens against the Bergs in Kodiak , Alaska . In 1991 the Bergs came into possession of a promissory note signed by Steven L. DeHart and Elsa A. DeHart dated January 4, 1991 , promising to pay to the Bergs, or order, the sum of $105,000 in installments beginning February, 1991. On September 10, 1993 , the IRS filed in Anchorage , Alaska , another notice of its tax liens against the Bergs for the unpaid balance of the assessment for the tax years 1980-1982.

On January 28, 1994, the Bergs filed a bankruptcy petition under Chapter 13. The case was subsequently converted to a liquidation under Chapter 7 and the Trustee was appointed.

PROCEEDINGS

The Trustee filed a complaint in the bankruptcy court seeking to void the federal tax liens on the DeHart promissory note. He invoked 11 U.S.C. §545(2). On March 28, 1995, the bankruptcy court ruled in favor of the Trustee, observing "there are legitimate bankruptcy policies to be served by §545(2), including that of equitable distribution among the creditors of the debtor."

The United States appealed to the BAP, which reversed the bankruptcy court. In agreement with United States v. Hunter (In re Walter) [95-1 USTC ¶50,072], 45 F.3d 1023 (6th Cir. 1995), the BAP held that the IRC's definition of "purchaser," 26 U.S.C. §6323(h) (6), was controlling and was not satisfied by §545(2) of the Bankruptcy Code. The BAP remanded to the bankruptcy court to enter judgment for the United States . The order creates appellate jurisdiction, In re Dominguez, 51 F.3d 1502, 1506-1507 (9th Cir. 1995), and the Trustee appeals.

ANALYSIS

The tax liens in question arise under IRC §6321. This statute provides as follows:

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. §6321.

Exceptions are made from such a lien even after notice of it has been filed by the IRS. The relevant exception here is with respect to a security, defined to include a negotiable note, 26 U.S.C. §6323(h)(4), with respect to "a purchaser of such security who at the time of purchase did not have actual notice or knowledge of the existence of such lien. "26 U.S.C. §6323(b)(1). The statute goes on to define "purchaser" to mean "a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice." 26 U.S.C. §6323(h)(6).

As the liens are created by federal law, the validity, durability, and qualified exceptions thereto are also determined by federal law. We have no occasion to look to the law of a particular state on bona fide purchasers (BFPs) or holders in due course. Federal law alone is decisive. In re Walter [95-1 USTC ¶50,072], 45 F.3d at 1030.

A trustee in bankruptcy 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 that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists.

11 U.S.C. §545(2). The question presented for decision is whether the Trustee, as this hypothetical BFP, meets the IRC's exception for purchasers, as narrowly defined by §6323(h)(6).

"[T]axes are the lifeblood of government" Bull v. United States [35-1 USTC ¶9346], 295 U.S. 247, 259 (1935). A court will not lightly assume that Congress intended to subordinate the efficacy of the federal tax laws to other considerations. Here §6321 is general and peremptory. The exceptions permitted under §6323 are carefully crafted and narrowly limited. There is no reference whatsoever to a particular exception for a trustee in bankruptcy.

Giving §§6321 and 6323 the dominant position they deserve, we hold that the powers conferred by Bankruptcy Code §545(2) on the Trustee as a hypothetical BFP are not sufficient to satisfy the conditions of IRC §6323. As the Sixth Circuit has held, a good faith purchaser is not necessarily a purchaser "for adequate and full consideration." In re Walter [95-1 USTC ¶50,072], 45 F.3d at 1030. The Trustee does not qualify for the exception provided by §6323(b)(1).

AFFIRMED.

 

 

[95-1 USTC ¶50,072] In re Elmer Walter, Dorla Walter, Debtors. United States of America , Plaintiff-Appellee v. John J. Hunter, Trustee, Defendant-Appellant

(CA-6), U.S. Court of Appeals, 6th Circuit, 93-4315, 2/3/95 , 45 F3d 1023, 45 F3d 1023. Affirming a District Court decision, 93-2 USTC ¶50,604 , 158 BR 984

[Code Secs. 6321 and 6323 ]

Bankruptcy and receivership: Lien for taxes: Status of trustee.--A bankruptcy trustee in a liquidation case that had been converted from a Chapter 11 reorganization could not avoid tax liens on the debtors' tractor where the IRS filed its notices of federal tax liens at the time the initial bankruptcy petition was filed. The trustee stepped into the shoes of a hypothetical bona fide purchaser, and the Bankruptcy Code does not grant hypothetical possession to a hypothetical bona fide purchaser. The debtors had possession of the tractor, and filing of the bankruptcy petition did not transfer actual possession or impute possession to the trustee.

Gary R. Allen, Acting Chief, Gary D. Gray, David A. Shuster, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. James M. Perlman, Hunter & Schank Company, 1700 Canton Ave. , Toledo , Ohio 43624-1378 , for defendant-appellant.

Before: KEITH, JONES, and MILBURN, Circuit Judges.

MILBURN, Circuit Judge:

The defendant-trustee, John J. Hunter, appeals the district court's order reversing a decision of the bankruptcy court and holding that the trustee could not avoid the statutory liens of the plaintiff-Internal Revenue Service (the "IRS"). The sole issue on appeal is whether the district court properly determined that the trustee could not, under the Bankruptcy Code, 11 U.S.C. §545(2) , avoid the statutory liens of the IRS on debtors' motor vehicle pursuant to the Internal Revenue Code, 26 U.S.C. §6323(b)(2) . For the reasons that follow, we affirm.

I.

On October 19, 1989 , the debtors, Elmer and Dorla Walter, filed a petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Ohio. At the time of the filing, debtors owned a 1986 Kenworth Tractor, which is the motor vehicle at issue in this case. Debtors listed the IRS as a creditor having claims for federal taxes. As of the petition filing date, debtors' assessed tax liabilities relating to the filed notices of tax liens totalled $389,395.01, including interest and penalties. ¹ On February 7, 1990, the IRS filed a proof of claim listing the nearly $390,000 as secured claims against debtors. The IRS also listed unsecured priority claims and unsecured general claims totaling $2,595.79.

On June 5, 1990, on debtors' motion, the bankruptcy court converted debtors' reorganization case to a liquidation case under Chapter 7 of the Bankruptcy Code. At that time, the bankruptcy court appointed John J. Hunter as trustee. In July 1990, the trustee took possession of the motor vehicle at issue, a 1986 Kenworth Tractor, which had been in debtors' possession when they filed their petition. Pursuant to a notice of intent to sell, on October 4, 1990, the trustee sold the motor vehicle for $24,000, free and clear of all liens.

After the sale, the trustee filed an objection to the IRS' proof of claim. The trustee asserted that because he occupied the position of a bona fide purchaser of the motor vehicle, the tax liens on the proceeds from the sale of the motor vehicle could be avoided and that the IRS' secured claims should be treated as unsecured priority claims. On April 14, 1992, the bankruptcy court entered an order sustaining the trustee's objection to the IRS' secured claims. See In re Walter, 139 B.R. 695 (Bankr. N.D. Ohio 1992). It found that the IRS properly filed its notices of tax liens, but concluded that the tax liens could be avoided under §542(2) of the Bankruptcy Code because the tax liens did not extend to the motor vehicle under Internal Revenue Code §6323(b)(2) . On June 10, 1992, the bankruptcy court entered an order that disposed of the trustee's remaining objections and allowed the IRS an unsecured priority claim of $822.88, and an unsecured general claim of $391,218.39, of which $389,395.01 was formerly secured by the federal tax liens.

On June 19, 1992, the United States filed a notice of appeal to the United States District Court for the Northern District of Ohio. In its memorandum opinion dated September 30, 1993, the district court reversed the bankruptcy court. See In re Walter [93-2 USTC ¶50,604 ], 158 B.R. 984 (N.D. Ohio 1993). It held that the tax liens could not be avoided under §545(2) of the Bankruptcy Code and that the proceeds of the sale of the motor vehicle were subject to the liens. It reasoned that while the trustee is given the status of a hypothetical bona fide purchaser, the trustee in this case failed to acquire possession of the motor vehicle before acquiring notice of the tax liens.

This timely appeal by the trustee followed.

II.

A.

This court has jurisdiction pursuant to 28 U.S.C. §§158(d), 1291 . As the bankruptcy trustee's power to avoid federal tax liens is a question of law, we review this issue de novo. In re Caldwell, 851 F.2d 852, 857 (6th Cir. 1988); see also In re Loretto Winery Ltd., 898 F.2d 715, 718 (9th Cir. 1990). This is a case of first impression in this circuit which involves the collision of Bankruptcy Code §545(2) and Internal Revenue Code §6323(b)(2) . Because of the complexity of the relationship between these two statutory provisions, we shall begin by setting forth the general legal principles involved in this case.

Section 545 of the Bankruptcy Code dictates when a trustee can avoid statutory liens. The relevant part of that section provides:

The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien--

(2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists.

11 U.S.C. §545(2) . ² Pursuant to this section, a trustee may step into the shoes of a hypothetical bona fide purchaser and claim the same defenses to statutory liens on a debtor's property as would a bona fide purchaser. Id. A trustee acquires that right as of the commencement of the case, id., which is the date of filing the bankruptcy petition. See 11 U.S.C. §101(42) .

Upon filing a petition under Chapter 11 of the Bankruptcy Code, a debtor obtains the title of "debtor-in-possession." 11 U.S.C. §1101(1) . A debtor-in-possession has virtually all of the rights and powers of a bankruptcy trustee, including the power to avoid statutory liens under §545(2) of the Bankruptcy Code. 11 U.S.C. §1107(a); In re WWG Indus., Inc., 772 F.2d 810, 811-12 (11th Cir. 1985); In re Tape City, U.S.A., Inc., 677 F.2d 401, 403 & n.7 (5th Cir. 1982) (per curiam); In re Garden Inn Steak House, Inc., 22 B.R. 830, 832 (Bankr. N.D. Ohio 1982). Because a trustee stands in the shoes of a hypothetical bona fide purchaser, it follows that a debtor-in-possession enjoys the same protections as would a bona fide purchaser at the time of the commencement of the case.

A federal tax lien under Internal Revenue Code §6321 is a statutory lien subject to avoidance. See 11 U.S.C. §101(53) . A federal tax lien on all property of a delinquent taxpayer arises at the time the tax liability of the taxpayer is assessed. 26 U.S.C. §§6321 , 6322 ; United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-20 (1985). Generally, a federal tax lien is made valid against third parties by filing a notice of federal tax lien. 26 U.S.C. §6323(a) ; In re Darnell [88-1 USTC ¶9123 ], 834 F.2d 1263, 1265 n.5 (6th Cir. 1987). However, it may not be valid against specified third parties under certain circumstances. See 26 U.S.C. §6323(b) . Section 6323(b)(2) of the Internal Revenue Code in relevant part provides:

Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid . . . [w]ith respect to a motor vehicle (as defined in subsection (h)(3)), as against a purchaser of such motor vehicle, if--

(A) at the time of the purchase such purchaser did not have actual notice or knowledge of the existence of such lien, and

(B) before the purchaser obtains such notice or knowledge, he has acquired possession of such motor vehicle and has not thereafter relinquished possession of such motor vehicle to the seller or his agent.

26 U.S.C. §6323(b)(2) . Having set forth the general legal principles involved in this case, we now turn to the specific issue on appeal.

B.

The trustee in this case appeals from the judgment of the district court reversing the bankruptcy court. The district court concluded that the federal tax lien on debtors' motor vehicle that arose under Internal Revenue Code §6321 , notice of which had been properly filed, could not be avoided. Thus, it held that the proceeds from the sale of the motor vehicle were subject to the federal tax lien. The trustee argues that the district court committed two fatal errors in its analysis.

The trustee's first argument is that the district court erred in determining the time that the lien is tested. After reciting the sequence of events, which it determined was dispositive, the district court concluded that the IRS was entitled to the proceeds from the sale of the motor vehicle. The district court stated:

Given this chronology, the Court concludes that the IRS is entitled to the proceeds from the sale of the vehicle at issue. The trustee is given the status of a hypothetical bona fide purchaser as of the date of the filing of the petition. That date, in this case, is June of 1990, when the proceeding was converted from a Chapter 11 to a Chapter 7 bankruptcy. By that time, the IRS had already timely filed its proof of claim, thereby making it enforceable. Thus, the trustee did not obtain hypothetical possession until after the IRS has [sic] perfected its lien, and the trustee does not fall within §545(2) .

J.A. 92. We agree with the trustee that this reasoning is flawed. The district court incorrectly concluded that June 1990 was the date of the filing of the petition. Bankruptcy Code §348(a) provides, "Conversion of a case from a case under one chapter of this title to a case under another chapter of this title . . . does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief." 11 U.S.C. §348(a). The language of this statute makes clear that the conversion relates back to the original date of filing the petition. See In re Williamson, 804 F.2d 1355, 1359, 1361 (5th Cir. 1986). It is of no consequence that a case was originally filed as a Chapter 11 case and was later converted to a Chapter 7 case. In re Southern Transfer & Storage Co., 157 B.R. 691, 693 (Bankr. M.D. Fla. 1993). The Chapter 7 case is deemed to have been commenced by the filing of the petition under Chapter 11, rather than the date of the conversion. Accordingly, we hold that for purposes of the bona fide purchaser test of Bankruptcy Code §545(2) , a case which is converted from a Chapter 11 case to a Chapter 7 case must be treated as though it were commenced as a Chapter 7 case at the time of the original petition under Chapter 11. ³

In this case, the petition was originally filed under Chapter 11 of the Bankruptcy Code on October 19, 1989. The case was converted to a liquidation case under Chapter 7 of the Bankruptcy Code on June 5, 1990. Because the conversion relates back to the original filing on October 19, 1989, the trustee steps into the shoes of a hypothetical bona fide purchaser as of that date. It follows that the trustee may avoid the federal tax liens if a hypothetical bona fide purchaser who obtained the motor vehicle on October 19, 1989, could avoid the federal tax liens. See 11 U.S.C. §545(2) .

The district court went on to state that the federal tax liens were made enforceable because the IRS had filed its proof of claim. This statement implies that filing a proof of claim is what renders a federal tax lien enforceable; however, a proof of claim is simply the means by which a creditor presents his claim to the bankruptcy court. ⁴ See 11 U.S.C. §501 . As already stated, a federal tax lien arises automatically when the tax liability is assessed and is made valid against third parties by the filing of a notice of federal tax lien. 26 U.S.C. §6323(a) ; In re Darnell [88-1 USTC ¶9123 ], 834 F.2d 1263, 1265 n.5 (6th Cir. 1987). In this case, the IRS had filed notices of federal tax liens at the time the petition was filed. Therefore, its liens were valid against third parties, except for certain purchasers afforded protection under Internal Revenue Code §6323(b)(2) .

C.

The trustee's second argument is that the district court erred in its application of §6323 of the Internal Revenue Code. Specifically, the trustee argues that the district court erred in concluding that the trustee could not take advantage of the protections of Internal Revenue Code §6323(b)(2) because the trustee did not have possession of the motor vehicle before he received notice of the lien when he was appointed to admin ister the Chapter 7 estate. The trustee states (and the IRS agrees) that it is irrelevant whether the trustee had possession of the motor vehicle because the strength of the lien is tested against a hypothetical bona fide purchaser. The trustee reasons that because debtors had possession of the motor vehicle when they filed the original Chapter 11 petition, the trustee may now avoid the lien.

As an initial matter, we find it necessary to address what the bona fide purchaser test actually requires. Many courts and commentators say that a trustee is given the status of a hypothetical bona fide purchaser for purposes of testing statutory liens under Bankruptcy Code §545(2) . See In re Tape City , 677 F.2d at 403; In re Williams, 109 B.R. 179, 181 (Bankr. W.D.N.C. 1989); 4 Collier on Bankruptcy ¶545.04 (15th ed. 1977). They then focus on what characteristics a trustee as a hypothetical bona fide purchaser possesses--that is, whether a trustee is a mere bona fide purchaser without possession of the goods, or a bona fide purchaser with additional qualities such as possession of the goods. See In re Znider [93-1 USTC ¶50,165 ], 150 B.R. 239, 245-46 (Bankr. C.D. Cal.), vacated on other grounds, 167 B.R. 603 (C.D. Cal. 1993); United States v. Sierer, 139 B.R. 752, 755 (N.D. Fla. 1991); In re Williams, 109 B.R. 179, 181 (Bankr. W.D.N.C. 1989). While this is a convenient way to state the test, such an approach is misdirected and overstates the trustee's position. A strict reading of the statute reveals that a trustee is not actually given the status of a bona fide purchaser; instead, he is given the power to avoid statutory liens where a hypothetical bona fide purchaser could avoid them. Thus, because it is a hypothetical bona fide purchaser that is the standard, the test is better stated by the courts that say a trustee steps into the shoes of a hypothetical bona fide purchaser. See In re Loretto Winery Ltd., 898 F.2d at 718; In re Rob inson, 166 B.R. 812, 813 (Bankr. D. Vt. 1994). In the end, the proper inquiry should be whether a statutory lien is enforceable against a bona fide purchaser as of the date the petition is filed. See 4 Collier on Bankruptcy ¶545.04 (15th ed. 1977).

Whether a bona fide purchaser may avoid a statutory lien is a matter that is left to state or federal lien law. ⁵ 4 Collier on Bankruptcy ¶545.04 (15th ed. 1977). Thus, where a statutory lien is created by state law, state law governs in determining whether the lien can be avoided by a bona fide purchaser, and the characteristics of a bona fide purchaser will also be determined by state law. See In re Loretto Winery Ltd., 898 F.2d at 718 ( California producer's lien); In re Tape City, 677 F.2d at 403 ( Louisiana 's vendor's lien). Where a statutory lien is created by federal law, however, federal law governs in determining whether the lien may be avoided by a bona fide purchaser, and the characteristics of a bona fide purchaser will also be determined by federal law. See In re Williams, 109 B.R. 179, 180 (Bankr. W.D.N.C. 1989) (federal tax lien); In re Bates, 81 B.R. 63, 64 (Bankr. D. Ore. 1987) (federal tax lien); see also United States v. Brosnan [60-2 ustc ¶9516 ], 363 U.S. 237, 240 (1960) (stating that federal law governs the operation and enforcement of federal tax liens).

The statutory liens in this case are federal tax liens created pursuant to Internal Revenue Code §6321 , and they are generally valid against third parties once notices of federal tax liens have been filed. See 26 U.S.C. §6323(a) . However, §6323(b) of the Internal Revenue Code affords protection for certain interests even though notice has been properly filed. 26 U.S.C. §6323(b) . The trustee in this case claims he is protected by Internal Revenue Code §6323(b)(2) , which protects a purchaser of a motor vehicle if before the purchaser received actual notice or knowledge of the lien, he acquired possession of the motor vehicle. 26 U.S.C. §6323(b)(2) . The applicability of that provision to the trustee in this case raises two distinct issues.

The first issue is whether the trustee may claim protection under Internal Revenue Code §6323 in the first instance. Internal Revenue Code §2363(b) affords protection only for a "purchaser," which is defined as "a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice." 26 U.S.C. §6323(h)(6) . Because a trustee may stand in the shoes of a bona fide purchaser for purposes of Bankruptcy Code §545(2) , the issue becomes whether a bona fide purchaser meets the definition of a purchaser. Although the term "bona fide purchaser" is not defined in the Bankruptcy Code, it is generally understood to mean "[o]ne who has purchased property for value without notice of any defects in the title of the seller." Black's Law Dictionary 177 (6th ed. 1990); Dietsch v. Long, 43 N.E.2d 906, 914-15 (Ohio Ct. App. 1942). Thus, "value" is a much lower standard than "adequate and full consideration in money or money's worth." Because a bona fide purchaser is not necessarily a purchaser for purposes of Internal Revenue Code §6323(b)(2) , ⁶ it follows that a trustee standing in the shoes of a hypothetical bona fide purchaser does not fall within the protection of this statute. ⁷ In re Helper, No. 93-71086, 1993 WL 453370, at *2 (Bankr. D.S.C. July 30, 1993); In re McNitt [92-2 ustc ¶50,427 ], 139 B.R. 21, 23 (Bankr. D. Idaho 1992); In re Bates [88-1 ustc ¶9124 ], 81 B.R. 63, 64 (Bankr. D. Or. 1987).

The second issue is whether the trustee, who stands in the shoes of a hypothetical bona fide purchaser, meets the possession and no actual notice or knowledge requirements of Internal Revenue Code §6323(b)(2) . As stated above, the purchaser must have possession to have priority over a federal tax lien. 26 U.S.C. §6323(b)(2) .

Numerous courts have addressed this issue by determining whether the Bankruptcy Code grants a hypothetical bona fide purchaser "hypothetical possession" over the property upon the filing of the petition, and they have not reached consistent results. One group of cases holds that the Bankruptcy Code does not grant hypothetical possession to a hypothetical bona fide purchaser. See In re Loretto Winery Ltd., 898 F.2d at 721; In re Tape City, 677 F.2d at 403-04; In re Stegeman, No. 84-01979-414, 1991 WL 541134, at *4 (Bankr. E.D. Wash. Jan. 25, 1991); see also In re Williams, 109 B.R. 179, 181 (Bankr. W.D.N.C. 1989); In re Bates [88-1 USTC ¶9124 ], 81 B.R. 63, 64 (Bankr. D. Or. 1987); In re Misco Supply Co., 43 B.R. 651, 653 (Bankr. D. Kan. 1984); In re Exclusive Industries Corp., 41 B.R. 493, 496 (Bankr. W.D. La. 1984). Another group of cases, however, holds to the contrary. See In re Coan, 72 B.R. 483, 486-87 (Bankr. M.D. Fla. 1987), vacated, 134 B.R. 670 (Bankr. M.D. Fla. 1991); In re Hughes, 9 B.R. 251, 256-57 (Bankr. W.D. La. 1981); see also In re J.R. Nieves & Co., 446 F.2d 188, 192 (1st Cir. 1971).

In In re Tape City, U.S.A., Inc., 677 F.2d 401 (5th Cir. 1982) (per curiam), the Fifth Circuit examined whether §545(2) of the Bankruptcy Code allowed a debtor-in-possession to avoid Louisiana vendor's privilege, which is a statutory lien that has no formal perfection requirements. In Tape City , the debtor filed bankruptcy under Chapter 11 and remained in possession of its property. The vendor, which had sold merchandise to the debtor, claimed that its vendor's privilege constituted a secured claim and demanded adequate protection of its interests in the merchandise. Under Louisiana law, a vendor of movable property which has not been paid has a vendor's privilege on the price of such property. Id. at 403 (citing La. Civ. Code Ann. arts. 3217(7), 3227). Louisiana law allows a bona fide purchaser to avoid the privilege if there has been both transfer of title and physical delivery of the property to the bona fide purchaser. Id. The court recognized that a debtor-in-possession in a Chapter 11 reorganization is treated like a trustee in a Chapter 7 liquidation, who is given the status of a hypothetical bona fide purchaser for purposes of testing statutory liens under Bankruptcy Code §545(2) . In applying the bona fide purchaser test, the court refused to assume that the debtor had parted with possession: "Even if [the debtor-in-possession] is considered a trustee who, under the legal fiction of the [Bankruptcy] Code, takes as a bona fide purchaser, we cannot accept [the debtor-in-possession's] argument that the mere filing of bankruptcy petition somehow transfers physical possession of the goods." Id. at 403-04. Therefore, the court concluded that since a trustee could not avoid the vendor's privilege, neither could the debtor-in-possession. Id. at 404.

Tape City relied on In re Trahan, 283 F. Supp. 620, 626 ( W.D. La. ), aff'd, 402 F.2d 796 (5th Cir. 1968) (per curiam), cert. denied, 394 U.S. 930 (1969), which was decided under §67(c)(1)(B) of the Bankruptcy Act, the predecessor to Bankruptcy Code §545(2) . In Trahan, the district court concluded that while §67(c) of the Bankruptcy Act gave the trustee the status of a bona fide purchaser, it did not give him physical possession of the property. Id. "Possession by the original vendee is a requisite for protection of the seller and the enforcement of his vendor's privilege under Louisiana law." Id. Therefore, the district court held that absent such possession, the trustee could not avoid the vendor's privilege. Id. The Fifth Circuit affirmed based on the opinion of the district court. In re Trahan, 402 F.2d at 796.

It now appears that Trahan and Tape City are the genesis of the rule on hypothetical possession. In In re Bates [88-1 USTC ¶9124 ], 81 B.R. 63 (Bankr. D. Or. 1987), the bankruptcy court read Tape City to say: "While the [Bankruptcy] Code grants the trustee certain avoiding powers as a hypothetical purchaser at the time of the commencement of the case, it does not grant the trustee hypothetical possession at the time of the commencement of the case." Id. at 64. Accordingly, the Bates court concluded that the debtor could not avoid the federal tax lien pursuant to Internal Revenue Code §6323(b)(2) . Id. Subsequent courts have cited Bates for the proposition that the Bankruptcy Code does not grant hypothetical possession to a hypothetical bona fide purchaser. See In re Stegeman, No. 84-01979-414, 1991 WL 541134, at *3 (Bankr. E.D. Wash. Jan 25, 1991); In re Williams, 109 B.R. 179, 181-82 (Bankr. W.D.N.C. 1989); cf. In re Woods Farmers Coop. Elevator Co., 946 F.2d 1411 (8th Cir. 1991) (holding that a lien unenforceable only against a buyer in the ordinary course of business could not be avoided by a bona fide purchaser because a buyer in the ordinary course of business has additional characteristics not possessed by a bona fide purchaser).

The Ninth Circuit has also followed the approach of Tape City in In re Loretto Winery Ltd., 898 F.2d 715 (9th Cir. 1990). Loretto Winery involved a producer's lien on partially processed grapes that had been delivered to the debtor processor. Under California law, the lien remained on the grapes only as long as the processor retained possession. Id. at 721. In determining whether the trustee could avoid the producer's lien, the court refused to assume that the trustee as a hypothetical bona fide purchaser had possession of the grapes when the debtor actually had possession at the moment the bankruptcy petition was filed. Id. The court held that because the debtor had possession when it filed bankruptcy, the producer's lien could not be avoided. Id. at 725.

However, the Trahan/Tape City line of cases is not without criticism. The First Circuit disapproved of Trahan in In re J.R. Nieves & Co., 446 F.2d 188 (1st Cir. 1971). Nieves involved a vendor's privilege created under an article of the Puerto Rican Civil Code that was similar to the Louisiana Civil Code article at issue in Tape City . Under the article, a bona fide purchaser must take possession of the merchandise to defeat a seller's lien. Id. at 190. The court stated, "In our view, when Congress spoke of the 'rights' of a hypothetical purchaser, it contemplated a full-blooded, not an anemic, purchaser." Id. at 192. Thus, it concluded that a characteristic of a hypothetical bona fide purchaser was possession of the merchandise and held that the trustee, as a hypothetical bona fide purchaser, could avoid the seller's lien. Id. 192, 194. However, the "full-blooded" bona fide purchaser which the court was referring to was based on its state law definition of bona fide purchaser. Id. at 192 n.6 ("Whether a given person is a bona fide purchaser . . . is defined by state law."). Therefore, the First Circuit's broad definition of bona fide purchaser is limited to liens created under Puerto Rican law.

In In re Hughes, 9 B.R. 251, 255 (Bankr. W.D. La. 1981), the bankruptcy court agreed with Trahan that Louisiana 's vendor's privilege was a statutory lien. However, it refused to follow Trahan's holding that a bona fide purchaser must obtain actual physical possession to avoid a vendor's privilege. The court stated, "In actuality the trustee is not a real bona fide purchaser who can protect his position by taking delivery the moment he pays for the goods. The trustee is a hypothetical bona fide purchaser on the date of the filing of the petition by the debtor." Id. at 256. Accordingly, the court held that the vendor's privilege could be avoided by the trustee in his position as a hypothetical bona fide purchaser under Bankruptcy Code §545(2) . Id. at 257. The court's analysis, however, ignored the fact that Louisiana law requires "actual possession" in order for a bona fide purchaser to be able to avoid the vendor's privilege. Therefore, we believe that Hughes was erroneously decided and do not rely on it.

In each of these cases, the court resolved the question of whether the lien could be avoided by a bona fide purchaser by looking at the law controlling the validity of the lien. We agree with, and shall follow the approach of the courts in these cases. However, as this is a case of first impression in this circuit, we do not adopt their holdings carte blanche.

In this case, the trustee claims he can avoid the lien pursuant to his powers under Bankruptcy Code §545(2) , which gives the trustee the power to avoid statutory liens where a hypothetical bona fide purchaser could avoid them. 11 U.S.C. §545(2) . As already stated, we must look to the law controlling the validity of the statutory lien to determine whether a bona fide purchaser could avoid the statutory lien. The statutory lien at issue is a federal tax lien, created under Internal Revenue Code §6321 , and because it is on a motor vehicle, its validity is controlled by Internal Revenue Code §6323(b)(2) . Therefore, the inquiry we must make is whether a hypothetical bona fide purchaser could avoid the statutory lien pursuant to Internal Revenue Code §6323(b)(2) . If a bona fide purchaser could avoid the statutory lien, the trustee could also avoid the statutory lien pursuant to his powers under §545(2) . Bankruptcy Code §545(2) dictates that the enforceability of the statutory lien must be tested as against a bona fide purchaser as of the date the petition is filed. 11 U.S.C. §545(2) . Therefore, we will test the federal tax liens as of October 19, 1989, which, as discussed above, is the date when the Chapter 11 petition was filed.

Consistent with our statement of the test--a trustee steps into the shoes of, rather than obtaining the status of a hypothetical bona fide purchaser--we will not impute characteristics or qualities of one to the other. A debtor-in-possession and a hypothetical bona fide purchaser are two separate persons. A debtor-in-possession may stand in the shoes of a hypothetical bona fide purchaser, but that is all he may do; he may not simultaneously stand in the shoes of a hypothetical bona fide purchaser and selectively assert characteristics that he has as a debtor-in-possession. This approach is necessary to fulfill the exact letter of Bankruptcy Code §545(2) , which provides that a debtor-in-possession may avoid a statutory lien only to the extent that a bona fide purchaser could. See 11 U.S.C. §545(2) . Moreover, imputing actual characteristics of a debtor-in-possession to a hypothetical bona fide purchaser would lead to different results depending on whether an actual trustee or a debtor-in-possession was exercising the avoidance power. In otherwise identical circumstances, a debtor-in-possession would be able to avoid the statutory liens, but a trustee would not, merely because it was the debtor-in-possession, rather than the trustee, who had actual possession of the vehicle at the commencement of the case and who sought to avoid the lien. See In re Loretto Winery Ltd., 898 F.2d at 721 n.9 ("[T]his would create an anomalous distinction between debtors-in-possession and trustees. A trustee would be able to avoid the statutory lien while the debtor-in-possession would not, even with all other circumstances identical. We do not think Congress intended this result."). Therefore, we will test the federal tax liens from the perspective of both the debtor and a hypothetical bona fide purchaser.

As debtors listed the IRS as a creditor having priority in the Chapter 11 petition filed on October 19, 1989, it is clear that debtors themselves were not without notice or knowledge of the federal tax liens. In addition, debtors were not purchasers within the meaning of Internal Revenue Code §6323(b)(2) . Therefore, debtors cannot, in their own right, avoid the federal tax liens under Internal Revenue Code §6323(b)(2) .

Likewise, a hypothetical bona fide purchaser could not avoid the federal tax liens because possession of the motor vehicle was in debtors and that possession cannot be imputed to a hypothetical bona fide purchaser. Simply filing the bankruptcy petition does not transfer actual possession away from debtors, see In re Misco Supply Co., 43 B.R. 651, 653 (Bankr. D. Kan. 1984), and we will not violate the express mandate of Internal Revenue Code §6323(b)(2) by assuming that a hypothetical bona fide purchaser has possession when, in reality, debtors had possession of the motor vehicle. Bankruptcy Code §545(2) makes clear that the trustee may only avoid a statutory lien that a bona fide purchaser could. Thus, where a bona fide purchaser is without the power to avoid a lien because the controlling law requires something more than mere bona fide purchaser status for protection, the trustee also is without power to avoid the lien. To state it as have many courts before us, the Bankruptcy Code does not grant hypothetical possession to a hypothetical bona fide purchaser.

Not only is this result consistent with the Trahan/Tape City line of cases, it is consistent with the approach this court took in a case involving §70(c) of the Bankruptcy Act, the predecessor to Bankruptcy Code §544(a)(1) , (2) , wherein we stated, "[T]he powers and rights of the hypothetical lien creditor under §70(c) are just what the statute says they are, no more and no less. . . . The contrary view would endow the trustee with almost of all the qualities of a bona fide purchaser or mortgagee for present value." In re Federal's Inc., 553 F.2d 509, 514 (6th Cir. 1977). We feel that the same reserved approach that we used in defining the characteristics of a hypothetical lien creditor is appropriate in defining the characteristics of a hypothetical bona fide purchaser under Bankruptcy Code §544(b)(2) .

D.

The trustee urges this court to follow the cases of United States v. Sierer, 139 B.R. 752 (N.D. Fla. 1991), and In re Znider [93-1 USTC ¶50,165 ], 150 B.R. 239 (Bankr. C.D. Cal.), vacated on other grounds, 167 B.R. 603 (C.D. Cal. 1993). Both Sierer and Znider involved Chapter 11 proceedings in which the debtor-in-possession sought to avoid federal tax liens on motor vehicles. In Sierer, the district court recognized that a bona fide purchaser must have possession of the motor vehicle in order to avoid federal tax liens under Internal Revenue Code §6323(b)(2) . Id. at 755. However, the district court evidently believed that the possession of the motor vehicle, which was in the debtor-in-possession, could be imputed to a hypothetical bona fide purchaser merely because the debtor-in-possession may stand in the shoes of a hypothetical bona fide purchaser. Id. Based on that reasoning, the district court held that the debtor-in-possession could avoid a filed federal tax lien. Id. In Znider, the bankruptcy court, relying on Sierer, reached the same result on essentially similar facts. Znider [93-1 USTC ¶50,165 ], 150 B.R. at 246. We reject both Znider and Sierer because the court in both of those cases erred by imputing characteristics of a debtor-in-possession to a hypothetical bona fide purchaser. That is precisely the type of analysis that we reject above.

In summary, although we agree that the district committed the two errors advanced by the trustee, we agree with the result, albeit for different reasons, see Hilliard v. United States Postal Serv., 814 F.2d 325, 326 (6th Cir. 1987), reached by the district court. Because the Bankruptcy Code does not grant hypothetical possession to a hypothetical bona fide purchaser, the trustee in this case may not avoid, under Bankruptcy Code §545(2) , the federal tax liens on debtors' motor vehicle.

III.

For the reasons stated, the judgment of the district court is AFFIRMED.

¹ The IRS had made federal income tax assessments against the debtors, doing business as Adrian & Duenquat Elevator, and had filed notices of federal tax liens on the following dates:

Taxable Assessment Date Notice of

 Year      Date    Tax Lien Filed

 1980   10/31/88   6/6/89

 1981   10/31/88   1/17/89

 1983   10/2/87    1/17/89

 1984   10/2/87    5/16/88

 

² We do not delve into the legislative history of Bankruptcy Code §545(2) for two reasons: First, the language of the statute is plain so it may be interpreted on its face. See United States v. Ron Pair Enters., Inc. [89-1 USTC ¶9179 ], 489 U.S. 235, 241 (1989). Second, the legislative history itself is contradictory and offers little help in interpreting the statute. In re Znider [93-1 USTC ¶50,165 ], 150 B.R. 239, 242 (Bankr. C.D. Cal.) (describing legislative history as "contradictory"), vacated on other grounds, 167 B.R. 603 (C.D. Cal. 1993); In re Williams, 109 B.R. 179, 182 (Bankr. W.D.N.C. 1989) (calling legislative history "clouded and contradictory").

³ We do not adopt the relation back doctrine for all purposes because the doctrine raises many issues--for example, determining what assets constitute property of the estate upon conversion--which we need not decide in this case.

⁴ We do note, however, that filing the proof of claim may affect whether the trustee was without the "actual notice or knowledge of the existence of such lien" required for protection under Internal Revenue Code §6323(b)(2) .

⁵ There are numerous cases which make the general statement that state law governs the nature of a lien and its enforceability against a bona fide purchaser. See, e.g., In re Hughes, 9 B.R. 251, 255 (Bankr. W.D. La. 1981). However, because those cases involved only liens created by state law, they cannot be read to say that state law governs in cases involving liens created by federal law.

⁶ Although it is not necessary that we look to the legislative history in interpreting Internal Revenue Code §6323 , we note that it supports this conclusion. The 1966 amendment was enacted to counteract Enochs v. Smith, 359 F.2d 924, 926 (5th Cir. 1966), where the Fifth Circuit held that §6323 did not require adequate consideration to make one a purchaser within its terms. The 1966 amendment to §6323 changed this result by adding the current definition for the term purchaser which requires "adequate and full consideration;" the amendment explained that "the bill modifies the results reached in court decisions under present law in that the amount paid can no longer be so small as to have little relation to the value of the property acquired. However, this requirement is not intended to preclude a bona fide bargain purchaser . . . ." S. Rep. No. 1708, 89th Cong., 2d Sess. (1966), reprinted in 1966 U.S.C.C.A.N. 3722.

⁷ This conclusion is not inconsistent with the rationale of Internal Revenue Code §6323 . The purpose of this so-called superpriority statute is to encourage the alienability of certain enumerated assets without threats of tax liability and to protect bona fide purchasers who obtained the assets without knowledge of the tax lien. In re Znider [93-1 USTC ¶50,165 ], 150 B.R. 239, 244 (Bankr. C.D. Cal.) (quoting S. Rep. No. 989, 95th Cong., 2d Sess. 86 (1978)), vacated on other grounds, 167 B.R. 603 (C.D. Cal. 1993); see also In re McNitt [92-2 USTC ¶50,427 ], 139 B.R. at 23. As to the alienability rationale, the existence of a tax lien on an asset is not going to impede the transfer of the asset as between a debtor and a trustee, or the subsequent transfer of the asset by a trustee to a third party purchaser, who will obtain the property free and clear of any lien. See 11 U.S.C. §363(b)-(c), (f)(3) (authorizing the sale of property free and clear of any lien where the selling price is greater than the aggregate value of all liens on the property). The fact that an asset is encumbered makes no difference in a trustee's decision to obtain that asset, as long as property is of more than inconsequential value or benefit to the bankruptcy estate. See 11 U.S.C. §542 (requiring turnover of property to trustee unless "such property is of inconsequential value of benefit to the estate"); 11 U.S.C. §554 (authorizing trustee to abandon property "that is burdensome to the estate or that is of inconsequential value and benefit to the estate"). As to the protection rationale, because the trustee is not actually giving value for the asset, he need not be afforded the same protection as a true bona fide purchaser. See S. Rep. No. 989, 95th Cong., 2d Sess. 86 (1978) (legislative report on proposed Bankruptcy Code §545(b) amendment that was deleted) ("[T]he reasons for enabling a bona fide purchaser to take these kinds of assets free of an unfiled tax lien, that is, to encourage the free movement of these assets in general commerce, do not apply to a trustee in a title 11 case, who is not in the same position as an ordinary bona fide purchaser as to such property."). Thus, because the rationale of Internal Revenue Code §6323 would not be advanced by extending the term purchaser to include a trustee, we conclude that a trustee is not protected by this statute.

 

 

[96-1 USTC ¶50,061] In re Guyana Development Corporation, Debtor. David Askanase, Trustee v. United States of America

U.S. Bankruptcy Court, So. Dist. Tex. , Houston Div., 93-41444-H5-11, 11/29/95 , 189 BR 393, 189 BR 393

[Code Secs. 6321 and 6323 ]

Deficiency and collection: IRS liens: Bankruptcy: Scope of lien: Jurisdiction.--

An IRS lien against the assets of a corporation extended to all of the corporation's property, both foreign and domestic. Code Sec. 6321 was drafted in the broadest possible language in order to reach all of a debtor's property wherever located. Moreover, for purposes of perfecting the tax lien, the debtor's personal property assets were deemed to be situated at its principal place of residence, which was the location of its principal executive office in Texas . The bankruptcy trustee could not avoid the IRS's lien under 11 U.S.C. Sec. 545(2) because the focus of that section was whether the lien was enforceable as to a theoretical bona fide purchaser and not whether it was unenforceable due to the jurisdictional limits of the U.S. Under applicable state ( Texas ) law, a bona fide purchaser was subject to a properly filed notice of tax lien. The trustee qualified as a bona fide purchaser under Code Sec. 6323 and, therefore, could take advantage of the exception to the IRS's lien with respect to certain stock held by the debtor's estate at the commencement of the bankruptcy case. Accordingly, the IRS's lien was invalid as to the shares belonging to the estate. The lien attached to the debtor's bank accounts, however. The Code Sec. 6323 exception relating to money did not apply with respect to the bank accounts because the accounts represented a right to receive money rather than the money itself. Further, the IRS's claims were secured by its liens even though its levies were invalidated.

Ruth E. Salek, Houston , Tex. , for debtor. Marvin Isgur, Kirkendall, Isgur & Rothfelder, 700 Louisiana , Houston , Tex. 77002 , for trustee. Louise P. Hytken, Department of Justice, Dallas , Tex. , for U.S.

AMENDED ORDER

BROWN, Bankruptcy Judge:

Before the Court is the combined contested matter and adversary proceeding commenced by David Askanase, Chapter 11 Trustee (the "Trustee") of Guyana Development Corporation ("GDC") to determine the extent, validity, and priority of the claims of the United States . This Court has jurisdiction of this proceeding pursuant to 28 U.S.C. §§1334 and 157. This is a core proceeding.

It is undisputed that the United States properly filed its statutory prepetition notices of tax lien with respect to the assets of GDC. The trustee urges, however, that the liens and levies of the United States are avoidable or inapplicable for the following reasons:

1. Non-Existent Foreign Asset Liens. The trustee urges that the United States ' liens based on 26 U.S.C. §6321 cannot apply to assets located outside of the United States . The trustee urges that neither the Constitution, nor principles of international sovereignty permit the assertion of lien rights over foreign assets.

2. Avoidability of Foreign Asset Liens. The trustee urges that even if section 6321 imposed foreign asset liens, such liens are unenforceable, and therefore, avoidable under 11 U.S.C. §545 .

3. Avoidability of Domestic Liens. The trustee asserts that under 26 U.S.C. §6323 , liens against stock or money are avoidable.

4. Avoidability of Domestic Levies. The trustee urges that the IRS levies are voidable preferences under 11 U.S.C. §547 because they attached within a few days of the commencement of the GDC bankruptcy and, if allowed to stand, would entitle the United States to receive more than it would receive in a Chapter 7 liquidation.

The trustee also contends that a chapter 11 liquidating plan can: (i) require the subordination of an unsecured penalty claim for taxes; and (ii) direct the application of liened and levied proceeds to the payment of taxes prior to payment of penalties. No dispute exists that penalty claims would be subordinated in a chapter 7 bankruptcy. See 11 U.S.C. §726(a)(4). It is also undisputed that a chapter 11 reorganization plan can direct the application of liened or levied assets. United States v. Energy Resources, Inc. [90-1 USTC ¶50,281 ], 495 U.S. 545, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990). The trustee believes that rational bankruptcy policy precludes an exception for tax penalty claims in a chapter 11 liquidating plan.