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[56-2 USTC ¶9704]In the Matter of Timberline Lodge, Inc., an
Oregon Corporation, Alleged Bankrupt U. S. District Court, Goldstein, Galton & Galton, Memorandum Opinion MCCOLLOCH, Judge: On The motion for permission to amend the original petition to include
allegations of two additional acts of bankruptcy (paragraph 6(b)
and (c)) should be denied for these reasons: 1. In paragraph 6(b) there is an attempt to allege a preferential
transfer which upon its face occurred more than four months prior
to the proffer of the amended petition. 1 2. Paragraph 6(c) fails to state specific facts relied upon to
constitute a preferential transfer. Allegations in the language of
the statute alone are insufficient. 2
The allegations should have included the date of the alleged
transfer, a description of the property transferred, and a
statement that it was made in satisfaction of an antecedent debt. A more difficult question is presented by the motion to dismiss the
original petition upon the ground that it does not allege an act
of bankruptcy. Allegations of the one act of bankruptcy are: "(6) That within four months next preceding
the filing of this petition, the said Timberline Lodge, Inc., an
Oregon corporation, committed an act of bankruptcy in that it did
heretofore, to-wit: on or about the 23rd day of March, 1955, while
insolvent, suffered or permitted the United States to obtain a
lien upon its property through legal proceedings and has not
vacated or discharged such lien within thirty (30) days from the
date thereof and that the United States did file in the office of
the County Clerk of Multnomah County, Oregon, two liens being No.
3396 in the amount of $5,380.03 and lien No. 3397 in the amount of
$14,245.62; that said liens are still in full force and effect and
have not been vacated or discharged as of the time of the filing
of this paper. That the sale of the equipment and inventory of
Timberline Lodge, Inc., under and by virtue of said liens is
scheduled to be sold at public auction on The first part of this paragraph does not state an act of
bankruptcy because the filing of a tax lien is not obtaining a
lien "through legal proceedings". 3
The last sentence seems to contain the essence of an act of
bankruptcy although defectively stated. The sentence might have
stated that the District Director of Internal Revenue on a
specified day levied upon and seized all inventory and equipment
of Timberline Lodge, Inc., by distraint and advertised it to be
sold at public auction on If the petition were permitted to be so amended the court would be
faced with a question, yet undecided, whether such facts
constitute an act of bankruptcy within the meaning of U. S. Code
Title 11, Section 21a(3): "* * * suffered or permitted, while insolvent, any creditor to
obtain a lien upon any of his property through legal proceedings or
distraint and not having vacated or discharged such lien
within thirty days from the date thereof or at least five days
before the date set for any sale or other disposition of such
property" [Bankrupt Taxpayer's Contention] Counsel for the alleged bankrupt contends that, inasmuch as a lien
for delinquent taxes is not one obtained through legal
proceedings, a distraint of specific personal property to enforce
collection of such a lien is not the kind of distraint intended by
Congress in adding the words "or distraint" by amendment
in 1952. Counsel is incorrect in stating that prior to 1952 the
above subdivision read as follows: "Suffered or permitted, while insolvent, any creditor to
obtain a preference through legal proceedings, and not having at
least five days before a sale or final disposition of any property
affected by such preference vacated or discharged such
preference;" This wording was abandoned by the Chandler Act in 1938 so that for
the past seventeen years the subdivision read exactly as first
quoted above until 1952 when the underscored words "or
distraint" were inserted. Thus in 1938 the troublesome word
"preference" was eliminated. Counsel's argument in
connection with the former use of the word preference in its
technical sense is no longer tenable. Although House Report No. 2320 states in explanation of the 1952
amendment that "a distraint under a landlord's warrant is not
a legal proceeding", the 1954 Collier Pamphlet Edition of the
Bankruptcy Act very carefully avoids any confusion as to the scope
of the amendment. Its comment edited by Professors Moore and Laube
(both members of the National Bankruptcy Conference) follows: "In addition, Section 3a(3) was amended to include within the
third act of bankruptcy the suffering or permitting of a lien upon
property by distraint, even though such a lien is not obtained by
'legal proceedings'. As stated in the House Report: 'Since it is
the unvacated or undischarged lien which should, in such
circumstances, give rise to the act of bankruptcy, a distraint
should be included.' See also 1 Collier on Bankruptcy (14th ed. by
Moore and Oglebay), Paragraphs 3.206 and 3.308." [Distraint to Enforce Tax Lien] Distraint is a word of wide use. It comprehends any seizure of
personal property to enforce a common law or statutory right or
lien. Tax liens are created by statute. Like landlord liens they
fall within the category of floating liens. Goods are sold and
moneys are checked out of bank accounts every moment of the day
against which there are floating liens. However such liens attach
to specific personal property only when it is levied upon or
seized to enforce the lien. In adding liens obtained through distraint Congress could not have
overlooked its own Internal Revenue Code Title 26 U. S. C. A., and
particularly Subchapter C entitled "Distraint". Section
3690--Authority to Distrain--reads: "If any person liable to pay any taxes
neglects or refuses to pay the same within ten days after notice
and demand, it shall be lawful for the collector or his deputy to
collect the said taxes, with such interest and other additional
amounts as are required by law, by distraint and sale, in the
manner provided in this subchapter, of the goods, chattels, or
effects, including stocks, securities, bank accounts, and
evidences of debt, of the person delinquent as aforesaid. 53 Stat.
451." Section 3692 provides that the collector may "by warrant
authorize a deputy collector to levy upon all property and rights
of property * * * belonging to such person, or on which the lien
in Section 3670 exists for the payment of the sum due * * *."
Section 3693 entitled "Proceedings on Distraint" states
"When distraint is made, as provided in Section 3690,
"the collector shall make an account of the goods or effects
distrained, a copy of which shall be left with the owner or
possessor thereof, and shall then proceed with the sale upon due
notice published and posted as prescribed. Section 3710 requires
"any person in possession of property, or rights of property,
subject to distraint, upon which levy has been made, shall, upon
demand * * * surrender such property or rights to such collector
or deputy * * *." Obviously if Congress had intended to limit liens obtained through
distraint to landlord liens it would have phrased the amendment
accordingly. In most states where landlord liens are recognized,
the liens are created by statute and exist against crops or
possessions of the tenant. The non crop liens exist against all
personal property of tenants so long as the property remains upon
the rented premises and from ten to thirty days after removal.
Like tax liens they attach to specific property only upon seizure
under a warrant of distress. Such warrants are usually issued by a
justice or other magistrate upon the affidavit of the landlord. It
cannot be argued that only landlord liens are obtained through
distraint. Like tax liens they are created and exist by virtue of
statutes. Like tax liens they attach to specific personal property
only by seizure under distraint. As Collier states: "It is not the lien itself, nor the
execution thereunder, which constitutes the act of bankruptcy. It
is rather the failure on the part of the debtor to have the same
vacated or discharged (1) at least five days before the date set
for the sale or other disposition of the property, or (2) within
thirty days after the creation of the lien." 4 Rule 15(a) provides that after a responsive pleading a party may
amend only by leave of court or by written consent; "and
leave shall be freely given when justice so requires."
Amendments to conform to evidence also must be permitted with
great freedom. If the facts are such as to sustain the suggested
additional allegations to remedy the defective pleading of the act
of bankruptcy, the petitioning creditors may have five days within
which to amend, otherwise the petition will be dismissed. 1
In re Brown Commercial Car Co., 227 Fed. 387. In re Haff
(CCA 2d Cir.) 136 Fed. 78. Collier Bankruptcy Manual, 2d Ed. p.
230. 2
In re Gaynor Homes Inc. (CCA 2d Cir.) 65 Fed. (2d) 378, 23
A. B. R. (N. S.) 654. Collier Bankruptcy Manual, 2d Ed. p. 81. 3
Matter of Rialto Properties Co. (D. C. Cal.) 8 Fed. (Supp.)
57. 4
Collier on Bankruptcy, 14th Ed., Vol. 1, p. 461. [80-1 USTC ¶9129]In the Matter of Monarch Industries, Inc.,
Bankrupt. (CA-5), U. S. Court of Appeals, 5th Circuit, No.
79-1841, Summary Calendar, *,
609 F2d 117, Morton Kosto, Friedman & Britton, 310 Southeast National Bank
Bldg., Orlando, Fla. 32801, for bankrupt. Gary L. Betz, United
States Attorney, Kendell W. Wherry, Assistant United States
Attorney, Jacksonville, Fla. 32201, M. Carr Ferguson, Assistant
Attorney General, Gilbert E. Andrews, Crombie J. D. Garrett, Karl
Schmeidler, Department of Justice, Washington, D. C. 20530, for
plaintiff-appellant. Before COLEMAN, Chief Judge, HILL and GARZA, Circuit Judges. The Internal Revenue Service ( The judgment of the district court is reversed with directions to
enter judgment treating the claim of the REVERSED. *
Fed. R. App. Proc. 34(a), 5th Cir. Local R. 18. 1
Before both the bankruptcy and district courts, the 68-1 USTC ¶9226]In the Matter of Major Manufacturing
Company, a Michigan Corporation, Debtor U. S. District Court, West. Dist. Walter K. Schmidt, 540 Old Kent Bldg., Grand Rapids, Mich., for
Major Mfg. Co. Murray De Groot, 640 Trust Bldg., Grand Rapids,
Mich., for bankrupt. Opinion NIMS, JR., Referee: Since It is the claim of the receiver that Ivankovich and Shaw are
essential to this operation and that they will terminate their
employment if the I. R. S. is allowed to continue its levies.
Because of their experience with debtor, it is claimed that these
employees are valuable and essential to the receiver. It is the claim of the I. R. S. that Ivankovich and Shaw owe for
assessments arising out of non payment of withholding and FICA
taxes by a corporation in which they were previously officers for
1960 and 1961. The I. R. S. also points out that the debtor itself
owes withholding and employment taxes and the I. R. S. has filed a
proof of claim in the sum of $16,602.52 in this estate. Since the controversy was submitted, the debtor has filed its Plan
which proposes inter alia to pay the I. R. S. claim in
full. Hearing on the Plan has been set for These are a few issues of fact. The Court determines these as
follows: 1. Ivankovich is indispensable to the receiver's operation in that
it would be impossible to replace him by one having the same
experience, knowledge, contacts, knowhow, and abilities and who
would be willing to put in the exceptionally long hours and
effort, which Ivankovich has, on a temporary operation at $150.00
a week, and the receiver cannot afford to pay more than this. 2. Shaw is especially valuable to the receiver because of her
experience, knowledge and contacts, not only as a bookkeeper and
secretary, but also in customer contact work. She could not be
replaced at $20.00 a week, and the receiver cannot pay more. 3. Ivankovich and Shaw would probably resign if the levies are
allowed to continue. 4. That the payroll of twenty five (25) persons in the small town
of Belding, Michigan (1960 census-4887) could not be easily
absorbed in the event of the closing of debtor, though I am of the
opinion that this fact is not material to the issues. It is the claim of the receiver that the funds from which payments
are made to employees of the receiver are custodia legis
and therefore cannot be reached by Notice of Levy. Though counsel cite many cases in their briefs bearing on this
general problem, I find none on the exact issue involved here,
that is, whether the United States by Notice of Levy can attach
the wages of an employee of an operating receiver in a Chapter XI
Proceedings, where to do so may cause the failure of the
Arrangement. In an Arrangement Proceedings, a receiver has the power, subject to
the control of the Bankruptcy Court, to operate the business of
the debtor during such period as the Court may fix. Bankruptcy
Act Sec. 343, 11 The purpose of the Arrangement Proceedings is stated by 9
Remington on Bankruptcy 202, Sec. 3565 as follows: "Chapter 11 of the Act, which governs
arrangements and compositions since the 1938 amendments, follows
the outline and concept of former Section 74, and it is obvious
that its purpose, like that of its predecessors, is to keep the
affairs of a debtor who can offer a fair arrangement acceptable to
most of his creditors out of bankruptcy, or to remove them from
further bankruptcy administration if bankruptcy proceedings are
already pending, substituting the arrangement with certain
safeguards, for the usual bankruptcy administration and
discharge." Thus, from the provisions of the Bankruptcy Act it seems clear that
all of the property of the debtor is under the exclusive
jurisdiction of this Court and thus would be in custodia legis.
This would be especially true in this case where by order of the
Court, the receiver may make no disbursement of funds without an
express order of the Court and the counter signature of a Referee
in Bankruptcy on any check which he issues under such order. The
Court may also issue such orders as may be necessary to enforce
the provisions of the Act and specifically to effect the purpose
of Chapter XI Proceedings within the intent of Congress as set
forth in the provisions of the Chapter. The general rule relied on by the receiver is stated in Bankers
Mortgage Co. of Topeka, Kans. v. McComb, 60 F. (2d) 218 (CCA
10th Cir. 1932) at p. 221: "It is a general rule that, where a person's
possession or control of property constitutes custodia legis, he
cannot be subjected to garnishment process in respect to such
property. * * * "The reason for the rule is that to require
such a person to respond in garnishment would result in an
interruption of the orderly progress of judicial proceedings and
an invasion of the jurisdiction of the court which has legal
custody of such property. * * * "Such a person, with the consent of the
court having custody of such property, may be held as garnishee
after the purposes of the law's custody have been accomplished and
such court has by order directed delivery thereof to the
garnishee-debtor. Under such circumstances, garnishment will not
interrupt the progress of judicial proceedings in such court nor
invade its jurisdiction. The officer holds the property not for
the law but for the person entitled thereto; and the reason for
the rule no longer exists." The receiver especially relies on In Re Chakos, 36 F. (2d)
776 (D. C., W. D. Wis.--1930) where the Court stated that the
granting of leave to allow one to garnishee a trustee in
bankruptcy was discretionary with the Referee. But, In Re
Chakos, supra, is not the law in our Circuit. In In Re
Berman and Company, 378 F. 2d 252 (CCA-6th Cir.--1967) the
Referee granted permission to the attachment by a State Court
order of a dividend payable to a creditor of a bankruptcy estate.
This action was affirmed by the District Judge. In reversing this
decision and directing the referee to pay the dividend to the
creditor, the Court said at p. 253: "* * * we are clearly of the opinion that a
referee in bankruptcy is not authorized or empowered to permit a
dividend in the hands of his trustee to be attached by process
from a state court. This has long been the rule established by
federal appellate courts." In discussing In Re Chakos, supra, the Court stated at pp.
254-255: "The appellee's principal reliance is upon a
district court case, In re Chakos, 36 F. (2d) 776, decided
by the District Court for the Western District of Wisconsin in
1930. The Chakos opinion purports to follow the Argonaut
Shoe and American Telephone cases, and cites them in
support of the following statement: 'It is the established rule in the federal court
(sic) that funds in custodia legis are not as matter of right
subject to either attachment or garnishment. * * *' The flaw in the Chakos reasoning lies in the fact that the
statement just quoted is not the rule set forth in the cases
cited. Those cases did not restrict 'the established rule' to the
statement that funds to either attachment or garnishment. They
unequivocally held that funds in the hands of a trustee in
bankruptcy are not subject to attachment by process from a state
court; that such a right could arise only from express statutory
authority, and that the bankruptcy court may not permit such
attachment'. "* * * "As we have seen, the Ninth and Seventh
Circuits have unqualifiedly held that a dividend in the hands of a
trustee in bankruptcy may not be reached by an attachment from a
state court; that the right to garnishee such funds can arise only
from express statutory authority which is not found in the
bankruptcy laws; and that (as heretofore quoted) 'the distribution
of the assets of bankrupt, therefore, cannot be stayed or
prevented by the process of a state court, the object of which is
to withhold a dividend from a creditor entitled thereto for the
security of a plaintiff pending litigation.' We agree with this
long-established rule, and regard as unsound the attempt of Chakos
to alter it by permitting a dividend in the hands of a trustee in
bankruptcy to be reached by a state court attachment if the
referee thinks the bankruptcy proceeding will not be delayed or
interfered with by the attachment. "This case is an example of the delay which
may occur if the Chakos holding is applied. Here, the
referee permitted the attachment because he thought his proceeding
would not be delayed by it. He tried, through the subterfuge of
having Berman's dividend check certified, to avoid delay in
closing the bankruptcy proceeding; but he was not successful. Now,
nearly two years after the attachment, the referee still has
possession of the certified dividend check, the trustee is still
under bond, and the bankruptcy case has not been terminated. It
could have been closed in the fall of 1965, had the referee not
permitted the dividend to be attached. "* * *." Thus, at least as to distributions in a bankruptcy proceedings, the
Court has no choice but to disallow all garnishments or
attachments issued out of other courts. The United States relies principally on In Re Quakertown
Shopping Center, Inc. [66-2 USTC ¶9655], 366 F. 2d 95 (CCA,
3d Cir. 1966). In that estate, the taxpayer was a creditor of a
debtor in an Arrangement Proceedings. The District Director served
a Notice of Levy on the receiver. In holding that the government
was entitled to payment out of the dividend due taxpayer, the
Court stated at p. 98: "In making a levy such as this the United
States becomes in effect the involuntary assignee of the creditor.
It does not invade the jurisdiction of the Bankruptcy Court or
interfere with the administration of the estate. It merely serves
notice on the receiver or trustee that whatever funds otherwise
would be paid to the taxpayer shall instead be paid to the
government as the distrainor, to the extent of the amount due it.
We are here on familiar ground. A creditor may voluntarily
transfer his claim against a bankrupt estate without obtaining the
approval of the Bankruptcy Court. 3 Collier on Bankruptcy (14th
ed. 1966) Sec. 57.06. We deem the levy to be similar in effect to
an assignment, albeit involuntary on the part of the creditor of
the bankrupt." I do not believe In Re Quakertown Shopping Center, Inc., supra,
is in anyway comparable to our matter. There the situation was no
different than any bankruptcy proceedings. Administration of the
estate would have been completed before the dividend would be
payable. There, the Notice of Levy could be of only slight
inconvenience to the receiver. In view of In Re Berman and
Company, supra, it is questionable that the 6th Circuit would
have decided In Re Quakertown Shopping Center, Inc., in the
same way as the 3d Circuit since after all the levy proceedings
are similar to a garnishment proceedings and the same possible
delays that were the reason for the 6th Circuit decision could
result in either type of proceedings. See United States v.
Eiland [55-1 USTC ¶9487], 223 F. 2d 118 (CCA 4th Cir. 1955). But, here we are faced with action by the United States that
seriously interferes with the administration of the estate. In
fact, this action may completely thwart Congress's intent that
Chapter XI proceedings keeps a debtor out of bankruptcy for the
benefit of the creditors as well as the economy of the community. I am well aware of the equities of government and that there is a
strong public policy that the It is to be noted that the most that could be collected on any one
levy against Ivankovich would be $150.00 and against Shaw of
$20.00. The I. R. S. must levy each week. United States v. Long
Island Drug Co. [41-1 USTC ¶9140], 115 F. (2d) 983 (CCA 2
Cir. 1940). But, here there is a possibility of a recovery of the
government's claim of $16,602.52 if a Plan is accepted and
confirmed. Because of a large mortgage and security agreement, it
is unlikely the government will receive a dividend in the event
the Plan fails. It seems rather shortsighted to go to the expense
of levy proceedings to gain a few dollars when by so doing the
recovery of a sizeable amount may be jeopardized. In Arrangement Proceedings, all parties involved, receiver, debtor,
creditors committees, employees and the Court face numerous
problems and are usually involved in a frantic effort to keep a
debtor alive in hopes that it can be revived so that the maximum
recovery may be obtained for creditors and the debtor be returned
to society as a contributing factor in our economy. Certainly,
this Court has been given actual and implied power by Congress to
prevent action that will place an impossible burden upon the
receiver, already faced with a surfeit of problems. I therefore hold that, as a minimum, it was incumbent upon the
Internal Revenue Service to obtain permission of this Court to
serve a notice of levy upon the receiver (or referee) and that if
such permission were requested, this Court would have no choice
but in its discretion to deny it under the facts in this case. In
view of my holding, it is not necessary to decide whether under In
Re Berman and Company, supra, the referee has such discretion. The order enjoining the Internal Revenue Service and its officers
from serving notices to levy on the receiver and referee is made
permanent and all outstanding levies are nullified. 77-2 USTC ¶9760]In re Ceafco, Inc., Bankrupt U. S. District Court, So. Dist. Ala., Bankruptcy
No. 28,700, Robert H. Allen, First National Bank Bldg., Mobile, Ala. 36602,
attorney for trustee, Herbert P. Feibelman, Jr., P. O. Box 2082,
Mobile, Ala. 36602, attorney for Construction Equipment Rental.
Edward J. Vulevich, Jr., Assistant United States Attorney, Mobile,
Ala. 36602, for U. S. Order on Show Cause At Mobile in said District on the 21st day of September, 1977,
before CAFFEY, JR., Bankruptcy Judge: This matter having come on
for hearing upon the Show Cause Order issued to United States of
America, Internal Revenue Service ( Now, therefore, the Court finds, concludes and orders as follows: Max E. Miller is the duly appointed, qualified, and acting Trustee
of this estate in bankruptcy, which is being actively administered
by him. Construction is a creditor of the bankrupt and has filed a claim
herein (Claim No. 39) which has been allowed as an expense of
administration in the Superceded Chapter XI proceeding. No
dividend to creditors has been declared by the Court under the
provisions of Section 39a(5) of the Bankruptcy Act and Bankruptcy
Rule 308. On The Trustee only recently advised the Court of the Tax levies and
requested advice as to the action to be taken by him in the
premises. The Court, thereupon, issued the Show Cause Order to
bring the matter up for determination. The tax levies were issued under the authority of 26 USCA 6331
which provides, inter alia: "(b) * * * A levy shall extend only to property possessed and
obligations existing at the time thereof * * *." Only this Court has the authority to determine, in accordance with
the law, how the assets of this estate in bankruptcy are to be
distributed, and whether any dividend is to be declared on the
claim of Construction. No such determination has yet been made.
Therefore, at the time the levies were served on the Trustee, he
did not have in his possession any property, or rights to
property, or moneys, which belonged to the taxpayer. Therefore,
the levies are premature and ineffectual as to the Trustee and the
assets of this estate in bankruptcy. In re Mr. Charles, Inc. (WD-Mich., 1976) 11
Collier Bankruptcy Cases 613 2 Bkcy. Ct. Dec. 1545 Now, therefore, it is ORDERED, ADJUDGED and DECREED that the
Notices of Levy served by the United States of America, Internal
Revenue Service, upon Max E. Miller, Trustee of this estate in
bankruptcy, be, and the same hereby are, declared null and void;
and said Trustee is hereby released therefrom. [98-1 USTC ¶50,447] In re Stephen D. Gebhart, t/a Gebhart
Pole Buildings, t/a Gebhart Construction Debtor, Stephen D.
Gebhart, t/a Gebhart Pole Buildings, t/a Gebhart Construction,
Movant v. United States of America, Internal Revenue Service,
Respondent U.S. Bankruptcy Court, Mid. Dist. Pa.,
1-96-01815,
WOODSIDE, Chief Bankruptcy Judge: The background for this order is as follows. Pre-petition, the
Debtor owned and operated an unincorporated pole-barn building
business, Gebhart Pole Buildings (GPB). Post-petition, without
notice in his Chapter 13 case, he incorporated this entity and
continued to do business. The corporation then incurred federal
employment tax liabilities but failed to pay them for 1997.
Therefore, on April 27, 1998, the In response, on May 1, 1998, the Debtor filed an emergency motion
for an injunction requiring release of the levy. The Debtor argues
that an injunction is appropriate because the levy affects his
ability to pay his Plan. The There are three kinds of taxes at issue here: FICA taxes FUTA taxes
and employee income tax withholding. The total dollar figure
asserted by the When the In In re Dickey [86-1 USTC ¶9424], 64 B.R. 3 (Bankr. E.D.
Va. 1985), the [T]he debtor argues . . . that he should not be forced by the
collection actions of a governmental agency to be unable to
perform under the original plan when he can schedule the net tax
debt to pay it all over time in addition to the other creditors. .
. . Id. at 4. [86-1 USTC ¶9424] In re: William L. Dickey, Debtor U.S. Bankruptcy Court, East. Dist. Va.,
Alexandria Div., 81-01504-A, Roy B. Zimmerman, 423 North Alfred St., Alexandria, Va. 22313-0185,
for debtor. Stuart M. Fischbein, Department of Justice,
Washington, D.C. 20530, for U.S. ORDER BOSTETTER, Bankruptcy Judge: This cause came on for trial before this Court on Tuesday, The debtor's plan under Chapter 13 was confirmed by this Court on
March 23, 1982. The claim of the Internal Revenue Service for
income taxes for the years 1979, 1980 and 1981 were provided for
by the Plan. After confirmation, the Internal Revenue Service
levied upon the debtor's residence and his savings and checking
accounts for assessments against him of income taxes for the years
1982 and 1983. The Internal Revenue Service also filed a notice of
the tax liens arising from those assessments. The debtor has moved
to hold the Internal Revenue Service in contempt for those acts
"for failure to comply with the automatic stay entered by
this Court on December 29, 1981, pursuant to the provisions of Section
362 and Section
1305 of the Bankruptcy Code." (Order to Show
Cause.) Simultaneously the debtor has filed a claim for the 1982
and 1983 tax liabilities and has moved to amend his plan to
provide for those liabilities. The debtor argues that under 11 U.S.C. Sections
1305(a) and 501(c) he should be permitted to file a
claim on behalf of the Internal Revenue Service for the
post-petition taxes and should be permitted under 11 U.S.C.
Section 1329 to amend his plan to provide for those taxes; that in
any event the taxes are to be treated as pre-petition claims by 11
U.S.C. Section 502(i); and that he should not "be forced by
the collection actions of a governmental agency to be unable to
perform under the original plan" when he can schedule the new
tax debt "to pay it all over time in addition to the other
creditors" (Memorandum of Points and Authorities at 7) within
the period of time contemplated by the original plan (Id. at 6). The Court concludes that the Internal Revenue Service has filed no
proof of claim with regard to debtor's post-petition 1982 and 1983
income tax liabilities; that neither 11 U.S.C., Sec.
1305(a) , nor 11 U.S.C., Sec.
501(c) permits the debtor in these circumstances to
file a proof of claim for a post-petition claim on behalf of a
creditor who does not file one; that 11 U.S.C., Sec. 502(i) does
not allow for the treatment of post-petition priority tax claims
under these circumstances as if they were pre-petition claims; and
that 11 U.S.C. Section 1329 does not permit amendment of the plan
in these circumstances. Finally, the Court concludes that upon confirmation of debtor's
Chapter 13 Plan, all property revested in the debtor and the
estate was terminated. 11 U.S.C. Section 1327(b); In re Stark,
8 B.R. 323 (Bkrtcy. N.D. Ohio 1981). Thus, upon confirmation of
the Plan, the automatic stay of 11 U.S.C., Sec.
362 terminated against collection of debtor's
post-petition 1982 and 1983 income tax liabilities. In re
Westholt Manufacturing, Inc., 20 B.R. 368 (Bkrtcy. Kansas
1982), aff'd sub. nom. United States v. Redmond, 36 B.R.
932 (D. Kansas 1984); In re Mason, 12 B.C.D. 527 (Bkrtcy.
Oregon 1984). Accordingly, IT IS ORDERED that the proof of claim filed by debtor
with regard to his post-petition income tax liabilities for 1982
and 1983 income tax liabilities be stricken. Further, IT IS ORDERED that debtor's application to amend his
supplemental plan to include debtor's post-petition income tax
liabilities for 1982 and 1983 be denied pursuant to 11 U.S.C., Sections
1305 and 1329. Finally, IT IS ORDERED that debtor's application to show cause why
the Internal Revenue Service should not be held in contempt be
dismisse [72-2 USTC ¶9574]In the Matter of Meter Maid Industries,
Inc., Bankrupt Debtor and B & G Limited, Appellant v. Edward
H. Levin, Trustee, Appellee (CA-5), U. S. Court of Appeals, 5th Circuit, No.
72-1144, Summary Calendar *,
462 F2d 436, Robert R. Before WISDOM, GODBOLD and RONEY, Circuit Judges. GODBOLD, Circuit Judge: B & G Limited petitioned the referee in bankruptcy for
reclamation of shares of capital stock and other papers from
Edward H. Levin, trustee for the bankrupt Meter Maid Industries,
Inc. On August 5, 1971 the referee entered an order granting the
reclamation and directing that Levin turn over the property in
issue to B & G within ten days. On August 10 the Internal
Revenue Service served a notice of levy on the trustee advising
him in effect that property in his possession owing to Stuart
Greenfield, the sole shareholder of B & G Limited, or his
wife, must be delivered to the B & G contends that the property is not subject to levy of the In Quakertown the The United States here was simply exercising its
right of self-help expressly granted to it by the same authority
which created the Bankruptcy Court and authorized Chapter XI
proceedings. . . . [T]he present case is not one in which there is
a judicial attachment issuing out of some other court, seeking to
seize property in the possession of the Bankruptcy Court. None of
the evils of collision between the judicial process of one court
and another court's authority over the funds can arise here. Id. at 97-98. Consequently it held the levy valid and
enforceable. We perceive no distinction between Quakertown
and the case at hand and therefore find the doctrine of custodia
legis inapplicable as a bar to the levy. Relying on §39(c) of the Bankruptcy Act, 11 U. S. C., §67(c), B
& G maintains alternatively that pursuant to the referee's
August 5 order it is entitled to possession of the papers held by
the trustee because the referee lacked jurisdiction to enter a
further order regarding that property. Section 39(c) provides that
an order of a referee shall become final after ten days unless a
person aggrieved by it shall petition for review within the ten
day period or any extension thereof. We have found §39(c)
"clearly inelastic in its command that some paper (either a
petition for review itself or a petition to extend the filing time
for a petition for review) be filed within ten days of the
issuance of the order complained of." St. Regis Paper Co.
v. Jackson, 369 F. 2d 136, 139 (5th Cir. 1966). Since no
qualifying paper was timely, filed, B & G's argument runs, the
referee's August 5 order became final and his later order
concerning the same subject matter was a nullity for lack of
jurisdictional authority. Two courts have agreed with appellant's
position. See In re Beverly Hills Security Investments, 233
F. Supp. 737 (D. Ariz. 1964); In re P. R. R. R. & Transport
Co., 201 F. Supp. 44 (D. P. R. 1962). We do not quibble with out previously expressed view of the
unyielding nature of the ten-day limit imposed by §39(c), but we
would have to strain beyond our powers to hear any clarion call
for the statute's applicability in this situation. Section 39(c)
speaks of time limits for review "by a judge" for
purposes of determining when a referee's order is final and such
review thus precluded. Apart from review by a judge, a referee has
the power to reconsider his orders. "That power is of course
limited in duration when there are terms of court, but in
bankruptcy there are none." In re Pottach Bros. Co.,
79 F. 2d 613, 616 (2d Cir. 1935). See Mavity v. Associates
Discount Corp., 320 F. 2d 133 (5th Cir. 1963), cert.
denied, 376 U. S. 920, 11 L. Ed. 2d 615 (1964); 2 Collier
on Bankruptcy, ¶38.09[3], 39.17 (14th ed. 1971). We noted the
difference, in terms of §39(c), between review by a judge and
reconsideration by a referee in St. Regis Paper Co. v. Jackson,
supra, at 138 n. 3. There we distinguished Smith v. Hill,
317 F. 2d 539 (9th Cir. 1963), in which a referee's
reconsideration of an order entered more than ten days prior was
found within his power, by pointing out that "[s]ection 39c
treats specifically only the question of vertical review by a
district court, and not horizontal reconsideration by a
referee." The limited sphere of operation of §39(c) was more sharply
circumscribed in In re Brendan Reilly Associates, Inc., 372
F. 2d 235 (2d Cir. 1967), where it was said: Some district courts have reasoned that the 1960 amendments to §39(c),
which provided that extensions must be applied for within ten days
and that "Unless the person aggrieved shall petition for
review of such order within such ten-day period, or any extension
thereof, the order of the referee shall become final", . . .
abrogated the referee's discretion to reconsider his orders. In
re Beverly Hills Security Investments, supra n. 4; In re P.
R. R. R. and Transport Co., 201 F. Supp. 44 (D. P. R. 1962).
This reasoning appears unsound because §39(c) does not treat the
question of reconsideration by the referee but rather the very
different matter of review by the district judge. Surely, the
"ancient and elementary power to reconsider" orders (In
re Pottasch Bros., Inc., supra, 79 F. 2d at 616), was not
nullified by the 1960 amendments. See In re Watkins, 197 F.
Supp. 500 (W. D. Va. 1961), explicitly rejecting the abrogation
argument. See also Smith v. Hill, supra, which does not
explicitly deal with the issue but holding that a referee has
power to reconsider his orders, either ignores or implicitly
rejects the argument. Id. at 239. We view the referee's second order modifying his August 5 decree as
a reconsideration by the referee and not as a "review"
within the contemplation of §39(c). That statute imposes no
limitations on the referee's traditional power to reconsider his
orders. The later order therefore remains standing as a valid
exercise of the referee's authority. AFFIRMED. *
Rule 18, 5th Cir.; see Isbell Enterprises, Inc. v. Citizens
Casualty Co. of New York, et al., 5th Cir. 1970, 431 F. 2d
409, Part I. [66-2 USTC ¶9655]In the Matter of Quakertown Shopping
Center, Inc., Bankrupt v. United States of America, Appellant (CA-3), U. S. Court of Appeals, 3rd Circuit, No.
15682, 366 F2d 95, 9/13/66, Reversing and remanding District
Court, 65-2 USTC ¶9681 M. E. Maurer, Wexler, Mulder & Weisman, One E. Penn. Sq.,
Juniper & Market Sts., Philadelphia, Pa., for appellee. Howard
M. Koff, Department of Justice, Washington, D. C. 20530, for
appellant. Before SMITH and FREEDMAN, Circuit Judges and MILLER, District
Judge. Opinion of the Court FREEDMAN, Circuit Judge: The question presented is whether the District Director of Internal
Revenue may validly serve notice of levy under the Internal
Revenue Code of 1954, §§ 6331-6332, on a Chapter XI receiver to
attach the claim of a taxpayer against its debtor in receivership
without the prior permission of the Bankruptcy Court. [Facts] On [District Court's Holding] Before the referee and in the district court the government claimed
that the levy was authorized by §301.6331-1(a)(3) of the Treasury
Regulations adopted under the 1954 Code. This provision recognizes
that during bankruptcy or receivership the assets of a taxpayer
generally are under the control of the court and that taxes cannot
be collected by levy upon assets in the custody of the court. It
declares that an exception exists where the proceeding has
progressed to such a point that the levy would not interfere with
the work of the court or where the court grants permission to
levy. 2
The referee adopted the government's contention and found that the
Quakertown proceeding had progressed to a point where the service
of notice of the levy would not interfere with the administration
and liquidation of the estate or the work of the court or the
receiver and trustee. The referee therefore awarded the full
amount of the tax claim with interest to the District Director,
and the remainder of the dividend was ordered to be paid to the
estate of Electricon, which had itself filed a Chapter XI petition
(later converted into a bankruptcy) on On review the learned district judge rejected the government's view
and held that the levy was unauthorized without the prior
permission of the Bankruptcy Court because the funds were in
custodia legis. 3
In re Quakertown Shopping Center, Inc. [65-2 USTC ¶9681],
248 F. Supp. 749 (E. D. Pa. 1965). On appeal the government has wisely abandoned reliance on the
Regulation and its position now is far different from that urged
on the district judge. In our view the Regulation applies only to a levy made upon a
taxpayer in bankruptcy or receivership and not to one made by way
of an attachment against an estate which is indebted to the
taxpayer. With the Regulation out of the case the question is whether the
levy is forbidden by the Bankruptcy Act or by the general doctrine
that property in custodia legis is not attachable. [Government Lien Rights] Section 6321 of the Internal Revenue Code of 1954 confers a lien in
favor of the United States upon all property and rights to
property belonging to any person liable for any tax who neglects
to pay it after demand. Section 6331 of the Code authorizes the
government to collect the tax by levy upon all property and rights
to property belonging to the taxpayer. The right to levy includes
the power to distrain and seize "by any means", and the
government is authorized to seize and sell the property or rights
to property of the taxpayer. Section 6332(a) of the Code requires
that any person in possession of property or rights to property
subject to levy upon which a levy has been made shall on demand of
the government surrender such property and if obligated with
respect thereto shall discharge such obligation to the government.
4
Section 6332(b) of the Code provides that any person who fails or
refuses to comply with the levy shall be liable personally to the
United States for the value of property, but not exceeding the
amount of the government's claim with costs and interest. "The right of the United States to collect its internal
revenue by summary administrative proceedings", said Mr.
Justice Brandeis, "has long been settled." Phillips
v. Commissioner [2 USTC ¶743], 283 U. S. 589, 595 (1931).
More recently Chief Judge Biggs in United States v. Sullivan
[64-1 USTC ¶9392], 333 F. 2d 100, 116 (3 Cir. 1964) described
this summary administrative remedy of self-help which is derived
from the sovereign power of taxation. "Levy is a summary,
non-judicial process, a method of self-help authorized by statute
which provides the Commissioner with a prompt and convenient
method for satisfying delinquent tax claims. [Citing authorities.]
Statutory levy is substantially broader in scope than anything
known to the common law, and it is applicable to intangible as
well as to tangible property. [Citing authority.] When validly
invoked, it effects a seizure of the delinquent's property
tantamount to a transferal of ownership. [Citing authority.] The
very nature and breadth of this somewhat drastic administrative
process gives continued emphasis to its raison d'etre and serves
to underscore the fundamental truth that 'taxes are the lifeblood
of government, and their prompt and certain availability an
imperious need.' Bull v. United States [35-1 USTC ¶9346],
. . . 295 U. S. [247], at 259. . . ." The United States here was simply exercising its right of self-help
expressly granted to it by the same authority which created the
Bankruptcy Court and authorized Chapter XI proceedings. The
doctrine which bars attachment of property in custodia legis is
based on the desirability of avoiding a clash between judicial
jurisdictions which would result from any attempt to use the
process of one to seize assets in the control of another judicial
authority. Such collisions are especially pronounced where the
judicial departments belong to different sovereignties, as in the
case of garnishment process issuing out of a state court to attach
property in the hands of a receiver of the federal Bankruptcy
Court. But the present case is not one in which there is a
judicial attachment issuing out of some other court, seeking to
seize property in the possession of the Bankruptcy Court. None of
the evils of collision between the judicial process of one court
and another court's authority over the funds can arise here. In
the absence of the reason for the rule, the rule itself can have
no application. [No Invasion of Bankruptcy Jurisdiction] In making a levy such as this the United States becomes in effect
the involuntary assignee of the creditor. It does not invade the
jurisdiction of the Bankruptcy Court or interfere with the
administration of the estate. It merely serves notice on the
receiver or trustee that whatever funds otherwise would be paid to
the taxpayer shall instead be paid to the government as the
distrainor, to the extent of the amount due it. We are here on
familiar ground. A creditor may voluntarily transfer his claim
against a bankrupt estate without obtaining the approval of the
Bankruptcy Court. 3 Collier on Bankruptcy (14th ed. 1966),
§57.06. We deem the levy to be similar in effect to an
assignment, albeit involuntary on the part of the creditor of the
bankrupt. In another sense, since the assignment constitutes a
claim to intangible property which is not immediately reducible to
possession it also has the characteristic of a lien. 5
The analogy to an assignment is not destroyed because General
Order 21 provides for notice by the referee to the original
claimant, and affords him an opportunity to object within ten
days, since there is no need for such provision in the case of
seizure by the government. Jeopardy assessments illustrate the
power of the government to seize property in satisfaction of tax
liability which it has assessed, long before judicial proceedings
will determine on the taxpayer's application whether the
government's seizure of his property was justified. See Phillips
v. Commissioner, supra; Quinn v. Hook [64-2 USTC ¶9609], 231
F. Supp. 718 (E. D. Pa. 1964), affirmed [65-1 USTC ¶9273] 341 F.
2d 920 (3 Cir. 1965); 9 Mertens, Law of Federal Income Taxation
(1965 Revision), §§ 49.144, et seq. We hold, therefore, that the levy was valid and enforceable and
that the amount of the assessment was payable to the United States
as the creditor of Electricon out of the Quakertown estate. [Interest Stops Upon Bankruptcy] This brings us to the question of interest on the government's
claim. The levy seized Electricon's claim against Quakertown to
the extent of the government's claim of $15,334.03 "together
with all additions provided by law". It is clear that the government would not be entitled to post
bankruptcy interest on its claim as a creditor of either
Quakertown or Electricon. Nicholas v. United States, 384 U.
S. 678, 682 (1966); New York v. Saper [49-1 USTC ¶9198],
336 U. S. 328 (1949). We believe it would be unjustified to
consider that the levy has the effect of carving out of the
Quakertown bankruptcy the government's claim with interest until
the date of payment so long as it does not exceed the full amount
of the dividend payable to Electricon. There is symmetry in such a
view, based as it is on the theory that the levy transferred
immediately to the government the assets of Quakertown to that
extent. The theory is useful by way of analogy in indicating the
superior right which the levy gives the government, but it cannot
be pressed too far. The property is intangible and is part of the
assets administered by the receiver. In effect the government is
an assignee or lienor of Electricon as creditor of Quakertown, and
as such is entitled to be paid out of the dividends which
Electricon would receive. But the amount which the government is
entitled to be paid as assignee or lienor is bounded by the
doctrine that Electricon's bankruptcy stops the running of
interest on the government's tax claim against it, even as against
such a claimant. 6
Taxation is an eminently practical matter. The theoretical
assignment to the government or its lien upon Electricon's claim
against Quakertown and its theoretical right to the intangible
property, while fully justifying its seizure, is not enough to
destroy the well-settled principle that interest on the
government's tax claim ceases to run on the taxpayer's bankruptcy. The government, therefore, is entitled to the payment out of the
dividend due Electricon of its claim of $15,334.03 with interest
thereon only to The judgment of the district court will be reversed and the cause
remanded for further proceedings in accordance with this opinion. 1
It was originally filed in the amount of $139,669.26. 2
"During a bankruptcy proceeding in either a Federal or State
Court the assets of the taxpayer are in general under control of
the court in which such proceeding is pending. Taxes cannot be
collected by levy upon assets in the custody of a court, whether
or not such custody is incident to a bankruptcy or receivership
proceeding, except where the proceeding has progressed to such a
point that the levy would not interfere with the work of the court
or where the court grants permission to levy. . . ." 3
The district judge was not called upon to decide whether the
Bankruptcy Court has power to permit such attachment. 4
An exception stated in the Act is not here relevant. 5
See United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d
100, 116 (3 Cir. 1964); Rosenblum v. United States [62-1
USTC ¶9384], 300 F. 2d 843, 844-45 (1 Cir. 1962); In the
Matter of Cherry Valley Homes, Inc. [58-2 USTC ¶9581], 255 F.
2d 706, 707 (3 Cir. 1958), cert. denied, sub nom. Dubois v.
United States, 358 U. S. 864; Freeman v. Mayer [58-1
USTC ¶9351], 253 F. 2d 295 (3 Cir. 1958); United States v.
Eiland [55-1 USTC ¶9487], 223 F. 2d 118, 121 (4 Cir. 1955). 6
United States v. Bass [59-2 USTC ¶9719], 271 F. 2d 129 (9
Cir. 1959); United States v. Harrington [59-2 USTC ¶9629],
269 F. 2d 719, 722 (4 Cir. 1959). 65-1 USTC ¶9138]In the Matter of San Fernando Valley
Restaurants, Inc., etc., Bankrupt U. S. District Court, Dist. Calif., Central Div.,
In Bankruptcy No. 103,858, 10/6/64 Thomas R. Sheridan, Francis C. Whelan, United States Attorneys,
Loyal E. Keir, James S. Bay, Assistant United States Attorneys,
808 Federal Bldg., Los Angeles, Calif. 90012, for U. S. Norman E.
Stevens, Buchalter, Nemer, Fields & Savitch, Fifth Floor,
Bankers Bldg., 629 S. Hill St., Los Angeles, Calif. 90012, for
Trustee in Bankruptcy. Memorandum on Review WESTOVER, District Judge: This matter comes before the Court upon a Petition for Review.
There is no dispute as to the facts. San Fernando Valley Restaurants, Inc., Bankrupt above named,
assigned certain Diners' Club, Inc. charges to J. H. Pingree
and/or J. M. Landeen, as Trustees for Continental Casualty Co.,
the total amount of the assigned funds being $6,000.27. Heretofore
this Court has held that, as the parties had not complied with
California Civil Code, §§ 3017 through 3029, relating to
assignments of accounts receivable, the assignments were invalid
as to creditors of the Bankrupt. Although the assignments had been made and received, Diners' Club,
Inc. had not transferred the money to the assignees; and upon the
Court's ruling anent the assignments' invalidity, the funds were
delivered to the Trustee in Bankruptcy. The money then was claimed
by the United States of America. The Trustee filed in the bankruptcy court an application for
determination of the right of the United States of America in and
to the sum of $6,000.27 received from Diners' Club, Inc. The
Referee held that the government was not entitled to the money;
from the Referee's Order this petition for review was filed. In its Memorandum of Points and Authorities the government states: "There is little doubt that the Trustee in
Bankruptcy herein would prevail were it not for the fact that the
United States served its Notice of Levy, Form 668-A, prior to
bankruptcy." [Assessment] The records and files disclose that on [Assignment of Accounts Receivable] On [Filing of Tax Lien] On [Service of Levy] And on On The government claims the funds in dispute on the theory that with
the serving of Notice of Levy it came into possession of said
funds and, consequently, the Trustee in Bankruptcy is not entitled
thereto. It appears from the record that the government has done everything
required of it to protect its interest. The assessments were duly
and regularly made; notice was filed with the County Recorder and
a levy made upon Diners' Club, Inc. prior to taxpayer's
bankruptcy. Diners' Club, Inc. had possession of the funds due
Bankrupt when the levy was filed by the government. There was nothing more the government could not to protect its
rights, except bring an action against Diners' Club, Inc.,
requiring it to pay said funds to the government. Upon
determination of the assignments' invalidity hereinbefore
described the money was transferred by Diners' Club, Inc. to the
Trustee who is now in possession thereof. [Applicable Case Law] The United States Court of Appeals for the Ninth Circuit, in Division
of Labor Law Enforcement v. United States [62-1 USTC ¶9389],
301 F. 2d 82 (a case involving "possession" of an
alcoholic beverage license by the District Director through tax
levy and which cites United States v. Eiland, 223 F. 2d
118) says, at page 84: "The Director, in "* * * "* * *. Eiland involved a levy upon a debt
owing to the bankrupt by serving a notice upon the debtor, but the
case is closely analogous to the case at bar. As was noted in that
case the District Director did all he could." In the case at bar the collection officer did not obtain manual
possession of the money in the hands of Diners' Club, Inc. But in
all other respects this case and Division of Labor Law
Enforcement v. United States, supra, are similar. United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118, arises
out of a tax levy filed by the government upon bankrupt's debtor,
before bankruptcy. The Court said, at page 122: "* * *. When bankruptcy occurs after the
levy and notice have been served upon a debtor of the bankrupt,
the trustee in bankruptcy cannot interfere with the rights of the
United States thereby perfected before bankruptcy." In the case now before the Court the levy was made and notice was
served upon the debtor before the filing of the petition in
bankruptcy. United States v. Manufacturers National Bank
[61-2 USTC ¶9701], 198 F. Supp. 157, is similar to the case at
bar. The District Director of Internal Revenue had made an
assessment against the taxpayer for excise taxes unpaid. The
following day a Notice of Lien was filed in the Office of of the
County Clerk. On the same day the District Director served Notice
of Levy on the defendant for collection of the tax liability.
Defendant refused to pay the money to the government. When an
action was filed by the government to enforce payment, the Court
granted a motion for summary judgment, holding that by service of
Notice of Levy the government came into possession of the funds in
the hands of defendant. In United States of America v. Arms Textile Manufacturing
Company, 200 F. Supp. 102, the Court says: "* * *. The sole issue is whether the levy
which was concededly made was sufficient to entitle the government
to the funds without further action thereon. It is my view that
the United States, in dealing with an intangible, has done
everything that was necessary and possible under its Notice of
Levy. I am constrained to adopt the holding of United States v.
Eiland, 4 Cir. [55-1 USTC ¶9487], 223 F. 2d 118, for the
purpose of acting on this petition and rule that the notice served
on the debtor did, in fact, take into possession the funds sought.
Such precluded any interest or right the petitioner [trustee in
bankruptcy] could have in the pending action." In the case of Youngstown S. & T. Co. v.
Patterson-Emerson-Comstock of Ind. [64-1 USTC ¶9128], 227 F.
Supp. 208 at 217 the Court states: "Therefore, since the United States levied
on the property in the hands of Youngstown Sheet and Tube Co. to
enforce the collection of taxes prior to the appointment of a
receiver, the debt is reduced to the possession of the United
States * * *." The Court said, in Rosenblum, Trustee v. United States [62-1
USTC ¶9384], 300 F. 2d 843, at page 844: "The decisive issue is a narrow one. It is
whether the government, by simply serving the notices of levy
authorized by §6331 of Title 26 U. S. C. upon debtors of a
bankrupt, reduces its claims against the debtors to 'possession'
thereby preventing the trustee in bankruptcy from subordinating
the government's claims against the debtors to the payment of the
expenses of administering the bankrupt's estate and claims against
the bankrupt for wages. "The trustee, in support of his contention
that mere notice of levy is not enough but that in addition
thereto a 'warrant of distraint' must also be served upon a debtor
in order to reduce the government's claim against the debtor to
'possession', relies primarily upon two cases decided under §3692
of the Internal Revenue Code of 1939, 26 U. S. C. §3692, United
States v. O'Dell [47-1 USTC ¶9190], 160 F. 2d 304 (C. A. 6,
1947), and Givan v. Cripe [51-1 USTC ¶9169], 187 F. 2d 225
(C. A. 7, 1951). These cases, however, do not stand unquestioned.
The late Chief Judge Parket, writing for his court in United
States v. Eiland, supra at 121, disagreed with the O'Dell
and Givan cases relied upon the trustees and in a carefully
reasoned opinion held that it was not necessary to serve a
'warrant of distraint' upon a debtor in order to reduce the
government's claim to 'possession;' that under the 1939 Code
notice of levy alone was enough to accomplish that end. * *
*." [Conclusions] It is the opinion of this Court that inasmuch as the government had
done everything possible to secure the funds prior to bankruptcy,
including service of the notice of levy, the claim of the United
States of America to the funds involved is superior to the claim
of the trustee in bankruptcy. The Court's order will be entered accordingly, and petitioner for
Review is hereby instructed to prepare appropriate findings of
fact, conclusions of law, and judgment in conformity with this
memorandum. Findings of Fact I. On or about II. On or about IV. On or about V. On or about VI. On VIII. On IX. On X. On XI. On XII. On XIII. On XIV. On XV. On XVI. The Trustee in Bankruptcy is in possession of the sum of
$6,000.27 which represents the amount in controversy herein. XVII. On XVIII. On XIX. On XX. On XXI. Any finding of fact deemed as or properly constituting a
conclusion of law is hereby adopted as a conclusion of law. Conclusions of Law 1. This Court has jurisdiction of the within controversy. 2. The assignments of the accounts receivable by the Bankrupt to
its assignees were at all times after the date of the filing of
the petition in bankruptcy voidable by the Trustee herein. 3. Said assignments of accounts receivable were invalid as to
creditors, including the United States of America, since the
parties to the assignments failed to comply with Sections 3017
through 3029 of the California Civil Code. Pingree v. Sulmeyer,
315 F. 2d 422 (9th Cir. 1963); see People v. Biscailuz, 107
C. A. 2d 71, 236 P. 2d 591 (1951). 4. The tax liens in favor of the United States of America arose at
such time as the taxes were assessed, prior to the filing herein
of the petition in bankruptcy, Sections 6321 and 6322 of the
Internal Revenue Code of 1954 (Title 26 U. S. C. Sections 6321 and
6322). 5. The United States of America, by making its assessment, filing
notice of its lien with the recording office in the county where
the debt of Diners' was situated, and serving upon Diners' a
notice of levy, had performed prior to the institution of the
bankruptcy proceedings every act required of it in order to
protect its interest. United States v. Eiland [55-1 USTC ¶9487],
223 F. 2d 118, 122 (4th Cir. 1955). 6. Since the notice of levy was served upon Diners' prior to the
institution of the bankruptcy proceedings, the rights of the
Trustee in Bankruptcy are subordinate to the perfected lien
interest in favor of the United States. United States v.
Eiland, supra; Division of Labor Law Enforcement v. United States
[62-1 USTC ¶9389], 301 F. 2d 82 (9th Cir. 1962); United States
v. Manufacturers National Bank [61-2 USTC ¶9701], 198 F.
Supp. 157 (N. D. N. Y. 1961); United States v. Arms Textile
Manufacturing Company, 200 F. Supp. 102 (D. N. H. 1961); Youngstown
Sheet & Tube Co. v. Patterson-Emerson-Comstock of Indiana
[64-1 USTC ¶9128], 227 F. Supp. 208, 217 (N. D. Ind. 1963); Rosenblum,
Trustee v. United States [62-1 USTC ¶9384], 300 F. 2d 843,
844 (1st Cir. 1962). 7. As the United States of America acquired a perfected lien
interest in the subject accounts receivable prior to the filing of
the petition in bankruptcy, the United States must prevail as
against any claim by the Trustee in Bankruptcy. 8. Any conclusion of law deemed as or properly constituting a
finding of fact is hereby adopted as a finding of fact. Judgment IT IS HEREBY ORDERED, ADJUDGED, 1. The order filed by the Referee in Bankruptcy on 2. The United States of America has a perfected lien interest in
and to the sum of $6,000.27 received by the Trustee in Bankruptcy
from The Diners' Club, Inc., which interest is superior to any
claim by the said Trustee to said sum; and 3. The Trustee in Bankruptcy is directed to pay over to the United
States of America the sum of $6,000.27 now in the Trustee's
possession. [62-1 USTC ¶9389]Division of Labor Law Enforcement,
Department of Industrial Relations, State of California, Appellant
v. United States of America, Appellee (CA-9), U. S. Court of Appeals, 9th Circuit, No.
17,541, 301 F2d 82, 4/4/62, Affirming unreported District Court
order Pauline Nightingale, State Bldg., Milford A. Maron, 1766 Stearns
Drive, Samuel Berman, Effie Sparling, Los Angeles, Calif., for
appellant. Louis F. Oberdorfer, Assistant Attorney General, Lee A.
Jackson, Joseph Kovner, Thomas H. McPeters, Department of Justice,
Washington 25, D. C., Francis C. Whelan, United States Attorney,
Lillian W. Wyshak, Assistant United States Attorney, Los Angeles,
Calif., for appellee. Before BARNES and DUNIWAY, Circuit Judges, and DAVIS, District
Judge. DUNIWAY, Circuit Judge: Acting on behalf of certain wage claimants, the Division of Labor
Law Enforcement of the State of California appeals from a decision
of the District Court affirming that of a Referee in Bankruptcy.
We have jurisdiction under 11 U. S. C. §47. The sole question presented is whether the United States had
acquired "possession" of a liquor license, issued by the
State of California to the bankrupt, before the bankruptcy. We
hold that it had, and are therefore affirming. The bankrupt's property included a General On-Sale Liquor License
issued by the State of California. The United States had acquired
a tax lien "upon all property and rights to property, whether
real or personal, belonging to [the bankrupt]" (See 26 U. S.
C. §6321). The District Director of Internal Revenue levied upon
the liquor license, pursuant to 26 U. S. C. §6331, which
provides: "(a) . . . it shall be lawful . . . to
collect such tax . . . by levy upon all property and rights to
property, (except such property as is exempt under section 6334)
belonging to such person or on which there is a lien provided in
this chapter . . . "(b) The term 'levy' . . . includes the
power of distraint and seizure by any means. In any case in which
the Secretary . . . may levy upon property or rights to property,
he may seize and sell such property or rights to property (whether
real or personal, tangible or intangible)." The Director, on [Bankruptcy of Taxpayer] On "(c) Where not enforced by sale before the
filing of a petition . . . (1) though valid against the trustee
under subdivision (b) of this section, statutory liens, including
liens for taxes or debts owing to the United States . . . on
personal property not accompanied by possession of such property,
. . . shall be postponed in payment to the debts specified in
clauses (1) and (2) of subdivision (a) of section 104 of this
title . . .." The debts specified in clause (2) of §64(a) (11
U. S. C. §104(d)) include the wage claims here involved. Thus,
the wage claims come ahead of the tax liens, unless the latter
were "accompanied by possession". Both parties are now agreed that a California liquor license is
"property" subject to a tax lien under 26 U. S. C. §6321.
2 Appellant's sole contention is that the District Director did not,
by his levy, get "possession" of the license. The claim
is that the license is intangible, separate from and not
sufficiently represented by the certificate, and not capable of
physical seizure or delivery. We agree that the certificate is not
the license, and it may be that mere seizure of the certificate
would not be enough. But we hold that what was done here was
enough. 3
Absence of the certificate, which must be posted "in a
conspicuous place upon the licensed premises" (Cal. Bus.
& Prof. Code §24046), would tend to warn a prospective
purchaser that the licensee's title might not be good, just as
lack of physical possession of an item of tangible personal
property would warn a prospective purchaser of that property. Add
to this, notice to the owner, which would cause an honest man 4
to warn anyone desiring to buy from him that the United States had
levied upon the license. Add also, notice to the Department of
Alcoholic Beverage Control, which must consent to the transfer of
any license (Cal. Bus. & Prof. Code §24070). We think that
these three things, together, are sufficient to be equivalent to
"possession" of this intangible item of property. We
need not consider what the result would have been were any one of
them lacking. Appellant has not suggested that anything more could have been
done. It suggests an action in a United States District Court,
under 26 U. S. C. §7403, to enforce the lien and subject the
property to the payment of the tax. Under that section, a receiver
could also be appointed. But what more could the receiver do, in
such a case, than the District Director did here? He could serve
notices, or a copy of a court order or injunction upon the
licensee and the Department, but these things, while they might
make it easier to control the actions of the licensee, and perhaps
of the Department, would not, in our opinion, give the receiver
any greater "possession" than the District Director
obtained by his levy. The availability of the procedure authorized
by §7403 does not make it exclusive. 5 It his been held that other types of intangible personal property,
not capable of manual delivery, can be levied upon, under 26 U. S.
C. §6331, and that the tax lien, when the levy is made, then
becomes one "accompanied by possession" under 11 U. S.
C. §107(c). 6
Eiland involved a levy upon a debt owing to the bankrupt by
serving a notice upon the debtor, but the case is closely
analogous to the case at bar. As was noted in that case, the
District Director did all he could. While it is clear to us that the sufficiency of a levy made by a
federal officer under a statute of the United States is a matter
of federal law, not state law, 7
our views are strengthened by the fact that, at the time in
question, a levy on the license under state law would have been by
a procedure quite similar. 8 What the District Director did here was sufficient to satisfy the
purpose of the requirements of the Bankruptcy Act (11 U. S. C. §107(c),
supra) as stated in Goggin v. Division of Labor Law
Enforcement, 1949, 336 U. S. 118, 127-29. The order appealed
from is correct. Affirmed. 1
The body of each notice reads, in part: "Persuant [sic] to
authority contained in Section 6331, Internal Revenue Code of
1954, and by virtue of a levy placed in my hands, for execution,
by the District Director of Internal Revenue, Los Angeles,
California, I have this date levied upon and seized" the
license, which was described by the name of licensee and its
number. 2
See: Cal. Bus. & Prof. Code §24070; Mollis v.
Jiffy-Stitcher Co., 1954, 125 Cal. App. 2d 236, 270 P. 2d 25; Golden
v. State of California, 1955, 133 Cal. App. 2d 640, 285 p. 2d
49. 3
We do not mean that the Director obtained "possession"
in the layman's sense, sometimes embodied in the idea of
"physical possession". The law is accustomed to fitting
words to the facts to which they must be applied, and must do so
even where, as here, it is probable that the lawmakers never
envisaged those facts. We think the word should be given a broad
meaning--the exercise of control, to the exclusion of others. We
think that this is compatible with the intent (if any) of the
Congress. The statute refers to intangible property, which is now
one of the major forms of wealth in this country. Obviously, such
property cannot be physically seized. 4
There are, no doubt, many dishonest men, but our legal system, of
necessity, assumes that people will act in a lawful and honest
manner, even though it also prescribes various sanctions against
those who do not. 5
United States v. Eiland, 4 Cir., 1955, [55-1 USTC ¶9487]
223 F. 2d 118, 121; cf. Everts v. Will S. Fawcett Co.,
1937, 24 Cal. App. 2d 213, 217, 74 P. 2d 815. 6
United States v. Eiland, 4 Cir., 1955, [55-1 USTC ¶9487]
223 F. 2d 118, 123-4; cf. Freeman v. Mayer, 3 Cir., 1958,
[58-1 USTC ¶9351] 253 F. 2d 295, 298. 7
Hoye v. United States, 9 Cir., 1960, [60-1 USTC ¶9365] 277
F. 2d 116, 119. 8
See Everts v. Will S. Fawcett Co., 1937, 24 Cal. App. 2d
213, 74 P. 2d 815; Meserve v. Superior Court, 1934, 2d Cal.
App. 2d 468, 38 P. 2d 453, and the California Code sections there
cited and discussed. (But see Sunset Realty Co. v. Dadmun,
1939, 32 Cal. App. 2d 24, 88 P. 2d 947; Turner v. Donovan,
1944, 64 Cal. App. 2d 375, 148 P. 2d 912, dealing with
garnishments.) Levy upon intangible personal property, not capable
of manual delivery, is made by "leaving with the person[s] .
. . having in his possession, or under his control, such . . .
personal property, a copy of the writ, . . . and . . . a notice
that . . . the . . . personal property in his possession, or under
his control . . . [is] attached." (Cal. Code Civ. Proc. §542
subd. 7) Such a levy supports a sale under execution. The law as
to levies upon causes of action, involved in the cited cases, has
since been changed (Cal. Code Civ. Proc. §688), and a liquor
license is no longer subject to execution under California law
(ibid. as amended in 1959), but this does not change the general
procedure for levying upon intangibles. We need not consider
whether the District Director could make a comparable levy upon a
California liquor license today, in spite of the 1959 amendment to
Cal. Code Civ. Proc. §688. 83-1 USTC ¶9422]In re: Internal Revenue Service Liabilities
and Refunds in Chapter 13 Proceedings U. S. District Court, Mid. Dist. Tenn., Case
#3:83-X-23, MORTON, Chief Judge: This matter is before the court for reconsideration of an agreed
order styled "Agreed Order Granting Relief from Automatic
Stay in Chapter 13 Proceedings" submitted by the Chapter 13
trustee and the Internal Revenue Service (hereinafter " The order in question was entered into between the Chapter 13
trustee and the The procedural mechanism by which the [Conflict with 11 This order must be vacated for several reasons. Initially, the
order is in conflict with 11 U. S. C. §362(d) which specifies in
detail the procedure to be followed in all requests for relief
from the automatic stay imposed by 11 U. S. C. §362(a). Section
362(d) states that the court shall grant relief from the automatic
stay only upon "request of a party in interest and after
notice and a hearing." 11 U. S. C. A. §362(d) (West 1979). 3
Compliance with these basic prerequisites is indispensable in
assuring that all parties in interest have an opportunity to be
heard. See generally In the Matter of Heyward, 15 Bankr.
629, 632 (Bankr. E. D. N. Y. 1981). As the United States Supreme
Court has observed, "[a]n elementary and fundamental
requirement of due process in any proceeding which is to be
accorded finality is notice reasonably calculated, under all the
circumstances, to apprise interested parties of the pendency of
the action and afford them an opportunity to present their
objections." Mullane v. Central Hanover Bank & Trust
Co., 339 U. S. 306, 314 (1950). The bankruptcy court for this
district, echoing the sentiments of the Supreme Court, has stated
that notice in a Chapter 13 proceeding is only sufficient if it is
reasonably designed to bring the matter in question to a party in
interest's attention. Majors v. Capitol Chevrolet Co., 19
Bankr. 275, 278 (Bankr. M. D. Tenn. 1982). The notice and hearing contemplated by the order in question is
completely insufficient to meet these fundamental standards. The
"notice" purportedly given by the order is in reality no
notice at all. The order merely states that it constitutes notice
to all "present and future Chapter 13 debtors." In re
Internal Revenue Service Liabilities and Refunds in Chapter 13
Proceedings, at 3. The order provides absolutely no method
whereby any debtor or any other party in interest would actually
receive notice of its contents. The concept of notice and a
hearing in §362(d) is not so flexible as to embrace such ex
parte relief. See In re Garland Corp., 6 Bankr. 456,
458 n. 2 (Bankr. 1st Cir. 1980); In the Matter of Sullivan Ford
Sales, 2 Bankr. 350, 354, (Bankr. D. Me. 1980). In addition,
the agreed order does not provide, as §362(d) prescribes, that a
party file a request in the specific case to obtain relief
from the stay and that such request be granted only after it has
been scrutinized by the court. See In re Garland Corp., 6
Bankr. at 458 n. 2. Review on a case by case basis is absolutely
necessary to protect the interests of all involved parties. [Order Allowed Improper Setoffs] A second basis for nullification of this order is that it permits
the It is thus readily apparent that this order does not limit the [Impairment of Fresh Start Principle] Even if the above problems did not exist, this court would still be
disinclined to grant the [Conflict with Prior Holdings] Lastly, the court would note that the order apparently permits,
contrary to prior decisions of this court and the bankruptcy
court, the Section 507 would include most claims held by the "(a) The following expenses and claims have
priority in the following order: . . . (6) Sixth, allowed unsecured claims of
governmental units, to the extent that such claims are for-- (A) a tax on or measured by income or gross
receipts-- (i) for a taxable year ending on or before the
date of the filing of the petition for which a return, if
required, is last due, including extensions after three years
before the date of the filing of the petition; (ii) assessed within 240 days, plus any time plus
30 days during which an offer and compromise with respect to such
tax that was made within 240 days after such assessment was
pending, before the date of the filing of the petition, or (iii) other than a tax of a kind specified in
section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed
before, but assessible, under applicable law or by agreement,
after, the commencement of the case; . . .." Furthermore if the The court is compelled by all of these reasons to vacate and render
null and void the agreed order previously entered into by the
Chapter 13 trustee and the Judgment In accordance with the Memorandum contemporaneously entered herein,
the court hereby ORDERS, ADJUDGES and DECREES that the agreed
order previously entered into between the Chapter 13 trustee and
the Internal Revenue Service on IT IS, THEREFORE, SO ORDERED. 1
Section 105 clearly allows the court to reconsider this matter. 11
U. S. C. A. §105(a) (West 1979) provides: "(a) The bankruptcy court may issue any order, process, or
judgment that is necessary or appropriate to carry out the
provisions of this title." In the aftermath of the United States Supreme Court's decision in Northern
Pipeline Construction Co. v. Marathon Pipeline Co., -- U. S.
--, 102 S. Ct. 2858 (1982), which held that the non-Article 2
Section 362(a)(6) and (7) expressly prohibit the "(a) Except as provided in subsection (b) of this section, a
petition filed under section 301, 302, or 303 of this, title . . .
operates as a stay, applicable to all entitles of-- . . . (6) any act to collect, assess, or recover a claim against the
debtor that arose before the commencement of the case under this
title; (7) the setoff any debt owing to the debtor that arose before the
commencement of the case under this title against any claim
against the debtor; . . .." 3
11 U. S. C. A. §102(1) (West 1979) defines "notice and a
hearing" as follows: "In this title-- (1) 'after notice and a hearing,' or a similar phrase-- (A) means after such notice as is appropriate in the particular
circumstances, and such opportunity for a hearing as is
appropriate in the particular circumstances; but (B) authorizes an act without an actual hearing if such notice is
given properly and if-- (i) such a hearing is not requested timely by a party in interest;
or (ii) there is insufficient time for a hearing to be commenced
before such act must be done, and the court authorizes such act; . . ." 4
A clear example of the type of improper setoff which this order
might allow is presented in the case of United States v.
Hammett. In Hammett, the court found that the 5
11 U. S. C. A. §1322(a)(2) (West 1979) provides as follows: "(a) The plan shall-- . . . (2) provide for the full payment, in deferred cash payments of all
claims entitled to priority under section 507 of this title,
unless the holder of a particular claim agrees to a different
treatment of such claim; . . .." [83-1 USTC ¶9319]In re: Joseph V. LaSpada and Rose S.
LaSpada: Debtors. United States of America on behalf of its agency
Internal Revenue Service Plaintiff v. Joseph V. LaSpada and Rose
S. LaSpada: Defendants U. S. Bankruptcy Court, East. Dist. Pa.,
Bankruptcy No. 81-04594K, 28 BR 963, Leonard P. Goldberger, 2000 Market St., Philadelphia, Pa. 19103,
for debtors. Virginia R. Powell, Assistant United States Attorney,
Philadelphia, Pa. 19106, for plaintiff. Opinion KING, JR., Bankruptcy Judge: This case reaches the Court on a complaint by the Internal Revenue
Service (I. R. S.) for relief from the automatic stay imposed by
§362 of the Bankruptcy Code. The Debtors have filed a motion to
dismiss the complaint which will be granted. 1 In April of 1980, the I. R. S. levied upon two (2) pieces of real
property owned by the Debtors located In Cherry Hill and Wildwood,
New Jersey. These properties were scheduled for tax sale on November 10, 1981;
However, the filing of the instant petition for relief under
Chapter 11 of the Bankruptcy Code stayed the sale. The I. R. S.
alleges that a total of $82,375.67 is due from the Debtors. It is
the position of the I. R. S. that the prepetition seizure of the
Debtors' property in and of itself, constitutes grounds for relief
from the stay on the basis that such property is no longer
property of the Debtors' estate under §541 of the Code. The
Debtors, on the other hand, contend that the complaint fails to
state a cause of action upon which relief can be granted under §362(d)
of the Code. The Debtors rely on the Opinion of the Second Circuit
of Appeals in U. S. A. v. Whiting Pools, Inc. [82-1 USTC ¶9269],
8 B. C. D. 1138 (2d Cir. 1982), wherein the Court of Appeals held
that property subject to an I. R. S. levy is property of the
estate so long as the property has not been actually sold. For the reasons set forth herein, this Court will grant the
Debtors' motion to dismiss the complaint. Aside from the Whiting
Pools case, the only other circuit court to address the issue
presented by this case has been the Fourth Circuit Court of
Appeals. In re Cross Electric Company, Inc. [81-2 USTC ¶9786],
664 F. 2d 1218 (4th Cir. 1981). In Cross, the I. R. S.
levied upon an account receivable of the debtor prior to the date
on which the taxpayer filed a petition for reorganization under
the Bankruptcy Code. The Bankruptcy Court, over the objection of
the I. R. S., issued an order "dissolving" the tax levy
and directing the holder of the account receivable to turn over
the funds to the debtor in possession. Although the district court
affirmed the order of the bankruptcy court, the Court of Appeals
reversed. The Fourth Circuit recognized that §541 and 542 of the
Code require all property of the debtor wherever located, to be
delivered to the trustee. The question addressed by the court was
whether the accounts subject to the levy were subject to this
turnover requirement. In simpler terms, the issue is whether the
debtor retained any legal or equitable interest in the accounts
once levy had been duly made. The court found that although the
debtor retained the right to redeem the property after the levy,
this right was contingent upon payment of the amount of the levy
plus costs. The court also noted that there was minimal likelihood
that any surplus would remain after satisfaction of the claim of
the I. R. S. The court concluded, therefore, that: Since it is thus plain that the trustee is in no position to
exercise any of the limited rights it may have to redeem the
property levied upon there was no authority in the bankruptcy
court to "dissolve" the I. R. S. levy or to order the
delivery of the account levied upon by the I. R. S. to the trustee
and the government is entitled to collect the account pursuant to
its levy. Cross, at p. 1221. In addressing a similar factual situation, however, the Court of
Appeals for the Second Circuit reached a contrary result. In Whiting
Pools, supra, the debtor in possession appealed from an order
of the District Court for the Western District of New York denying
the debtor's motion to require the I. R. S. to turn over property
seized pursuant to a levy for unpaid withholding and F. I. C. A.
taxes. The Circuit Court reversed the District Court; holding that
an I. R. S. levy on property in which the debtor has equity does
not divest the debtor of all property interests by transferring
title to the government. In the instant case, the record contains no evidence as to the
value of the properties seized by the I. R. S. The burden of proof
on the issue of the debtors' equity in the properties, or lack
thereof, must be borne by the party seeking relief from the stay.
11 U. S. C. §362(g)(2). Because the I. R. S. has not met this
burden, the Court must assume that the debtors do have equity in
the properties subject to the levy. Therefore, this case is
analogous to the factual situation in Whiting Pools and
distinguishable from the Cross Electric case. In its brief, the I. R. S. argues that the case sub judice
is distinguishable from Whiting Pools, on the basis that in
Whiting Pools, the I. R. S. seized all of the debtor's
equipment, vehicles, inventory and supplies. In the instant case,
the I. R. S. levied upon a beach house and a residence only. The
theory of the I. R. S. is that the property subject to the levy in
Whiting Pools was necessary for an effective
reorganization, while the property subject to the levy in this
case is not necessary for reorganization. Although the argument is
facially attractive, no such requirement is present in §541 and
542 of the Bankruptcy Code. Section 541 provides for the creation
of an estate comprised of ". . . all legal or equitable
interests of the debtor in property." 11 U. S. C. §541(a)(1).
This provision does not distinguish between property necessary for
reorganization and that which is unnecessary for effective
reorganization. The next argument advanced by the I. R. S. is more thought
provoking. As stated above, §541 defines property of the estate
as all legal or equitable interests of the debtor in property, not
all property in which the debtor has an interest. The I. R. S.,
therefore, asserts that the debtor cannot acquire greater rights
in the property than that which existed prior to the filing of the
petition. Because the debtors' interests were limited to the right
to redeem the properties upon full payment of taxes, to receive
notice of the sale, and to receive any surplus proceeds, the I. R.
S. argues that these are the only rights that should pass to the
estate. This Court recognizes that many other courts have found
this reasoning persuasive. See e.g. In re Avery Health Center,
Inc. [81-1 USTC ¶9229], 8 Bankr. 1016 (W. D. N. Y. 1981); Parker
GMC Truck Sales, Inc. v. United States [80-2 USTC ¶9778], 6
B. C. D. 899 (Bankr. S. D. Ind. 1980); In re Winfrey Structural
Concrete Co. v. I. R. S., 6 B. C. D. 695 (Bankr. D. Colo.
1980). However, many other courts have taken the contrary view expressed
by the Court in Whiting Pools. See, e.g., Matter of
Aurora Cord and Cable Co., 2 Bankr. 342 (Bankr. N. D. Ill.
1980); In re Alpa Corp., 7 B. C. D. 791 (Bankr. D. Utah
1981); Matter of Bristol Convalescent Home, Inc. [81-2 USTC
¶9639], 7 B. C. D. 1151 (Bankr. D. Conn., 1981); Troy Indus.,
Catering Service v. State of Michigan, 2 Bankr. 521 (Bankr. E.
D. Mich. 1980). This Court has previously ruled upon a similar issue in the case of
In re Barsky, 6 Bankr. 1216 (Bankr. E. D. Pa. 1980). In Barsky,
this Court Ordered the Common-wealth of Pennsylvania to turn over
to the estate all property which had been seized pursuant to a tax
levy prior to the filing of the bankruptcy petition. This Court
relied on the Aurora and Troy Opinions. These cases
rejected any analysis which examined whether any party had a
greater interest in the property. As we stated in Barsky: The taxing authority is an attaching lien creditor in constructive
possession of the property. The debtors, however, have not lost
their interest in the property. Id. at 1218. Therefore, we will follow our ruling in Barsky which is
consistent with the Opinion of the Second Circuit Court of Appeals
in Whiting Pools. We hold that the prepetition levy by the
I. R. S. or any taxing authority is insufficient in and of itself
to divest the estate of all interests in the property. In its brief, the I. R. S. asks the Court to impose an adequate
protection requirement in the event this Court should decide the
aforementioned issue in a matter adverse to the I. R. S. We note,
however, that this relief is not appropriate. The I. R. S. did not
raise the issue of adequate protection in the complaint. Any
question of lack of adequate protection is, therefore, not
properly before the Court. An Order will be entered dismissing the
complaint. Order ORDERED that the above-captioned complaint for relief from the
automatic stay be, and hereby is, DISMISSED. 1
This Opinion constitutes the findings of fact and conclusions of
law in accordance with Bankruptcy Rule 752. [95-1 USTC ¶50,210] United States of America,
Plaintiff-Appellant v. Stephen C. Hemmen, Defendant-Appellee (CA-9), U.S. Court of Appeals, 9th Circuit,
93-35643, Gary R. Allen, Robert L. Baker, William S. Easterbrook, Department
of Justice, Washington, D.C. 20530, for plaintiff-appellant.
Stephen C. Hemmen, Tacoma, Wash., pro se. Before: ARTHUR L. ALARCON, ROBERT R. BEEZER and ANDREW J.
KLEINFELD, Circuit Judges. Opinion BEEZER, Circuit Judge: The United States, acting through the Internal Revenue Service
("Service"), appeals the entry of judgment for Stephen
Hemmen, bankruptcy trustee for Flavor Fresh Meals, Inc.
("Flavor Fresh"), in its action seeking $13,535.91 and
interest for Hemmen's failure to honor its levy with respect to
the allowed administrative expense claims of the debtor's
president, Falah Tuba Al-Hadid ("Al-Hadid" or
"taxpayer"), pursuant to 26 U.S.C. §6332(c)(1)
. The Service contends that the district court erred as
a matter of law in concluding that Al-Hadid's claims were
"not a property right that was in Hemmen's possession or that
he was obligated to pay" at the time the notice of levy was
served. The district court had jurisdiction pursuant to 28 U.S.C.
§§1340 and 1345. We have jurisdiction pursuant to 28 U.S.C. §1291
. We reverse. I On On On On II We review de novo the legal question whether the Service's
levy with respect to a taxpayer's allowed administrative expense
claim must be honored by a bankruptcy trustee. See In re
American Bicycle Ass'n [90-1
USTC ¶50,104 ], 895 F.2d 1277, 1278-79 (9th Cir.
1990). The Service contends that the district court's conclusion rests on
the faulty premise that Al-Hadid's allowed administrative expense
claim was not "property or rights to property subject to
levy" within the meaning of §§6331(a)
and 6332(a)
. Arguing that an allowed administrative expense claim
is properly characterized as "property" or as a
"right to property" under Washington law, the Service
contends that Hemmen, as bankruptcy trustee, was personally liable
under §6332(c)(1)
for his failure to honor the Title 26 U.S.C. §6321
gives the United States a lien for unpaid taxes against
"all property and rights to property, whether real or
personal, belonging . . . [to a delinquent taxpayer]." The
tax lien has a very broad scope. See, e.g., United States v.
National Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 719-720 (1985) (concluding
that the tax lien reaches "every interest in property that a
taxpayer may have"); In re Kimura [92-2
USTC ¶50,397 ], 969 F.2d 806, 810 (9th Cir. 1992)
(same). We look to state law to determine whether a taxpayer's
interest constitutes "property" and to federal law to
determine the resulting consequences. United States v. Bess
[58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958). Tax liens arise
upon assessment and continue in effect until the liability is paid
or the statute of limitations expires. Glass City Bank v.
United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267 (1945); see 26 U.S.C. §6502(a)
(providing that an enforcement action must begin within
six years of assessment). The Code provides for two methods by which the Service can enforce
its lien. It can bring a foreclosure action pursuant to 26 U.S.C. §7403
or it can, as it did here, simply levy on the property
pursuant to §6331(a)
. 1
Unlike a foreclosure action, the levy is essentially a
provisional, administrative procedure. National Bank of
Commerce [85-2
USTC ¶9482 ], 472 U.S. at 722. The levy reaches only
"property possessed and obligations existing at the time of
the levy." 26 U.S.C. §6331(b)
. The Service has interpreted this "present
obligation" requirement as follows: [l]evy may be made by serving a notice of levy on any person in
possession of, or obligated with respect to, property or rights to
property subject to levy, including receivables, bank accounts,
evidences of debt, securities, and salaries, wages, commissions,
or other compensation. . . . [A] levy extends only to property
possessed and obligations which exist at the time of the levy. Obligations
exist when the liability of the obligator is fixed and
determinable although the right to receive payment thereof may be
deferred until a later date. 26 C.F.R. §301.6331-1(a)(1)
(emphasis added). A levy with respect to intangible
property is made by service of a notice of levy. United States
v. Donahue Industries, Inc. [90-2
USTC ¶50,343 ], 905 F.2d 1325, 1330 (9th Cir. 1990).
Service of a notice of levy confers on the United States the right
to all property levied upon and creates a custodial relationship
so that the property comes into the constructive possession of the
government. American Acceptance Corp. v. Glendora Better Homes
[77-1 USTC ¶9348 ], 550 F.2d 1220, 1222-23 (9th Cir. 1977)
(citing Phelps v. United States [75-1 USTC ¶9467 ], 421 U.S. 330, 334 (1974)). Title 26 U.S.C. §6332(a)
imposes a duty on third parties to honor the Service's
notice of levy. 2
Failure to honor the levy results in personal liability under 26
U.S.C.§6332(c)(1). 3
Section
6332(c)(2) further provides that the Service may assess
an additional penalty against "any person" who
"fails or refuses to surrender such property or rights to
property without reasonable cause." 26 U.S.C. §6332(c)(2)
. We recognize only two defenses available to a party
served with a notice of levy: (1) the party did not possess any
property or rights to property of the taxpayer and (2) the
property was subject to a prior attachment or execution. Bank
of Nevada v. United States [58-1 USTC ¶9228 ], 251 F.2d 820, 824 (9th Cir. 1957), cert.
denied, 356 U.S. 938 (1958). A The Service is correct that Al-Hadid's interest in his allowed
administrative expense claims constituted "property"
under Washington law. Washington defines "property" very
broadly. See, e.g., Lee & Eastes, Inc. v. Public Serv.
Comm'n, 328 P.2d 700, 702 (Wash. 1958) (defining the term
"property" as "embracing everything that has
exchangeable value"). Accord Little v. United States,
704 F.2d 1100, 1106 (9th Cir. 1983) (concluding that a right of
redemption is "property" under §6321
when it represents an "economic asset" that
has "pecuniary worth," notwithstanding its
characterization as a "privilege" under California law).
A party who holds an allowed claim against a bankruptcy estate
clearly holds something of "exchangeable" value. The
fact that an allowed claim can be satisfied only after certain
events have transpired, such as the determination that the estate
has sufficient assets to satisfy the claim, does not negate the
character of the holding as "property" under
Washington's broad definition of this term. Accord Leuschner v.
First Western Bank & Trust Co. [58-2
USTC ¶9723 ], 261 F.2d 705, 708 (9th Cir. 1958) (cited
in St. Louis Union Trust Co. v. United States [80-1 USTC ¶9282 ], 617 F.2d 1293, 1302 (8th Cir. 1980)). B That an allowed administrative expense claim constitutes
"property" is not, as the Service suggests in its
opening brief, dispositive. In its oral decision, the district
court expressly conceded that Al-Hadid's claim may be a contingent
property right subject to the Service's levy. It concluded,
however, that Al-Hadid's interest was "not a property right
that was in the possession of Mr. Hemmen or that he [Hemmen]
was obligated to pay at the time of the levy. He had nothing
at that time that belonged to the taxpayer." The district
court reached this conclusion largely on the reasoning in United
States v. Mitchell [65-2 USTC ¶9581 ], 349 F.2d 94, 105-06 (5th Cir. 1965), in
which the Fifth Circuit considered whether a tax levy obligated an
insurer to turn over the cash surrender value of its insured's
executory life insurance contract. Determining that the levy was
noticed prior to the insured's election to take the cash surrender
value, the Fifth Circuit concluded that the insurer did not
possess any property it could surrender at the time the notice of
levy was served. Id. Noting that a levy, unlike a lien,
does not apply to after-acquired property, the court reasoned that
"a new levy would seem necessary to reach the cash surrender
value when it is eventually demanded." Id. As the underscored passage and the court's reliance on Mitchell
indicate, the district court's conclusion was based on the
determination that Hemmen did not "possess or was not
obligated with respect to" Al-Hadid's property at the time he
received the notice of levy. Thus, in addition to determining
whether an allowed claim is "property" under Washington
law, we must consider whether, as a matter of federal law, the
notice of levy obligated Hemmen to surrender funds that became
available only after the estate was liquidated and the bankruptcy
court approved the proposed distribution. This is essentially a
question of timing implicating the present obligation
requirement in §6331(b)
. Under the Service's own interpretation, we must
determine whether the liability of the bankruptcy estate to
Al-Hadid was "fixed and determinable" at the time the
notice of levy was served on Hemmen. 26 C.F.R. §301.6331-1(a)(1)
. It appears that no Circuit court has specifically considered at
which point, if ever, a bankruptcy estate becomes an
"obligator" whose liability with respect to a creditor's
allowed administrative expense claim is "fixed and
determinable" within the meaning of 26 C.F.R. §301.6331-1(a)(1)
. As a preliminary matter, we cannot agree with the
district court that Mitchell establishes the appropriate
point of departure. 4
In this respect, we note only that the holding in Mitchell
has been superceded by passage of §104
of the Federal Tax Lien Act of 1966, Pub. L. No.
89-719, 80 Stat. 1125, codified in part at 26 U.S.C. §6332(b)
. 5
Although not controlling on the question before us, Congress'
passage of §104
in the wake of Mitchell cautions us not to
construe too restrictively the reach and scope of the tax levy.
See United States v. Metropolitan Life [89-1 USTC ¶9362 ], 874 F.2d 1497, 1499-1500 (11th Cir. 1989).
The Supreme Court has also more recently rejected a restrictive
construction of the reach of the tax levy, albeit in an unrelated
context. See National Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. at 729 (concluding that a
notice of levy obligates banks to surrender a taxpayer's funds
held in a joint bank account even absent prior notice to joint
holders on the ground that it is a provisional measure designed to
promote the prompt collection of taxes). We are also not persuaded that Laughlin v. Hemmen emphasizes that Laughlin concerned only funds payable
from confirmed Chapter 13 plans and that the Service took the
position in that action that "the levy would not be effective
against the estate of the third debtor, for which there was not
yet a confirmed plan." [90-2
USTC ¶50,459 ], 912 F.2d at 198. Analogizing the
pre-plan Chapter 13 estate to an unliquidated Chapter 7 estate, he
argues that Laughlin supports the position that the notice
of levy was defective because it was premature. Although he does
not argue the point directly, he implies that a second levy,
noticed after the Chapter 7 estate was liquidated or, perhaps,
after the bankruptcy court approved the proposed distribution, was
necessary to meet the "present obligation" requirement
of §6331(b)
. Although the decision can be construed to give rise to the
inference Hemmen draws from it, the holding in Laughlin
actually supports the Service's position in the present action.
Nor are we persuaded that the Eighth Circuit would have agreed
with Hemmen's position had this question been before it. In this
respect, we note that the court expressly declined to rest its
decision on the narrower holding that the Service's levy was valid
only because claims against a postconfirmation Chapter 13 estate
are vested property rights. See Laughlin [90-2
USTC ¶50,459 ], 912 F.2d at 198 n.4. Finally, even
accepting Hemmen's analogy between a pre-plan Chapter 13 and an
unliquidated Chapter 7 estate, we are not persuaded, for reasons
we explore below, that a levy is necessarily defective with
respect to a creditor's interest in a pre-plan Chapter 13 estate. Finding no case law on point, we turn directly to the language of
26 C.F.R. §301.6331-1(a)(1)
to determine whether Hemmen was obligated to honor the
Service's levy on the facts before us. 6
We note at the outset that §301.6331-1(a)(1)
defines a "fixed and determinable" liability
negatively, by distinguishing a "fixed and determinable"
liability from obligations merely involving deferred payment. This
means that, to prevail, Hemmen must, at a minimum, establish that
the estate's liability to Al-Hadid at the time the notice of levy
was served was materially distinguishable from that of an obligor
on an ordinary contract with an executory duty to pay for a
completed performance by the obligee. We conclude that as a matter
of law he cannot do so. There is no dispute that Al-Hadid fully performed the beneficial
acts giving rise to his allowed administrative expense claims
prior to the service of the notice of levy. The provisions in the
Bankruptcy Code for the allowance of administrative expense claims
and for the administrative expense priority effectively negate the
proposition that the services Al-Hadid's rendered to the estate
were the beneficial acts of a volunteer, performed without
legitimate expectations of compensation. See 11 U.S.C. §§503
, 507
. The $13,535.91 payment he ultimately received was
tied to the performance he undertook prior to the service of the
tax levy. The payment simply cannot, thus, be characterized as
after-acquired property. Hemmen is correct that, although allowed,
Al-Hadid's administrative expense claim could be reduced to money
only after it was determined that sufficient assets existed to
satisfy his claims and the bankruptcy court approved the proposed
distribution. He is also correct that the trustee retained the
power during the interim to move the court to disallow the
administrative expense claims. None of these conditions to
payment, however, undermines the proposition that the obligation
of the estate to Al-Hadid was "fixed" within the meaning
of §301.6331-1(a)(1)
after the underlying performance was completed and the
claim was allowed by the court. Accord United States v.
Antonio, 91-2 U.S. Tax Cas. ( Although what sum, if any, would be ultimately paid to Al-Hadid on
his allowed claims was uncertain at the time the notice of levy
was served, this uncertainty does not defeat the fact that the
estate's obligation was "determinable." Unlike a
requirement that the extent of an obligation be
"determined," the term "determinable" requires
only that the sum be capable of precise measurement in the future.
Accord Reiling v. United States, 77-1 U.S. Tax Cas. ( We conclude that an allowed administrative expense claim against a
bankruptcy estate is "property" under Washington law
subject to a Federal tax levy and that Hemmen, as trustee, was
obligated with respect to a "fixed and determinable"
liability at the time the notice of levy was served on him. We are
aware that our conclusion imposes an added burden on bankruptcy
trustees. See Laughlin [90-2
USTC ¶50,459 ], 912 F.2d at 199. We are also aware,
however, of the additional burden that a contrary conclusion would
impose on the Service's ability to expeditiously collect
delinquent taxes. The rule Hemmen urges would create a narrow
window of opportunity through which the Service can effectively
serve notice of levy. We see little benefit to requiring the
Service to closely monitor the progress of the administration of
every estate against which delinquent taxpayers hold allowed
claims. This added burden and delay would defeat the very purpose
that the administrative levy was designed to serve. See National
Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 729; cf. In re American
Bicycle Ass'n [90-1
USTC ¶50,104 ], 895 F.2d at 1280-81 (concluding that
Anti-Injunction Act precludes a bankruptcy court from enjoining
the Service from collecting a penalty assessed against an officer
of the debtor corporation). Our conclusion merely requires the
trustee to pay funds to the Service rather than to the delinquent
taxpayer once the estate is liquidated and the proposed
distribution is approved. The trustee is presumably in a posi tion
to monitor the progress of the administration of the estate more
efficiently. Because we can affirm the district court on any basis fairly
supported by the record, United States v. Washington, 969
F.2d 752, 755 (9th Cir. 1992), we next consider the alternative
defenses Hemmen raised before the district court. A Hemmen contends that the Service's notice of levy violated the
automatic stay provision at 11 U.S.C. §362
. As noted above, this argument was rejected by the Eighth Circuit in
Laughlin, on the reasoning that the entities the automatic
stay is designed to protect were left unaffected levy. [90-2
USTC ¶50,549 ] 912 F.2d at 198; cf. B&G Ltd. v.
Levin [72-2 USTC ¶9574 ], 462 F.2d 436, 438 (doctrine of custodia
legis does not bar Service's levy against funds payable to
fourth party) (5th Cir. 1972); In re Quakertown Shopping
Center, Inc. [66-2 USTC ¶9655 ], 366 F.2d 95, 98 (3d Cir. 1966) (same). We
agree. The automatic stay is designed to protect the debtor, the
assets of the estate and the interests of other creditors in those
assets. Laughlin [90-2
USTC ¶50,549 ], 912 F.2d at 198. Any perceived effect
of a tax levy on the debtor, the estate's assets or the interests
of other creditors is purely chimerical. The only interests
reached by the levy belonged to a nondebtor, Al-Hadid. The levy
created a custodial relationship, bringing Al-Hadid's interest
into the constructive possession of the United States. See Glendora
Better Homes [77-1 USTC ¶9348 ], 550 F.2d at 1222-23. The actual operation
of the levy is, thus, practically indistinguishable from a
creditor's voluntary transfer of a claim. See Bankruptcy Rule
3001(e). B Hemmen also argues that he is shielded from personal liability
under the doctrine of quasi-judicial immunity because his final
distribution was made pursuant to court order. As a general matter, bankruptcy trustees enjoy broad immunity from
suit when acting within the scope of their authority and pursuant
to court order. Bennett v. Williams, 892 F.2d 822, 823 (9th
Cir. 1989). Trustees are not immune, however, for intentional or
negligent violation of duties imposed by law. Id. We have
determined that Hemmen was under a legal duty to honor the
Service's levy. Although the issue confronting him was in some
respects novel, Hemmen was on notice that the Service had levied
on Al-Hadid's property and failed to honor the levy in violation
of §6332(c)(1)
. Hemmen's failure to honor the levy, moreover, did not
arise out of his duty to protect the assets of the estate. We also
find noteworthy that Hemmen did not argue before the district
court, or in his brief before this court, that he sought
instruction or guidance or even brought the precise legal question
to the attention of the bankruptcy court. He thus cannot
characterize his failure to honor the levy as resulting from
obedience to a court order. Under these circumstances,
quasi-judicial immunity does not shield him from liability. C Hemmen's remaining equitable defenses revolve around a common
nucleus of fact, involving the Service's failure to timely respond
to his notice of proposed disposition and to initiate this action.
He invokes laches. He also argues that the Service's failure to
object to the notice of proposed distribution misled him into
believing that the Service considered its levy to be defective and
that it, consequently, would not hold him personally liable for
failing to honor the levy. These facts can be characterized to
state a defense of equitable estoppel. As a preliminary matter, the district court properly rejected
Hemmen's invocation of laches. See United States v. First Nat'l
Bank of Circle [81-2
USTC ¶9615 ], 652 F.2d 882, 890 (9th Cir. 1981)
(laches is not a defense to the enforcement of tax claims by the
United States). The traditional elements of equitable estoppel are that: (1) the
party to be estopped knows the facts, (2) he or she intends that
his or her conduct will be acted on or must so act that the party
invoking estoppel has a right to believe it is so intended, (3)
the party invoking estoppel must be ignorant of the true facts,
and (4) he or she must detrimentally rely on the former's conduct.
Watkins v. United States, 875 F.2d 699, 709 (9th Cir. 1989)
(en banc), cert. denied, 498 U.S. 957 (1990). 7
When a party seeks to invoke equitable estoppel against the
government, we additionally require a showing that the agency
engaged in "affirmative conduct going beyond mere
negligence" and that "the public's interest will not
suffer undue damage" as a result of the application of this
doctrine. Id. at 707. Hemmen presents a strong case for the application of equitable
estoppel under its traditional elements. Although it is unclear
what the Service actually knew, it could infer that Hemmen would
act in a manner contrary to its interests when after a nearly
eighteen month-long period of silence following its notice of levy
it received the notice of a proposed disposition listing Al-Hadid
as the payee of his allowed claims. Despite this fact, the Service
failed to timely object or to otherwise alert Hemmen to the fact
that the levy had not been released with respect to Al-Hadid's
claims. It then served its final demand several weeks after the
proposed distribution was effected and the estate was closed.
Unaware of the Service's position, Hemmen, perhaps reasonably in
light of the dicta from the Eighth Circuit's decision in Laughlin
discussed above, paid the funds to Al-Hadid in reliance on the
Service's silence. Although strong, the facts do not meet the high threshold we have
established for applying equitable estoppel against the
government. Even if the public's interest would not "suffer
undue damage" because of the singular facts presented here,
the Service's failure to object to the proposed distribution, or
to otherwise alert Hemmen to the consequences of his proposed
course of action, raises questions only as to what the Service
failed to do; the Service's conduct cannot be characterized as
"affirmative conduct going beyond mere negligence." Watkins,
875 F.2d at 707. Hemmen's estoppel defense necessarily fails. IV The Service's 1
§6331(a) provides, in pertinent part, that: if any person liable to pay any tax neglects or refuses to pay the
same . . . [the Service may] collect such tax . . . by levy upon
all [nonexempt] property and rights to property belonging to such
person or on which there is a lien provided in this chapter for
payment of such tax. 2
Section 6332(a) provides, in pertinent part, that: any person in possession of (or obligated with respect to) property
or rights to property subject to levy upon which levy has been
made shall . . . surrender such property or rights (or discharge
such obligation) . . . except such part of the property or rights
as is, at the time of such demand, subject to an attachment or
execution under any judicial process. 3
Section 6332(c)(1) provides, in pertinent part, that: [a]ny person who fails or refuses to surrender any property or
rights to property, subject to levy, upon demand by the Secretary,
shall be liable in his own person and estate to the United States
in the sum equal to the value of the property or rights not so
surrendered, but not exceeding the amount of taxes for the
collection of which such levy has been made, together with costs
and interest on such sum . . . . Current §6332(e)
, formerly §6332(d)
, provides the third party an absolute defense against
any subsequent claim by a "delinquent taxpayer or any other
person." 4
An even less appropriate point of departure is Mutual Life Ins.
Co. of New York v. United States [65-1
USTC ¶9279 ], 343 F.2d 71, 73 n.4 (9th Cir. 1965), in
which we expressly reserved the question addressed in Mitchell.
In Mutual Life, we concluded that the insurer's failure to
turn over the cash surrender value of the policy was for
reasonable cause because "levy and demand upon an insurer did
not, without further proceedings, give rise to an obligation on
the part of the insurance company forthwith to cancel the policy
and make payments to the United States of the cash surrender
value." 343 F.2d at 74. In the instant case, the Service is
not seeking a penalty under §6332(c)(2)
for Hemmen's failure to surrender Al-Hadid's property
without reasonable cause. It does not urge that he was under a
duty to liquidate estate assets in order to honor its levy at the
time he received the notice. As such, that decision is inapposite. 5
Section 6332(b)(1) provides, in pertinent part, that: [a] levy on an organization with respect to a life insurance or
endowment contract issued by such organization shall, without
necessity for the surrender of the contract document, constitute a
demand by the Secretary for payment . . . and the exercise of the
right of the person against whom the tax is assessed to the
advance of such amount. Such organization shall pay over such
amount 90 days after service of notice of levy. 6
As trustee, Hemmen represented the bankruptcy estate. See 11
U.S.C. §323(a). As the estate's representative, he was charged
with the duty to reduce to money the property of the estate. See
11 U.S.C. §363(b). As such, the service of a notice of levy upon
him for any obligations owing by the estate was proper. 7
Although we have never applied this doctrine to bar the Service
from enforcing a levy, we have left open this possibility. See United
States v. Overman [70-1 USTC ¶9342 ], 424 F.2d 1142, 1147-48 (9th Cir. 1970); accord
United States v. One 1973 Buick Auto., 560 F.2d 897, 899 (8th
Cir. 1977). Dissenting
Opinion KLEINFELD, Circuit Judge I respectfully dissent. I would affirm the district court's
judgment in favor of the trustee, Mr. Hemmen. Mr. Al-Hadid, not Mr. Hemmen, owed the taxes. Mr. Hemmen can be
obligated only if, when the The actual notice of levy issued in 1985 ordered Hemmen to pay
"money . . . now in your possession and belonging to this
taxpayer [Al-Hadid] (or for which you are obligated) and all money
or other obligations owing from you to this taxpayer," up to
$93,576.93. If the majority analysis is correct, then the
implication must be that when Hemmen received this notice of levy,
he should have sent a check to the The The (a) Except as provided in subsection (b) of this
section, a petition filed . . . operates as a stay, applicable to
all entities, of-- (3) any act to obtain possession of property of
the estate or of property from the estate or to exercise control
over property of the estate 11 U.S.C. §362(a)
; 11 U.S.C. §101(15)
(" 'entity' includes person, estate, trust,
governmental unit, and United States Trustee"). The reader
will notice that exceptions to the automatic stay are listed in
subsection (b). The list includes an exception for "issuance
to the debtor by a governmental unit of a notice of tax
deficiency." 11 U.S.C. §362(b)(9)
. There is no exception for notices of levy. The tax
regulations expressly prohibit a levy upon assets in the custody
of the court in a bankruptcy proceeding, "except where the
proceeding has progressed to such a point that the levy would not
interfere with the work of the court or where the court grants
permission to levy." 26 C.F.R. §301.6331-1(a)(3)
; see also 1A Collier on Bankruptcy P12.06[4]
("The Even if it had been lawful for the Levy may be made by serving a notice of levy on
any person in possession of, or obligated with respect to,
property or rights to property subject to levy, including
receivables, bank accounts, evidences of debt, securities, and
salaries, wages, commissions, or other compensation. Except as
provided in §301.6631-2(c) with regard to a levy on salary or
wages, a levy extends only to property possessed and
obligations which exist at the time of the levy. Obligations exist
when the liability of the obligor is fixed and determinable
although the right to receive payment thereof may be deferred
until a later date. For example, if on the first day of the
month a delinquent taxpayer sold personal property subject to an
agreement that the buyer remit the purchase price on the last day
of the month, a levy made on the buyer on the tenth day of the
month would reach the amount due on the sale, although the buyer
need not satisfy the levy by paying over the amount to the
district director until the last day of the month. Similarly, a
levy only reaches property in the possession of the person levied
upon at the time the levy is made. For example, a levy made on a
bank with respect to an account of a delinquent taxpayer is
satisfied if the bank surrenders the amount of the taxpayer's
balance at the time the levy is made. The levy has no effect upon
any subsequent deposit made by the taxpayer. Subsequent deposits
may be reached only by a subsequent levy on the bank. 26 C.F.R. §301.6331-1(a)(1)
(emphasis added). In 1985, when the The two examples provided in the regulation illustrate what the
words "fixed and determinable" mean. Mr. Al-Hadid's
$13,535.91 is not like the amount to become payable at the end of
the month from the real estate buyer. That amount is fixed and
determined, even though not yet payable. The $13,535.91 is more
closely analogous to the subsequently made bank deposit. The
earlier levy does not make the bank liable to the The [98-1 USTC ¶50,300] In the Matter of Jerry Creel, Nedrey E.
Creel, Debtors. Hancock Bank of Louisiana, Plaintiff v. District
Director, Internal Revenue Service, Department of The Treasury,
United States of America, Jerry Creel, Nedrey Creel, and S.J.
Beaulieu, Jr., CH. 13 Trustee, Defendants |