6337 Annotations: Bankruptcy- Levy

Redemption of Properly: Bankruptcy

[79-1 USTC ¶9209]In the Matter of Lester Stackpole, d/b/a Stackpole Construction, Bankrupt, James A. Goodman, Esquire, Trustee in Bankruptcy, Plaintiff v. Internal Revenue Service, Defendant

U. S. Dist. Ct. , Dist. Me. , No. Div., in Bankruptcy, No. BK76-177ND, ADV 78-68, 12/11/78

[Code Sec. 6337 and Bankruptcy Rule 701]

Bankruptcy: Sale and redemption of property subject to tax lien: Effect on lien.--A sale of property redeemed by a trustee in bankruptcy from a purchaser at public tax sale did not extinguish the tax lien rights of the IRS on the property or the sale proceeds. The trustee merely redeemed the property as the successor in interest to the bankrupt, leaving it subject to all liens incumbent upon it prior to the public tax sale.

David King, R. B. Dunning & Co., P. O. Box 862, Bangor, Me. 04401, James A. Goodman, Goodman, Goodman & Kornreich, 21 Main St., Bangor, Me. 04401, for plaintiff. David J. Curtin, Department of Justice, Washington , D. C. 20530, for defendant.

Memorandum of Decision Facts

CYR, Bankruptcy Judge:

The revelant facts have been stipulated.

On May 12, 1975 , R. B. Dunning Company [Dunning] filed a writ of attachment in the Hancock County Registry of Deeds on two parcels of real estate owned by the bankrupt. On June 3, 1975 , the Internal Revenue Service [IRS] filed a notice of federal tax lien for unpaid withholding tax liabilities of the bankrupt totalling $17,165.80. Dunning obtained a default judgment against the bankrupt on August 19, 1975 . On August 20, 1975 , another lien notice was filed by IRS for withholding tax liabilities totalling $2,436.01. On October 3, 1975 , Dunning obtained an execution, which was never recorded. The Dunning attachment has been extended to October 3, 1980 .

On March 22, 1976 , IRS seized the subject parcels of real estate and sold them at public sale, on April 28, 1976 , to E. R. Grindle for the sum of $1,000. IRS issued its certificate of sale to Grindle on May 27, 1976 . No deed was ever delivered to Grindle.

The bankrupt filed a voluntary petition in bankruptcy on August 6, 1976 . On August 25, 1976 , the receiver redeemed the two parcels of real estate from Grindle on payment of $1,000, with interest at $66.67. Dunning filed its proof of secured debt against the estate on September 23, 1976 . On March 2, 1977 , IRS filed a proof of secured debt against the bankrupt estate.

On July 8, 1977 , the trustee in bankruptcy applied to the bankruptcy court for an order authorizing sale of the redeemed real estate, which was made the subject of an order of notice and hearing on July 25, 1977 . IRS was duly notified, but failed to appear at the hearing or to interpose any objection to the application. On July 28, 1977 , the court entered an order approving the application. Thereafter, the real estate was sold for $33,600. IRS failed to take an appeal from the order of July 28, 1977 .

The trustee in bankruptcy objects to the allowance of the proof of secured debt filed by IRS, on the grounds that the July 28, 1977 order constitutes a final determination that one half the net proceeds from the sale belong to Dunning. The plaintiff further asserts that IRS has failed to account for other property of the bankrupt seized and applied against the IRS claim.

Law

The order of July 28, 1977 , although final, did not purport to determine the validity or enforceability of the lien of IRS. Indeed, Bankruptcy Rule 701(2) expressly requires that any proceeding instituted by a party before a bankruptcy judge to determine the validity, priority, or extent of a lien or other interest in property governed by the adversary proceedings rules of Part VII of the Rules of Bankruptcy Procedure. The July 28, 1977 order, which transferred valid liens from the property to the sale proceeds, did not extinguish the lien rights of IRS. Bankruptcy Rule 701(3) requires that any sale of property free and clear of a lien for which the lienholder can be compelled to accept a money satisfaction must also proceed in accordance with the adversary proceedings rules of Part VII. See also 26 U. S. C. §7425(a)(1).

The trustee in bankruptcy may proceed in accordance with Bankruptcy Rule 701(2) & (3) to seek whatever relief he deems appropriate, including a ruling on the validity of the lien of IRS.

In the interests of minimizing delay and expense, however, the court notes that the parties have stipulated that the acquisition of this property by the receiver from E. R. Grindle constitute a redemption. The receiver cannot qualify as a tax sale purchaser. The receiver merely redeemed the property as the successor in interest to the bankrupt, leaving it subject to all liens and other adverse interests incumbent upon it immediately prior to the tax sale. Samet v. United States [65-2 USTC ¶9520], 242 F. Supp. 214, 222 (M. D. N. C. 1965). If the receiver had acquired the property by purchase from Grindle, the tax sale purchaser, following the expiration of the redemption period, the IRS lien and liens junior to it would have been extinguished by virtue of 26 U. S. C. ¶6339(b)(c). On the other hand, redemption by the receiver, provided the receiver was entitled to redeem, left the title to the land in the same condition as if no tax sale had taken place. It seems clear enough from 26 U. S. C. §6337(b) and 11 U. S. C. §110a, that the receiver in bankruptcy of a delinquent taxpayer whose real estate has been sold pursuant to 26 U. S. C. §6335 may redeem the real estate within the 120-day period following the tax sale prescribed by 26 U. S. C. §6337(b).

IRS is allowed twenty days within which to amend its proof of debt to reflect any additional credits due on the tax claim. Thereafter, the trustee in bankruptcy is allowed twenty days within which to commence adversary proceedings consistent with this opinion, should he elect to proceed further.

The objection to the IRS proof of secured debt is hereby dismissed.