6321 Bankruptcy page3

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Rimco Acquisition Company, Plaintiff v. Wardell Johnson, an individual, his heirs, and assigns, known and unknown, Bessie J. Johnson, her heirs, and assigns, known and unknown, Goldman Investments Company Profit Sharing Plan, a Michigan Corporation, the United States of America-Internal Revenue Service, Occupants at 137 McLean, Highland Park, Michigan, and all other persons or entities who may claim an interest in property commonly known as 137 McLean, Highland Park, Michigan, Defendants

U.S. District Court, East. Dist. Mich. , So. Div., 98-CV-60379-AA, 8/5/99, 68 FSupp 2 d 793

[Code Secs. 6321 and 6325 ]

Tax lien: Quiet-title action: Stay: Bankruptcy proceeding of parent.--The IRS's status as a federal tax lien holder on a property was preserved following a nonjudicial tax sale because a company that acquired an interest in the property did not prove that proper notice of the sale was given to the government. The quiet title action brought by the company was not stayed, pending the bankruptcy proceedings of the company's parent company. There was no support for the subsidiary's position that a bankruptcy filing by the parent automatically stayed actions against the subsidiary.

[Code Sec. 7425 ]

Tax lien: Notice not given: Tax sale: Lien not discharged.--The IRS's status as a federal tax lien holder on a property was preserved following a nonjudicial tax sale because a company that acquired an interest in the property did not prove that proper notice of the sale was given to the government. The company failed to respond to the IRS's discovery requests and, as a result, was deemed to have admitted that the IRS was never given proper notice of the sale. Therefore, the federal tax lien on the property was not discharged.

ORDER GRANTING DEFENDANT UNITED STATES OF AMERICA'S MOTION FOR SUMMARY JUDGMENT and ORDER OF REMAND

HACKETT, District Judge:

Before the court is an action to quiet title to property located at 137 McLean, Highland Park , Michigan . Originally, this action was filed in Wayne County Circuit Court. However, defendant United States of America ( United States ) removed the action to federal court pursuant to 28 U.S.C.A. §1444 (West 1994).

Defendant Wardell Johnson, a holder of an interest in the property, failed to pay federal income taxes for the years 1987 and 1988. As a result, the United States attached a lien on the property in the amount of $22,055.85, which includes statutory interest. The United States ' lien was recorded with the Wayne County Register of Deeds on December 21, 1995. However, the property was subjected to a tax sale resulting from unpaid property taxes. The State of Michigan and ultimately, the City of Highland Park , obtained title to the property. Plaintiff purchased the property from the City of Highland Park and initiated the instant action in an effort to quiet title to the property. According to plaintiff, the United States ' interest in the property was extinguished through the tax sale.

On April 1, 1999, the United States filed a motion for summary judgment. After failing to receive a timely response to the motion, the court ordered plaintiff to show cause in writing why summary judgment should not be granted in favor of the United States . On May 21, 1999, plaintiff filed a written response to the court's order to show cause.

Defendant United States argues that the property is still subject to its recorded federal tax liens because no notice of the non-judicial sale was served upon the United States pursuant to §7425 of the Internal Revenue Code. On January 22, 1999, the United States served a Request for Admissions, Interrogatories and a Request for Production upon plaintiff to determine whether the United States was properly given notice of the nonjudicial sale. To date, plaintiff has failed to respond to the United States ' discovery. As a result, the United States contends that plaintiff is deemed to have admitted that the United States was never given proper notice of the tax sale.

In response, plaintiff informed the court that it is a wholly owned subsidiary of one of the MCA/RIMCO debtors, ¹ who filed voluntary petitions for relief under Chapter 11 of the United States Code (the Bankruptcy code). Mortgage Corporation of America (MCA) is the mortgagee of the property, securing a $45,000 indebtedness owed by plaintiff. Because of the mortgage arrangement, plaintiff argues that MCA has an interest in the property and that this interest is part of MCA's bankruptcy estate. According to plaintiff, any grant of summary judgment in favor of the United States would adversely affect the property interest of the bankruptcy estate of MCA. Therefore, plaintiff requests that the court stay the case pursuant to the automatic stay provisions of 11 U.S.C.A. §362(a)(3) (West 1993 & Supp. 1999).

In reply, defendant United States contends that the action is not subject to stay pursuant to 11 U.S.C.A. §362(a)(3). According to the United States , the bankruptcy filing by a parent does not automatically stay actions against a wholly owned subsidiary. Plaintiff has not filed for bankruptcy relief. Instead, plaintiff is merely a wholly owned subsidiary of one of the bankruptcy debtors. While plaintiff asserts that the grant of summary judgment in favor of the United States would adversely affect MCA's mortgage interest, the MCA/RIMCO debtors have not been named as a party in this action to quiet title. In fact, defendant United States argues that the instant action could only improve the MCA/RIMCO debtors relative priority as this case seeks to remove the United States ' lien as a discharged lien. Furthermore, the United States contends that it is not attempting to foreclose its tax lien at this time. It is not seeking to obtain possession of the property or to exercise control over the property. Instead, the United States is merely attempting to maintain its status as a lien holder.

Standard of Review

Federal Rule of Civil Procedure 56(c) empowers the court to render summary judgment "forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." See F.D.I.C. v. Alexander, 78 F.3d 1103, 1106 (6th Cir. 1996). The Supreme Court has affirmed the court's use of summary judgment as an integral part of the fair and efficient administration of justice. The procedure is not a disfavored procedural shortcut. Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986); see also Kutrom Corp. v. City of Center Line , 979 F.2d 1171, 1174 (6th Cir. 1992).

The standard for determining whether summary judgment is appropriate is " 'whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.' " Winningham v. North Am. Resources Corp., 42 F.3d 981, 984 (6th Cir. 1994) (citing Booker v. Brown & Williamson Tobacco Co. Inc., 879 F.2d 1304, 1310 (6th Cir. 1989)). The evidence and all inferences therefrom must be construed in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Enertech Elec., Inc. v. Mahoning County Comm'r, 85 F.3d 257, 259 (6th Cir. 1996); Wilson v. Stroh Co., Inc., 952 F.2d 942, 945 (6th Cir. 1992). "[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); see also Hartleip v. McNeilab, Inc., 83 F.3d 767, 774 (6th Cir. 1996).

If the movant establishes by use of the material specified in Rule 56(c) that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law, the opposing party must come forward with "specific facts showing that there is a genuine issue for trial." First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 270 (1968); see also Adams v. Philip Morris, Inc., 67 F.3d 580, 583 (6th Cir. 1995). Mere allegations or denials in the non-movant's pleadings will not meet this burden. Anderson, 477 U.S. at 248. Further, the non-moving party cannot rest on its pleadings to avoid summary judgment. It must support its claim with some probative evidence. Kraft v. United States [93-1 USTC ¶50,278], 991 F.2d 292, 296 (6th Cir.), cert. denied, 510 U.S. 976 (1993).

Analysis

Congress established a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to any taxpayer who fails to pay federal taxes due. 26 U.S.C.A. §6321 (West 1989). See Fognini v. Hughes, No. 91-75359, 1993 WL 126410 at *1, 71 A.F.T.R. 2d 93-750, 93-1 U.S.T.C. ¶50,180 (E.D. Mich. Jan. 7, 1993). A federal tax lien arises at the time the IRS assesses the tax delinquencies against a taxpayer and sends a notice and demand for payment. Id. at §6322. Generally, once notice of the federal tax lien is properly filed, it is entitled to priority over subsequent competing liens. Id. at §6323. "[A] federal tax lien attaches to the property itself, not to the delinquent taxpayer's ownership interests in the property." Fognini [93-1 USTC ¶50,180], No. 91-75359, 1993 WL 126410, at *2. When a federal tax lien is filed, it is state law which determines whether the delinquent taxpayer has an interest in property to which the federal lien may attach. Id. However, "[t]he transfer of property subsequent to the attachment of the lien does not affect the lien, for 'it is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere [subject to the incumbrance]. . . .' " Id. (citing United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57 (1958)).

26 U.S.C.A. §7425 (West 1989) outlines the manner in which a federal tax lien may be divested under local law. §7425 provides in part:

(b) Other sales.--Notwithstanding subsection (a) [covering judicial sales] a sale of property on which the United States has or claims a lien, or a title derived from enforcement of a lien, under the provisions of this title, made pursuant to an instrument creating a lien on such property, pursuant to a confession of judgment on the obligation secured by such an instrument, or pursuant to a nonjudicial sale under a statutory lien on such property--(1) shall, except as otherwise provided, be made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1);. . . .

Treasury Regulation §301.7425-2(1) defines the term "non-judicial sale" as including a state property tax sale. Fognini [93-1 USTC ¶50,180], No. 91-75359, 1993 WL 126410, at *2. Therefore, once a federal tax lien is properly filed, the United States must be given notice of any nonjudicial sale, in this case the tax sale, or the property remains subject to the federal lien. See Vereyken v. Annie's Place, Inc., 964 F.2d 593, 596 (6^th Cir. 1992); Baldwin County Savings and Loan Ass'n v. I.R.S., 921 F.2d 1229, 1231 (11^th Cir. 1991); Security Pacific Mortgage Corp. v. Choate [90-1 USTC ¶50,143], 897 F.2d 1057, 1058 (10^th Cir. 1990); Fognini [93-1 USTC ¶50,180], No. 91-75359, 1993 WL 126410, at *2.

In the instant case, the United States ' tax lien was recorded with the Wayne County Register of Deeds on December 21, 1995. Plaintiff does not assert that it gave notice to the United States or the IRS of the tax sale (timely or otherwise). In fact, defendant United States ' assertion that plaintiff failed to respond to its interrogatories and requests for admissions went unchallenged. Because plaintiff failed to respond to the United States ' request for admissions served on January 22, 1999, the court finds that plaintiff is deemed to have admitted that the United States was never given proper notice of the tax sale. Fed.R.Civ.P. 36(a); See First Requests for Admission to RIMCO, ¶6, p. 3. Therefore, the property remains subject to the United States ' federal tax liens.

Although plaintiff requests that this court stay the instant action pending the bankruptcy proceedings of plaintiff's parent company, the court finds that plaintiff's argument lacks merit. Plaintiff has not filed for bankruptcy relief. Instead, plaintiff's parent company is currently a debtor in a bankruptcy proceeding. Plaintiff has offered no support for its position that a bankruptcy filing by a parent company automatically stays actions against a wholly owned subsidiary. 11 U.S.C.A. §362(a)(3) provides for an automatic stay against "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." The United States is not attempting to obtain possession of the property or to exercise control over the property. Moreover, the United States is not requesting that the property be sold to satisfy its existing federal tax lien at this time. Instead, the United States is seeking to preserve its status as a federal tax lien holder as a result of plaintiff's lawsuit seeking to quiet title to 137 McLean, Highland Park , Michigan .

Furthermore, the United State 's federal tax lien was recorded with the Wayne County Register of Deeds at the time MCA was granted a mortgagee interest in the property. Plaintiff and MCA were on notice at the time of the tax sale of the United States ' lien interest on the property. Therefore, the grant of summary judgment would not adversely affect the property interest of MCA's bankruptcy estate.

Conclusion

Because federal law controls the discharge of a federal tax lien and plaintiff failed to comply with the notice requirements of 26 U.S.C.A. §7425, the federal tax lien filed against 137 McLean, Highland Park, Michigan, has not been discharged and the United States' motion for summary judgment is hereby GRANTED. In addition, the court no longer retains jurisdiction pursuant to 28 U.S.C.A. §1444, as the United States is no longer a party in the instant action. Therefore, the case is hereby REMANDED for further proceedings in state court.

SO ORDERED.

¹ MCA Financial Corporation, MCA Mortgage Corporation, Mortgage Corporation of America, Inc., RIMCO Financial Corporation, RIMCO Management Company, RIMCO Building Company, RIMCO Development Company, Real Estate Solutions Group, RIMCO Realty and Mortgage, Mortgage Corporation of America, Warehouse Lenders, Inc., and Property Corporation of America.

 

 

 

In re Ross Tudisco, Debtor. Ross Tudisco, Plaintiff-Appellant v. United States of America, Dept. of Treasury, Internal Revenue Service, Defendant-Appellee

(CA-2), U.S. Court of Appeals, 2nd Circuit, 98-5075, 7/7/99, 183 F3d 133, Affirming an unreported District Court decision

[Code Sec. 6321 ]

Tax lien: Property subject to: Bankruptcy: Exempt property: Pension.--A federal tax lien attached to pension payments that were exempt from the delinquent taxpayer's bankruptcy estate.

[Code Sec. 6871 ]

Bankruptcy: Discharge: Willful attempt to evade taxes.--An individual's tax liabilities were not discharged in his Chapter 7 bankruptcy because they arose from his willful attempt to evade taxes. Although the debtor was aware of his obligation to pay taxes, he failed to file returns and he gave his employer a false affidavit intended to establish his exemption from withholding. Ross Tudisco, pro se, appellant. Varuni Nelson, Kevin P. Mulry, Assistant United States Attorneys, Of Counsel, for Zachary W. Carter, United States Attorney, Eastern District of New York, for defendant-appellee, United States of America, Department of Treasury, Internal Revenue Service.

Before: CALABRESI and PARKER, Circuit Judges, and TRAGER, Judge. ^*

CALABRESI, Circuit Judge:

Plaintiff-appellant Ross Tudisco appeals from the judgment entered in the United States District Court for the Eastern District of New York (Leonard D. Wexler, Judge) affirming the final judgment of the United States Bankruptcy Court for the Eastern District of New York (Francis G. Conrad, Judge). The bankruptcy court had dismissed Tudisco's adversary proceeding against the United States Department of Treasury, Internal Revenue Service ("IRS"). We affirm.

BACKGROUND

On January 3, 1996, Tudisco's debts were discharged in a Chapter 7 bankruptcy action. This case arises in the aftermath of that discharge, as Tudisco sought, in two parallel Chapter 13 proceedings, to stave off tax collection efforts by the IRS .

After the termination of the Chapter 7 case, Tudisco initiated a Chapter 13 proceeding, in order to develop a plan for adjusting his debts ("plan proceeding"). During the course of the plan proceeding, which came before Judge Eisenberg, Tudisco filed an objection to a claim on his assets by the IRS. He did so on two grounds: (1) that his tax liability for the years 1985 through 1991 had been discharged in his prior Chapter 7 bankruptcy ("dischargeability issue") and (2) that his only assets--his pension--were exempt property and hence not subject to a tax lien ("lien issue"). After both parties had briefed these questions, Tudisco began a separate Chapter 13 adversary proceeding against the IRS before Judge Conrad. Tudisco's complaint in the adversary proceeding raised the same two issues that he had asserted in the plan proceeding.

Judge Eisenberg held a hearing on October 28, 1997, and disposed of the lien but not the dischargeability question. The entry for this date on the Bankruptcy Court docket reads: "Court finds that all exempt property is subject to a lien, all other issues are same as addressed in the adversary proceeding pending before Judge Conrad, matters are adjourned pending resolution of adversary, submit order on exemption." Not surprisingly, in light of Judge Eisenberg's decision, the adversary proceeding before Judge Conrad addressed only Tudisco's dischargeability claim, and Judge Conrad's order of July 30, 1998, dismissing the adversary proceeding, made explicit reference only to this issue.

Following Tudisco's timely appeal of Judge Conrad's dismissal order, the district court considered both the dischargeability and lien issues. It affirmed the bankruptcy court's decision that Tudisco's tax debt was nondischargeable under 11 U.S.C. §523(a)(1)(C). The district court also held that it lacked jurisdiction over the lien issue because (1) Judge Eisenberg's decision "was not embodied in a separate written order or entered as a judgment" and was therefore not a final, appealable order, and (2) had it been a final order, appeal from it would have been untimely. Federal Rule of Bankruptcy Procedure 8002(a) requires that a notice of appeal be filed within ten days of a final order. The August 6, 1998, notice of appeal was filed more than ten days after Judge Eisenberg's October 28, 1997, order. In dicta, the district court went on to note that the bankruptcy court had ruled correctly on the underlying substantive issue, since, under 26 U.S.C. §6321 and 11 U.S.C. §522(c)(2)(B), a debtor's exempt assets, including a pension, are subject to attachment by an IRS lien.

DISCUSSION

A. STANDARD OF REVIEW

The district court's order affirming the bankruptcy court is "subject to plenary review." Shugrue v. Air Line Pilots Ass'n, Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 988 (2d Cir. 1990). This court "review[s] conclusions of law de novo, and findings of fact under a clearly erroneous standard." Id.

B. DISCHARGEABILITY ISSUE

A debtor who files successfully under Chapter 7 of the Bankruptcy Code generally receives a complete discharge from pre-petition debts. See 11 U.S.C. §727(b) (1994). Certain debts are, however, excepted from discharge. See 11 U.S.C. §523 (1994). In particular, 11 U.S.C. §523(a)(1)(C) excepts from discharge any tax debt "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." The government invokes this exception and claims that Tudisco's tax debt was not discharged in his prior Chapter 7 filing. The government does not argue that Tudisco filed a fraudulent return, but contends instead that he willfully evaded taxes.

Although this court has yet to interpret the willfulness exception under §523(a)(1)(C), we benefit from the analysis of six other circuits. See United States v. Fegeley (In re Fegeley) [97-2 USTC ¶50,544], 118 F.3d 979 (3d Cir. 1997); In re Birkenstock, 87 F.3d 947 (7th Cir. 1996); Dalton v. Internal Revenue Service, 77 F.3d 1297 (10th Cir. 1996); Bruner v. United States (In re Bruner) [95-2 USTC ¶50,356], 55 F.3d 195 (5th Cir. 1995); Haas v. Internal Revenue Service (In re Haas) [95-1 USTC ¶50,200], 48 F.3d 1153 (11th Cir. 1995); Toti v. United States (In re Toti) [94-1 USTC ¶50,235], 24 F.3d 806 (6th Cir. 1994). The interpretations given to this exception by the other circuits, while not completely uniform, compare Haas [95-1 USTC ¶50,200], 48 F.3d at 1156, with Bruner [95-2 USTC ¶50,356], 55 F.3d at 200, see infra, all support the conclusion that the exception bars discharge of Tudisco's tax debt.

The willfulness exception consists of a conduct element (an attempt to evade or defeat taxes) and a mens rea requirement (willfulness). See Griffith v. United States (In re Griffith), 174 F.3d.1222, 1224 (11th Cir. 1999); In re Fegeley [97-2 USTC ¶50,544], 118 F.3d at 983; In re Birkenstock, 87 F.3d at 951. We address each of these in turn.

Most circuits have held that a simple nonpayment of taxes does not satisfy §523(a)(1)(C)'s conduct requirement. Thus, the Eleventh Circuit concluded that mere knowledge of a tax debt, accompanied by nonpayment, could not render a tax debt nondischargeable under the exception. See In re Haas [95-1 USTC ¶50,200], 48 F.3d at 1156. As the In re Haas court noted, "the defining characteristic of all debtors--honest and dishonest, alike--[is] insufficient resources to honor all of [their] obligations." Id. A broad reading of the exception--rendering nondischargeable any tax debts, except those "discovered . . . in the course of . . . bankruptcy proceedings," id. at 1155--would eviscerate the basic "fresh start" policy of the Bankruptcy Code for the "honest but unfortunate debtor." Id at 1156. The court buttressed this conclusion by contrasting the language of the Chapter 7 exception with that of provisions of the Internal Revenue Code, which penalize "attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof." Id. at 1156-57 (quoting 26 U.S.C. §7201 (1994) and also looking to language of 26 U.S.C. §§6531(2), 6653, 6672 (1994)). "The omission of the words 'or payment thereof,'" from the bankruptcy exception, the In re Haas court concluded, "indicates that Congress did not intend that a failure to pay taxes, without more, should result in the nondischargeability of a debtor's tax liabilities in bankruptcy." In re Haas [95-1 USTC ¶50,200], 48 F.3d at 1157. Other courts have reached similar conclusions. See In re Fegeley [97-2 USTC ¶50,544], 118 F.3d at 983; In re Birkenstock, 87 F.3d at 951; Dalton , 77 F.3d at 1301.

In re Haas has, however, received some criticism. See In re Bruner [95-2 USTC ¶50,356], 55 F.3d at 200. After disapproving of the In re Haas court's analysis, insofar as it contrasted §523(a)(1)(C) with provisions of the Internal Revenue Code, the Fifth Circuit in In re Bruner took the position that the bankruptcy exception "surely encompasses both acts of commission as well as culpable omissions." Id. In re Haas has also been criticized by a later panel in its own circuit. See In re Griffith , 174 F.3d at 1225-27.

To the extent that In re Haas and In re Bruner actually do conflict, we need not, however, decide between them. Because Tudisco engaged in more than "mere nonpayment," his conduct constitutes an attempt to evade or defeat taxes under either standard. His failure to pay his taxes was accompanied by a failure to file his tax returns, at least until 1992. While he may not have transferred assets or created shell corporations, cf. In re Birkenstock, 87 F.3d at 952 (finding the conduct element satisfied based on a failure to pay, a failure to file, and the creation of a shell trust); Bruner [95-2 USTC ¶50,356], 55 F.3d at 200 (finding the conduct element satisfied based on a failure to pay, a failure to file, a resort to an "inordinate number of cash transactions," and the creation of a "shell entity"), Tudisco did submit a patently false affidavit to his employer. On its face, the affidavit was clearly intended to establish Tudisco's exemption from income tax withholding. Under the circumstances, we conclude that the bankruptcy court's finding--that Tudisco attempted to evade or defeat federal income taxes--is not clearly erroneous.

Similarly, the finding that Tudisco "willfully" evaded taxes is not reversible. The mens rea requirement of §523(a)(1)(C) mandates that the debtor's conduct be undertaken "voluntarily, consciously or knowingly, and intentionally." Dalton , 77 F.3d at 1302; see also In re Bruner [95-2 USTC ¶50,356], 55 F.3d at 197; In re Toti [94-1 USTC ¶50,235], 24 F.3d at 809.

Tudisco himself conceded that he knew that he had to pay taxes. At his trial, he retracted this statement and instead claimed that several years of research had led him to believe that he was not obliged to pay taxes. When asked to identify the sources that supported this conclusion, he responded with evasive answers such as "books" or "people that I met, travelers from different parts of the country," whose names he had long since forgotten. Given these facts, the bankruptcy court could reasonably have rejected his retraction.

There is sufficient evidence to support the conclusion that Tudisco willfully sought to evade his federal tax obligations. The district court therefore properly affirmed the bankruptcy court's finding on this issue.

C. LIEN ISSUE

The court below incorrectly held that it lacked jurisdiction over the lien issue. But because we find that Tudisco's claim fails on the merits, we affirm the district court's decision upholding the bankruptcy court's dismissal of the adversary proceeding.

1. Jurisdiction

The district judge concluded that jurisdiction did not exist under 28 U.S.C. §158(a) because Judge Eisenberg's order on the lien issue in the plan proceeding was not an appealable final order. The district court also noted that the order was not final because it had not been reduced to writing. But whether an order is final turns not on whether it was written or oral. Rather, an order is final, and thus appealable, in the bankruptcy context, if it "completely resolve[s] all of the issues pertaining to a discrete claim, including issues as to proper relief." Official Comm. of Subordinated Bondholders v. Integrated Resources, Inc. (In re Integrated Resources, Inc.), 3 F.3d 49, 53 (2d Cir. 1993) (emphasis omitted); see also LTV Steel Co. v. United Mine Workers (In re Chateaugay Corp.), 922 F.2d 86, 90 (2d Cir. 1990) (stating that a bankruptcy order is final for appeal purposes if it "resolve[s] discrete disputes within the larger case . . ."). Had it been final, the court added, the appeal from it would not have been timely under Federal Rule of Bankruptcy Procedure 8001, which provides that a notice of appeal must be filed within ten days.

Judge Eisenberg's order was in fact not final when issued and had not become final by the date of Tudisco's appeal because the plan proceeding had not then concluded. Perhaps as a result, Tudisco never appealed from it. While Tudisco could have taken an interlocutory appeal of Judge Eisenberg's ruling pursuant to 28 U.S.C. §158(a)(3) (authorizing appeal from interlocutory orders of bankruptcy court "with leave" of the district court), he was not required to do so. Cf. Sonnax Indus., Inc. v. Tri Component Prods. Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280, 1283 n.1 (2d Cir. 1990) (noting that §158(a) "authorizes district courts to hear appeals from interlocutory orders by discretionary leave of the district court" (emphasis added)); see also Elliott v. Four Seasons Properties (In re Frontier Properties, Inc.), 979 F.2d 1358, 1362-64 (9th Cir. 1992) (trustee did not waive an issue by failing to bring an interlocutory appeal). Accordingly, we agree that the district court lacked jurisdiction to review any part of the plan proceeding.

The fact that the district court lacked jurisdiction over Judge Eisenberg's order in the plan proceeding, does not, however, mean that the district court lacked jurisdiction over the lien issue. Tudisco's complaint in the adversary proceeding raised both the dischargeability question and the lien issue. In order for Judge Conrad to dismiss the case with prejudice--which he did--he had to reach a decision on the merits of all the issues in Tudisco's complaint. Cf. Fed. R. Civ. P. 41(b) (providing that an involuntary dismissal "operates as an adjudication upon the merits"). Therefore, a rejection of Tudisco's position on the lien issue was necessarily, if only implicitly, a part of the final dismissal order of the bankruptcy court. As a result, the district court had jurisdiction pursuant to 28 U.S.C. §158(a), and we, in turn, have jurisdiction under 28 U.S.C. §158(d) (giving the courts of appeals jurisdiction over final decisions by district courts).

2. Merits

We must, therefore, reach the merits of Tudisco's claim that the tax lien cannot reach his exempt assets.

In the plan proceeding, the IRS filed a proof of claim, indicating $179,001.81 as a secured debt. Tudisco objected, arguing, inter alia, that this figure represented his accumulated "retirement," and that his retirement was an exempt asset.

Both Tudisco and the government have assumed, but not demonstrated, that Tudisco's pension is indeed exempt. See 11 U.S.C. §522(b) (authorizing certain property to be exempted from the estate and thereby to escape liquidation in satisfaction of creditors' claims). We need not decide whether this is in fact the case. As the government correctly argues, even if the pension is exempt, the tax lien nevertheless attaches.

Under 26 U.S.C. §6321, a tax liability gives rise to a lien, which attaches to "all [of the taxpayer's] property and rights to property." The Supreme Court has given an expansive reading to this language, stating that it "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985); see also Bourque v. United States (In re Bourque) [97-2 USTC ¶50,630], 123 F.3d 705, 706 n.2 (2d Cir. 1997) (quoting 11 U.S.C. §522(c)(2)(B) in discussing 26 U.S.C. §6321: " '[A] tax lien, notice of which is properly filed,' is effective against exempt property . . . and may not be avoided."). As a result, even if Tudisco's retirement funds are exempt from the bankruptcy estate, they are nevertheless subject to a tax lien.

CONCLUSION

In light of Tudisco's acknowledged failure to pay his taxes, his failure to file his tax returns until 1992, and his submission of false withholding statements to his employer, the finding that he willfully sought to evade or defeat payment of taxes was not clearly erroneous, and his tax liability was, therefore, nondischargeable. Since, moreover, a properly filed tax lien is effective even against property exempt from the bankruptcy estate, the bankruptcy court was correct in dismissing Tudisco's adversary proceeding. Accordingly, we AFFIRM the decision of the district court upholding that dismissal.

^* The Honorable David G. Trager, Judge of the United States District Court for the Eastern District of New York, sitting by designation.

 

 

In the Matter of John Davis Orr, Debtor. Internal Revenue Service, Appellee v. John Davis Orr, Appellant

(CA-5), U.S. Court of Appeals, 5th Circuit, 98-40170, 7/12/99, 180 F3d 656, 180 F3d 656. Affirming an unreported District Court decision

[Code Sec. 6321 ]

Liens: Delinquent taxpayer: Beneficiary: Spendthrift trust: Distributions: Property subject to lien.--An IRS lien on a debtor's income distributions from a spendthrift trust predated and survived the bankruptcy because it attached to future distributions at the time of its creation, rather than as of each distribution. The lien against future distributions was valid since the equitable interest the taxpayer had in the trust corpus and his legal entitlement to future income distributions constituted property to which a lien could attach and survive until the tax liability was satisfied.

Before SMITH, DEMOSS and STEWART, Circuit Judges.

DEMOSS, Circuit Judge:

A spendthrift trust beneficiary who extinguished personal federal tax liabilities through bankruptcy now appeals the determination by the district court that distributions from the trust are subject to a prebankruptcy federal tax lien until the tax liability is satisfied. The district court's order conclusively settles a discrete issue within the bankruptcy case, and is appealable pursuant to 28 U.S.C. §158(d). We conclude that the federal tax lien on Orr's income distributions from this Texas spendthrift trust attached to future distributions at the time of the creation of the lien, and not as of the time each distribution was made. The lien thus predates and survives the bankruptcy. The judgment below is, therefore, affirmed.

I.

On April 24, 1965, Unis Chapman Eichelberger executed a document entitled "Unis Chapman Eichelberger Chapman Ranch Trusts" ("Trust Document"). Eichelberger's grandson, John Davis Orr, is the named principal beneficiary of the Unis Chapman Eichelberger Chapman Ranch Trust I ("Trust"), described in the Trust Document. The Trust provides that Orr, after reaching the age of thirty, shall receive "all of the net income of the trust distributed annually or at more frequent intervals." The Trust lasts for Orr's life and then terminates. Orr has limited testamentary power over the distribution of the Trust's property after his death, but if Orr does not exercise this power the property is distributed to Orr's then-living descendants, and if no such persons exist, to charity. The spendthrift provision reads as follows:

No trust assets or income shall be liable for the debts of any beneficiary, nor subject to seizure under any judicial writ or proceeding. No beneficiary shall have the power to give, grant, sell, assign, transfer, mortgage, pledge, encumber, or in any manner to anticipate or dispose of the interest in the trust estate or its income or to dispose of the interest in the trust estate or its income or to dispose of any trust property until it has been actually delivered to him in accordance with the terms hereof, except that the foregoing shall in no manner restrict the authority otherwise granted to any trustee who is a beneficiary to distribute the trust property as provided herein.

Despite the generous provisions made for him by his grandmother, Orr has encountered financial difficulties. He filed for bankruptcy relief under Chapter 7 on November 1, 1995, and received his discharge on May 21, 1996. He has received no distributions from the Trust since filing for bankruptcy relief. And, most pertinent to the present controversy, he had previously run afoul of the Internal Revenue Service by failing to pay income taxes.

Orr failed to file his federal income tax returns for 1984 through 1991. After examination, the IRS and Orr agreed to the amount of tax and signed a Form 4549-CG, Income Tax Examination Changes, consenting to assessment and collection on October 1, 1992. On October 26, 1992, the IRS assessed the taxes, penalties, and interest reflecting the consent. Despite notice and demand, Orr's federal income tax liabilities for the taxes assessed on October 26, 1992 (to the date of the bankruptcy petition) were as follows:

Year                                                             Amount

1984 ......................................................... $160,062.08

1985 .........................................................   63,126.91

1986 .........................................................   88,018.08

1987 .........................................................   79,723.98

1988 .........................................................  141,729.83

1989 .........................................................   29,435.00

1990 .........................................................   45,436.27

1991 .........................................................   23,842.35

 

Notices of federal tax liens were filed in the personal and real property records of Nueces County , Texas for the 1984 through 1991 income tax liabilities on January 11, 1993. Orr also owed federal income taxes on the date of petition for 1992 in the amount of $2.69. Notices of federal tax liens were filed in the personal and real property records of Nueces County for the 1992 income tax liability on December 28, 1993. At the times the notices of federal tax liens were filed, Orr was a resident of Nueces County .

Orr filed this adversary action to determine the answer to one stipulated issue: "Whether the Internal Revenue Service's Notices of Federal Tax Lien attached to any interest of Debtor in the Unis Chapman Eichelberger Chapman Ranch Trust I to secure the payment of Debtor's federal income tax liabilities for 1984 through 1992?" The parties agree that Orr can be granted a personal discharge from his federal tax liability for 1984 through 1991 pursuant to 11 U.S.C. §727, but not for his liability for 1992. Furthermore, the parties stipulated that the federal tax liens attached to Orr's property or interests in property in existence at the time of his bankruptcy filing are not dischargeable as to the property to which they attached. There is no stipulation as to whether the federal tax liens attached or attaches to any of Orr's interest in the Trust or its assets, or that Orr has or had an interest in the Trust or its assets.

Orr prevailed in the bankruptcy court. The IRS appealed to the district court, which reversed the bankruptcy court. Orr now appeals the judgment of the district court.

II.

Counsel were instructed to brief the question of "[w]hether the order from which appeal is taken in the bankruptcy case is a final order for purposes of appeal." The parties agree that this Court may properly exercise its appellate jurisdiction, invoking the grant of jurisdiction in 28 U.S.C. §158(d). That statute provides that "[t]he courts of appeals shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees entered under subsections (a) and (b) of this section." 28 U.S.C. §158(d). Subsection (a) provides for the appellate jurisdiction of district courts over inter alia, "final judgments, orders, and decrees of bankruptcy judges." (Subsection (b), which is inapplicable in this case, pertains to the jurisdiction of bankruptcy appellate panels.)

Orr prevailed on his motion for summary judgment in the bankruptcy court, based on his contention that the tax liens do not attach to his post-discharge income distributions from the Trust. In the context of a bankruptcy proceeding, this grant of summary judgment qualified as a "final order" reviewable by the district court. This Court has explained:

A [bankruptcy] case need not be appealed as a "single judicial unit" at the end of the entire bankruptcy proceeding, but the order must constitute a `final determination of the rights of the parties to secure the relief they seek in this suit,'" or the order must dispose of a discrete dispute within the larger bankruptcy case for the order to be considered final.

Texas Extrusion Corp. v. Lockheed Corp. (In re Texas Extrusion Corp.), 844 F.2d 1142, 1155 (5th Cir. 1988) (internal citations omitted). There is, therefore, a lower threshold for meeting the "final judgments, orders, and decrees" appealability standard under 28 U.S.C. §158(a) than there is for the textually similar "final decisions" appealability standard under 28 U.S.C. §1291. In this case, the decision of the bankruptcy court resolved all dispositive issues pertaining to the discrete dispute concerning the post-discharge viability of pre-discharge federal tax liens on Orr's interest in the Trust, and therefore was ripe for appeal to the district court.

Likewise, the district court's reversal of the bankruptcy court is reviewable by the court of appeals pursuant to 28 U.S.C. §158(d). Review of "final decisions, judgments, orders, and decrees" under §158(d) is more akin to review of "final decisions" under §1291 in nonbankruptcy appeals, whereby "[a] decision is final when it 'ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'" Briargrove Shopping Ctr. Joint Venture v. Pilgrim Enters., Inc., 170 F.3d 536, 539 (5th Cir. 1999) (quoting Askanase v. Livingwell, Inc., 981 F.2d 807, 810 (5th Cir. 1993) (quoting Coopers & Lybrand v. Livesay, 437 U.S. 463, 467, 98 S. Ct. 2454 (1978))). But even under §158(d), "this court's determination of whether an order is final (and therefore appealable) is more liberal in the bankruptcy context" than under §1291. See Lentino v. Cage (In re Lentino), No. 98-20626, 1999 WL 77140, at *2 (5th Cir. Mar. 5, 1999) (summary calendar).

If this adversary proceeding stood alone as an independent case, it would be appealable even under the higher standard of §1291. Now that the district court has overruled the bankruptcy court and ordered "that IRS' lien shall attach to all income distributions made to Orr from the spendthrift trust at issue," there is nothing left for the bankruptcy court to do. Hence, the matter is sufficiently "final" for appellate review.

III.

Orr is the beneficiary of a spendthrift trust. Texas law has historically respected the validity of spendthrift trusts. See, e.g., Caples v. Buell, 243 S.W. 1066 (Tex. Comm'n App. 1922); see generally 72 Tex. Jur. 3d Trusts §§37-42 (1990). The state specifically acknowledges the validity of spendthrift trusts by statute. See Tex. Prop. Code Ann. §112.035 ( Vernon 1995).

The creation of a trust involves the separation of legal and equitable ownership of property. The trustee is the legal owner of the corpus of a spendthrift trust; the beneficiary is the equitable owner. See, e.g., Burns v. Miller, Hiersche, Martens & Hayward, P.C., 948 S.W.2d 317, 322 (Tex. App.--Dallas 1997, writ denied).

The tax liens at issue in this case were created pursuant to 26 U.S.C. §6321, which provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. §6321. "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267, 66 S. Ct. 108, 110 (1945). "Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719, 105 S. Ct. 2919, 2924 (1985). The Supreme Court has construed the language of §6321 to mean that a tax lien attaches not only to property owned by the debtor at the time the lien attaches, but also to after-acquired property until the tax liability is satisfied. See Glass City Bank [45-2 USTC ¶9449], 326 U.S. at 267-69, 66 S. Ct. at 110-11.

The interaction between federal and state law in this area is an important facet of our analysis. It is well-settled that in federal taxation cases, the definition of underlying property interests is left to state law, but the consequences that attach to those interests are determined by reference to federal law. See United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 683, 103 S. Ct. 2132, 2137 (1983); Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513, 80 S. Ct. 1277, 1280 (1960). Thus, we look to state law to determine the character of any property right Orr may have in future distributions from the Trust, but federal law determines whether or not, and at what point in time, a tax lien may attach to that property interest. See, e.g., United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55-57, 78 S. Ct. 1054, 1057-58 (1958).

A.

The principle of the Glass City Bank case (that a tax lien attaches to the debtor's after-acquired property until the tax liability is satisfied) was long ago extended to include the attachment of a tax lien to after-acquired distributions from a spendthrift trust. See United States v. Dallas Nat'l Bank [46-1 USTC ¶9117], 152 F.2d 582 (5th Cir. 1945) (hereinafter, Dallas I), appeal after remand [47-2 USTC ¶9405], 164 F.2d 489 (5th Cir. 1947), appeal after second remand [48-1 USTC ¶9242], 167 F.2d 468 (5th Cir. 1948) (hereinafter, Dallas III). The precise holding of the Dallas opinions is the main bone of contention in the appeal of Orr's case, which involves the added feature of an intervening bankruptcy. Orr's filing for bankruptcy relief under Chapter 7 did not affect the validity of any tax lien the IRS may have had prior to the filing. Ordinarily, liens and other secured interests survive bankruptcy. See Farrey v. Sanderfoot, 500 U.S. 291, 297, 111 S.Ct. 1825, 1829 (1991); see also 11 U.S.C. §522(c)(2)(B) ("Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose before the commencement of the case, except a tax lien, notice of which is properly filed[.]"); Isom v. United States (In re Isom) [90-1 USTC ¶50,216], 901 F.2d 744, 745 (9th Cir. 1990) ("The liability for the amount assessed remains legally enforceable even where the underlying tax debt is discharged in the bankruptcy proceeding. A discharge in bankruptcy prevents the I.R.S. from taking any action to collect the debt as a personal liability of the debtor. [T]heir property remains liable for a debt secured by a valid lien, including a tax lien."). There is no discussion in 11 U.S.C. §541(c)(2) of liens, tax or otherwise, that attach before bankruptcy discharge. Repeatedly, courts have been willing to attach liens to post-discharge benefits despite the "fresh start" policy of the bankruptcy scheme. See, e.g., Connor v. United States (In re Connor) [94-2 USTC ¶50,296], 27 F.3d 365 (9th Cir. 1994); In re Wesche [96-1 USTC ¶50,265], 193 B.R. 76 (Bankr. M.D. Fla. 1996). The IRS therefore has a valid tax lien against Orr's interest in the Trust if that lien attached before Orr's personal liabilities were extinguished in bankruptcy. The dispositive issue is, therefore, the question of whether a federal tax lien in this situation attaches to a spendthrift trust beneficiary's equitable interest in the trust itself or to each individual distribution as it is paid to the beneficiary. Both parties to this appeal claim support for their respective positions in Dallas .

Dallas involved a federal tax liability owed by Carolyn Maxwell, arising from several stock transactions. Mrs. Maxwell was a resident of England , so the government sought to enforce the tax liability by imposing a lien on her interest in a spendthrift trust, of which the Dallas National Bank was trustee. As in the customary trust arrangement, the trustee possessed legal title to the trust funds. Mrs. Maxwell received monthly income payments from the trust. This Court concluded that the government had a valid lien, and explained the result as follows:

Mrs. Maxwell has no title to the corpus of any property other than the profits after they have accrued and have been passed to her account and made available to her by the Trustee. In other words, after "the net revenues," amounting to approximately $54 per month, accrue, or are set apart and become payable to her, such net revenues then belong to her and are then subject to the lien of the Government for taxes, and are available as an appropriate res in a proceeding in rem by the Government to have a lien for delinquent taxes declared and enforced against such revenues.

The Government is entitled to a lien upon these monthly payments of net revenue in the hands of the Trustee, by virtue of the law as stated in 26 U.S.C.A.Int.Rev.Code, §§3670 and 3671.

Under the holding of [Glass City Bank], that the lien of the United States attaches to after-acquired property, we think that such lien will continue to be fastened on the monthly income from the trust as it becomes payable to the taxpayer.

Dallas I [46-1 USTC ¶9117], 152 F.2d at 585 (footnote omitted). In a following appeal (Dallas III), Circuit Judge Edwin R. Holmes of Yazoo City , Mississippi , noted in a specially concurring opinion that:

The taxpayer is the equitable owner for life of an undivided interest in Texas realty, which under local law is not subject to seizure or sale for ordinary debts incurred by the taxpayer; but this does not mean that testamentary restraints against alienation should prevail against the fastening of a lien for federal income taxes on the taxpayer's equitable interest in the trust estate. We are, in fact, holding the contrary in this case.

Dallas III [48-1 USTC ¶9242], 167 F.2d at 469 (Holmes, J., specially concurring). Orr emphasizes the language in Dallas I that "such lien will continue to be fastened on the monthly income from the trust as it becomes payable to the taxpayer," 152 F.2d at 585 (emphasis supplied), in support of his contention that no valid lien would exist until he actually received a distribution from the trust, and because through bankruptcy he has discharged his personal liability for the tax, the lien can no longer continue to attach to future distributions. See, e.g., Connor [94-2 USTC ¶50,296], 27 F.3d at. The IRS emphasizes the language in Dallas III indicating that the lien attaches to Orr's "equitable interest in the trust estate," [48-1 USTC ¶9242], 167 F.2d at 469 (emphasis supplied), and therefore precedes and survives Orr's bankruptcy.

The Dallas panels did not need to confront the question presented by Orr's case. The trust distributions paid to Mrs. Maxwell fell into the category of after-acquired property at the time she received them. There was no bankruptcy, as there is in this case, to discharge the debtor's personal liability for the taxes owed. As Mrs. Maxwell received each new distribution from the trust, a new §6321 lien would fasten onto the distribution so long as she owed the taxes. The law was settled in Glass City Bank that such after-acquired property became subject to a statutory federal tax lien on the debtor's "property," and thus there was no need to decide whether the lien could have attached earlier. The Dallas I opinion specifically invokes Glass City Bank to justify its result. Thus, the opinion of Judge Holmes (which was not joined by any other judge) that the tax lien validly attached to Mrs. Maxwell's equitable interest in the trust was not necessary to the decision in that case.

B.

The issue addressed by Judge Holmes, specially concurring in the Dallas III appeal, is squarely presented by Orr's case, because the only way the IRS can collect from Orr's trust distributions is if the tax lien on future distributions attached before Orr's personal liability was discharged through bankruptcy. With the issue now squarely presented, fifty-one years later, we conclude that the dictum announced by Judge Holmes was correct. Texas law recognizes the validity of the Trust's spendthrift clause. Texas law acknowledges that a spendthrift trust beneficiary possesses an equitable ownership interest in the trust corpus. And Texas law respects the Trust's bestowal upon Orr of a fully vested right to receive distributions from the trust on at least an annual basis. These interests constitute "property" or "rights to property" under §6321, even though the beneficiary does not possess total, exclusive, fee-simple ownership.

The broad scope of 26 U.S.C. §6321, encompasses "property" in this sense, as befits that statute's purpose of tax collection, see United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20, 105 S. Ct. 2919, 2923-24 (1985). Courts have routinely concluded that §6321 tax liens attach to other types of equitable interests. See, e.g., Southern Bank v. IRS [85-2 USTC ¶9670], 770 F.2d 1001, 1003, 1009-10 (11th Cir. 1985) (equitable right of redemption); Runkel v. United States [76-1 USTC ¶9152], 527 F.2d 914, 916 (9th Cir. 1975) (equitable interest in real property); United States v. Johansson [71-2 USTC ¶9602], 447 F.2d 702, 705 (5th Cir. 1971) (equitable lien); United States v. Klimek [97-1 USTC ¶50,281], 952 F. Supp. 1100, 1112 (E.D. Pa. 1997) (equitable ownership of real property); Bank of Lyons v. Cavanaugh (In re Cavanaugh), 153 B.R. 224, 228 (Bankr. N.D. Ill. 1993) (equitable interest in a land trust). ¹

Moreover, the attachment of the lien in this case is not at odds with the Texas policy of respecting the wishes of the creator of a spendthrift trust by enforcing the trust's anti-alienation provisions. The wishes of the creator of the spendthrift trust are to ensure a stream of income for the beneficiary by preventing the beneficiary from leveraging present purchasing power out of future payments. The state may (and Texas does) think it advisable to respect the wishes of the creator of the trust by enforcing the spendthrift term. Creditors in Texas are on notice of the unenforceability of any loan agreement with a trust beneficiary that purports to grant an interest in future distributions from a spendthrift trust. The risk of default is thereby placed on the shoulders of creditors who rely on the spendthrift trustee's income stream.

The government does not stand in the shoes of an ordinary creditor seeking to attach distributions from a spendthrift trust. Consistent with the imperative nature of tax collection, §6321 gives the government an advantage over ordinary creditors in collection matters. Moreover, the rationale for shifting the risk of default to creditors, who ought to examine the terms of a trust before agreeing to accept the right to future distributions as collateral, does not apply to the government, which imposes the income tax unilaterally and without reference to spendthrift protections. The wishes of the creator of a spendthrift trust cannot overcome the government's need to collect tax and a spendthrift trust beneficiary's duty to pay tax. It does not make sense to permit the spendthrift trust to be a vehicle for tax immunity.

Though not dispositive of the meaning of "property and rights to property" under §6321, we further note that Texas law supports the classification of Orr's interest in the Trust as "property." In determining the ordinary meaning of the term "property" for the purposes of statutory construction, the Supreme Court of Texas has characterized it as extending to "every species of valuable right and interest." State v. Public Util. Comm'n, 883 S.W.2d 190, 200 ( Tex. 1994) (citing Womack v. Womack, 141 Tex. 299, 172 S.W.2d 307, 308 (1943)); cf. Tex. Prop. Code Ann. §111.004(12) ( Vernon 1995) (for purposes of the Trust Code: `Property' means any type of property, whether real, tangible or intangible, legal, or equitable. The term also includes choses in action, claims, and contract rights, including a contractual right to receive death benefits as designated beneficiary under a policy of insurance, contract, employees' trust, retirement account, or other arrangement.").

We are aware of authority suggesting that "[i]n enforcing §6321, appellate courts have interpreted 'property' or 'rights to property' to mean state-law rights or interests that have pecuniary value and are transferable." Drye Family 1995 Trust v. United States [98-2 USTC ¶50,651], 152 F.3d 892, 895 (8th Cir. 1998) (citing United States v. Stonehill [96-1 USTC ¶50,318], 83 F.3d 1156, 1159-60 (9th Cir. 1996); In re Kimura [92-2 USTC ¶50,397], 969 F.2d 806, 811 (9th Cir. 1992); In re Terwilliger's Catering Plus, Inc. [90-2 USTC ¶50,460], 911 F.2d 1168, 1171-72 (6th Cir. 1990); 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516], 790 F.2d 354, 357-58 (3d Cir. 1986); Southern Bank v. IRS [85-2 USTC ¶9670], 770 F.2d 1001, 1005 (11th Cir. 1985)), cert. granted on other grounds, 119 S. Ct. 1453 (1999). We think this test takes an unnecessarily narrow view of the scope of §6321. In particular, we know of no controlling authority which compels the conclusion that transferability is a necessary incident of "property and rights to property" under the statute. Indeed, a persuasive scholarly treatment of the question comes to the opposite conclusion. See Note, Property Subject to the Federal Tax Lien, 77 Harv. L. Rev. 1485, 1485-87 (1964).

The terms "property and rights to property" have no statutory definition. This Court has noted in the past that in crafting the tax lien statute, "Congress did not attempt to define the commercial cosmos. Rather, it was perfectly willing to let contemporary transactions be analyzed to determine whether or nor the delinquent taxpayer had any part of a bundle of rights of commercial value, to which the tax lien would then attach." Randall v. H. Nakashima & Co. [76-2 USTC ¶9770], Ltd., 542 F.2d 270, 278 (5th Cir. 1976). And it bears repeating that the Supreme Court has held that "Congress meant to reach every interest in property that a taxpayer might have." National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 719, 105 S. Ct. at 2924. Each case requires individual consideration, and we conclude that despite the nontransferability of a spendthrift trust beneficiary's interest in the trust, Orr's interest still possesses sufficient characteristics of "property" or "rights to property" to fall within the scope of §6321.

With reference to Texas law, we conclude that at the time the liens were filed, Orr possessed equitable and legal rights to future income distributions from the Trust. With reference to federal law, we conclude that those rights constituted "property" or "rights to property" subject to attachment pursuant to §6321. Because the federal tax lien attached to Orr's rights to future payments at the time of the filing of the lien, Orr's subsequent bankruptcy does not affect the validity of the lien against Orr's equitable ownership of the Trust and legal right to receive income distributions from the Trust. The tax lien is therefore valid against future income distributions.

IV.

In sum, we conclude that we may exercise appellate jurisdiction in this case. The subject matter of the appeal is a discrete issue within a larger bankruptcy case, which was presented in the context of an adversary action between the parties. The order of the district court settled the sole issue in contention. Jurisdiction is proper under 28 U.S.C. §158(d).

Furthermore, the IRS has a valid lien against future income distributions to Orr from the Trust. Under state law, Orr possesses an equitable interest in the trust corpus and legal entitlement to future income distributions from that trust. These interests constitute "property" or "rights to property" to which a 26 U.S.C. §6321 tax lien may attach.

AFFIRMED.

¹ Texas Commerce Bank Nat'l Ass'n v. United States, 908 F. Supp. 453 (S.D. Tex. 1995), relied upon by Orr, is not to the contrary. Texas Commerce Bank involved an attempt by the IRS to levy upon the interest of Ellanor Ann Fondren in a trust in which payments to her were left to the sole discretion of the trustee until the year 2002. The court ruled that distributions made to Fondren in trustee's discretion did not violate the levy because Fondren had no interest to which the levy could attach. Unlike the the spendthrift trust in this case, the discretionary nature of the trustee's power in Texas Commerce Bank meant that the beneficiary had no property or rights to property to which the levy could attach. And although the trust provided that Fondren would be entitled to future income distributions that right was "clearly a contingent, non-vested, and non-determinable right" at the time the IRS imposed its levy.

We also note that it is not clear from the Texas Commerce Bank opinion why the Glass City Bank and Dallas principles of tax liens' attachment to after-acquired property, including distributions from a spendthrift trust, would not have applied to the trustee's distributions to Fondren. In any case, Texas Commerce Bank does not support Orr's contention that a vested right to future payments from a spendthrift trust cannot be property or rights to property susceptible to attachment by a tax lien.

 

 

 

Gary Lee Pansier, Plaintiff v. United States of America, Defendant United States of America, Appellant v. Gary Lee Pansier, Appellee

U.S. District Court, East. Dist. Wis. , 97-C-647, 10/16/98, 225 BR 657, 225 BR 657. Reversing and remanding an unreported BC-DC decision

[Code Secs. 6321 and 6871 ]

Bankruptcy: Property subject to tax liens: Prepetition property: Insurance payments: Right to receive payments: Third-party beneficiary.--Disability benefits that a delinquent airline pilot began receiving after he filed his bankruptcy petition were subject to a prepetition federal tax lien. Under state ( Wisconsin ) law, the debtor had a prepetition vested right to the payments as a third-party beneficiary of his employer's disability insurance policy. Thus, under federal law, his right to the payments constituted prepetition property even though it was non-assignable, would terminate upon his death, and could be divested if he ceased to qualify as disabled. It was also irrelevant that his right to the payments could be treated as income, rather than property, under state law.

Gary Pansier, Crivitz, Wis., Pro se. Mary E. Bielefeld, Thomas Schneider, U.S. Atty., Washington, D.C., for Defendant.

DECISION

ADELMAN, District Judge:

The United States appeals the April 24, 1997, decision and order of the bankruptcy court, in which Bankruptcy Court Chief Judge James E. Shapiro denied the government's summary judgment motion, granted Gary Pansier's motion for contempt, and ordered the government to return an amount of money to Pansier and pay compensatory damages. The issue on appeal is whether disability payments Pansier received after filing a bankruptcy petition and receiving a discharge are considered property to which a pre-petition Internal Revenue Service tax lien extended.

I. BACKGROUND FACTS AND PROCEDURAL HISTORY

The IRS assessed unpaid income taxes against Pansier on January 23, 1989, and recorded a notice of federal tax lien on August 17, 1989, in the Wisconsin county where Pansier lived. The amount assessed for 1982 was approximately $16,000; the amount assessed for 1983 was about $48,000. The notice of lien was renewed December 6, 1994.

Pansier filed a Chapter 7 petition in bankruptcy on February 26, 1990, and received a discharge on May 30 of that year. The discharge order stated that all creditors whose debts were discharged "are enjoined from commencing, continuing or employing any action, process or act to collect, recover or offset any such debt as a personal liability of the debtor(s), or from property of the debtor(s) whether or not discharge of such debt is waived." (R. 9, Ex. D). ¹

While his bankruptcy proceedings were pending, Pansier initiated an adversary proceeding against the IRS seeking a determination of the dischargeability of his 1982 and 1983 federal tax obligations. On October 9, 1990, the bankruptcy court ordered Pansier's 1982 and 1983 federal income tax liability discharged. The bankruptcy judge noted, though, that "[n]othing in this order is determinative of the lien rights being claimed by the Internal Revenue Service against the plaintiff's pre-petition property." (R. 9, Ex. C at 2.)

Pansier had been a commercial airline pilot for Republic Airlines and its successor Northwest Airlines. Northwest provided a disability income benefit for Pansier under the its group accident and sickness insurance policy with AMEX Assurance Company, now known as GE Capital Assurance Company (I'll refer to the policy as the "AMEX policy"). (See Bank. R. 30, 41, Ex. 1.) The policy premiums were paid by the airline. Pansier became disabled in December 1987 due to general neuralgia in his shoulders and arms; he has been on long-term medical leave of absence continuously since then. Disability payments under the AMEX policy also began around the end of 1987.

The AMEX policy precluded Pansier from assigning his benefits and provided for continuation of payments until Pansier reached age sixty, which happened in February 1997. Pansier was required, though, to periodically give proof that he continued to be totally disabled. It is undisputed that at the time he filed his bankruptcy petition, Pansier was receiving the monthly disability payments pursuant to the AMEX policy. He listed the disability payments as income in the schedules regarding his petition.

In the summer of 1996 the IRS levied on Pansier's disability payments. As a result of the levy, the IRS received two payments from the insurer totaling $5,328.66. The IRS applied $3,109.80 of the funds toward tax liabilities for years not discharged in Pansier's bankruptcy. The balance of $2,218.86, however, was applied by the IRS to the 1983 tax year.

On September 30, 1996, and October 30, 1996, Pansier filed in the bankruptcy court motions for injunctive relief against the IRS and for an order holding the IRS in contempt. He claimed that the IRS levy violated the bankruptcy court's prohibition of collection of discharged debts and sought an order requiring the IRS to cease the levies. The IRS responded with a motion for summary judgment, claiming that at the time he filed his bankruptcy petition, Pansier held a vested pre-petition right to receive the payments, and arguing that the IRS should be permitted to keep the levied proceeds applied to the 1983 tax year. Chief Judge Shapiro agreed with Pansier. He ordered the $2,218.86 returned to Pansier ² and further ordered the IRS to pay compensatory damages in the amount of Pansier's travel costs for attending hearings on the matter, which totaled $111.60.

As stated above, the government appealed and the issue before me is whether the tax lien arising from Pansier's 1983 tax liability attached to the post-petition disability payments.

II. STANDARD OF REVIEW

In a bankruptcy appeal, findings of fact are reviewed under a "clearly erroneous" standard, Fed.R.Bank.P. 7052, 8013, while conclusions of law are reviewed de novo, In re Ionosphere Clubs, Inc., 922 F.2d 984, 988 (2d Cir. 1990); see In re Boomgarden, 780 F.2d 657, 660 (7th Cir. 1985). The issue on appeal is one of law, thus my review will be de novo.

III. ANALYSIS

A. The Broad Reach of a Federal Tax Lien

Title 26 U.S.C. §6321 creates a federal tax lien when a person liable to pay any tax neglects or refuses to pay such tax after demand. The section 6321 lien arises in the amount of unpaid tax, interest, and penalties, and attaches to "all property and rights to property, whether real or personal," belonging to the taxpayer. Id. This language "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. . . . 'Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.' " United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) (quoting Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267, 66 S.Ct. 108, 90 L.Ed. 56 (1945)).

The lien imposed by section 6321 arises at the time assessment is made and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322; National Bank [85-2 USTC ¶9482], 472 U.S. at 719, 105 S.Ct. 2919. The lien attaches to the taxpayer's property and rights to property as of the moment of assessment ³ and, except as described below, attaches to any property acquired subsequently. Glass City [45-2 USTC ¶9449], 326 U.S. at 267, 268, 66 S.Ct. 108; Tillery v. United States (In re Tillery) [97-1 USTC ¶50,227], 204 B.R. 575, 576 (Bank.E.D.Okla.1996). The lien does not attach to property or a right to property acquired by a debtor after a petition in bankruptcy has been filed and the underlying tax liability is discharged against the debtor personally. United States v. Sanabria, 424 F.2d 1121 (7th Cir. 1970); Leavell v. United States (In re Leavell), 124 B.R. 535, 540 (Bankr.S.D.Ill.1991). But IRS liens pass through bankruptcy unaffected as to property or rights to property attached prior to the petition's filing. Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); Isom v. United States (In re Isom) [90-1 USTC ¶50,216], 901 F.2d 744 (9th Cir. 1990). In other words, while tax liens securing dischargeable debts do not attach to property acquired post-petition, bankruptcy does not change their effectiveness regarding property interests a debtor held pre-petition.

B. Determination of Whether a Property Right Exists

It is well settled that state law controls the threshold determination of whether rights and interests in property exist. National Bank [85-2 USTC ¶9482], 472 U.S. at 722, 105 S.Ct. 2919; United States v. Librizzi [97-1 USTC ¶50,263], 108 F.3d 136, 137 (7th Cir. 1997). Section 6321 " 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law.' " National Bank [85-2 USTC ¶9482], 472 U.S. at 722, 105 S.Ct. 2919 (quoting United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958)). Once, though, it has been determined that state law creates a sufficient interest of the taxpayer to satisfy the requirements of section 6321, state law becomes inoperative, and federal law determines the consequences. National Bank [85-2 USTC ¶9482], 472 U.S. at 722, 105 S.Ct. 2919 (quoting Bess [58-2 USTC ¶9595], 357 U.S. at 56-57, 78 S.Ct. 1054); Hoornstra v. United States, 969 F.2d 530, 532 (7th Cir. 1992).

C. The Bankruptcy Court's Interpretation of State Law

The bankruptcy court, relying primarily on Leighton v. Leighton, 81 Wis.2d 620, 261 N.W.2d 457 (1978), found that under Wisconsin law the levied disability payments were not "property" prior to their actual payment, which occurred post-petition. In Leighton, the Supreme Court of Wisconsin considered how retirement plans and veterans' disability benefits should be treated in divorce cases. The court found that both vested and unvested interests in a pension plan may be considered in the division of property because an "employee's interest in a pension plan, even one that is noncontributory on his part, is not a mere gratuity or expectancy, but an enforceable contract right." Id. at 635-36, 261 N.W.2d 457. The court sharply distinguished, however, between retirement plan interests and veterans' disability benefits received from the federal government. According to the state high court, a disability pension is more like compensation for impairment of one's body rather than an asset acquired or accumulated through the marital relationship. "The disability allowance is a federally-provided replacement for earning capacity lost by reason of injuries sustained while in military service." Id. at 636, 261 N.W.2d 457. The Leighton court analogized to disability benefits payable under the Social Security Act, which it had previously treated as income rather than an asset for divorce purposes:

We similarly view the disability benefits in the case before us as income to the defendant, material only to his ability to pay alimony, if alimony were awarded. His disability allowance is to be considered as part of his earned income, literally so, and not as an asset to be divided between the parties.

Id. at 637, 261 N.W.2d 457.

According to the bankruptcy court, Leighton mandates that Pansier's disability payments not be characterized or considered as property at all until the payments are received, because they are more akin to income than property.

D. Pansier's Interest in the Disability Policy

The bankruptcy court misinterpreted the role properly played by state law in federal tax-collection matters. Under National Bank and Bess, state law controls only in determining whether a taxpayer has a legal interest of some sort. National Bank [85-2 USTC ¶9482], 472 U.S. at 722, 724 n. 8, 105 S.Ct. 2919, Bess [58-2 USTC ¶9595], 357 U.S. at 55, 78 S.Ct. 1054. The question whether a particular state-law interest actually constitutes "property" or a "right to property" is a matter of federal law, however. National Bank [85-2 USTC ¶9482], 472 U.S. at 727, 105 S.Ct. 2919; Bess [58-2 USTC ¶9595], 357 U.S. at 56-57, 78 S.Ct. 1054.

Under Wisconsin law a third party to a contract has a recognizable right to recover under it or enforce it. Malone by Bangert v. Fons, 217 Wis.2d 746, 767, 580 N.W.2d 697 (Ct.App.), review denied, No. 96-3326, 584 N.W.2d 123 (Wis. May 18, 1998); Goossen v. Estate of Standaert, 189 Wis.2d 237, 249, 525 N.W.2d 314 (Ct.App.1994). "A person may enforce a contract as third-party beneficiary if the contract indicates that he or she was either specifically intended by the contracting parties to benefit from the contract or is a member of the class the parties intended to benefit." Goossen, 189 Wis.2d at 249, 525 N.W.2d 314.

Pansier had a third-party beneficiary contract right under the disability insurance contract--and a vested right at that. Neither the government nor Pansier disputes that the policy covered former pilots of Republic Airlines who continued to work for Northwest Airlines, and that Pansier was within this specified class of third-party beneficiaries. Neither the government nor Pansier disputes that the policy provided benefits if such a pilot became totally disabled and lost his license to fly, and that Pansier met this and all other requirements for receiving benefits, entitling him to payments under the contract. And neither party disputes that Pansier actually was receiving benefits both at the time of assessment and the time he filed his petition.

The bankruptcy court, though, thought that Pansier's right as a third party beneficiary was negated because the right was not assignable, terminated upon death, and had no value on the open market; the court likened the benefits to an educational degree, which the Wisconsin Supreme Court has ruled has no divisible property value in a divorce. See DeWitt v. DeWitt, 98 Wis.2d 44, 296 N.W.2d 761 (Ct.App.1980). The nonassignability and termination upon death aspects of Pansier's interest, however, are not dispositive. Pension benefits also conceivably may terminate upon an employee's death or be nontransferable, yet even Leighton recognized that the right to such benefits was an enforceable contract right and therefore constituted property.

The bankruptcy court also suggested that because Pansier's right to disability benefits could conceivably terminate--if, for example, his disability went away or if he failed to undergo regular treatment (a condition of receiving benefits)--his right to benefits could not be considered a property right under Wisconsin law. But the fact that Pansier's right to benefits could possibly be divested in the future based on the occurrence of some event, does not in any way diminish Pansier's right to benefits. Until such time as an insured voluntarily gives up his or her rights under the contract by failing to meet a condition subsequent, the insurer is bound to the policy and the insured has an enforceable right. In the absence of a divesting act by Pansier, the insurer had no right to cancel the contract of insurance. 2 Lee R. Russ & Thomas F. Segalia, Couch on Insurance §30:1 (3d ed.1997). Moreover, cancellation would merely terminate any benefits prospectively. Id. §30:3. In the event Pansier failed to file proof of disability down the road AMEX could not, by canceling the insurance policy for cause, avoid liability that had already vested thereunder. Id. §30:25.

E. Characterization of This Interest Under Federal Law

Pansier, then, had a vested right under state law and the AMEX policy to receive payment of future disability benefits. According to National Bank, that is the end of the use of state law--and of the case, for such a state-law contract right constitutes "property" or a "right to property" for purposes of an IRS lien and levy. National Bank [85-2 USTC ¶9482], 472 U.S. at 724, 105 S.Ct. 2919. When a payment by an insurer can be enforced and can inure to the delinquent taxpayer's pecuniary benefit, then the taxpayer's right to the payment is a "right to property" under federal law. It is "firmly established in case law that a 'federal tax lien attaches to a then existing right to receive property in the future.' " In re Wesche [96-1 USTC ¶50,265], 193 B.R. 76, 77 (Bankr.M.D.Fla.1996) (quoting Wessel v. United States (In re Wessel) [93-2 USTC ¶50,549], 161 B.R. 155, 159 (Bankr.D.S.C.1993)); see In re Blackerby, 208 B.R. 136, 140 (Bankr.E.D.Pa.1997) (when tax liens arise, under federal law they attach to any contractual right to receive monetary payments, even when the payments are due to be received at a future date). As soon as an enforceable right arises, the tax lien attaches. William T. Plumb, Jr., Federal Tax Liens, §3(a) at 22 (3d ed.1981).

In a case very similar to this one, Fried v. New York Life Ins. Co. [57-1 USTC ¶9412], 241 F.2d 504 (2d Cir. 1957), the Second Circuit found that an IRS lien attached to monthly disability benefit payments. Fried had purchased private disability insurance, then was assessed income tax deficiencies, and next became totally and permanently disabled. The IRS levied upon the disability insurance company for Fried's payments. The insurance company, which admitted its contract liability to pay Fried $250 each month as long as he remained disabled, deposited the disability payments with the court and Fried and the government litigated who would receive them. The Second Circuit sided with the government: "Fried had a contractual right to these sums each month which the insurance company could not defeat. Therefore . . . the government by proper levy could require that these sums be applied upon Fried's delinquent taxes." Id. at 505.

Tillery, also nearly identical factually with the current case, concerned a debtor's disability payments received from the Civil Service Retirement and Disability Fund for government employees. As in Pansier's case, the IRS had assessed Tillery for unpaid taxes and then Tillery filed a petition in bankruptcy, on which date he was receiving disability payments. After discharge, the IRS levied upon the disability payments. Tillery [97-1 USTC ¶50,227], 204 B.R. at 576. The issue before the bankruptcy court in Tillery was the same as here--whether the tax lien arising prior to the petition in bankruptcy attached to the disability annuity payments. The bankruptcy court found that because at the time he filed his petition Tillery had a right to receive the pension payments, that right was a property right, and as a result the tax lien attached to the post-petition payments. Id. at 576-77.

Numerous other cases likewise find a contractual or other right to obtain funds or future payments to be "property" or a "right to property" for purposes of the federal tax lien statute. In National Bank the United States Supreme Court found that as a matter of federal law, the state-law right to withdraw money from a joint bank account is a "right to property" adequate to justify the use of a levy. National Bank [85-2 USTC ¶9482], 472 U.S. at 724-25, n. 8, 105 S.Ct. 2919. In Bess the Supreme Court held that a delinquent taxpayer who had purchased life insurance policies naming another as beneficiary may not have had property or rights to property in the death proceeds but did have a property right in their cash surrender value. State law indicated that the taxpayer had a right under the policy to compel the insurer to pay the surrender value and that was all that was needed for purposes of the tax lien. The fact that under state law such a property right was exempt from creditors' liens was irrelevant. Bess [58-2 USTC ¶9595], 357 U.S. at 55-57, 78 S.Ct. 1054. "State law defined the nature of the taxpayer's interest in the property, but the state-law consequences of that definition are of no concern to the operation of the federal tax law." National Bank [85-2 USTC ¶9482], 472 U.S. at 723, 105 S.Ct. 2919 (summarizing Bess).

In St. Louis Union Trust Co. v. United States [80-1 USTC ¶9282], 617 F.2d 1293, 1301-02 (8th Cir. 1980), the Eighth Circuit found that a taxpayer's right to receive income from a fund in escrow with a trust company could be attached and levied by a federal tax lien. According to the court, "[t]he unqualified contractual right to receive property is itself a property right subject to seizure by levy, even though the right to payment of the installments has not matured at the time of the levy. . . . In the present case the Trust Company had a fixed contractual obligation to pay the Income to Stone as it was earned. The IRS could and did seize that right to satisfy his unpaid tax liabilities." Id. at 1302. Also, notably, in Wisconsin (Dept. of Revenue) v. Bar Coat Blacktop, Inc. [86-2 USTC ¶9598], 640 F.Supp. 407, 412 (W.D.Wis.1986), a case involving Wisconsin law as to the interest of a taxpayer in a contract, the fact that the taxpayer's right to proceeds of the contract were dependent on its own later performance did not alter the fact that at the time the contract was accepted, the taxpayer acquired a property right for purposes of a federal tax lien. See also Connor v. United States (In re Connor) [94-2 USTC ¶50,296], 27 F.3d 365 (9th Cir. 1994) (debtor's statutory right to receive monthly payments from state after retirement as state supreme court justice was "property" to which federal tax lien attached pre-petition); United States v. Rye [77-1 USTC ¶9264], 550 F.2d 682 (1st Cir. 1977) (federal tax lien attached to taxpayer's right to receive alimony); Roberts v. United States/IRS (In re Roberts) [97-2 USTC ¶50,843], 219 B.R. 573 (Bankr.D.Or.1997) (debtor's Social Security disability payments subject to IRS lien); Morris v. United States (In re Morris) [94-1 USTC ¶50,035], 73 A.F.T.R.2d 94-862, 1993 WL 525657 (Bankr.W.D.Tenn.1993) (same); Wessel, 161 B.R. at 159-60 (federal tax lien attached to post-petition annuity payments because contractual right to receive those payments arose pre-petition).

The fact that an interest is terminable does not put it beyond the range of the lien; but the government's interest is subject to the same infirmities as the taxpayer's. Plumb, supra, §3(a) at 23. The IRS acquires whatever rights the taxpayer himself possesses, stepping into the taxpayer shoes. National Bank [85-2 USTC ¶9482], 472 U.S. at 725, 105 S.Ct. 2919. That is, if Pansier had recovered and regained his pilot's license, his disability payments would have ended and the government would have stopped receiving payments pursuant to its levy. But until that happened, any right to payments that Pansier had, the government had too.

The inalienability of Pansier's rights under the disability policy likewise does not affect the federal tax lien. See Rye [77-1 USTC ¶9264], 550 F.2d 682 (federal tax lien attached to taxpayer's right to receive alimony, even though right to alimony was not assignable); Raihl v. United States (In re Raihl) [93-1 USTC ¶50,290], 152 B.R. 615, 618 (9th Cir. BAP 1993) ("The inalienability of the pension interests does not destroy their character as property."); Wessel [93-2 USTC ¶50,549], 161 B.R. at 159-60 (federal tax lien attached to post-petition annuity payments because contractual right to receive those payments arose pre-petition; immaterial that plaintiff could not assign his benefits).

Pansier points to no cases from Wisconsin or any other state where disability benefits or similar future payments under a contract were found outside the scope of the federal tax lien when the right to the payments arose pre-petition.

In sum, when a debtor has an unqualified right to receive certain payments, such as disability benefits, prior to the date on which he files bankruptcy, the right to receive those future payments constitutes "property," or at least a "right to property," acquired pre-petition for purposes of section 6321. Blackerby, 208 B.R. at 141.

F. The Bankruptcy Court's Error

The bankruptcy court dismissed Fried and Tillery because those cases originated in New York and Oklahoma , respectively, and because the court thought Leighton indicated a different result under Wisconsin law. As a preliminary matter, I disagree with the bankruptcy court's reading of Leighton. Leighton's characterization of disability payments as not being divisible property in a divorce proceeding does not mean that the payments are not property at all or that the disability policy is not a "right to property." The Wisconsin courts have policy reasons for excluding disability payments from property divisible at divorce. It does not follow that no property right at all exists in regard to a disability policy--especially one from a private policy or contract as opposed to government benefits--and its future payments. In Wisconsin a life insurance policy is property. See Bersch v. VanKleeck, 112 Wis.2d 594, 596-97, 334 N.W.2d 114 (1983). State law recognizes (as the United States Supreme Court did in Bess) two distinct property interests in a life insurance policy: ownership of the policy and the interest of the named beneficiaries in future payments. Id. Disability policies differ only in that the beneficiary usually is the insured himself. In Wisconsin personal injury awards also are property, as are workers' compensation awards--although both are presumed to be the individual property of an injured spouse. Troia v. Troia, --Wis.2d--,-----, 1998 WL 652663, *2-*3 (Ct.App. Sept. 24, 1998); Weberg v. Weberg, 158 Wis.2d 540, 548-50, 463 N.W.2d 382 (Ct.App.1990). Leighton likened disability payments to "compensation to Mr. Leighton for impairment of his body," Leighton, 81 Wis.2d at 636, 261 N.W.2d 457--in other words to a personal injury award. While Leighton treated disability payments like income, its import really was that the disability policy and resulting payments are presumed to be the property of an individual spouse and, like personal injury awards, not usually subject to equitable division. Moreover, even assuming that Leighton implies that future disability payments must be treated as income, once it is received "income" becomes "property," thus a disability policy would still generate a "right to property" for purposes of the tax lien.

Leighton affirmed that under state law an insured has some interest in payments from a disability insurance policy. What Leighton said about the consequences of that interest is irrelevant to the question of whether the federal tax lien attaches. It "is not material that the economic benefit to which the right pertains is not characterized as 'property' by local law." Plumb, supra, §3(b) at 27. "Were federal law not determinative of the classifier of the state-created interest, states could defeat the federal tax lien by declaring an interest not to be property, even though the beneficial incidents of property belie its classification." In re Kimura [92-2 USTC ¶50,397], 969 F.2d 806, 810 (9th Cir. 1992), quoted in Raihl [93-1 USTC ¶50,290], 152 B.R. at 617. The state-law consequences for divorce purposes of a third-party beneficiary interest in disability payments simply do not come into play. The key instead is whether Pansier had any interest in the disability policy under state law. Pansier had something at the time he filed his petition that guaranteed future payments--the insurance company did not continue to send him money gratuitously--and that something was a third-party contract right. Federal law dictates that such a contract right is "property" or a "right to property" for purposes of the federal tax lien. Under federal law, as of the petition date, the federal tax lien had already attached to Pansier's right to receive future disability policy payments under the AMEX policy.

REVERSED AND REMANDED for further proceedings consistent with this decision.

¹ References to the district court's record are noted as "R." References to the record in the bankruptcy court will be referred to as "Bankr. R."

² The IRS's levy. of the $3,109.80 for tax liabilities for years other than 1982 or 1983 was not challenged.

³ Because the federal tax lien arises by operation of law if a person is unable to pay tax liability after demand is made, without the necessity of the filing of a notice of lien, this general tax lien is referred to as a "secret lien". Suarez v. United States (In re Suarez) [95-1 USTC ¶50,268], 182 B.R. 916, 919 n. 2 (Bankr.S.D.Fla.1995). "It is quite possible that a financially troubled taxpayer . . . will not know whether or when a tax lien has been imposed upon all his property because. . . . [the lien] arises automatically on the occurrence of certain events and without express notification to the taxpayer." William T. Plumb, Jr., Federal Tax Liens §2 at 10 (3d ed.1981). In his appeal briefs and in regard to the motion to compel I denied on September 29, Pansier brought up the issue of whether the government had a valid lien because it was not recorded. As the above authorities point out, however, recordation is not required. Registration merely makes the lien effective against subsequent third party creditors. 26 U.S.C. §6323(a); Suarez [95-1 USTC ¶50,268], 182 B.R. at 919.

"The fact that the Government may or may not file a notice of its lien in appropriate public records has nothing whatever to do with the validity of the lien against the taxpayer himself." Plumb, supra. (Emphasis deleted.)

One of Pansier's arguments is that the government had to pursue more formal procedures (such as a foreclosure lawsuit) than it did to obtain his disability benefits. The tax code provides two principal tools for execution on a federal tax lien, however: (1) a lien-foreclosure lawsuit under 26 U.S.C. §7403; or (2) administrative levy under 26 U.S.C. §6331. See National Bank [85-2 USTC ¶9482], 472 U.S. at 720, 105 S.Ct. 2919. In this case the IRS followed the latter course.

 

 

 

In re Dwight E. Avis, Jr., Debtor. United States of America , Plaintiff-Appellant v. H. Jason Gold, Trustee, Trustee-Appellee In re Dwight E. Avis, Jr., Debtor. United States of America , Plaintiff-Appellee v. H. Jason Gold, Trustee, Trustee-Appellant

(CA-4), U.S. Court of Appeals, 4th Circuit, 97-2683, 97-2755, 6/28/99, 178 F3d 718, 178 F3d 718. Affirming an unreported District Court decision

[Code Secs. 6321 and 6323 ]

Federal tax liens: Property subject to: Inherited property: Property of bankruptcy estate: Contingent rights: Value of: Stipulation as to.--A perfected prepetition IRS lien that the automatic stay prevented from attaching to an inheritance that became part of a bankruptcy estate postpetition did attach to the present value of the debtor's future interest in the inheritance on the date his bankruptcy petition was filed. The parties had stipulated to the present value of the debtor's contingent inheritance rights at the time he filed the petition; thus, that interest was in existence when he entered bankruptcy.

[Code Secs. 6323 and 6871 ]

Bankruptcy: Automatic stay: Exceptions: Federal tax liens: Property subject to: Inherited property: Property of bankruptcy estate.--The automatic stay of Bankruptcy section 362(a)(5) prevented attachment of an IRS lien on an inheritance that became part of a Chapter 7 debtor's bankruptcy estate, even though the IRS filed notice of the lien before the debtor filed his bankruptcy petition. Although the Bankruptcy Code does not address whether a federal tax lien attaches to property acquired by a bankruptcy estate postpetition, the court concluded that the automatic stay is intended to prevent postpetition perfection of interests in a bankruptcy estate. Thus, even though the IRS had taken all steps to perfect the lien prior to the filing of the petition, it was not valid with respect to the inheritance because that property did not exist prepetition. Moreover, the existence of express exceptions to the automatic stay for state and local tax liens and liens on property transferred out of the bankruptcy estate supported the conclusion that Congress did not intend to exclude the perfection of a federal tax lien from the automatic stay provisions.

Gary Dexter Gray, Tax Division, United States Department of Justice, Washington , D.C. , for Appellant. William McCarron, Jr., Gold & Stanley, P.C., Alexandria , Virginia , for Appellee. Loretta C. Argrett, Assistant Attorney General, Helen F. Fahey, United States Attorney, Sara S. Holderness, Tax Division, United States Department of Justice, Washington, D.C., for Appellant. H. Jason Gold, Gold & Stanley, P.C., Alexandria , Virginia , for Appellee.

Before: NIEMEYER and HAMILTON, Circuit Judges, and HERLONG, United States District Judge for the District of South Carolina, sitting by designation.

Affirmed by published opinion. Judge

Niemeyer wrote the opinion for the court in Parts I, II, and III, in which Judge Herlong joined. Judge Hamilton wrote a dissenting opinion. Judge Herlong wrote an opinion dissenting from Part IV.

OPINION

NIEMEYER, Circuit Judge: This appeal requires us to determine, as an issue of first impression in this circuit and other circuits, whether the automatic stay provision of §362(a)(5) of the Bankruptcy Code precludes attachment of an IRS lien on assets acquired by the debtor during the bankruptcy proceeding even though the IRS had, before the bankruptcy petition was filed, done all that was necessary to obtain its lien against the debtor's after-acquired property, pursuant to §§6321 and 6323 of the Tax Code.

Both the bankruptcy court and the district court on appeal concluded that the stay imposed by §362 prevented the IRS's lien on after-acquired property from attaching to an inheritance acquired by the debtor during bankruptcy. These courts, however, did recognize the IRS's lien to the extent of the present value of the debtor's future interest, determined as of the date the bankruptcy petition was filed.

For the reasons that follow, we affirm.

I

Dwight Avis was placed in an involuntary Chapter 7 bankruptcy proceeding by a petition filed by his creditors on May 10, 1995. On the schedule of personal property that Avis later filed in the bankruptcy proceeding, he disclosed a contingent interest in the nature of a potential inheritance under trusts of Davis Weir and Maureen Weir, and he attributed to it the value, "UNKNOWN." Davis Weir had, under his will, created a spendthrift trust for the benefit of his wife Maureen and a number of others, including Avis. Maureen was given a power of appointment to convey trust assets to the beneficiaries, including Avis, but not to herself. Her own support and maintenance were administered by trustees. In Maureen's will, she exercised the power of appointment given to her by the Davis Weir trust by bequeathing whatever was left of the trust's assets to the beneficiaries, including a three-percent interest to Avis. Because Avis' interest was contingent on (1) how the Davis Weir trust was administered, (2) whether Maureen Weir would exercise the discretionary power given to her under the trust, and (3) whether any assets would remain, it was unclear to Avis what, if anything, he would inherit from the trust.

During the bankruptcy, on September 3, 1995, Maureen Weir died, leaving three percent of the Weir trust's assets to Avis. But because the trustee in bankruptcy did not then know of Avis' inheritance, the bankruptcy estate was closed on December 15, 1995, without the payment of any funds to creditors. When the trustee learned of the inheritance, he timely moved to have the bankruptcy proceedings reopened in order to bring the inheritance within the estate pursuant to 11 U.S.C. §541(a)(5)(A), a provision of the Bankruptcy Code bringing into a bankruptcy estate any property inherited by the debtor within 180 days after the filing of the bankruptcy petition. The bankruptcy court granted the motion, and the trustee thereafter liquidated Avis' inheritance for $149,669.

The Internal Revenue Service ("IRS") filed a timely proof of claim against these funds in the reopened bankruptcy proceeding in the amount of $127,306 for taxes, interest, and penalties that Avis owed for earlier tax years. It alleged that $109,819 of its claim was secured by a lien that it had obtained almost a year before Avis was placed in bankruptcy. The IRS had duly filed notices of its tax lien in 1994 in Fairfax County and Shenandoah County , Virginia .

Addressing the IRS's claim, the bankruptcy court ruled that the automatic stay imposed by §362 of the Bankruptcy Code prevented the IRS from obtaining a tax lien on property received by the bankruptcy estate after the bankruptcy petition was filed, even though notice of the lien had been filed before the bankruptcy petition was filed. Accordingly, it denied the IRS's claim that it had a secured position to the extent of $109,819. The bankruptcy court did, however, recognize that the IRS had a secured position to the extent of the value of Avis' interest in the inheritance as of the date of the bankruptcy petition. The parties stipulated that value to be $1,000 because the inheritance was subject to contingencies. Accordingly, the bankruptcy court entered an order concluding that the IRS held a $1,000 secured claim and that the remaining $108,819 that was claimed to be secured was an unsecured claim against Avis' bankruptcy estate. From this ruling, both the trustee and the IRS appealed to the district court.

The district court affirmed the bankruptcy court's order, and both parties noticed appeals to this court.

II

At the outset, we must recognize the undisputed principles that apply to this case in order to reach the issue. All of a debtor's property becomes part of the bankruptcy estate upon the filing of a bankruptcy petition and therefore becomes subject to the substantive provisions of the Bankruptcy Code. See 11 U.S.C. §541(a)(1). That property includes all legal or equitable interests of the debtor as of the petition date, wherever located and by whomever held. See 11 U.S.C. §541(a)(1); see also In re Cordova, 73 F.3d 38, 42 (4th Cir. 1996) (describing the estate created by §541 as "broad and all-embracing" (citation omitted)). The date of the bankruptcy petition is generally controlling for defining estate property, and property acquired by the debtor after the petition is filed may be retained by the debtor, clear of all claims ultimately discharged by the bankruptcy proceeding. See American Bankers Ins. Co. v. Maness, 101 F.3d 358, 362 (4th Cir. 1996); In re Andrews, 80 F.3d 906, 910 (4th Cir. 1996); see also 5 Collier on Bankruptcy §541.03, at 541-9 (15th ed. 1998). This general rule, however, is subject to an exception for certain types of after-acquired property, such as inheritances. Section 541 of the Bankruptcy Code provides that a bankruptcy estate includes "[a]ny interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date by bequest, devise, or inheritance." 11 U.S.C. §541(a)(5)(A).

Property of a bankruptcy estate receives various levels of protection from the post-petition reach of creditors and third parties through the automatic stay provisions of the Bankruptcy Code. Specifically, §362 of the Bankruptcy Code provides that a bankruptcy petition "operates as a stay" of any litigation, lien enforcement, or other efforts by creditors or third parties to enforce or collect pre-petition claims, except as specifically exempted. 11 U.S.C. §362(a). This stay serves to "protect[ ] the relative position of creditors [and] to shield the debtor from financial pressure during the pendency of the bankruptcy proceeding." Winters v. George Mason Bank, 94 F.3d 130, 133 (4th Cir. 1996) (citations omitted); see also In re Holtkamp, 669 F.2d 505, 508 (7th Cir. 1982) ("The purpose of the automatic stay is to preserve what remains of the debtor's insolvent estate and to provide a systematic equitable liquidation procedure for all creditors, secured as well as unsecured, thereby preventing a chaotic and uncontrolled scramble for the debtor's assets in a variety of uncoordinated proceedings in different courts" (internal citations and quotation marks omitted)). Indeed, the automatic stay represents "one of the fundamental debtor protections provided by the bankruptcy laws." Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494, 503 (1986) (quoting legislative history of the Bankruptcy Code).

While the law generally recognizes the creation of liens in after-acquired property, see, e.g., U.C.C. §9-204, the applicability of the Bankruptcy Code's automatic stay to the attachment of such liens to assets acquired during the bankruptcy proceedings is not uniform. For instance, when a lien is created in after-acquired property by a consensual security agreement entered into before the filing of the bankruptcy petition, the Bankruptcy Code will not generally recognize attachment of the lien to property acquired post-petition. See 11 U.S.C. §552(a). But §552(b) provides specific exceptions. In addition, when state and local governments have liens for ad valorem property taxes that come due post-petition, the Bankruptcy Code recognizes those liens and exempts them from the automatic stay. See 11 U.S.C. §362(b)(18). The Code does not, however, address whether the automatic stay provision precludes attachment of other statutory or non-consensual liens in after-acquired property when the property comes into the estate after the bankruptcy petition is filed. More particularly, it does not address whether a tax lien created by 26 U.S.C. §6321 is permitted to attach to property acquired by the estate post-petition.

The lien created by §6321 of the Internal Revenue Code for taxes, interest, and penalties owed, applies in favor of the United States "upon all property and rights to property, whether real or personal, belonging to [the taxpayer]." 26 U.S.C.§6321. Liens created by §6321 become "valid" as against third parties upon the IRS's filing notice of the lien in any recording office within the state in which the property is located. See 26 U.S.C. §6323(a), (f). Moreover, liens created by §6321 apply not only to property in which the taxpayer already has an interest, but also to property acquired by the taxpayer after the government files notice of its lien. See United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 448 (1993) (citing Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265 (1945)).

Accepting these principles, the IRS contends that the district court erred in not recognizing that its claim for $109,819 was entitled to secured status on the ground that the IRS took all steps necessary to perfect its lien before the bankruptcy petition was filed. Accordingly, it contends that its tax lien attached to Avis' inheritance before the bankruptcy and that therefore the automatic stay imposed by 11 U.S.C. §362 had no effect on the property already encumbered by the lien when it entered the bankruptcy estate. Alternatively, the IRS contends that §362(a)(5), by its terms, only stays affirmative post-petition "act[s]" to secure pre-petition claims, and that the stay would not apply to liens that attach to debtor's property "by operation of law," such as those arising under §6321 of the Internal Revenue Code.

Likewise accepting the stated principles, the trustee in bankruptcy maintains that no lien of the IRS could attach to Avis' inheritance before the petition date because the property was not then in existence. He argues that the inheritance automatically passed into the bankruptcy estate post-petition by reason of 11 U.S.C. §541(a)(5)(A) "without ever becoming property of the Debtor under that section." Accordingly, it could not be subject to the IRS's lien against the debtor. Alternatively, the trustee argues that attachment to post-petition property is an "act" stayed by §362(a)(5) of the Bankruptcy Code. To construe the stay otherwise, he argues, would allow the IRS to improve its position post-petition at the expense of unsecured creditors.

III

The public policy favoring enforcement of statutorily created tax liens is important to the national tax collection effort. Similarly, the public policy underlying the §362 stay of enforcement efforts during bankruptcy proceedings is essential to the equitable order necessary for administering fairly the assets of a debtor in bankruptcy. This tension between the IRS's lien in after-acquired property created by §6321 of the Tax Code and the bankruptcy policy of protecting estate property from creditors' efforts to improve their positions can be resolved only by a closer examination of the nature of the IRS's lien and the reach of a §362 stay.

The IRS's lien is created by statute on amounts owed the IRS for taxes, interest, and penalties. See 26 U.S.C. §6321. It becomes valid against third persons upon the IRS's filing of notice of the lien in the manner prescribed by statute. See 26 U.S.C.§6323(a), (f). In determining when a lien created by §6321 in after-acquired property becomes "perfected," the Supreme Court analogized the tax lien to security agreement liens regulated by Article 9 of the Uniform Commercial Code, concluding that a tax lien in after-acquired property does not attach to such property until the debtor actually acquires the property and therefore is not "perfected" until that time. See McDermott [93-1 USTC ¶50,164], 507 U.S. at 451-53. Until the lien attaches to the property, it is "inchoate." Id. at 452 n.5. Moreover, the Court rejected the notion that a lien in after-acquired property became perfected when there was nothing more to be done by the creditor to obtain a lien. Id. at 451 & n.4.

In this case, therefore, the IRS had a lien in all of Avis' property in existence at the time the bankruptcy petition was filed and an inchoate lien in property that he might thereafter acquire, such as his inheritance from the Weir trust. But the IRS's inchoate lien in the inheritance could not be perfected until Avis actually received the inheritance. Thus, only when Maureen Weir died in September 1995, conveying an inheritance to Avis, could the IRS lien become perfected; the lien could not attach to the inheritance until it came to Avis. But at the same time it came to Avis, it also became property of the bankruptcy estate pursuant to 11 U.S.C. §541(a)(5)(A) and thus became subject to the provisions of the §362 automatic stay. Accordingly, we must determine whether §362 stays the perfection of the IRS's lien at the time the estate received the inheritance even though the lien would otherwise have become "perfected" as a matter of law.

The applicable section of the automatic stay provision provides that the bankruptcy petition stays "any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title." 11 U.S.C. §362(a)(5) (emphasis added). The IRS argues that because its lien became perfected by operation of law and not by any act by it or on its behalf, §362(a)(5) does not apply because the provision explicitly stays only "act[s]." We believe that this argument reads the term "act" too narrowly for the demands of its context. While "act" is defined as "the doing of a thing," or a "deed," it is also defined to mean "a state of real existence rather than possibility." Merriam Webster's Collegiate Dictionary 11 (10th ed. 1994). By advancing a narrow definition of "act," the IRS would have its pre-petition claim secured at the expense of unsecured creditors. We believe that this argument overlooks a chief aim of§362(a)(5), which is to prevent the post-petition perfection of interests in a debtor's bankruptcy estate.

Our conclusion that the stay of §362 was intended to bar the perfection of federal tax liens is bolstered by Congress' recent addition of §362(b)(18) to the Bankruptcy Code. In 1994, Congress enacted §362(b)(18) to exempt from the stay provision the perfection of liens resulting from state or local property taxes. It provides that §362(a) does not operate as a stay against "the creation or perfection of a statutory lien for an ad valorem property tax imposed by the District of Columbia, or a political subdivision of a State, if such tax comes due after the filing of the petition." See 11 U.S.C. §362(b)(18). If the perfection of statutory liens resulting by operation of law were generally excluded from the automatic stay of §362(a), Congress would not have found it necessary to add §362(b)(18) exempting the perfection of liens created by state or local law. Because that section applies only to state and local tax liens, it must be inferred that Congress did not intend to exempt the perfection of federal tax liens. See 3 Collier on Bankruptcy §362.05[17], at 362-74. This conclusion finds further support in §362(b)(18)'s legislative history. See H. Rep. No. 103-835, at 58-59 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3367-68 (stating that Congress added §362(b)(18) to "allow local governments to utilize their statutory property tax liens in order to secure the payment of property taxes" without violating the automatic stay (emphasis added)).

Our conclusion also finds support in §362(b)(9). As amended, that section permits governmental units to conduct audits, issue notices of tax deficiencies, make demands for tax returns, and assess taxes with notices of demands for payment. See 11 U.S.C. §362(b)(9). Significantly, however, any tax lien that arises as a result of an assessment cannot take effect with respect to property in the bankruptcy estate unless the tax is nondischargeable and the property to which the assessment will attach is transferred out of the estate or will otherwise revest in the debtor. Id. The plain inference flowing from the existence of the §362(b)(9) exception is that all other efforts to assess or collect taxes remain stayed under §362(a), unless otherwise exempted under the Bankruptcy Code, such as in §362(b)(18) (relating to local property taxes). In short, the inclusion of sections such as §362(b)(18) and §362(b)(9) as exceptions to the automatic stay suggests that Congress did not intend to exclude the perfection of a federal tax lien from the automatic stay of §362(a). See 3 Collier on Bankruptcy §362.05[9], at 362-67.

The IRS argues for a negative inference arising from§552(a) of the Bankruptcy Code which precludes perfection of liens in after-acquired property when the property is acquired by the estate after the petition for bankruptcy is filed. The IRS maintains that because §552(a) applies to consensual "security agreements" and not to statutorily created liens, by implication, statutorily created liens can apply to after-acquired property coming to the estate. We conclude, however, that this implication from §552(a) cannot be read to vitiate the stronger implication drawn from Congress' specific addition of §362(b)(18) to the stay provisions. Because §362(b)(18) explicitly addresses the perfection of statutory liens--exempting from stay only state and local property tax liens and not federal income tax liens--the conclusion to be drawn is that the perfection of federal tax liens was left to be stayed by §362(a).

Accordingly, we hold that the attachment of a federal tax lien created under 26 U.S.C. §6321 to property acquired during the bankruptcy proceedings is an "act" that is stayed by operation of §362(a)(5).

IV

We must also address the trustee's cross appeal, challenging the district court's recognition of the IRS's secured claim to the extent of $1,000. That amount represented the stipulated value of Avis' interest in the Weir trust as of the bankruptcy petition date.

As a general proposition, the district court was applying the principle that all of Avis' property which existed at the time of the petition in bankruptcy was subject to the IRS's lien. Since Avis' interest in the Weir trust was valued as of that time at $1,000 by stipulation, we can find no basis to reverse the ruling. Even if the bankruptcy court made the valuation as a finding of fact, we would not conclude that the finding constituted clear error.

As a named beneficiary, Avis was only entitled to a distribution from the Davis Weir trust if the trustee did not distribute all of the trust's income to Maureen Weir and if Maureen Weir exercised her power of appointment in Avis' favor. While the interest was a real one in that Davis Weir had died in 1975 and his will was therefore fixed, it was contingent on the existence of trust assets and Maureen Weir's power of appointment. See Brown v. Saake, 190 So.2d 56, 58 (Fla. Dist. Ct. App. 1966) ("An estate is contingent if, in order for it to become a present or vested estate, the fulfillment of some condition precedent other than the determination of the preceding freehold estate is necessary" (citation omitted)) (The parties have stipulated that Florida law governs the interpretation of the Weir trust). Even though contingent, Avis' interest possessed some value, however small. Because the record contains nothing suggesting that any finding attributing a $1,000 value to this interest was unreasonable or otherwise in error, we affirm the district court's order recognizing the IRS's secured claim to the extent of $1,000.

For the foregoing reasons, we affirm the district court's judgment holding that the IRS's claim against Avis' bankruptcy estate is secured to the extent of $1,000 and unsecured for the remainder.

AFFIRMED

[Dissenting Opinion]

HAMILTON, Circuit Judge

I agree with the majority's conclusion that the IRS had an inchoate lien on Avis' potential inheritance from the Weir trust at the time the bankruptcy petition was filed. I also agree with the majority's conclusion that "only when Maureen Weir died in September 1995, conveying an inheritance to Avis, could the IRS lien become perfected; the lien could not attach to the inheritance until it came to Avis." Ante at 8. For several reasons, however, I do not agree with the majority's subsequent conclusion that §362(a)(5) operated to prevent the IRS's tax lien from attaching to the inheritance. On this point, I respectfully dissent.

This appeal involves what is known in bankruptcy parlance as the "claw-back" provision of the Bankruptcy Code. In relevant part, the claw-back provision brings into the bankruptcy estate, inter alia, "[a]ny interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date--(A) by bequest, devise, or inheritance. . . ." 11 U.S.C. §541(a)(5)(A). In essence, the claw-back provision extends the petition date six months for the purpose of capturing for the bankruptcy estate property that the debtor acquires within six months after the initial petition date. Thus, the claw-back provision treats such after acquired property of the debtor as though the debtor had acquired it prior to the initial petition date. Congress enacted the claw-back provision in order to prevent debtors from manipulating the bankruptcy petition date so as to deprive creditors of certain assets. See In re Woodson, 839 F.2d 610, 619-20 (9th Cir. 1988).

In this case, Avis inherited approximately $150,000 from Maureen Weir within 180 days of May 10, 1995, the date Avis' creditors filed the Chapter 7 petition. By virtue of the claw-back provision, Avis' inheritance should be treated as though it was acquired prior to the date the petition was filed. Treating the inheritance as such, the IRS's lien was perfected by operation of law. Indeed, all parties agree that if Avis had already inherited the approximately $150,000 pre-petition, it would have entered the bankruptcy estate encumbered by the IRS's tax lien. Notably, treating the inheritance as entering the bankruptcy estate encumbered by the IRS's tax lien fully coincides with the purpose of the claw-back provision to prevent debtors from manipulating the bankruptcy petition date so as to deprive creditors of certain assets. See In re Woodson, 839 F.2d at 619-20.

The majority holds that the inheritance entered the bankruptcy estate unencumbered by the IRS's tax lien. In reaching this holding, the majority necessarily holds that property subject to the claw-back provision is also subject to §362(a)(5). However, this holding ignores the plain language of the claw-back provision, which expressly contemplates the bankruptcy estate receiving only the actual interest in the inheritance that the debtor hypothetically would have possessed had he acquired it or been entitled to acquire it on the original petition date.

Succinctly put, §362(a)(5) is irrelevant to this case. Section 362(a)(5) essentially prevents a creditor from encumbering a debtor's property post-petition. In contrast, the claw-back provision instructs courts to treat property acquired within 180 days of the petition date as if the debtor owned the property pre-petition. In this case, that means recognizing the inheritance as entering the bankruptcy estate encumbered by the IRS's tax lien. To hold as the majority does improves the position of Avis' unsecured creditors at the expense of one of his secured creditors, which is an anomalous result obviously not contemplated by the plain language of the claw-back provision.

For these reasons, I would hold that the IRS has a secured claim against the bankruptcy estate in the amount of $109,819 for federal income taxes, penalties, and interest owed by Avis for certain previous tax years. Accordingly, I would reverse the district court's affirmance of the bankruptcy court and remand the case to the district court with instructions to remand the case for further proceedings consistent with this holding. ^*

^* Because, in my view, the IRS's tax lien was fully secured via Avis' post-petition inheritance, I would reverse the district court's affirmance of the bankruptcy court's determination that the IRS is only entitled to a secured lien of $1,000, the stipulated value of Avis' interest in the Weir trust as of the bankruptcy petition date.

[Concurring and Dissenting Opinion]

HERLONG, District Judge

: I concur with Parts I, II, and III of Judge Niemeyer's opinion and agree that the automatic stay provision of the Bankruptcy Code operated to prevent the IRS's tax lien from attaching to the inheritance. Yet I disagree with the conclusion that the IRS had a secured claim to the extent of $1000. Accordingly, I respectfully dissent to Part IV of Judge Niemeyer's opinion.

As correctly stated in Part IV of Judge Niemeyer's opinion, the $1000 "represented the stipulated value of Avis' interest in the Weir trust as of the bankruptcy petition date." Ante at 10. Part I of Judge Niemeyer's opinion, however, states that the $1000 stipulation represented "the value of Avis' interest in the inheritance as of the date of the bankruptcy petition." Ante at 4 (emphasis added). This latter description is inaccurate because Avis' interest in the Davis Weir trust is distinct from his interest in the inheritance.

The bankruptcy court allowed the IRS to have a lien "in the post-petition distribution of principal from the trust under the will of David Weir only to the extent of the present value of Avis' interest in the trust as of the filing dated of the chapter 7 petition." (J.A. at 90.) The parties then stipulated that "the present value of the debtor's interest in the trust as of the filing date" was $1000. (J.A. at 92.) Thus, the description employed by Judge Niemeyer's opinion in Part IV is the correct characterization of the $1000 stipulation--it represents Avis' interest at the time of the filing in the trust, not the inheritance. If the "debtor's interest in the trust as of the filing date" is closely examined, however, it becomes clear that there are three "interests" that Avis had in the trust at that time. None of these interests can provide a basis for giving the IRS a secured lien. Accordingly, the district court erred in allowing the IRS to have a secured claim to the extent of $1000.

The first of Avis' three interests in the trust at the time of the filing date was Avis' interest in receiving income from the trust ("income interest"). This income interest was a valid property interest that clearly had some value at the time of the filing of the petition. Thus, it may appear that the IRS's lien should have attached to it. Avis' income interest, however, was effectively listed on his bankruptcy petition as exempted from the bankruptcy estate. When reopening the case, the bankruptcy court specifically stated that "exempted was [Avis'] right to the income from the trust." (J.A. at 24.) Therefore, the income interest may not serve as a basis for a secured lien by the IRS.

The second of Avis' three interests in the trust at the time of the filing was a contingent remainder interest in the trust ("contingent remainder interest"). This interest was contingent upon (1) Maureen Weir not exercising her power of appointment over the assets of the trust, and (2) Avis living twenty-five years after the death of Maureen Weir. See (J.A. at 86.) If these two events occurred, then Avis would receive a distribution of three percent of the remaining corpus of the trust. There is nothing unusual about this interest--Avis was simply one of several potential remaindermen under the trust.

Avis' contingent remainder interest was a valid property interest that clearly had some value at the time of the filing of the petition. Thus, it may appear that the IRS's lien should have attached to it. This interest, however, was effectively listed on the petition as exempted from the bankruptcy estate. When reopening the case, the bankruptcy court specifically stated that "exempted was . . . any contingent remainder interest not maturing within the 180-day period after the commencement of the case." (J.A. at 24.) Avis' contingent remainder interest did not mature within the 180-day period after the commencement of the case. Indeed, it could not mature in such a period because it could not mature until twenty-five years after the death of Maureen Weir, and she was still alive at the commencement of the case. Consequently, the contingent remainder interest was exempted and therefore may not serve as a basis for a secured lien by the IRS.

The third of Avis' three interests in the trust at the time of filing was the possibility that Avis might inherit a portion of the corpus of the trust via Maureen Weir's exercise of her testamentary power of appointment in his favor, thereby terminating the trust early and distributing a portion to Avis. This "expectancy interest," as I will call it, was not a property interest at all--even though it materialized into a very real $150,000 inheritance--because under Florida law "[a] proposed devise contained in a will conveys no interest to the devisee so long as the testatrix is alive." Bowman v. Yelvington, 280 So. 2d 497, 499 (Fla. Dist. Ct. App. 1973). Because Maureen Weir was alive at the time of the filing, no interest was conveyed via her will. The bankruptcy court itself stated that the possibility of inheriting under the power of appointment was a "mere expectancy" that did not rise to the level of a property interest at the time Avis filed the bankruptcy petition. (J.A. at 85.) Specifically, the court stated: "Since Maureen Weir remained free to change her will at any time prior to her death, the language in the will exercising her power of appointment in favor of Avis could have no legal effect, and conveyed no interest in the principal of the trust, until she died." (J.A. at 86-87 (emphasis added).)

Because Avis' expectancy interest under the power of appointment was not a property interest at the time of the filing of the petition, there was nothing to which the IRS's lien could attach. Neither could Avis' expectancy be considered one of the contingencies under his vested contingent remainder interest. The expectancy interest did come to fruition in the form of a $150,000 inheritance, but this inheritance did not exist until Maureen Weir's death, which came after the filing of the petition. At that point, the automatic stay provision prohibited the IRS's lien from perfecting. At the time of filing, however, the possibility of an inheritance within 180 days was a "mere expectancy" and not a property interest. Therefore, it may not serve as a basis for a secured lien by the IRS.

When the bankruptcy court examined this issue, it recognized that the expectancy interest had no value. It then allowed the IRS to have a secured lien on the value of Avis' income interest and vested contingent remainder interest in the trust. This value was later stipulated to be $1000. ^* However, the court erred in allowing the lien to be secured because these two interests, as explained above, had been properly exempted. It is peculiar that the bankruptcy court declared these interests to be exempt when it reopened the case and then allowed a secured claim against their value in a later order. It appears that the bankruptcy court simply forgot that these interests had been held to be properly exempted. Regardless of the reasons for the inconsistency, the law of the case was that the interests were exempted, and the district court erred in allowing the secured claim on the basis of exempted interests.

Furthermore, the fact that the distribution of the inheritance itself was not exempted does not alter the above analysis. The bankruptcy court stated that "the right to the distribution was not effectively claimed exempt and has not passed out of the bankruptcy estate." (J.A. at 25.) This statement is correct. It is important to remember that the inheritance did not exist at the time of the filing and that Avis' possibility of receiving the inheritance was not a valid property interest. This expectancy is entirely distinguishable from Avis' interest in the trust at the time of the filing (i.e. his income interest and contingent remainder interest), which was exempted. The reason that the distribution of the inheritance was not exempted was because Avis' description of his interest in the Davis Weir trust on the schedule of exemptions "did not fairly place the trustee and creditors on notice of the debtor's immediate right to a 3% lump sum distribution of principal arising from Maureen Weir's exercise of her power of appointment." (J.A. at 25.) Avis' description of his interest in the Davis Weir trust on the schedule of exemptions did, however, place the trustee and creditors on notice of his income interest in the trust and of his contingent remainder interest in the trust. Thus, these interests were exempted, whereas the inheritance was not.

In fact, the bankruptcy court, in finding that the inheritance was not exempted, distinguished Avis' eventual right to a three-percent lump sum distribution of principal (arising from Maureen Weir not exercising her power of appointment and from Avis living twenty-five years past the death of Maureen Weir)--i.e. Avis' contingent remainder interest--from Avis' immediate right to a three-percent lump sum distribution of principal (arising from Maureen Weir's exercise of her power of appointment)--i.e. the inheritance. It held that the former was exempted and that the latter was not. See (J.A. at 24-25). I am in full agreement.

In sum, there was no interest in the trust or in the inheritance at the time of the filing of the petition to which the IRS's lien could attach. The income and contingent remainder interests were properly exempted, and the expectancy interest in the inheritance was not a property interest. Thus, whether the $1000 represented the exempted income interest, the exempted contingent remainder interest, or the non-existent expectancy interest--or some combination of the three--it was error for the bankruptcy court to hold that the IRS had a secured lien in that amount.

I also would like to point out an alternative resolution of the case based upon the above discussion. If Maureen Weir's death and resulting exercise of her power of appointment terminated the trust--thereby terminating Avis' income and contingent remainder interests--the property to which the IRS's lien attached no longer existed when the IRS instituted proceedings to use this property as a basis for its secured claim. Thus, even if this property were not properly exempted, it ceased to exist and consequently could not form the basis of a secured claim.

In conclusion, the IRS has no secured claim to the extent of $1000. Accordingly, I would reverse the district court's affirmance of the bankruptcy court on this issue.

^* To the extent the $1000 represented Avis' expectancy interest in the inheritance, the lower court erred because Avis' expectancy interest did not rise to the level of a property interest and thus could not be assigned a value. Because the bankruptcy court had just made this determination, it does appear that it included the value of Avis' expectancy interest in the amount of the secured lien.

 

 

 

In re James F. and Maureen Mulligan, Debtors. James F. Mulligan, Plaintiff v. United States of America , Internal Revenue Service, Defendants

U.S. Bankruptcy Court, Dist. N.H., 98-11536-MWV, 5/14/99, 234 BR 229

[Code Secs. 6321 , 6323 and 6871 ]

Bankruptcy: Discharge: Tax liens: Personal liability: Real property: Personal property: Standing: Trustee: Debtor: Exempt property.--

A federal tax lien on a delinquent individual's real and personal property survived the discharge of his underlying tax deficiencies in Chapter 7 bankruptcy. Although the bankruptcy discharged his personal liability for the debt, it did not affect a valid tax lien that was secured by his real property, even though he had no equity in it. Further, the IRS had not exercised its discretion to issue a certificate of release with respect to the lien. The lien also remained valid against the debtor's personal property. Since the bankruptcy trustee had the power to avoid liens against the property of the bankruptcy estate, the debtor generally lacked standing to request such relief. His limited standing to avoid liens against property that was exempt from his bankruptcy estate was irrelevant because tax liens remained valid against exempt property.

[Code Sec. 6325 ]

Bankruptcy: Discharge: Tax liens: Personal liability: Lien against property: Real property: Personal property: Standing: Trustee: Debtor: Exempt property: Value of property: Judicial determination: Redemption of property.--

A federal tax lien on a delinquent individual's real and personal property survived the discharge of his underlying tax deficiencies in Chapter 7 bankruptcy. The discharge of his personal liability did not affect the liens and the IRS had not exercised its discretion to issue a certificate of release. The debtor also was not entitled to a court determination of the value of each item of personal property that was subject to the lien, which would allow him to redeem the property by tendering that amount to the IRS. Since he failed to object to the government's proof of claim, it was allowed as filed. Also, Chapter 7 debtors were not allowed to "strip down" a creditor's lien to a judicially determined value. Further, he was not entitled to redeem property in which he no longer had an exempt interest. Thus, he could redeem the property only by paying the full amount of the claim that was secured by the lien.

[Code Sec. 6871 ]

Bankruptcy: Tax liens: Avoidance of: Standing: Trustee: Debtor: Exempt property.--

A federal tax lien on a delinquent individual's real and personal property survived the discharge of his underlying tax deficiencies in Chapter 7 bankruptcy. Since section 545 gave the bankruptcy trustee the power to avoid liens against the property of the bankruptcy estate, the debtor generally lacked standing to request such relief. Although section 522 gave him limited standing to avoid liens against property that was exempt from his bankruptcy estate, it also provided that tax liens remained valid against exempt property.

Grenville Clark, III, Esq., Gray Wendell & Clark, P.C., Attorney for the Plaintiff. John V. Cardone, Esq., U.S. Department of Justice, Attorney for the Defendant.

MEMORANDUM OPINION

VAUGHN, Chief Judge:

The Court has before it both the United States of America , Internal Revenue Service's ("Defendant") motion and James F. Mulligan's ("Plaintiff" or "Debtor") cross-motion for summary judgment. In its motion, the Defendant alleges that its lien on the Debtor's real and personal property for unpaid taxes may not be avoided or stripped down to a judicially determined value. The Plaintiff objects, and cross-moves alleging that the Court should: (1) release the Defendant's lien on his condominium because it has no equity; (2) avoid the Defendant's lien on his interest in personal property under 26 U.S.C. §6323(b) and (c); and (3) declare the value of each article of personal property to which the Defendant's lien attaches so that the Plaintiff may redeem his property by paying the amount of the lien on each item.

On May 5, 1999, the Court heard the parties' motion and cross-motion for summary judgment and took both under submission. For the following reasons, the Court grants the Defendant's motion for summary judgment and denies the Plaintiff's cross-motion for summary judgment.

This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§1334 and 157(a) and the "Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire," dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. §157(b).

FACTS

There are no material facts in dispute. The Plaintiff filed a joint Chapter 7 bankruptcy petition with his wife on April 20, 1998. On Schedule A of their petition, the Debtors listed the value of their condominium as $75,000. Schedule B lists total personal assets of $36,025.92, $16,153.69 of which is owned either jointly or by the Plaintiff alone; however, the [Plaintiff's] ¹ Memorandum on Cross Motions for Summary Judgment states that the value of the Plaintiff's personal property has diminished to $6,652.19. ²([Pl.'s] Mem. at 2, ¶2.) On Schedule C, the Debtors claimed their homestead exemption and certain other exemptions under N.H. Rev. Stat. Ann. §511:2 and 26 U.S.C. §6334(a)(1) and (a)(3) for office furniture, a computer, checking accounts, clothes, household goods, cars, jewelry and other personal items. Schedule D lists a total of $85,567.30 in first and second mortgages on the Debtors' condominium, and Internal Revenue Service liens for unpaid 1991, 1993 and 1994 taxes on the Plaintiff's real and personal property totaling $15,342.04. ³

The Defendant filed a proof of claim on June 25, 1998, which set forth a $22,062.72 secured claim, a $5,081.22 unsecured priority claim and a $170.04 unsecured general claim. ⁴ (Proof of Claim #13; Mem. of Law and Exs. in Supp. of United States ' Mot. for Summ. J. ["Def.'s Mem."], Ex. 2.) The Debtors did not object to the Defendant's proof of claim. On June 26, 1996, the Defendant filed a Notice of Federal Lien with the Town Clerk for the Town of Chester and the Rockingham County Register of Deeds for the unpaid 1991, 1993 and 1994 taxes, which noticed a secured claim of $15,342.04 on the Plaintiff's property. (Def.'s Mem., Ex. 3.) The Debtors received their discharge on August 12, 1998.

DISCUSSION

I. Rule of Law for Summary Judgment Motions.

Under Rule 56(c) of the Federal Rules of Civil Procedure, made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7056, a summary judgment motion should be granted only when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." "Genuine," in the context of Rule 56(c), "means that the evidence is such that a reasonable jury could resolve the point in favor of the nonmoving party." Rodriguez-Pinto v. Tirado-Delgado, 982 F.2d 34, 38 (1^st Cir. 1993) (quoting United States v. One Parcel of Real Property, 960 F.2d 200, 204 (1^st Cir. 1992)). "Material," in the context of Rule 56(c), means that the fact has "the potential to affect the outcome of the suit under applicable law." Nereida-Gonzalez v. Tirado-Delgado, 990 F.2d 701, 703 (1^st Cir. 1993). Courts faced with a motion for summary judgment should read the record "in the light most flattering to the nonmovant and indulg[e] all reasonable inferences in that party's favor." Maldonado-Denis v. Castillo-Rodriguez, 23 F.2d 576, 581 (1^st Cir. 1994).

II. The Secured Status of Defendant Internal Revenue Service's Claim.

Section 6321 states that "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C.A. §6321 (1982 & Supp. 1998); see also United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985) ("The statutory language 'all property and rights to property,' appearing in §6321 . . . is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. . . . Stronger language could hardly have been selected. . . .") (internal citations omitted). When the Plaintiff failed to pay his 1991, 1993 and 1994 taxes, the Defendant obtained a statutory lien under section 6321 on all the Plaintiff's property. §6321. Further, the Defendant obtained a perfected security interest upon all of the Plaintiff's property on June 26, 1996, when it filed its Notice of Federal Tax Lien with the Chester Town Clerk and the Rockingham County Register of Deeds. Under section 6322, the Defendant's lien remains in effect until it "is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C.A. §6322 (1982 & Supp. 1998).

Although the Plaintiff's underlying tax debt may have been discharged, "the liability for the amount assessed remains legally enforceable even where the underlying tax debt is discharged in the bankruptcy proceeding." Isom v. United States (In re Isom) [90-1 USTC ¶50,216], 901 F.2d 744, 745 (9^th Cir. 1990) (citing Long v. Bullard, 117 U.S. 617 (1886)). See also Johnson v. Home State Bank, 501 U.S. 78, 84 (1991) ("[A] bankruptcy discharge extinguishes only one mode of enforcing a claim--namely, an action against the debtor in personam--while leaving intact another--namely, an action against the debtor in rem."); Dillard v. United States (In re Dillard), 118 B.R. 89, 92 (Bankr. N.D. Ill. 1990) (stating that section 6325(a) does "not violate the fresh start policy because Congress intended for valid tax liens to survive bankruptcy") (internal citations and quotations omitted).

The Plaintiff has not disputed that the lien was properly recorded and, at hearing, could not dispute that the Defendant's secured status persists on his real property, although his personal liability with respect to the lien has been discharged.

In his cross-motion for summary judgment, however, the Plaintiff asserts that the Court should order the Defendant to release its lien under 26 U.S.C. §6325 since there is no equity in his condominium. Section 6325(a)(1) states:

(a) Release of lien.--Subject to such regulations as the Secretary may prescribe, the Secretary shall issue a certificate of release of any lien imposed with respect to any internal revenue tax not later than 30 days after the day on which--

(1) Liability satisfied or unenforceable.--The Secretary finds that the liability for the amount assessed, together with all interest in respect thereof, has been fully satisfied or has become legally unenforceable . . .

26 U.S.C.A. §6325(a)(1) (1982 & Supp. 1998). As stated above, however, it is irrelevant that there is no equity in the property. The lien survives and continues to be secured by the Plaintiff's real property. At any rate, under section 6325, the tax lien is not released until the certificate of release is issued by the Secretary, see United States v. Waite, Inc. [80-1 USTC ¶9128], 480 F. Supp. 1235 (D.C. Pa. 1979), but whether a certificate of discharge should be issued is discretionary, 26 U.S.C. §6325(b) ("Subject to such regulations as the Secretary may prescribe, the Secretary may issue a certificate of discharge. . . ."). No release has been issued by the Secretary relative to this matter. Thus, the Defendant's lien remains secured by the Plaintiff's pre-petition real property, and may not be avoided, even though the Plaintiff's personal liability has been discharged. Isom [90-1 USTC ¶50,216], 901 F.2d at 745 ("We hold that 26 U.S.C. §6325(a)(1) does not require the I.R.S. to release valid tax liens when the underlying tax debt is discharged in bankruptcy."); 11 U.S.C.A. §524(a)(2).

III. Whether the Plaintiff Has Standing to Avoid the Defendant's Lien.

The complaint in this adversary proceeding alleges essentially two causes of action: (1) under section 724(a), ⁵ which implicates 726(a)(4), upon which neither the Plaintiff nor the Defendant have focused their motions, memoranda and arguments at hearing; ⁶ and (2) under section 6323(b) of the Internal Revenue Code in conjunction with sections 545(2) and 522(h) of the Bankruptcy Code. (Pl.'s Compl. 2-4.) At hearing, counsel for the Defendant asserted, as a threshold issue, that the Plaintiff does not have standing to avoid its liens under section 545(2) of the Bankruptcy Code. Counsel for the Plaintiff countered that some case law supports a debtor's power to avoid liens under section 545(2), and, additionally, that the Plaintiff may avoid the lien against his personal property to the extent section 522(h) grants debtors certain avoidance powers.

Section 545 states, in pertinent part:

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

. . . .

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

11 U.S.C.A. §545(2) (1986) (emphasis added).

A divergence of opinion has formed around this issue, with the result that a majority of courts have found that debtors have no standing under section 545(2) to avoid liens. See Aikens v. Philadelphia , Water Revenue Bureau (In re Aikens), 94 B.R. 869, 872 (Bankr. E.D. Pa.) ("While §545(2) vests avoidance powers solely in the trustee, . . . the Debtor is empowered to stand in the shoes of the trustee if he satisfies the criteria of 11 U.S.C. §§522(h), 522(g)(1), and (g)(2). . . .") (internal citations omitted), aff'd, 100 B.R. 729 (E.D. Pa.), aff'd, McLean v. Philadelphia , Water Revenue Bureau, 891 F.2d 474 (3d Cir. 1989); see also Cardillo v. Andover Bank (an re Cardillo), 169 B.R. 8 (Bankr. D.N.H. 1994) (except to enhance the debtor's exemptions under section 522, the chapter 5 avoiding powers of a trustee are not available to a chapter 13 debtor). Compare Stangel v. United States (In re Stangel), 222 B.R. 289 (Bankr. N.D. Tex. 1998) (without the joinder of the trustee under section 545(2), a debtor has no standing to avoid liens); Wethington v. United States (In re Wethington), 219 B.R. 529, 530 (Bankr. D. Minn. 1997) ("The Plaintiff, as a debtor in a case under Chapter 13 before this Court, lacks standing to exercise the lien avoidance remedies of 11 U.S.C. §545(2) as against the Defendant."); O'Neil v. United States (In re O'Neil), 177 B.R. 809, 812 (Bankr. S.D.N.Y. 1995) ("Most courts have held that a chapter 13 or chapter 7 debtor lacks standing to avoid tax liens pursuant to section 545 of the Bankruptcy Code. . . ."); In re Robinson, 166 B.R. 812, 812 (Bankr. D. Vt. 1994) ("We deny Debtors' motion and hold that a Chapter 7 debtor does not have standing to bring an action to avoid such liens under §545(2) by way of §§522(f) or (h)."); Goebel v. United States (In re Goebel), 153 B.R. 593, 594 (Bankr. M.D. Fla. 1993) ("Under the specific language of this section [545(2)], only the trustee has standing to avoid a statutory lien. . . ."); Matter of Coan, 72 B.R. 483, 485 (Bankr. N.D. Fla. 1987) ("It is without dispute that Chapter 13 debtors are empowered and have the ability to exercise the Trustee's lien avoidance powers under Chapter 5."), vacated, In re Coan, 134 B.R. 670 (Bankr. M.D. Fla. 1991); In re Henderson , 133 B.R. 813, 817 (Bankr. W.D. Tex. 1991) ("Nowhere in the Code, including Chapter 5, is the debtor granted standing to avoid tax liens on non-exempt property."); Perry v. United States (In re Perry), 90 B.R. 565, 566 (Bankr. S.D. Fla. 1988) ("The debtor's only standing with respect to any of the trustee's avoidance powers is provided by §522(h). . . ."); In re Mattis, 93 B.R. 68 (Bankr. E.D. Pa. 1988) (finding that debtor lacked standing under section 545(2) to avoid the Internal Revenue Service's lien). Cf. Cleary v. United States (In re Cleary), 210 B.R. 741, 744 (Bankr. N.D. Ill. 1997) ("This section [545(2)] permits a trustee or debtor to take the position of a hypothetical bona fide purchaser and claim the same defenses to the statutory liens on the debtor's property as such a purchaser could claim.") (internal citations omitted).

In an interesting twist on the issue, as counsel for the Plaintiff noted at hearing, one Bankruptcy Court granted the debtors an assumed platform on which to stand and held that they could invoke the power to avoid under 545(2). ⁷ Straight v. First Interstate Bank (In re Straight) [96-2 USTC ¶50,423], 200 B.R. 923, 929 (Bankr. D. Wyo. 1996). However, on appeal, the Bankruptcy Appellate Panel for the Tenth Circuit held that the standing issue was moot because, in the interim, a trustee was joined as a party. Straight v. First Interstate Bank (In re Straight) [97-1 USTC ¶50,374], 207 B.R. 217 (B.A.P. 10^th Cir. 1997), appeal dismissed, First Interstate Bank v. Straight (In re Straight), No. 97-8037 (10^th Cir. Mar. 13, 1998); see also Internal Revenue Serv. v. Diperna [96-1 USTC ¶50,171], 195 B.R. 358, 361 (E.D.N.C. 1996) (Responding to the Internal Revenue Service's contention that the debtor did not have standing to avoid its lien, the bankruptcy court stated, after a long discussion regarding section 545(2) of the Bankruptcy Code and 6323(b) of the Internal Revenue Code, that "[a]ssuming without deciding that the debtor has standing, the above analysis applies with equal force to the debtor."); Carrens v. United States (In re Carrens) [96-1 USTC ¶50,294], 198 B.R. 999 (Bankr. M.D. Fla. 1996) (Chapter 13 debtors sought to avoid liens under section 545(2); however, the issue of standing was never discussed by the bankruptcy court, which focused instead on whether a trustee is a "purchaser" under section 6323(b) of the Internal Revenue Code).

With all the above case law on this issue in mind, the Court holds that the Plaintiff does not have standing under section 545(2) of the Bankruptcy Code to avoid the Defendant's liens. Therefore, despite the parties' arguments outlined in their memoranda to the contrary, it follows that a discussion comparing a "bona fide purchaser" under section 545(2) of the Bankruptcy Code to a "purchaser" under section 6323(b) of the Internal Revenue Code is superfluous and unnecessary.

Going back to the remaining part of the Plaintiff's argument, however, a number of other courts have held that a debtor has limited power under section 522(h) to avoid liens on non-exempt personal property. DeMarah v. United States (In re Demarah), 62 F.3d 1248, 1251 (9^th Cir. 1995) ("The fact that DeMarah may be able to exempt the property [under section 522(h)] that is subject to the tax lien from the bankruptcy estate does not mean that he can remove the lien itself, or that portion of it which secures the penalty."); United States v. Hunter (In re Walter) [95-1 USTC ¶50,072], 45 F.3d 1023, 1034 (6^th Cir. 1995) ("Bankruptcy Code §545(2) makes clear that the trustee may only avoid a statutory lien that a bona fide purchaser could."); Goebel, 153 B.R. at 594 ("11 U.S.C. §522(h) confers standing upon a debtor to invoke the trustee's §545 powers to the extent that the debtor could exempt the property involved.").

Section 522(h) states that:

The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if--

(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549 of 724(a) of this title or recoverable by the trustee under section 553 of this title: and

(2) the trustee does not attempt to avoid such transfer.

11 U.S.C.A. §522(h) (1988). Thus, section 522(h) grants a debtor power to avoid if certain conditions are met, the first of which is whether the "debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer. . . ." §522(h). Since section 522(g)(1) states, in pertinent part, that "the debtor may exempt under subsection (b) of this section property that the trustee recovers under section 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property[,]" 11 U.S.C. §522(g)(1) (1988) (emphasis added), the Court must address whether the Plaintiff's personal property could be exempted under section 522(b) at all. Quillard v. United States (In re Quillard) [93-1 USTC ¶50,110], 150 B.R. 291, 295 (Bankr. D.R.I. 1993) ("However, the Debtors' avoiding powers with respect to IRS tax liens are limited by 11 U.S.C. §522(c)(2)(B).") (citing In re Henderson, 133 B.R. 813, 817 (Bankr. W.D. Tex. 1991)).

Section 522(c)(2)(B) states that:

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

. . . .

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

. . . .

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

11 U.S.C.A. §522(c)(2)(B) (1986). Section 522(c)(2)(B) is clear. The Plaintiff's property, even that claimed as exempt under Schedule C, continues to secure the Defendant's lien. See generally DeMarah v. United States (In re DeMarah), 62 F.3d 1248, 1251 (9^th Cir. 1995) ("In short, it is pellucid that property exempted from the estate remains subject to tax liens. Congress could hardly have been more direct in declaring that result."); O'Neil, 177 B.R. at 812 ("[S]ection 522(c)(2)(B) clearly prevents the avoidance of tax liens for exempt property. . . . The language of section 522(c)(2)(B) is unambiguous."); Quillard [93-1 USTC ¶50,110], 150 B.R. at 295("[E]ven after discharge has entered, property claimed as exempt under §522 remains available to satisfy any pre-petition debt secured by a valid tax lien, when notice of the lien has been property filed. . . . Any other construction would render the plain language of §522(c)(2)(B) meaningless.") (internal citations omitted).

IV. Judicial Determination of the Value of the Plaintiff's Personal Property and the Plaintiff's Right of Redemption.

Finally, the Plaintiff requests that the Court declare the value of each article of personal property in which the Defendant's lien subsists so that the Plaintiff can redeem his personal property by paying the amount of the lien on each item. The Plaintiff states that he should be entitled to "tender to the IRS an amount of money corresponding [to] the value of his interest in his personal property and obtain release of the IRS' lien therein." ([Pl.'s] Mem. at 6, ¶1.) However, the Court will not effectively "strip down" the Defendant's lien by judicially determining the value of the Plaintiff's property. First, the Plaintiff did not file an objection to the Defendant's proof of claim. Under section 502, the Defendant's claim as filed is allowed. 11 U.S.C.A. §502(a) (1986). Second, in Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court held that a Chapter 7 debtor may not "strip down" a creditor's lien on real property to a judicially determined value. See also Swiatek v. Pagliaro (In re Swiatek), 231 B.R. 26 (Bankr. D. Del. 1999) (holding that a totally undersecured, nonconsensual judgment lien could not be avoided once the lien was allowed); Douthart v. Security Pacific Fin. Corp. (In re Douthart), 123 B.R. 1, 3 (Bankr. D.N.H. 1990) (Yacos, J.) ("Indeed, to allow chapter 7 debtors to 'strip down' undersecured liens [on real property] would give them greater rights than debtors have under other chapters of the Code. . . ."). Third, the Plaintiff may not redeem his personal property under section 722 of the Bankruptcy Code because the Plaintiff has no exempt interest in it. 11 U.S.C.A. §722 (1988) ("An individual debtor may . . . redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title. . . ."). The Plaintiff's redemption may only be accomplished by paying the Defendant the amount of the claim secured by the lien, which is the entire amount of the Defendant's personal property. ⁸

V. Conclusion.

Thus, for these aforementioned reasons, the Court hereby grants the Defendant's motion for summary judgment and denies the Plaintiff's cross-motion for summary judgment. The Court finds that the Defendant continues to hold its lien on the Plaintiff's real and personal property, and the Court also declines to effectively "strip down" the Defendant's lien by judicially determining the value of the Plaintiff's personal property. This opinion and order constitutes the Court's findings of facts and conclusions of law in accordance with Federal Rule of Procedure 7052.

¹ The memorandum was submitted by the Plaintiff, although it is entitled "Defendant's Memorandum."

² The Plaintiff's complaint states that Schedule D of his petition lists the Internal Revenue Service as "a secured creditor holding IRS tax liens in his non-exempt real and personal property having a value of $5,639.15." (Pl.'s Compl. at 2, ¶6.)

³ The Debtors' Schedule D lists and describes the Internal Revenue Service's lien as secured only by James F. Mulligan's "all non-exempt real and personal property[,]" which is a legal conclusion. (Pet. Sch. D.)

⁴ Paragraph 7 of the Plaintiff's complaint states that "[a]s indicated by the IRS's proof of claim filed in the Mulligans' bankruptcy case, the total amount of the IRS's secured claim is $22,062.72, of which $3,421.45 comprises penalties avoidable pursuant to §724(a) of the Bankruptcy Code." Regardless of the Plaintiff's position, the proof of claim is allowed since the Debtors did not object to it.

⁵ Section 724(a) of the Bankruptcy Code also states that "the trustee may avoid a lien that secures a claim. . . ." 11 U.S.C.A. §724(a) (1988). Section 726(a) governs the order of distribution of claims. See 11 U.S.C.A. §726(a) (1988).

⁶ Since neither party has addressed the merits pertaining to sections 724 and 726(a)(4), the Court will refrain from a discussion of these sections. At any rate, the matter may be decided under other sections alleged in the Plaintiff's complaint.

⁷ To more fully explain it, the Bankruptcy Court held that the Chapter 13 debtors had standing to commence avoidance actions under sections 544(a), 545(2) and 547(b), so long as they turned over all money to the trustee for the unsecured creditors. Straight [96-2 USTC ¶50,423], 200 B.R. at 933.

⁸ This does not mean that the Plaintiff couldn't settle this claim with the Defendant by paying the value of the collateral through an offer to compromise or otherwise.

 

 

 

Ronald Jesse Allison, Martha J. Allison, Plaintiffs-Appellants v. U.S. Department of Internal Revenue, Department of the United States of America, Boilermaker-Blacksmith National Pension Trust, Defendants-Appellees

(CA-9), U.S. Court of Appeals, 9th Circuit, 99-35949, 9/26/2000, 2000 U.S. App. LEXIS 24084. Vacating and remanding a District Court decision, 99-1 USTC ¶50,522

[Code Sec. 7402 ]

Court of Appeals: Jurisdiction: District court: Untimely appeal from bankruptcy court.--The Ninth Circuit Court of Appeals lacked jurisdiction over the merits of pro se married taxpayers' claim that the IRS wrongfully levied against their pension funds and real and personal property because the district court lacked jurisdiction over the claim. Jurisdiction was lacking in the district court because the taxpayers failed to timely appeal a bankruptcy court judgment dismissing their complaint within ten days of the judgment.

Ronald Jesse Allison, Martha J. Allison, Forsyth, Mont., pro se. Bruce Ellisen, Anthony T. Sheehan, Department of Justice, Washington, D.C. 20530, for U.S., G. Gordon Atcheson, Blake & Uhlig, Mark A. Kistler, Blake & Ulig, Kansas City, Kan., Karl J. Englund, Missoula, Mont., for Boilermaker-Blacksmith Natl. Pension Tr.

Before: WALLACE, FERNANDEZ and MCKEOWN, Circuit Judges. ¹

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

MEMORANDUM ²

Ronald Jesse Allison and Martha J. Allison appeal pro se from the district court's order affirming the bankruptcy court's judgment dismissing their adversary complaint alleging wrongful levy by the Internal Revenue Service ("I.R.S.") against pension funds and real and other personal property.

We lack jurisdiction over the merits of the Allisons' appeal because the district court lacked jurisdiction. See Greene v. United States (In re Souza), 795 F.2d 855, 857 (9th Cir. 1986). The district court lacked jurisdiction because the Allisons failed to file their notice of appeal within ten days of the bankruptcy court judgment as required by Fed. R. Bankr. P. 8002(a). See Greene, 795 F.2d at 857 (indicating the court strictly construes the ten-day requirement).

Accordingly, we vacate the judgment of the district court and remand the case for dismissal.

Each party shall bear its own costs on appeal.

VACATED and REMANDED.

¹ Because the panel unanimously finds this case suitable for decision without oral argument, we deny the Allisons' motion for oral argument. See Fed. R. App. P. 34(a)(2).

² This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as may be provided by 9th Cir. R. 36-3.