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
District Court, East.
, So. Div., 98-CV-60379-AA, 8/5/99, 68 FSupp 2 d 793
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.
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,
. Originally, this action was filed in Wayne County Circuit Court.
United States of America
) removed the action to federal court pursuant to 28 U.S.C.A. §1444
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
attached a lien on the property in the amount of $22,055.85, which
includes statutory interest. The
' 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
and ultimately, the City of
, obtained title to the property. Plaintiff purchased the property from
the City of
and initiated the instant action in an effort to quiet title to the
property. According to plaintiff, the
' interest in the property was extinguished through the tax sale.
On April 1, 1999, the
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
. 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
served a Request for Admissions, Interrogatories and a Request for
Production upon plaintiff to determine whether the
was properly given notice of the nonjudicial sale. To date, plaintiff
has failed to respond to the
' discovery. As a result, the
contends that plaintiff is deemed to have admitted that the
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
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
contends that the action is not subject to stay pursuant to 11 U.S.C.A.
§362(a)(3). According to the
, 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
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,
argues that the instant action could only improve the MCA/RIMCO debtors
relative priority as this case seeks to remove the
' lien as a discharged lien. Furthermore, the
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
is merely attempting to maintain its status as a lien holder.
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.
317, 327 (1986); see also Kutrom Corp. v. City of
, 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.,
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
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
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).
Congress established a lien
in favor of the
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.
at §6322. Generally, once notice of the federal tax lien is properly
filed, it is entitled to priority over subsequent competing liens.
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.
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]. . . .' "
(citing United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57
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:
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);. . . .
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
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 (6th Cir. 1992); Baldwin
County Savings and Loan Ass'n v. I.R.S., 921 F.2d 1229, 1231 (11th
Cir. 1991); Security Pacific Mortgage Corp. v. Choate [90-1 USTC
¶50,143], 897 F.2d 1057, 1058 (10th Cir. 1990); Fognini
[93-1 USTC ¶50,180], No. 91-75359, 1993 WL 126410, at *2.
In the instant case, the
' 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
or the IRS of the tax sale (timely or otherwise). In fact, defendant
' assertion that plaintiff failed to respond to its interrogatories and
requests for admissions went unchallenged. Because plaintiff failed to
respond to the
' request for admissions served on January 22, 1999, the court finds
that plaintiff is deemed to have admitted that the
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
' 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
is not attempting to obtain possession of the property or to exercise
control over the property. Moreover, the
is not requesting that the property be sold to satisfy its existing
federal tax lien at this time. Instead, the
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,
'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
' lien interest on the property. Therefore, the grant of summary
judgment would not adversely affect the property interest of MCA's
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
is no longer a party in the instant action. Therefore, the case is
hereby REMANDED for further proceedings in state court.
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
U.S. Court of Appeals, 2nd Circuit, 98-5075, 7/7/99, 183 F3d 133,
Affirming an unreported District Court decision
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.
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:
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.
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.
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."
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
(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]
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."
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;
, 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."
In re Haas has also been criticized by a later panel in its own
circuit. See In re
, 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
, 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.
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
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
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).
We must, therefore, reach
the merits of Tudisco's claim that the tax lien cannot reach his exempt
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
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
Court of Appeals, 5th Circuit, 98-40170, 7/12/99, 180 F3d 656, 180 F3d
656. Affirming an unreported District Court decision
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
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.
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
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
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
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
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
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
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:
[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.
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
463, 467, 98
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.
Orr is the beneficiary of a
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
Jur. 3d Trusts §§37-42 (1990). The state specifically acknowledges the
validity of spendthrift trusts by statute. See
Prop. Code Ann. §112.035 (
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:
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.
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
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
at 267-69, 66
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
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
1054, 1057-58 (1958).
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
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.
(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
involved a federal tax liability owed by Carolyn Maxwell, arising from
several stock transactions. Mrs. Maxwell was a resident of
, 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:
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.
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.
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.
I [46-1 USTC
¶9117], 152 F.2d at 585 (footnote omitted). In a following appeal
(Dallas III), Circuit Judge Edwin R. Holmes of
, noted in a specially concurring opinion that:
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
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
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.
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
law recognizes the validity of the Trust's spendthrift clause.
law acknowledges that a spendthrift trust beneficiary possesses an
equitable ownership interest in the trust corpus. And
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,
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
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
does) think it advisable to respect the wishes of the creator of the
trust by enforcing the spendthrift term. Creditors in
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
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
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 (
1994) (citing Womack v. Womack, 141
299, 172 S.W.2d 307, 308 (1943)); cf. Tex. Prop. Code Ann. §111.004(12)
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
at 719, 105
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
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.
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.
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
District Court, East.
, 97-C-647, 10/16/98, 225 BR 657, 225 BR 657. Reversing and remanding an
unreported BC-DC decision
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 (
) 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.
ADELMAN, District Judge:
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.
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
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
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
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
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
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
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
at 267, 268, 66 S.Ct. 108; Tillery v.
(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.
v. Sanabria, 424 F.2d 1121 (7th Cir. 1970); Leavell v.
(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.
410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); Isom v.
(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.
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],
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
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
at 722, 105 S.Ct. 2919 (quoting Bess [58-2 USTC ¶9595], 357
at 56-57, 78 S.Ct. 1054); Hoornstra v. United States, 969 F.2d
530, 532 (7th Cir. 1992).
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."
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."
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
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.
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
at 722, 724 n. 8, 105 S.Ct. 2919, Bess [58-2 USTC ¶9595], 357
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
at 727, 105 S.Ct. 2919; Bess [58-2 USTC ¶9595], 357
at 56-57, 78 S.Ct. 1054.
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
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.
§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.
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
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."
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.
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
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
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
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."
at 1302. Also, notably, in
(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
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
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
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.
The Bankruptcy Court's Error
The bankruptcy court
dismissed Fried and Tillery because those cases originated
, respectively, and because the court thought Leighton indicated
a different result under
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
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
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.
Disability policies differ only in that the beneficiary usually is the
insured himself. In
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.
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.
References to the district court's record are noted as "R."
References to the record in the bankruptcy court will be referred to as
The IRS's levy. of the $3,109.80 for tax liabilities for years other
than 1982 or 1983 was not challenged.
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.
(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
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
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
Court of Appeals, 4th Circuit, 97-2683, 97-2755, 6/28/99, 178 F3d 718,
178 F3d 718. Affirming an unreported District Court decision
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,
, for Appellant. William McCarron, Jr., Gold & Stanley, P.C.,
, 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.,
, 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
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.
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.
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
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
The district court affirmed
the bankruptcy court's order, and both parties noticed appeals to this
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.
Dep't of Envtl. Protection, 474
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
"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
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
at 451-53. Until the lien attaches to the property, it is
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.
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
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
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, 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.
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, at
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).
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.
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.
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.
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
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
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
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
Bankruptcy Court, Dist. N.H., 98-11536-MWV, 5/14/99, 234 BR 229
Secs. 6321 , 6323
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.
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
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.
Sec. 6871 ]
Bankruptcy: Tax liens: Avoidance of: Standing: Trustee: Debtor:
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.
Department of Justice, Attorney for the Defendant.
VAUGHN, Chief Judge:
The Court has before it
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
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).
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
(Proof of Claim #13; Mem. of Law and Exs. in Supp. of
' 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
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.
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 (1st Cir. 1993) (quoting
v. One Parcel of Real Property, 960 F.2d 200, 204 (1st
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 (1st 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 (1st Cir. 1994).
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
(In re Isom) [90-1 USTC ¶50,216], 901 F.2d 744, 745 (9th
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
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 . . .
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
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
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
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. . . .
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.
, 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.
, 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.
(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
, 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.
(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.
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. 10th
Cir. 1997), appeal dismissed, First Interstate Bank v. Straight (In
re Straight), No. 97-8037 (10th 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 (9th 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 (6th 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
(2) the trustee does not
attempt to avoid such transfer.
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.
(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
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. . . .
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.
(In re DeMarah), 62 F.3d 1248, 1251 (9th 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.
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
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.
The memorandum was submitted by the Plaintiff, although it is entitled
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.)
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.)
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.
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).
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.
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.
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
Court of Appeals, 9th Circuit, 99-35949, 9/26/2000, 2000
App. LEXIS 24084. Vacating and remanding a District Court decision, 99-1
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
This court has designated this opinion as NOT FOR PUBLICATION. Consult
the Rules of the Court before citing this case.
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
We lack jurisdiction over
the merits of the Allisons' appeal because the district court lacked
jurisdiction. See Greene v.
(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.
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).
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.