Annotations-
Clothing
6334
Annotations: Clothing- Levy
Property
Exempt from Levy: Clothing
[83-1 USTC ¶9357]Georgia Warren,
Plaintiff v. Robert C. Warren, et al., Defendants
U.
S. District Court, East. Dist.
Okla.
, No. 82-18-C, 3/24/83
[Code Secs. 6331 and 6334]
Levy: Fire insurance proceeds: Another's property: Property exempt
from levy: Clothes.--The IRS could not levy upon the proceeds from a
fire insurance policy on the taxpayer's residence because the house and
the insurance proceeds belonged to the taxpayer's wife. The taxpayer had
transferred the house to her prior to the assessment date and the
transfer was not fraudulent. He was entitled under the policy to receive
proceeds in the amount of the value of his destroyed clothing and such
proceeds were exempt from levy
George Farrar,
Farrar & Farrar, 320 Mayo Building,
Tulsa
,
Okla.
74103
, for plaintiff. Ken Cunningham,
3745 East 31st St.
,
Tulsa
,
Okla.
74135
, for defendants. Rick Disney, Department of Justice,
Dallas
,
Tex.
75242
, for U. S.
Findings
of Fact and Conclusions of Law
SEAY, District
Judge:
This case
having been tried to the court without a jury, based on all the
evidence, pleadings, and briefs, the court makes the following Findings
of Fact and Conclusions of Law pursuant to Rule 52 of the Federal Rules
of Civil Procedure.
Findings
of Fact
1. Georgia M.
Warren is the record title holder of the following described real
estate, situated in
Cherokee County
,
Oklahoma
:
The S/2 of the
NW/4 and the SW/4 of the NE/4 of the NW/4 and the NW/4 of the NW/4 of
Section 21, Township 18 North, Range 21 East AND The SE/4 of the NE/4 of
the NE/4 and the E/2 of the SE/4 of the NE/4 and a piece or parcel of
land, more particularly described as follows to-wit:
Beginning at
the Northeast corner of the SE/4 of the SE/4 of the SE/4 of Section 20,
Township 18 North, Range 21 East; thence West 295 feet thence South 295
feet; thence East 295 feet, thence North 295 feet to the point of
beginning; all being in Section 20, Township 18 North, Range 21 East.
2. Georgia
Warren, her husband, Robert C. Warren, and their son, Lanny, were
residing in the house located on the above described property when it
was totally destroyed by fire on July 16, 1981.
3. The
Warren
's home was insured by a policy of fire insurance issued by State Farm
Fire and Casualty Company. Both Georgia and Robert Warren were intended
named insureds on the policy, but only Robert C. Warren is listed as the
named insured.
4. Prior to
May 9, 1978, Robert and Georgia Warren jointly owned the real estate
previously described. Robert had recently been through bankruptcy.
Furthermore, without his wife's permission he had previously signed her
name to an earlier mortgage on the family home. Threatened with divorce
and criminal charges of forgery, Robert quitclaimed his interest in the
real property to his wife Georgia on May 9, 1978, and
Georgia
executed a mortgage for $92,000.00 to pay off the previous loan in order
to save Robert from criminal charges. Robert's conveyance to
Georgia
was not executed with fraudulent intent in an attempt to avoid
creditors.
5. Georgia
Warren was the owner of the personal property located in the home, with
the exception of Robert Warren's clothes and the personal property owned
by their son Lanny.
6. Lanny
Warren
owned various items of personal property which were destroyed in the
fire, and which had a total value of $3,518.22.
7. Robert
Warren's clothing which was destroyed by the fire had a total value of
$585.00.
8. The
contract of fire insurance between the Warrens and State Farm Fire and
Casualty Company provides that State Farm insures the property, "to
the extent of the actual cash value of the property at the time of loss
. . . nor in any event for more than the interest of the Insured . .
."
9.
"Insured" is defined in the policy as follows:
(1)
the Named Insured stated in the Declarations of this policy;
(2)
if residents of the Named Insured's household, his spouse, the relatives
of either, and any other person under the age of twenty-one in the care
of any Insured."
10. The
policy's loss payable clause provides that the entire loss is to be
adjusted by the named insured and is payable to him.
11.
State
Farm Fire and Casualty deposited $147,000.00 with the court in payment
of the fire loss. $57,848.48 has been paid out of this fund to the loss
payee on the fire insurance policy, Liberty State Bank of Tahlequah.
12. Renus
Warren is the father of Robert Warren. Over a period of years prior to
1967 Renus Warren loaned his son Robert approximately $50,000.00. On
December 5, 1967, Robert and Georgia Warren executed a mortgage of the
above described real property to Renus Warren in the principal sum of
$50,000.00, payable on or before one year.
13. This
mortgage from Robert and Georgia Warren to Renus Warren was assigned to
Liberty State Bank of Tahlequah on March 30, 1977. The mortgage was
reassigned to Renus Warren by Liberty State Bank on October 13, 1982.
The assignment to the Liberty State Bank was intended by the parties as
a subordination agreement.
14. Robert
made interest payments to his father several times a year, and
altogether the payments over the years totalled between $9,000.00 and
$10,000.00 Robert never made any payment on the principal. No evidence
was introduced showing any written promise by Robert to pay a debt to
his father or written acknowledgment of any such debt, other than the
mortgage itself.
15. Renus
Warren was not listed on the fire insurance policy as a loss payee.
16. Robert
Warren was the president of Robert C. Warren, Inc. and was responsible
for payment of the corporation's employment taxes.
17. On March
17, 1980, Robert C. Warren was assessed $65,924.27 by the Internal
Revenue Service as a result of unpaid employment taxes.
18. Notice of
the assessment and demand for payment were sent to Robert C. Warren at
his last known home address on March 17, 1980.
19. Robert C.
Warren made no payment to the Internal Revenue Service as demanded.
20. A federal
tax lien was filed of record in
Cherokee County
,
Oklahoma
, against Robert C. Warren on April 14, 1980.
21. The
Internal Revenue served a Notice of Levy on September 21, 1981, to State
Farm Insurance Company seeking property, rights to property, monies,
credits and bank deposits belonging to Robert C. Warren.
Conclusions
of Law
1. The court
has jurisdiction of this matter under 28
U. S.
C. §1346 and §1441(c).
2. Venue is
proper in the Eastern District of Oklahoma under 28
U. S.
C. §1391(b).
3. Rule 17 of
the Federal Rules of Civil Procedure provides, "a party with whom
or in whose name a contract has been made for the benefit of another . .
. may sue in his own name without joining with him the party for whose
benefit the action is brought." Therefore Lanny Warren (an intended
beneficiary of the contract of fire insurance existing between his
parents and the State Farm Fire and Casualty Company) need not be named
as a party to the action, but may be represented by his mother,
plaintiff Georgia Warren.
4. A policy of
fire insurance is a personal contract which does not run with the land
nor pass to a purchaser by sale of the property insured, Niagra Fire
Ins. Co. v. Aebischer, 44 P. 2d 5 (1934). It is in itself the
measure of the rights of all persons under it, and its provisions must
govern in determining who are the beneficiaries, Welch v. Montgomery,
205 P. 2d 288 (1949).
5. Robert
Warren's right to receive payment under the fire insurance policy is
limited by the policy language "nor in any event for more than the
interest of the insured." Robert Warren may not receive insurance
proceeds for property which did not belong to him.
6. The
Internal Revenue Service may not levy execution against property
belonging to Georgia Warren simply because her insurance company
customarily combines the claims of all family members for payment with
one check.
7. 26
U. S.
C. §6303(a) provides:
Where it is
not otherwise provided by this title, the Secretary shall, as soon as
practicable, and within 60 days, after the making of an assessment of a
tax pursuant to section 6203, give notice to each person liable for the
unpaid tax, stating the amount and demanding payment thereof. Such
notice shall be left at the dwelling or usual place of business of such
person or shall be sent by mail to such person's last known address.
8. 26
U. S.
C. §6321 provides:
"If
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount (including any interest, additional amount,
addition to tax, or assessable penalty, together with any costs that may
accrue in addition thereto) shall be a lien in favor of the United
States upon all property and rights to property, whether real or
personal, belonging to such person.
9. 26
U. S.
C. §6331 provides:
If any person
liable to pay any tax neglects or refuses to pay the same within 10 days
after notice and demand, it shall be lawful for the Secretary to collect
such tax (and such further sum as shall be sufficient to cover the
expenses of the levy) by levy upon all property and rights to property
(except such property as is exempt under section 6334) belonging to such
person or on which there is a lien provided in this chapter for the
payment of such tax.
10. 26
U. S.
C. §6334 provides:
(a)
Enumeration.--There shall be exempt from levy--
(1)
Wearing apparel and school books.--Such items of wearing apparel and
such school books as are necessary for the taxpayer or for members of
his family . . .
11. Under 46
O. S. §301 the statute of limitations for an action to enforce a
mortgage is ten years from the date of the last maturing obligation
secured by such mortgage.
12. Payment of
money alone is insufficient to extend the limitation period for
enforcement of a mortgage without written acknowledgment of the debt or
a written promise to pay the debt, 12 O. S. §101.
13. The
mortgage from Robert and Georgia Warren to Renus Warren executed
December 5, 1967, is unenforceable because it is barred by the statute
of limitations.
14.
Introduction into evidence of a Certificate of Assessments and Payments
is sufficient to create a rebuttable presumption that notice and demand
was given to the taxpayer on the date recorded on the Certificate, United
States v. Lorson Electric Company [73-1 USTC ¶9449], 480 F. 2d 554
(2nd Cir. 1973).
15. An
attorney's lien may be made effective by giving written notice to the
adverse party prior to judgment of the case, Campanello v. Mason,
571 P. 2d 449 (1977). Since plaintiff's attorney asserted his attorney's
lien in open court and in the pleadings, an attorney's lien was created
in his favor despite his failure to endorse his claim upon the original
complaint.
WHEREFORE, it
is the judgment of this court that the remaining funds should be
distributed as follows:
$88,566.52
(including
the claim of
Lanny
Warren
and
her attorney
George
1. Georgia M. Warren Farrar)
2. Robert C. Warren 585.00
3. Renus Warren -0-
4. Internal Revenue Service -0-
Judgment
Pursuant to
this court's opinion filed herein the court enters judgment for the
claims of Georgia M. Warren and Robert C. Warren and against the claims
of Renus Warren and the Internal Revenue Service and awards the funds on
deposit with the court as follows:
$88,566.52
(including
the claim of
Lanny
Warren
and
her attorney
George
1. Georgia M. Warren Farrar)
2. Robert C. Warren 585.00
3. Renus Warren -0-
4. Internal Revenue Service -0-
[90-2 USTC ¶50,559]
United States of America
(IRS), Plaintiff v. James Luther Stowe, Defendant
U.S.
District Court, No. Dist.
Ind.
, South Bend Div., S87
-497, 9/21/90, 121 BR 549, Affirming and reversing an
unreported Bankruptcy Court decision
[Code
Sec. 6871 ]
Bankruptcy and receivership: Prepetition interest: Priority
treatment.--The bankruptcy court committed reversible error in
determining that the prepetition interest component of the IRS's claim
against a debtor should be afforded only general priority treatment.
Prepetition interest is to be accorded the same priority as the
underlying claim for taxes.
[Code
Secs. 6321 , 6323 and 6334 ]
Lien for taxes: Levy and distraint: Exempt property: Bankruptcy.--The
bankruptcy court erroneously valued the amount of the IRS's allowed
secured claims by improperly exempting certain wearing apparel and
household goods from a federal tax lien. Although such property may be
exempted from a tax levy, the same exemption does not apply to a tax
lien.
MEMORANDUM AND ORDER
MILLER, JR.,
District Judge:
This cause is
before the court on cross-appeals filed by creditor, the United States
Internal Revenue Service ("IRS"), and debtor James Luther
Stowe from a decision of the bankruptcy court on June 29, 1987 with
respect to the IRS's claim against Mr. Stowe's assets. The IRS seeks
fulfillment of unpaid taxes and delinquencies assessed against the
debtor for several tax years. Both debtor and creditor filed motions to
alter and amend the June 29 order; those motions were denied, and the
bankruptcy court ruled that the legal determinations rendered in its
order of June 29, 1987 were final and fully appealable. The parties then
appealed to this court.
Factual
Background and the Decision Below
Mr. Stowe
petitioned for relief under Chapter 13, Title 11 of the United States
Code, and later filed his Chapter 13 Statement and Chapter 13 Plan.
Several meetings for creditors were held with respect to Mr. Stowe's
bankruptcy filing, and the bankruptcy court confirmed a proposed plan.
About five months later, Mr. Stowe was permitted to file a First Amended
Chapter 13 Plan which generally provided for full payment of the IRS's
priority tax claims.
The IRS filed
a claim against Mr. Stowe's assets in the sum of $61,423.33, specifying
that its claim included the following items: (1) $5,968.19 representing
an unsecured priority claim for general taxes due and pre-petition
interest; (2) $55,455.14 as a secured tax claim representing interest
due on its claim to the date of filing Mr. Stowe's petition and penalty
claims; and (3) $723.86 representing a general unsecured claim in the
form of computed non-pecuniary loss penalty assessments to date of Mr.
Stowe's petition.
Mr. Stowe
filed an objection to the IRS's claim, at which point such claim became
a contested matter under Bankruptcy Rule 9014. Later, he filed a
supplemental objection to the IRS's claim. Following the parties'
submission of briefs, the bankruptcy court entered an order determining
the legal issues raised by the parties in their memoranda. The
cross-appeals before this court challenge two of those legal
determinations.
Standard
of Review
Bankruptcy
Rule 8013 provides:
On an appeal
the district court or bankruptcy appellate panel may affirm, modify, or
reverse a bankruptcy court's judgment, order, or decree or remand with
instructions for further proceedings. Findings of fact shall not be set
aside unless clearly erroneous, and due regard shall be given to the
opportunity of the bankruptcy court to judge the credibility of the
witnesses.
This
rule makes it clear that the court's review of the bankruptcy judge's
findings of fact is to be under the clearly erroneous standard. In re
Weber, 892 F.2d 534, 538 (7th Cir. 1989); In re Excalibur
Automobile Corp., 859 F.2d 454, 457 n.3 (7th Cir. 1988); In re
Hillingoss, 849 F.2d 280, 282 (7th Cir. 1988); First Wisconsin
Nat'l Bank v. Federal Land Bank, 849 F.2d 284, 286 (7th Cir. 1988).
Under this standard, if the trial court's account of the evidence is
plausible in light of the record viewed in its entirety, a reviewing
court may not reverse even if convinced that it would have weighed the
evidence differently as trier of fact; the factfinder's choice between
two permissible views of evidence cannot be clearly erroneous. Anderson
v. City of
Bessemer
City
, 470
U.S.
564, 573-574 (1985); EEOC v. Sears, Roebuck & Co., 839 F.2d
302, 309 (7th Cir. 1988).
A bankruptcy
court's conclusions of law are reviewed de novo on appeal. In
re Newman, 903 F.2d 1150 (7th Cir. 1990); Calder v. Camp Grove
State Bank, 892 F.2d 629 (7th Cir. 1990). The bankruptcy court's
conclusions do not bind the district court and are entitled only to such
deference as the district court sees fit. In re Cricker, 46
Bankr. 229 (N.D.
Ind.
1985); Rushville Production Credit Ass'n v. Mohr, 42 Bankr. 1000
(S.D.
Ind.
1984); In re Schaller, 27 Bankr. 959 (W.D. Wis. 1982). In
addition, the court must determine whether the bankruptcy court applied
the proper legal standard to the facts. In re Stratton, 23 Bankr.
284, 287 (D.S.D. 1982).
Both the
debtor and the IRS raise questions of law on appeal. This court must,
therefore, review the bankruptcy court's decision as to the legal issues
de novo.
Mr.
Stowe's Argument on Appeal
Mr. Stowe
contends that the bankruptcy court committed reversible error in
determining that the pre-petition interest component of the IRS's claim
should be afforded priority treatment. Alternatively, he argues that
pre-petition interest should be afforded only general priority
treatment. In his brief, Mr. Stowe argues that the legislative history
of 11 U.S.C. §507
1 and a
minority of cases support the conclusion that Congress did not intend to
include pre-petition interest as part of the general tax claim and so
give that item priority status along with the claim. Mr. Stowe's
arguments in part concede that the majority of cases oppose such an
argument on appeal, but he argues that such precedent is faulty in its
reasoning.
The bankruptcy
court noted that "the overwhelming majority of cases clearly weigh
in favor of according the pre-petition interest the same priority status
as the tax itself." The court went on to list several cases
supporting this legal conclusion, notably the decision in In re
H.G.D. & J. Mining Company, Inc. [87-1 USTC ¶9344 ],
15 B.C.D. 384 (S.D.W.V. 1986), aff'd, 836 F.2d 546 (4th Cir.
1987).
In rejecting
Mr. Stowe's position, the bankruptcy court found that several cases
cited by Mr. Stowe were less persuasive both in their facts and in legal
basis than those cited by the IRS and relied on by the bankruptcy court.
Specifically, the court noted as lacking in persuasive effect the
decision in In re Razorback Ready-Mix Concrete Co., 45 B.R. 917
(Bankr. E.D. Ark. 1984), and an unpublished opinion from the Southern
District of Illinois in Barger v. United States, No. 85-5386,
slip op. (S.D. Ill. July 31, 1985). Hindsight shows that the bankruptcy
court correctly stated the law on the issue of pre-petition interest.
Recent case
law uniformly rejects Mr. Stowe's arguments both before the bankruptcy
court and on appeal. The holding in In re Razorback was
explicitly overruled in In re Stonecipher Distributors, Inc., 80
B.R. 949 (Bankr. W.D. Ark. 1987). Barger was remanded by the
Seventh Circuit on April 28, 1986 by joint stipulation of the parties
noting an error in law.
In an opinion
rendered earlier this year, the Seventh Circuit Court of Appeals
explicitly he!d that pre-petition interest is to be accorded the same
priority as the underlying claim for taxes. In In re Larson, 862
F.2d 112, 125 (7th Cir. 1990), the court noted that the definition of a
claim under the bankruptcy code section 101(a)(A), 11 U.S.C. §101(4)(A) , as a
"right to payment" includes interest accumulated on that
claim. 862 F.2d at 125; see also In re Young, 70 B.R. 43, 45
(Bankr. S.D.
Ind.
1987); In re Brinegar, 76 B.R. 176, 178 (Bankr. D.
Colo.
1987); In re Treister [85-2 USTC ¶9672 ],
52 B.R. 735, 737 (Bankr. S.D.N.Y. 1985).
If this issue
was alive in controversy at the time of the bankruptcy court's June,
1987 ruling, the issue has now been definitively ruled on in this
circuit. Accordingly, this court must affirm the bankruptcy court's
finding with respect to the priority afforded the pre-petition interest
accrued on Mr. Stowe's tax liability.
The
IRS's Argument on Appeal
The IRS argues
on appeal that the bankruptcy court erroneously valued the amount of its
allowed secured claim. Initially, the IRS finds fault with the
bankruptcy court's determination that certain of Mr. Stowe's personal
property was exempt from a federal tax lien pursuant to 26 U.S.C. §6334(a) . Although the
IRS presents several alternative arguments on this point, the court
finds the first argument persuasive and so declines to address the
subsequent grounds for appeal.
The bankruptcy
court held that certain wearing apparel and household goods listed by
Mr. Stowe as exempt from tax liability on his Schedule B-4 filing were
not subject to a federal tax lien. As authority for this conclusion, the
court cited to 26 U.S.C. §6334 . However, while that statute
exempts certain property (including wearing apparel, personal effects,
and furniture) from a tax levy, it does not grant a delinquent taxpayer
with exemption from a tax lien on such items. 26 U.S.C. §6334(a)(1) . Notably, 26
U.S.C. §6321 generally provides
that:
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount . . . shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
such person.
There is a
clear distinction between a creditor's rights through levy and those
through a lien. Federal tax liens, in particular, are very broad and may
attach to a wide range of property, while the procedure of satisfying
such claims through a levy (or the seizure or actual possession of the
property) are more narrowly circumscribed. United States v. National
Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 720-721 (1985); see also In
re
Jackson
[88-1 USTC ¶9186 ],
80 B.R. 213, 215 (Bankr. D.
Colo.
1987); United States v. Aetna Life Insurance Company of Hartford,
Connecticut [42-1
USTC ¶9266 ], 46 F. Supp. 30, 36 (D. Conn. 1942).
Since the
bankruptcy court's decision in June, 1987, the federal courts have
decidedly held that federal tax liens may be secured on property exempt
from levy under 26 U.S.C. §6334(a) . IRS v.
Barbier, 896 F.2d 377, 378 (9th Cir. 1990); In re Beard [90-1
USTC ¶50,260 ], No. 87-11501, slip op at 4-5 (Bankr. N.D.
Ind.
April 3, 1990); In re Ray, 48 B.R. 534 (Bankr. S.D. Ohio 1988); In
re Bates [88-1 USTC ¶9124 ],
81 B.R. 63 (Bankr. D.
Ore.
1987); In re Ridgley, 81 B.R. 65 (Bankr. D.
Ore.
1987); In re Driscoll, 57 B.R. 322, 327 (Bankr. W.D. Wis. 1986).
Accordingly,
the bankruptcy court's decision that certain personal property of Mr.
Stowe may be exempted from a federal tax lien pursuant to 26 U.S.C. §6334
was contrary to law. Neither the statute cited by the
bankruptcy court nor established precedent supports the bankruptcy
court's holding. This court, therefore, must reverse the bankruptcy
court's decision on this issue, finding that Mr. Stowe's reported
wearing apparel and household goods are not exempt from federal tax
liens.
Conclusion
For the
reasons set forth above, the decision of the bankruptcy court is
AFFIRMED IN PART and REVERSED IN PART in accordance with this order.
SO ORDERED.
1 That section
of the Bankruptcy Code sets forth various standards for determining the
priorities among the claims of different creditors, including the
government's claim for unpaid taxes. Section 507(a)(7) generally gives
the IRS's claim for unpaid taxes priority status, but does not state
whether interest on such tax amounts also receive priority status.
