Opinion
Case No. 7-99-02518-WSA, Adversary Proceeding No. 03-00194.
March 10, 2004
ORDER
For reasons stated in this Court's contemporaneous Memorandum Decision, it is
ORDERED
that any claim of the IRS that it is entitled to a lien against the proceeds of the settlement with the Ball "spendthrift trust" is DENIED and the Trustee's Objection is hereby SUSTAINED without prejudice to any other property of the bankruptcy estate or otherwise which may be subject to the IRS's claimed lien. Accordingly, this proceeding is hereby DISMISSED.
The Clerk is requested to send copies of this Order and the Memorandum Decision to the Debtor, Debtor's counsel, counsel for the Trustee, counsel of record for the Defendant, and the Office of the United States Trustee for this District.
MEMORANDUM DECISION
The matter before the Court is the Chapter 7 Trustee's Objection to that portion of the Internal Revenue Service's proof of claim in this case which asserts that it is secured to the extent of $82,138,21. The dispute between the parties is whether a settlement of $150,000 obtained by the Trustee as a result of his challenge to a purported "spendthrift" trust is subject to a lien in favor of the IRS for unpaid income taxes owed by the Debtor and his spouse, a lien which dates back prior to the creation of the purported trust. Because the Trustee's Objection relates to the validity of the lien of the IRS as relates to the property obtained from the trust, on motion of counsel for the IRS the issue joined between the parties has been converted into an adversary proceeding. For the purpose of ruling upon the conflicting contentions of the parties, counsel have agreed to a stipulation of facts, which immediately follows:
STIPULATION
William E. Callahan, Jr., Trustee (the "Trustee"), by counsel, and the United States of America, by counsel, stipulate and agree to the following for the purpose of the Trustee's objection to Claim No. 2:
1. James C. Ball filed a petition under Chapter 7, Title 11, United States Code in the United States Bankruptcy Court for the Western District of Virginia, Roanoke Division, on July 26, 1999, commencing the captioned case (the "Case").
2. The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and 157(a).
3. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(b).
4. The Trustee was appointed the trustee in the Case at the first meeting of creditors and continues to serve in that capacity.
5. The Internal Revenue Service ("IRS") filed a Notice of Federal Tax Lien against James C. Ball on April 18, 1994 in the Clerk's Office of the Circuit Court of Buchanan County, Virginia. A Facsimile Federal Tax Lien Document copy of the recorded Notice of Federal Tax Lien is attached hereto as Exhibit 1.
6. The IRS filed a Notice of Federal Tax Lien against James C. and Sammie Ball on April 18, 1994 in the Clerk's Office of the Circuit Court of Buchanan County, Virginia. A Facsimile Federal Tax Lien Document copy of the recorded Notice of Federal Tax Lien is attached hereto as Exhibit 2.
7. The IRS filed a Notice of Federal Tax Lien against James C. and Sammie Ball on May 4, 1995 in the Clerk's Office of the Circuit Court of Washington County, Virginia. A Facsimile Federal Tax Lien Document copy of the recorded Notice of Federal Tax Lien is attached hereto as Exhibit 3.
8. By Trust Agreement dated March 17, 1995, Tammy Blevins and Eric Douglas Ball conveyed to Robert T. Copeland, Trustee (the "Trust Trustee") certain property in trust (the "James and Sammie Ball Trust") for the benefit of James Ball and Sammie Ball. A true and complete copy of the Trust Agreement is attached hereto as Exhibit 4.
9. By Deed of Gift dated March 17, 1995 and recorded in the Clerk's Office of the Circuit Court of Washington County, Virginia in Deed Book 914, page 781 on April 25, 1995, Eric D. Ball and Phyliss Ball, his wife, and Tammy Blevins and Joey Winn Ball, her husband, conveyed a certain improved parcel of real property to Robert Copeland, Trustee.
10. By an Agreement dated March 10, 1999, Robert Copeland resigned as trustee and First Bank and Trust Company assumed responsibility as successor trustee of the James and Sammie Ball Trust.
11. First Bank and Trust Company, as Trust Trustee, sold the Washington County real property referred to in paragraph 9, above, in June, 1999.
12. The Trustee, by counsel, filed Adversary Proceeding No. 01-00092A-WSA (the "Adversary Proceeding"), seeking an order directing the Trust Trustee to turn over the property of the estate.
13. Pursuant to the Court's direction, the Trustee and the defendants in the Adversary Proceeding mediated and reached a settlement by which First Bank and Trust Company, the successor Trust Trustee, agreed to pay the sum of $150,000.00 to the estate in full satisfaction of the estate's claims against the Trust corpus.
14. Following the entry of the Order approving the settlement, the Trustee and the defendants in the Adversary Proceeding executed a Settlement Agreement and Release, a true and complete copy of which is attached hereto as Exhibit 5.
15. On May 10, 2002, pursuant to the terms of the Settlement Agreement and Release, the Trustee received a check in the amount of $85,000.00 from the First Bank and Trust Company account of the James Ball Trust and a check in the amount of $65,000.00 from the First Bank and Trust Company account of the Sammie Ball Trust. A true and complete copy of each check is attached hereto as collectively Exhibit 6.
16. The funds paid by First Bank and Trust Company, Trust Trustee, in settlement of the Adversary Proceeding were from the proceeds of the sale of the Washington County real property and any earnings thereon.
(Exhibits omitted)
In addition to the stipulated facts, the Court further finds that although the trust agreement attached as Exhibit 4 to the Stipulation references an "Exhibit A" setting forth the initial corpus of the purported trust, no Exhibit A is attached to the trust agreement. The complaint in the adversary proceeding which the trustee brought to challenge this trust alleged that no such Exhibit A was ever prepared. In that complaint the Trustee essentially alleged that the purported spendthrift trust was a sham orchestrated by Mr. and Mrs. Ball and their attorney with proceeds of fire insurance upon their former residence property and that the Balls' children had simply acted as their agents and facilitators. These allegations were never actually litigated as a result of the settlement and the settlement agreement contained language denying on behalf of the defendants all of the Trustee's claims. The IRS has not requested the Court to take judicial notice of any facts or otherwise made any offer of evidence in this proceeding that the Washington County real estate referred to in paragraph # 16 of the Stipulation was ever property of the Balls which was subject to the IRS lien. The IRS was never named a party to the Trustee's adversary proceeding which challenged the purported trust. Counsel for the Trustee did give it notice of the proposed settlement of the adversary proceeding resulting in the payment of the $150,000 to the Trustee, but the IRS did not file any objection to the settlement or appear at the noticed hearing in opposition to same.
The proof of claim filed by the IRS is in the total amount of $152,589.19 of which $191.56 is asserted to be entitled to priority and $82,138.21 is said to be secured by unspecified real estate and motor vehicle and "all of debtor(s) right, title and interest in property — 26 U.S.C. § 6321."
CONCLUSIONS OF LAW
This Court has jurisdiction of this proceeding by virtue of the provisions of 28 U.S.C. § 1334(a) and 157(a) and the delegation made to this Court by Order from the District Court on July 24, 1984. This is a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(K).
According to Rule 3001(f) of the Federal Rules of Bankruptcy Procedure, a properly filed proof of claim constitutes prima facie evidence of the validity and amount of the claim. However, that presumption does not extend to the status of the claim. See In re Cardinal Industries Inc., 151 B.R. 833, 836 (Bankr. S.D. Ohio 1992). (No presumptive validity for claim of entitlement to administrative expense priority status). Furthermore, it has been specifically held that once an asserted IRS tax lien has been challenged by a bankruptcy trustee, "the burden of establishing the validity of the lien rests on the party [ i.e., the IRS] claiming the lien." In re Southeast Railroad Contractors, Inc., 235 B.R. 619, 622 (Bankr. E.D. Tenn. 1996). This principle is not affected by the Supreme Court's decision in the case of Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15 (2000), dealing with a state tax assessment filed in a bankruptcy case, which held that the bankruptcy trustee bears the burden of proof upon any objection to a proof of claim when non-bankruptcy substantive law places the burden of proof upon the debtor. See also Moser v. United States, 25 Fed. Appx. 161, 163 (4th Cir. 2002) (accord as to IRS claim) (unpublished). The question presented here is not a dispute concerning the amount and validity of the IRS's monetary claim, none of which the Trustee contests, but whether the IRS has a lien upon any of the property acquired by the Trustee as a result of the settlement with the "spendthrift trust". Therefore, although the IRS's claim is entitled to a presumption of validity, there is no presumption that its claim is secured.
The Internal Revenue Service asserts its claim under 26 U.S.C. § 6321, which states that:
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 (emphasis added).
Because the Trustee's adversary proceeding brought against the "spendthrift trust" resulted in a settlement, the validity of such trust has never been tested in court. There is no disputing that the tax lien accorded to the IRS by 26 U.S.C. § 6321 is remarkably powerful and comprehensive. It extends even to property which under state law would not be subject to the claims of other creditors. See Drye v. United States, 528 U.S. 49 (1999) (disclaimed property). United States v. Craft, 535 U.S. 274 (2002) (tenancy by the entirety property). Nevertheless, there remains some obligation upon the IRS to establish that its challenged lien did attach to the property which the "spendthrift trust" used as consideration for the settlement and the release of the Trustee's claim. Based on the Stipulation agreed to by the parties, there is no evidence before the Court or which has been cited by the IRS that would establish that it ever had a lien upon the Washington County property which the Balls' son and daughter conveyed to the trust and the proceeds of which were used to provide the money for the settlement with the Bankruptcy Trustee. In such circumstances it is not the responsibility of the Court to inquire whether such evidence might exist. Accordingly, there is no basis for the Court to determine that there was any lien upon property which came out of that trust into the Trustee's hands to pay for the settlement.
For these reasons the Court will sustain the Trustee's Objection and enter a contemporaneous order invalidating any claim of IRS lien against the proceeds of the settlement with the Ball "spendthrift trust".