Opinion
Bankruptcy Court no. 02-17845, No. 1:03-cv-369
January 6, 2004
MEMORANDUM
I. Introduction
Appellant, the United States of America, appeals pursuant to 28 U.S.C. § 158(a), the order of the bankruptcy court, entered on August 27, 2003, denying the objection of the Internal Revenue Service ("IRS") to confirmation of the Chapter 13 plan of debtor, Gerald V. Sanderfer ("Sanderfer" or "debtor"). [Court File No. 1].
II. Background
The pertinent facts of this case have been stipulated. Before filing this bankruptcy action, Sanderfer was in a prior Chapter 13 bankruptcy. (Bankruptcy Case No. 98-14652). After confirmation, but while the bankruptcy was still pending, the IRS filed a notice of a federal tax lien on May 6, 2002, for unpaid federal income tax liabilities for 1995, 1996, 1998, 1999, and 2000. Because the notice of federal tax lien partly consisted of pre-petition liabilities subject to the automatic stay, on August 13, 2002, the IRS amended the notice of federal tax lien to refer solely to the post-petition liabilities-1998, 1999 and 2000 — and removed the liens for the pre-petition periods.
Sanderfer's prior bankruptcy was dismissed November 8, 2002. He filed a second petition for Chapter 13 bankruptcy protection on December 2, 2002. The IRS did not file another notice of federal tax lien during the period between Sanderfer's two Chapter 13 bankruptcies.
In its memorandum opinion and order of August 27, 2003, the Bankruptcy Court held that the IRS's filing of the post-petition notice of federal tax lien during Sanderfer's earlier Chapter 13 bankruptcy proceeding failed to "perfect" the federal tax liens for the purpose of securing the United States proof of claim in the instant bankruptcy because the filing of the notice of tax lien violated the automatic stay provisions of 11 U.S.C. § 362. More specifically, the bankruptcy court held that the filing of the notice of federal tax lien by the IRS created a tax lien under 11 U.S.C. § 362(b)(9)(1). However, the bankruptcy court held that the federal tax lien was not perfected since: (1) "[t]he confirmed plan [in the earlier Chapter 13 proceeding] provided that the property would vest in the debtor only when he completed the plan;" and (2) "[t]he debtor's property was till in the bankruptcy estate and protected by the automatic stay when the IRS filed the lien notice." [Court File No. 1, Exhibit 4, p. 4].
Further, the bankruptcy court noted that the IRS could have taken steps to "perfect" its tax lien before Sanderfer's property exited the first bankruptcy estate by requesting the bankruptcy court to grant it relief from the automatic stay. Id. at p. 5. However, the IRS did not seek such relief from the bankruptcy court. Accordingly, the bankruptcy court found that there was no equitable ground present in the instant action for giving effect to the notice of tax lien, despite its having been filed in violation of the automatic stay; and, the court found the IRS's notice of tax lien was void. Id. at p. 8. Therefore, the bankruptcy court found that the IRS's claim for unpaid taxes "should be treated as unsecured." Id. III. Issue
The sole issue to be resolved on appeal is whether the bankruptcy court erred in concluding that the filing of a notice of federal tax lien against Sanderfer for post-petition tax liabilities violated the automatic stay provision of 11 U.S.C. § 362; and, therefore, the IRS claims for unpaid post-petition taxes were "unsecured".
IV. Standard of Review
The bankruptcy court is the finder of fact. The Court must uphold the findings of fact made by the bankruptcy court unless those findings are determined to be clearly erroneous. Fed.R. Bank P. 8013. However, a bankruptcy court's conclusions of law are reviewed de novo on appeal. In re Johnson, 209 F.3d 611, 612(6th Cir. 2000); In re 255 Park Plaza Assocs. Ltd. Partnership, 100 F.3d 1214, 1216 (6th Cir. 1999); In re Isaacman, 26 F.3d 629, 631 (6th Cir. 1994); In re Caldwell, 851 F.2d 852, 857 (6th Cir. 1988); Fed.R.Bank.P. 8013. "A finding is `clearly erroneous" when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948). This Court has the authority to affirm, modify, or reverse the judgment of the bankruptcy court. If necessary, this Court may also remand the case to the bankruptcy court for further proceedings. Fed.R.Bank.P. 8013.
V. Analysis
After reviewing the record and the applicable law, this Court finds that the opinion of the bankruptcy court is "clearly erroneous."
In its brief on appeal, the United States asserts that the filing by the IRS of the notice of federal tax lien for post-petition taxes was permitted by 11 U.S.C. § 362(a)(5). [Court File No. 3, p. 7]. Specifically, the United States asserts that the notice of tax lien was filed only against the debtor, Gerald V. Sanderfer, not against the bankruptcy estate of Gerald V. Sanderfer. Id. at 9; Court File No. 1, Exhibit 1, Attachment B]. The government further asserts that the bankruptcy court misinterpreted the decision in Matter of Clark, 207 B.R. 559 (Bank. S.D. Ohio 1997); and, it asserts that the bankruptcy court failed to consider that all of the property of the debtor, Gerald V. Sanderfer, was not property of the bankruptcy estate under the Chapter 13 plan. Id. at 10-11.
Finally, the United States asserts that because it did not violate the automatic stay provisions of 11 U.S.C. § 362, when Sanderfer's first Chapter 13 bankruptcy was dismissed, all of the estate property revested in Mr. Sanderfer, and the federal tax liens attached to the revested property. Id. at 12-13. Consequently, the United States asserts that when Sanderfer filed the instant Chapter 13 bankruptcy, and his property was transferred into the bankruptcy estate, it transferred into the bankruptcy estate subject to the federal tax lien, which was filed pre-petition to the second Chapter 13 bankruptcy, and the United States is a secured creditor/claimant in the current Chapter 13 bankruptcy.
Title 11 U.S.C. § 362 states in pertinent part:
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970 ( 15 U.S.C. § 78eee(a)(3)), operates as a stay, applicable to all entities, of —
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) 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)(4), (5). Subsection (b) of § 362 also provides in pertinent part:
(b) The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970 ( 15 U.S.C. § 78eee(a)(3)), does not operate as a stay —
(9) under subsection (a) of this section, of the issuance to the debtor by a governmental unit of a notice of tax deficiency;11 U.S.C. § 362(b)(9).
In Matter of Clark, 207 B.R. 559 (Bankr. S.D. Ohio 1997), the bankruptcy court was faced with the issue as to whether the post-petition levy by the IRS on the debtor, Robert Clark, without the IRS having obtained relief from the stay, violated the automatic stay provision of 11 U.S.C. § 362. In Clark, the debtor filed his bankruptcy action on December 28, 1993, the Chapter 13 plan was confirmed by the bankruptcy court on March 15, 1994. Id. at 561.
After the confirmation of the debtor's Chapter 13 plan, the debtor continued to incur continuing federal tax liability. Id. On October 28, 1996, the IRS wrote to the debtor informing him it was preparing to file a notice of federal tax lien ("NFTL") and issuing a wage levy to the debtor's employer. Id.
The bankruptcy court found that the actions of the IRS violated the automatic stay provisions of 11 U.S.C. § 362. In concluding that the actions of the IRS violated the automatic stay provisions of § 362, the Clark court drew a distinction between two forms of Chapter 13 bankruptcy plans. Id. at 564-65. The Clark court noted that under many Chapter 13 plans "at least some part of the property of the estate revests in the debtor upon confirmation. Under such plans, there is some property that upon confirmation ceases to become property of the estate protected by the automatic stay." Id. at 564. The Clark court stated, albeit in dicta, that under that form of Chapter 13 plan, "a postpetition creditor is free to pursue a collection against any property that is not property of the estate." Id. (citing United States Postal Service v. Black (In re Heath), 198 B.R. 298 (S.D. Ind. 1996)).
However, the Clark court noted that the confirmation order of the Chapter 13 plan in the action before it provided "that all property of the debtor and of the estate defined by § 1306(a), which expressly includes postpetition earnings, remains subject to the exclusive jurisdiction of the court, and that all property shall remain property of the estate and shall vest in the debtor only upon dismissal, discharge or conversion." Id. The Clark court stated that in a chapter 13 case involving such a confirmation plan, a postpetition debtor had certain courses of action open to it. Namely, the post-petition debtor could:
simply move for relief from the automatic stay, and if relief is granted, may pursue any assets of the debtor that are subject to the order granting relief. If a creditor felt that the automatic stay did not apply and thus obtaining relief was not necessary, the creditor could bring an action for a declaratory judgment to that effect. A creditor may also move the court for dismissal of the debtor's chapter 13 case or for conversion of the chapter 13 case to one under chapter 7 . . . a creditor could also simply wait for a discharge to be entered and may then pursue any assets of the debtor for collection since all of the debtors assets would have vested in the debtor upon discharge and been freed of all claims of prepetition creditors.Id. at 565 (emphasis in original). However, according to the Clark court:
one option that is not available to a creditor in the [Internal Revenue] Service's position is to simply ignore the provisions of the chapter 13 plan and the confirmation order, and to proceed with self-help remedies in violation of the automatic stay which remained in full force and effect under the plan and confirmation order.Id.
Thus, contrary to the assertions of the United States, in the instant action, the bankruptcy court did not misread the decision in Clark and that decision is not helpful the government's position.
In re Truelove, No. 93-11170KC, 1994 WL 486930 (Bankr. N.D. Iowa, May 26 1994), the debtors filed their first chapter 13 case in 1985 and received a discharge on November 19, 1992. Id., 1994 WL 486930 at * 1. The debtors then filed a second chapter 13 action on July 7, 1993. Id.
The IRS filed a NFTL on November 13, 1992, six days before the debtors received a discharge in their first Chapter 13 bankruptcy. Id. Consequently, the NFTL filed by the IRS constituted a post-petition claim with regard to the debtor's first chapter 13 case. Id.
In the confirmation plan of their second chapter 13 bankruptcy, the debtors did not provide for payment of the IRS's allegedly "secured claim" on the ground that it was invalid because it was filed in violation of the automatic stay. Id. The IRS objected to confirmation of the debtors second chapter 13 plan. With regard to the contentions of the IRS, the Truelove court held:
the IRS was barred by the automatic stay from perfecting its lien against property of debtors' chapter 13 estate. Such property consisted of Debtor's property and wages necessary to fund their Chapter 13 plan. The Court finds that on November 13, 1992, when the IRS filed its notice of lien, Debtors Chapter 13 plan was completely funded and the IRS lien could not have attached to any property of the estate at that time. Filing the notice of lien on that date did not violate the automatic stay.Id. at *3.
In In re Nichols, No. L88-00954W, 1994 WL 932214 (Bankr. N.D. Iowa, Sep. 28, 1994), the debtor filed his bankruptcy petition on June 16, 1988, and the chapter 13 plan was confirmed on March
29, 1989. Id., 1994 WL 932214 at *1. The debtor failed to pay federal income taxes for the years 1989 through 1993; and, for each delinquent tax year, the IRS filed a NFTL. Id. The IRS claimed its post-petition tax claims were secured by liens against the debtors property; and, it contested payments made from the bankruptcy estate by the chapter 13 trustee. Id. These distributions by the trustee were payments made from funds resulting from the sale of the debtor's house. Id.
The Nichols court found that the NTFL's filed by the IRS violated the automatic stay provision of § 362 because they were attempts to perfect liens against the property of the chapter 13 estate. Id. at *2. The Nichols court noted that the chapter 13 plan, which had been confirmed by the bankruptcy court provided that the debtor would "within . . . five years under the Plan, list and sell his residence . . . and shall apply such amounts as necessary to fully satisfy al priority claims, the allowed secured claims and 10% of the allowed unsecured claims." Id.
Consequently, the Nichols court held that because the proceeds from the sale of the debtor's residence were to be used to fulfill obligations under the chapter 13 plan, the IRS attempt to "perfect" a NFTL against the property of the bankruptcy estate was void as a violation of the automatic stay provision. Id. at *3.
As the bankruptcy court noted in its memorandum in this case, "confirmation [of Standerfer's chapter 13 plan] did not vest the property of the bankruptcy estate in the debtor. The confirmed plan provided that the property would vest in the debtor only when he completed the plan." [Court File No. 1, Exhibit 4, p. 4]. Accordingly, the Court finds that the decision of the bankruptcy court that the NFTLs filed by the IRS to secure tax claims for unpaid delinquent tax claims of the debtor violated the automatic stay of § 362 because they were an attempt to "perfect" a lien against property in the chapter 13 bankruptcy estate is not clearly erroneous.
However, the United States argues that even if the NFTLs were a violation of the automatic stay provision of 11 U.S.C. § 362, they were merely voidable under § 362, and not void. Consequently, according to the United States, when Sanderfer's first chapter 13 bankruptcy was dismissed on November 8, 2002, the property of the bankruptcy estate revested in him and the NFTL's "perfected" the liens against the debtor's "revested" property, such that when Sanderfer filed his second chapter 13 bankruptcy petition, the "revested" property entered the second Chapter 13 bankruptcy estate subject to the "secured" claims of the United States for payment of the debtor's delinquent income taxes.
Title 11 U.S.C. § 349 provides in pertinent part:
§ 349. Effect of dismissal
(b) Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title —
(1) reinstates —
. . .
(C) any lien voided under section 506(d) of this title;
(3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.11 U.S.C. § 349(b)(1)(C) (b)(3).
In In re Ullrich, 186 B.R. 747 (Bankr. M.D. Fla. 1995), the IRS assessed taxes against the debtor. Following the debtor's filing of a chapter 13 bankruptcy petition, the IRS filed a NFTL. Sometime thereafter, the debtor's chapter 13 case was dismissed. Two days later the debtor filed a petition for chapter 11 bankruptcy. The Ullrich court found that the IRS's filing of the NFTL's violated the automatic stay provisions of 11 U.S.C. § 362. It further found that the
NFTL filing was void not "avoided", and the IRS took no action to validate its action or seek retroactive relief. Additionally, Section 349(b)(3) "revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title." Before the filing of the Chapter 13, the Debtor's property was unencumbered by a NFTL. Therefore, the IRS's act of filing the NFTL remained void.Id. at 749.
However, in Easley v. Pettibone Michigan Corporation, 990 F.2d 905 (6th Cir. 1993), the Sixth Circuit held that "actions taken in violation of the stay are invalid and voidable and shall be voided absent limited equitable circumstances." Id. at 911. The Sixth Circuit suggested that
only where the debtor unreasonably withholds notice of the stay and the creditor would be prejudiced if the debtor is able to raise the stay as a defense, or where the debtor is attempting to use the stay unfairly as a shield to avoid an unfavorable result, will the protections of section 362(a) be unavailable to the debtor.Id. None of the limited equitable circumstances apply to the instant action.
Thus, under existing Sixth Circuit precedent, since the NFTLs filed by the IRS were not void, but merely avoidable, the Court finds that under 11 U.S.C. § 349, the NFTL "perfected" the tax lien at the time the debtor's first chapter 13 petition was dismissed on November 8, 2003. This was the same time that the property "revested" in Sanderfer. Thus, at the time Sanderfer filed the instant chapter 13 petition, the tax lien had already been "perfected"; and, when the property "revested" in Sanderfer, following the dismissal of the first Chapter 13 bankruptcy, it "revested" in Sanderfer subject to the simultaneously "perfected" federal tax liens.
Accordingly, this Court finds that the bankruptcy court's finding that the IRS was not a secured creditor because it failed to do anything in the interim between the two chapter 13 bankruptcies to "perfect" its tax liens was "clearly erroneous." Therefore, the judgment of the bankruptcy court entered on August 27, 2003, will be REVERSED.
VI. Conclusion
The judgment of the bankruptcy court rendered on August 27, 2003, will be REVERSED and this matter is REMANDED to the bankruptcy court for further proceedings consistent with this opinion. The Clerk shall close the file. Each party will bear their own costs of this appeal.
A separate order will enter.
ORDER
In accordance with the accompanying memorandum opinion, the judgment rendered on August 27, 2003, by the United States Bankruptcy Court for the Eastern District of Tennessee, Southern Division is REVERSED and this matter is REMANDED to the bankruptcy court for further proceedings consistent with this opinion. Each party shall bear their own costs of this appeal. The Clerk of Court shall close the file.SO ORDERED.