Opinion
No. 91-00030-E
May 22, 1991
Appeal from the United States Bankruptcy Court for the Northern District of West Virginia.
Taxes — Liens — Discharge — Discharge of Debts — Exemptions — Enforcement Against Exempt Assets. — A tax lien on property exempt in bankruptcy is enforceable against that exempt property even though the tax debt is dischargeable. This is the plain meaning of Section 522(c)(2). The general rule has been maintained from pre-Code law that liens pass through bankruptcy unless they are avoided. The general proposition established by Section 522(c)(1) is that liens are not enforceable against exempt assets. This, however, is qualified by the remaining subsections of Section 522(c), which provide exceptions to this rule. One exception, stated clearly and straightforwardly, is that valid tax liens are enforceable against exempt assets. This exception makes no mention, and hence makes no distinction between liens supporting nondischargeable or dischargeable debts. Hence, according to the statutory language itself, valid tax liens may be enforced against exempt assets regardless of the dischargeable nature of the debt.
See Sec. 522(b) at ¶ 9203, Sec. 522(c) at ¶ 9204, and Sec. 1141(d) at ¶ 12,204.
Taxes — Liens — Avoidance of Liens. — Tax liens are statutory liens beyond the reach of the avoidance powers of Section 522(f), which only applies, as relevant here, to judicial liens.
See Sec. 522(f) at ¶ 9218.
This action is before the Court on the appeal of the debtor, S. Franklin Burford, from a final judgment order of the bankruptcy court in this jurisdiction. This Court has appellate jurisdiction pursuant to 28 U.S.C. § 158(a) and Bankruptcy Rule 8001(a). The parties have fully briefed the issues on appeal, which are ripe for decision.
ISSUE ON APPEAL
Whether the United States Internal Revenue Service may enforce a lien to protect an amount of taxes owed, where the tax debt is dischargeable under 11 U.S.C. § 1141(d) and where the encumbered property is exempt under the Bankruptcy Code, 11 U.S.C. § 522.
STANDARD OF REVIEW
Because the Appellant presents on appeal only an issue of law, this Court reviews the decision of the bankruptcy court de novo.
BACKGROUND
On January 4, 1988, Debtor/Appellant S. Franklin Burford filed a petition for reorganization with the Bankruptcy Court for the Middle District of Florida. That proceeding was transferred to the Bankruptcy Court for the Northern District of West Virginia. In this proceeding, the Internal Revenue Service ("IRS") submitted a proof of claim in the amount of $1,054,487.64, of which all but $30,000 was secured. This amount, less the unsecured $30,000, represented income tax assessments previously made against Appellant Burford. Prior to Appellant Burford's having filed a petition, the IRS had filed with the Circuit Court of Pinellas County, Florida, a lien on his home at 1480 Gulf Boulevard, Clearwater, Florida, among other properties, to secure the tax debt.
In August 1990, Appellant Burford filed a "Motion to Avoid Lien that Impairs an Exemption" to avoid the lien on the Clearwater property. The bankruptcy court denied the motion, holding that the lien of the IRS may continue in effect regardless of the confirmation of the reorganization plan.
DISCUSSION
For purposes of this motion, the parties agree that the relevant property is "exempt" property within the meaning of 11 U.S.C. § 522 and that the income taxes designated in the lien are "dischargeable" pursuant to 11 U.S.C. § 1141(d). Thus the sole issue before the Court is whether a bankrupt may avoid a lien on exempt property issued to secure payment of a dischargeable tax debt.
Appellant Burford presents two arguments, contending that the bankruptcy court erred. First, he argues that the legislative history of 11 U.S.C. § 522 indicates that Congress intended that dischargeable taxes cannot be collected from exempt assets and that the lien on the exempt property should therefore be avoided. Although the Appellant cites relevant statutory history regarding the collection of dischargeable debts from exempt assets, he overlooks the clear dictates of Congress regarding the status of legitimately secured tax liens in bankruptcy proceedings.
Section 522(c)(2)(B) of the Bankruptcy Code is at the heart of the issue raised. This section, which generally excepts statutory tax liens from avoidance in bankruptcy proceedings, states in relevant part:
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.
The plain language of this section thus states that a debtor may not avoid a statutory tax lien simply because the property securing the debt is exempt in bankruptcy proceedings. Not surprisingly, numerous bankruptcy courts have reached this conclusion. See, e.g., In re Verma, 91 B.R. 17, 18 (Bkrtcy. W.D. Pa. 1987) (statutory tax liens specifically excepted from discharge and exemption); In re Davis, 22 B.R. 523 (Bkrtcy. W.D. Pa. 1981) (same).
Allowing a valid pre-bankruptcy tax lien to survive discharge in bankruptcy conforms with the well-settled, and oft recognized, rule in Long v. Bullard, 117 U.S. 617 (1886), that a bankruptcy discharge does not prevent the enforcement of valid pre-bankruptcy liens. See Estate of Lellock v. Prudential Ins. Co., 811 F.2d 186 (3rd Cir. 1987) (valid liens pass through bankruptcy proceedings unaffected by discharge). See also United States v. Marlow, 48 B.R. 261, 262 (D. Kan. 1984) (citing a wealth of authority that concludes that a pre-bankruptcy lien survives bankruptcy discharge). The cases following Long v. Bullard teach that a discharge in bankruptcy proceedings extinguishes the personal liability of the debtor but not a valid lien upon his or her property. This authority thus also establishes that the valid IRS lien on Appellant Burford's property should survive discharge in the bankruptcy proceedings.
Appellant Burford argues that in overhauling the Bankruptcy Act, the Congress mitigated the rule of Long v. Bullard. He points to a comment explaining a related amendment of Section 522(c)(1). This explanation stated that the revised law provides "that dischargeable taxes cannot be collected from exempt assets. This changes present law, which allows the collection of dischargeable taxes from exempt property." 124 Cong. Rec. 113 (Sept. 28, 1978). Section 522(c)(1) states that a debtor's exempt property may not be liable for pre-petition debts except for nondischargeable tax debts, alimony or support. By implication, the bankruptcy court thus may not liquidate such property to satisfy dischargeable tax debts.
This Section, however, operates in conjunction with the following section, 522(c)(2), which — as discussed above — states that a debt secured by a valid tax lien may be satisfied with exempt property. This limitation on 522(c)(1) does not distinguish between dischargeable and nondischargeable tax debts, and thus a lien that secures either order of tax debt may survive discharge in bankruptcy proceedings. The latter section thus limits the scope of the former in reference to certain secured debts. As the bankruptcy court in this action noted, the legislative history to this section confirms the propriety of this conclusion. See H.R. Rep. No. 595, 95th Cong. 1st Sess. 361 (1977) ("The bankruptcy discharge will not prevent the enforcement of valid liens. The rule of Long v. Bullard, 117 U.S. 617 (1886) is accepted with respect to the enforcement of valid liens on nonexempt property as well as on exempt property . . ."). Congress thus intended that valid tax liens survive bankruptcy proceedings regardless of whether the tax debt underlying the lien was or was not dischargeable. This Court thus concludes that the bankruptcy court did not err in reaching a similar conclusion.
Second, Appellant Burford asserts that the lien at issue in this case is a "judicial", rather than a "statutory", lien and that it was therefore avoidable pursuant to 11 U.S.C. § 522(f). Section 522(f) does allow for the avoidance of judicial liens, which are those obtained "by judgment, levy, sequestration or other legal or equitable process or proceeding." 11 U.S.C. § 101(36). As the bankruptcy court concluded, however, the IRS tax lien on Appellant Burford's property is a statutory lien. Although the lien is a means of securing the tax debt owed the United States as calculated by the United States Tax Court, the lien arises as a result of the operation of 26 U.S.C. § 6321 and 6323. These statutes provide for the creation of a lien in favor of the United States for unpaid taxes and for the perfection of such liens by the filing of liens of record. Id. The liens in this case are statutory in nature and not avoidable pursuant to 11 U.S.C. § 522(f). See In re Senyo, 82 B.R. 401, 402 (Bktcy. W.D. Pa. 1988); In re Bernstein, 62 B.R. 545, 550-51 (Bktcy D. Vt. 1986). Appellant's second objection to the ruling of the bankruptcy court thus also fails.
For these reasons, this Court will affirm the decision of the bankruptcy court. The IRS liens on the property at issue shall survive the Appellant's discharge from bankruptcy in the underlying matter, though, at that time the Appellant will be relieved of personal liability for any dischargeable taxes.
An appropriate Order will issue.