Summary
holding that secured claims of the IRS may not simultaneously be treated as a priority unsecured claim
Summary of this case from In re ThomasOpinion
Civ. No. 04-5898 (GEB).
March 18, 2005
MEMORANDUM OPINION
This is an interlocutory appeal from a decision of the United States Bankruptcy Court for the District of New Jersey ("the Bankruptcy Court") denying Appellant's motion for summary judgment. This Court has appellate jurisdiction over this matter pursuant to 28 U.S.C. § 158(a). The Court, having considered the parties' submissions and decided the matter without oral argument pursuant to Fed.R.Civ.P. 78, and for the reasons set forth below, will affirm the order below.
Pursuant to Fed.R.Bankr.P. 8003, Appellant is required to file a motion for leave to appeal. Despite Appellant's failure to request leave to appeal, this Court will grant leave to appeal under Fed.R.Bankr.P. 8003(c) and reach the merits of the action.
I. BACKGROUND
Harry Herckner ("Appellant") and his wife, Pamela Herckner, are delinquent in the filing of their 2000 individual income tax returns. The IRS properly filed federal tax liens against properties jointly owned by Mr. and Mrs. Herckner in Burlington County and Ocean County, New Jersey and Citrus County, Florida for the delinquent taxes and attendant civil penalties. On February 2, 2004, Mr. Herckner filed a voluntary Chapter 7 petition and identified the real and personal property to which the federal liens would have attached. On May 13, 2004, the IRS filed a proof of claim based upon the 2000 joint federal income tax liability and civil penalties. In its proof of claim, the IRS stated an unsecured priority claim in the amount of $177,227.61 and an unsecured general claim in the amount of $26,311.42. Appellant then commenced an adversary proceeding asserting that the claims filed by the IRS should be reclassified as fully secured claims. The Bankruptcy Court denied Appellant's motion for summary judgment and this appeal followed.
For the purposes of this section, the Court relies on the party's Joint Stipulation of Facts.
II. ANALYSIS
A. Standard of Review
Bankruptcy Rule 8013 provides, in pertinent part:
On appeal the district court . . . may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, 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 witnesses.
FED. R. BANKR. P. 8013 (2005). "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 conclusion that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948). A bankruptcy court's conclusions of law, on the other hand, are subject to plenary review. See Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988). Where mixed questions of law and fact are presented, the appropriate standard must be applied to each component of the appeal. See In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir. 1989).
B. The IRS May Elect To Be Treated As An Unsecured Creditor
A creditor may surrender its security in a bankruptcy proceeding and instead make an unsecured claim against the estate. See Hoxworth v. Blinder, 74 F.3d 205, 209 (10th Cir. 1996) ("[T]he [Bankruptcy C]ode allows [the creditor] to make an unsecured proof of claim against the estate, and not assert its secured lien against assets traced into the estate."). A secured creditor can pursue one of three courses:
(1) he may prove his claim as an unsecured claim and surrender his security; (2) he may prove his claim as a secured claim, give credit thereon for the value of the security, and share in the general assets as to the unsecured balances; or (3) he may not file a claim at all and rely solely upon his lien.Delaney v. City and County of Denver, 185 F.2d 246, 251 (10th Cir. 1950). For example, in In re Krahn, 124 B.R. 78 (Bkrtcy. D. Minn. 1990), the court held that the IRS could not resuscitate a pre-petition lien, emphasizing that it hadvoluntarily abandoned its secured status to assert a priority unsecured claim. See Krahn, 124 B.R. at 80-81. Therefore, this Court concludes that the IRS can elect to abandon its secured status under pre-petition liens and proceed as an unsecured creditor.
The Court is not persuaded by Appellant's position that the presence of pre-petition liens dictates that the IRS must pursue secured claims. As correctly pointed out by the IRS and Trustee in their respective briefs, each of the cases cited by Appellant to support this position are readily distinguishable on the facts. In each of these cases, the IRS had filed secured claims in a bankruptcy proceeding, but then attempted to have the claims treated as priority claims in a Chapter 11 plan filed in the same proceeding. See U.S. v. TM Bldg. Products, Ltd., 231 B.R. 364, 367-68 (S.D. Fla. 1998); In re DiMaria, 202 B.R. 634, 640 (Bkrtcy. S.D. Fla. 1996); In re Reichert, 138 B.R. 522, 525 (Bkrtcy. W.D. Mich. 1992). Each court correctly held that secured claims are not entitled to priority treatment. See e.g. DiMaria, 202 B.R. at 640 (holding that "the IRS is not entitled to claim both the benefits of its right to encumbered property and the status afforded to unsecured claims under § 507"). None of these cases, however, address the situation where, as here, the IRS opts to abandon its pre-petition liens and file unsecured claims rather than secured claims.
Appellant further contends that "[h]ad the IRS identified its claim as secured, the Trustee would have been required to abandon some or all of Mr. Herckner's assets under 11 U.S.C. § 554." Appellant Brief at 2. However, Section 554 merely provides that the trustee or the court may determine that property should be abandoned because it is either burdensome to the estate or of inconsequential value and benefit to the estate. See 11 U.S.C. §§ 554(a) and (b) (2005). Further, Appellant offers no further support for this contention.
For example, in U.S. v. TM Bldg. Products, Ltd., 231 B.R. 364 (S.D. Fla. 1998), the IRS filed a proof of claim and amended proof of claim, both times listing both secured and unsecured claims. TM Bldg., 231 B.R. at 367. The IRS then filed objections to the debtors Chapter 11 Plan of Reorganization.Id. As a result, the debtor amended its Plan prior to the confirmation hearing. Id. During the confirmation hearing, the IRS urged denial of confirmation, but never objected to the Plan's classification of its claims as secured rather than priority. Id. at 368. On appeal, the IRS argued that its secured claims should have been treated as unsecured priority claims. The district court affirmed the Chapter 11 Plan and declined to permit the IRS to treat its secured claims as unsecured priority claims. The court emphasized that "the presence or absence of a recorded Notice of Federal Tax Lien at the time a petition for Chapter 11 relief is filed will control how a claim . . . is treated in bankruptcy." TM Bldg., 231 B.R. at 370-71.
The situation in TM Bldg. is much different than that presented here. Here, the IRS actually filed unsecured priority claims. The TM Bldg. decision cannot be construed to affect the creditor's right to abandon its pre-petition liens and pursue unsecured priority claims. Similarly, DiMaria and Reichert do not support Appellant's position in this case. These cases merely hold that a filed secured claim may not also be treated as a priority claim in a Chapter 11 Plan.
This Court finds that allowing the IRS to proceed as an unsecured creditor does not constitute a violation of 26 U.S.C. § 6334. Appellant has cited no authority to support this position. Further, as the IRS points out, it has not levied on Appellant's property. Moreover, as discussed supra, this Court finds that the Bankruptcy Code permits the IRS to abandon its security interest and pursue unsecured priority claims.
Therefore, this Court holds that the IRS may abandon its security interest and elect to be treated as an unsecured creditor. Accordingly, this Court affirms the Bankruptcy Court's order denying Appellant's motion for summary judgment.
III. CONCLUSION
For the foregoing reasons, the order of the Bankruptcy Court denying Appellant's motion for summary judgment is affirmed. An appropriate form of order is filed herewith.