Opinion
Case No 91-04971 (SEK)
November 5, 2003
OPINION AND ORDER
Heard on September 8, 2003, the question is whether we have the authority to order the Clerk of Court ("the Clerk") to withdraw funds levied by the Internal Revenue Service (the "IRS") which the Chapter 7 Trustee consigned as unclaimed funds and the Clerk deposited in the Court's registry account. We deny the Clerk's request for lack of subject matter jurisdiction and recommend that the District Court adopt our findings showing there is a distinction between a withdrawal and an IRS levy and the latter is self executing, requiring no further order from this Court.
Statement of Undisputed Facts
1. This case was dismissed on May 29, 1992, as Nelson O. Colon Gonzalez (the "Debtor") died while the case was pending and the Trustee was no longer able to administer the estate.
2. Approximately three years later, the Trustee filed a final report and account requesting an order concerning the disposition of estate funds. On September 28, 1995, we ordered the Trustee to deliver the funds to Debtor's heirs.
3. About two years later, the Trustee filed a "Report of Trustee Under Bankruptcy Rule 3011", accompanied by voided check #3545, for $7,976.47, payable to "Sucn. Nestor Colon Gonzalez", and check #3054 for the same amount, payable to the Clerk, "in compliance with the provisions of 11 U.S.C. § 347(a), because the funds were not claimed by the debtor's heirs or successors". The Clerk deposited these funds in the Court's registry account pursuant to 28 U.S.C. § 2041.
F.R.B.P. 3011 provides:
The trustee shall file a list of all known names and addresses of the entities and the amounts which they are entitled to be paid from remaining property of the estate that is paid into court pursuant to § 347(a) of the Code.11 U.S.C. § 347(a) states:
Ninety days after the final distribution under section 726, 1226, or 1326 of this title in a case under chapter 7, 12, or 13 of this title, as the case may be, the trustee shall stop payment on any check remaining unpaid, and any remaining property of the estate shall be paid into the court and disposed of under chapter 129 of title 28 [28USC § 2041 et seq.].
28 U.S.C. § 2041 states:
All moneys paid into any court of the United States, or received by the officers thereof, in any case pending or adjudicated in such court, shall be forthwith deposited with the Treasurer of the United States or a designated depositary, in the name and to the credit of such court. This section shall not prevent the delivery of any such money to the rightful owners upon security, according to agreement of parties, under the direction of the court.
4. On March 19, 1998, a public accountant, Guillermo Bonilla, appearing pro se, requested that the above mentioned funds be delivered to the IRS as "Debtor owes the IRS the amount of $7,184.62." This was Mr. Bonilla's first appearance in this case, so we ordered him to file credentials authorizing him to represent Debtor's heirs in this matter. He did not answer our order, and we took no further action.
5. Then, on January 8, 1999, the IRS served Notice of Levy (pursuant to 26 U.S.C. § 6331 (a)) addressed to the Clerk claiming "$6,315.26 in connection with the pre-petition assessed income tax indebtedness of Nestor 0. Colon", the deceased debtor.
6. According to the Clerk, he negotiated with the IRS for two years, but has not yet complied with the levy. Then in March of 2002, citing 28 U.S.C. § 2042, the Clerk filed a motion requesting entry of an order authorizing him to withdraw the funds deposited in the Court's registry account levied by IRS. This motion was filed after the bankruptcy case had been closed since 1995, after the documents filed in the case have been misplaced and not recuperated, and the IRS was not notified.
28 U.S.C. § 2042 states:
No money deposited under section 2041 of this title shall be withdrawn except by order of court. In every case in which the right to withdraw money deposited in court under section 2041 has been adjudicated or is not in dispute and such money has remained so deposited for at least five years unclaimed by the person entitled thereto, such court shall cause such money to be deposited in the Treasury in the name and to the credit of the United States. Any claimant entitled to any such money may, on petition to the court and upon notice to the United States attorney and full proof of the right thereto, obtain an order directing payment to him.
7. We addressed several questions to the Clerk which prompted him to join the IRS in filing a joint motion consenting to the reopening of the case and asking the court to direct "payment of the abandoned funds to the United States pursuant to an IRS Levy".
8. The IRS avers Debtor's heirs, by not asserting any claim against the levy, have abandoned these funds. Furthermore, the IRS claims the Clerk could be liable under 26 U.S.C. § 6332(d)(1) for not honoring the IRS levy, but will be immunized from any liability under 26 U.S.C. § 6332(e) if he honors the IRS levy by paying the funds to the Government, The Clerk insists the law requires a court order instructing him to make such a withdrawal.
9. We did not approve the stipulation, ordering the Clerk and the IRS to file briefs. These have been submitted and oral argument was heard as per transcript of the September 8, 2003 hearing.
Discussion
A. Jurisdiction
Bankruptcy courts are court of limited jurisdiction. See 28 U.S.C. § 1334 and 157. As explained by Judge Wisdom in In the Matter of Wood. 825 F.2d 90, 92-93 (5th Cir. 1987), afterMarathon and the Bankruptcy Amendments and Federal Judgeship Act of 1984, under 28 U.S.C. § 1334(a) original and exclusive jurisdiction over the petition for bankruptcy itself lies in the federal district courts and in their bankruptcy units. The federal district courts have original, but not exclusive jurisdiction, over matters or proceedings listed under 28 U.S.C. § 1334(b). Thus, "[t]he jurisdictional provisions of the 1978 Act . . . accomplished two things. First, subsection (b) vested an expansive bankruptcy jurisdiction in the district courts. Second, subsection (c) conferred the power to exercise that jurisdictional grant in the bankruptcy courts." Id. at 92. The placement of bankruptcy jurisdiction is controlled by the statutory distinction between core and non-core proceedings defined by 28 U.S.C. § 157.Id. at 94-95. Thus, "[u]pon referral from the district court, the bankruptcy judge has full statutory authority to "hear and determine . . . all core proceedings. . . . ` 28 U.S.C. § 157(b)(1)." In re Arnold Print Works. Inc., 815 F.2d 165, 167-168 (1st Cir. 1987). "Non core proceedings, those that the statute calls `related to' bankruptcy cases, concern aspects of the bankruptcy case that Marathon barred non-article III judges from determining on their own." Id. at 168. Article III judges would retain the ultimate control over non-core proceedings, where the bankruptcy court's adjudicative role is limited to proposing findings of fact and conclusions law for a district court to adopt or change.
Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S.50, 102 S.Ct. 2858; 73 L.Ed.2d 598 (1982).
The facts at bar show the controversy is at best, a non-core matter within the purview of 28 U.S.C. § 157(c)(1). The issue concerns the Clerk's assertion that he, as the custodian of funds deposited in the court's "registry account", needs an order authorizing the withdrawal to comply with the IRS levy. The basis for this assertion is not contained in title 11 of the United States Code, also referred to as the Bankruptcy Code, and is not brought to our attention within the context matters essential to the reorganization or liquidation of an ongoing bankruptcy estate. The Clerk's assertion is grounded in the section of title 28 of the United States Code concerning his role in administering funds deposited with the court in pending, or adjudicated cases. Hence, our role is limited to proposing a ruling to the District Court in this non-core matter. B. Difference between an IRS levy and a withdrawal of money pursuant 28 U.S.C. § 2042.
The Clerk claims his role, when served by an IRS levy under 26 U.S.C. § 6331(a) is limited by 28 U.S.C. § 2042 regulating withdrawals of money deposited in accounts in pending or adjudicated cases within the purview of 28 U.S.C. § 2041. Accordingly, he argues he cannot comply with the IRS levy unless the Court first authorizes him to make the withdrawal of the levied funds.
The IRS argues no court order is needed for the Clerk to comply with an administrative tax levy, as the Clerk is the custodian of the levied funds and his role is limited to handing these over, or refusing to deliver the levied funds with the attendant consequences provided by applicable tax law. IRS further points to a case in bankruptcy where a Trustee, in an analogous role to that of the Clerk, was denied a request for a court order in order to comply with an IRS levy. Hence, the argument goes, the Clerk who is a custodian under tax law of the funds derived from a closed case in bankruptcy needs no further order from the Court should he decide to abide by the levy served upon him by the IRS.
Beam v. Internal Revenue Service, 192 F.3d 941 (9th Cir. 1999).
Title 26 U.S.C. § 6331(a) provides: `[I]f any person liable to pay a 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 . . . levy upon all property . . . on which there is a (tax) lien . . . `(t)he term `levy' . . . includes the power of distraint and seizure by any means.' § 6331(b). Treasury Regulations, 26 C.F.R. § 301.6331 — 1(a) (1) (1974), provide that a `(L)evy may be made by serving a notice of levy, `and that levy gave the United States the right to the proceeds, [citation omitted.] Title 26 U.S.C. § 6332(a) requires that any person holding property levied upon must surrender it to the Government, or become liable for the tax, § 6332(c). With surrender, however, any duty owed to the taxpayer is extinguished, § 6332(d). (Our emphasis.)Phelps v. U.S., 421 U.S. 330, 335, 95 S.Ct. 1728, 44 L.Ed.2d 201 (1975). Further, explanations given in U.S. v. National Bank of Commerce, 472 U.S. 713, 720; 105 S.Ct. 2919; 86 L.Ed.2d 565 (1985) show " [t]he levy is a provisional remedy and typically does not require any judicial intervention.'" (Our emphasis.) Lastly,
[i]n the situation where the taxpayer's property is held by another, a notice of levy upon the custodian is customarily served pursuant to § 6332(a). This notice gives the IRS the right to all property levied upon, [citation omitted], and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government, [citation omitted] If the custodian honors the levy, he is `discharged from any obligation or liability to the delinquent taxpayer with respect to such property or rights to property arising from such surrender or payment. [citation omitted] If, on the other hand, the custodian refuses to honor a levy, he incurs liability to the Government for his refusal."[citation omitted] Id. at 721.
"Among the advantages of administrative levy is that it is quick and relatively inexpensive" and protects the government against diversion or loss while the assessment of third party rights to the levied funds are being resolved. Id.
The Court also states: "It is well established that a bank account is a species of property `subject to levy' within the meaning of §§ 6331 and 6332. A levy on a bank account has been permitted since the Revenue Act of 1924 . . . and the Treasury Regulations explicitly authorize such levies." [citations omitted]Id.
The withdrawal of funds deposited in a § 2042 account on the other hand requires a court order. The law provides withdrawal of funds deposited in an account regulated by 28 0.S. § 2041, must be preceded by the following procedure: "[a]ny claimant entitled to any such money may, on petition to the court and upon notice to the United States attorney and full proof of right thereto, obtain an order directing the payment to him." Unlike an IRS administrative levy, the withdrawal contemplates notice, a court ruling based on full proof of the claimant's entitlement to such money, and no releases from liability or penalty assessment resulting from the custodian's actions concerning the withdrawal.
Hence, the law recognizes an IRS levy is different from a withdrawal of funds deposited in a § 2042 account. The Clerk's role in handling a withdrawal of funds deposited with the United States or a designated depositary, and his role in handling an IRS levy of those funds is likewise different. Recognizing this difference, we find the Clerk must decide without a Court order whether to honor or dishonor the IRS levy.
SO ORDERED.