Opinion
Case No. 97-14816-SSM, Contested Matter No. 98-1527
October 19, 1998
Richard A. Bartl, Esquire, Tyler, Bartl, Burke Albert, PLC, Alexandria, VA, of Counsel for the debtors
Robert Coulter, Esquire, Alexandria, VA, of Counsel for the Internal Revenue Service
MEMORANDUM OPINION
This matter is before the court on a motion for relief from the automatic stay filed by the United States of America on behalf of the Internal Revenue Service ("IRS") to permit enforcement of a Federal tax lien against the debtors' retirement plans. A hearing was held on September 21, 1998, at which the court invited supplemental memoranda from the parties and took the matter under advisement.
Facts
The facts are undisputed. Vincent N. Rice and Bernadine P. Rice filed a joint voluntary petition under chapter 13 of the Bankruptcy Code in this court on June 27, 1997.
They had previously filed a joint chapter 7 petition on December 10, 1996, and had received a discharge on March 27, 1997. It is undisputed that the discharge eliminated their personal liability for the taxes now in question, consisting of unpaid Federal income tax liabilities for 1985, 1986, 1987, and 1992.
Prior to the chapter 7 petition, the IRS had filed a Notice of Federal Tax Lien on December 8, 1994, with respect to the 1985, 1986 and 1987 liabilities, and on April 9, 1996, with respect to the 1992 liabilities. Among the assets scheduled in the debtors' chapter 7 case was Mr. Rice's interest, valued at $79,386.18, in a Civil Service Retirement System pension, and Mrs. Rice's interest, valued at $61,300.00, in a teacher's pension administered by the Virginia State Retirement System. Mr. Rice is retired and currently receiving pension payments. Mrs. Rice has not yet retired but anticipates doing so in the near future. On the schedules filed in their chapter 13 case, they listed the IRS as an unsecured priority creditor in the amount of $13,498. The basis for the claim is stated as "tax lien on 11905 Fawn Ridge Lane, Reston, VA."
Both pensions are defined benefit plans, and the values shown on the schedules are the amount of the debtors' contributions, and not necessarily the actuarial value of the benefits to be paid out under the plan.
It is, to say the least, confusing to list a secured tax claim on Schedule E — which is where priority unsecured claims are supposed to be listed — simply because it would have been a priority claim had it not been secured. It is also not clear how the value of $13,498 was arrived at, given the listed fair market value of the property ($350,000), the amount of the first trust ($322,000), a homeowner's association lien ($1,000), and a judgment lien ($1,980). In any event, since the debtors' plan provides for full payment of the filed IRS proof of claim, the precise value of the debtors' equity is of only academic interest.
The debtors' chapter 13 plan, filed on June 27, 1997, was confirmed without objection in the amount of $1,000 per month for 50 months. The claim of the IRS was provided for in § B-3-B of the plan ("Payments to Priority Creditors"), which stated that the IRS would be paid the Fawn Ridge Lane property would receive regular monthly payments postpetition in the amount of $2,801 directly from the debtors, while the pre-petition delinquency in the amount month for 50 months. The unsecured creditors would be paid 100 cents on the dollar.
The debtors' schedule of income reflects that Mr. Rice is retired and receiving $3,100 disability compensation. Mrs. Rice is employed by the Fairfax County Public Schools and is not currently receiving a pension. Their combined net monthly income, as reflected on the
On August 22, 1997 — 5 weeks prior to confirmation of the plan — the IRS filed a timely proof of claim in the total amount of $12,476.50 for 1994, 1995, and 1996 Federal $1,895.50 as a general unsecured claim. The proof of claim did not assert any or any confirmed on October 1, 1997. On August 6, 1998 — ten months after was confirmed — the IRS filed the motion for relief from the automatic stay that is presently before the court, asserting for the first time a secured claim in the amount of $100,830.94 and seeking relief from the automatic stay to levy against the debtors' pensions.
Conclusions of Law and Discussion I.
The filing of a bankruptcy petition creates an automatic stay of, among other actions, "any act to create, perfect, or enforce against property of the debtor any lien to the extent that such Hen secures a claim that arose before the commencement of a case under this title." § 362(a)(5), Bankruptcy Code (emphasis added). It is undisputed that the debtors' right to receive payments in accordance with the terms of their respective pension plans is a property right. There is also no dispute that the IRS claim for the taxes in question arose before the commencement of the case. Additionally, there is no dispute that the IRS, as a result of the debtors' nonpayment of those taxes and the filing of a notice of tax lien, acquired a lien in the amount of the unpaid taxes "upon all property and rights to property, whether real or personal" belonging to the debtors. 26 U.S.C. § 6321 and 6323. Finally, there can be no doubt that the chapter 7 discharge, although eliminating the debtors' personal liability for those taxes, did not affect the IRS's right to enforce the lien in rem against any property to which it had attached prior to the chapter 7 filing. Connor v. United States (In re Connor), 27 F.3d 365 (9th Cir. 1994) (prepetition Federal tax lien attached to chapter 7 debtor's interest in his state retirement pension, and, since the debtor's interest had vested prepetition, postpetition payments were not "after acquired property" and could be levied upon by IRS); see also Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 2153, 115 L.Ed.2d 66 (1991) (a discharge extinguishes only the personal liability of the debtor); § 522(c)(2), Bankruptcy Code (unavoided tax liens may be enforced against exempt property after the case).
It is worth emphasizing that § 362(a)(5), unlike other subsections of § 362(a), addresses property of the debtor, as distinguished from property of the estate. Thus the revesting of property of the estate in the debtor which occurs under § 1327(c), Bankruptcy Code, upon confirmation of a chapter 13 plan, does not terminate the stay.
Even though the debtors' personal liability for the taxes has been extinguished, the IRS, because of its unavoided lien, continues to have a "claim" within the meaning of the Bankruptcy Code. § 102(2), Bankruptcy Code ("`claim against the debtor' includes claim against property of the debtor"); Johnson, 501 U.S. at 83 , (mortgage lien surviving chapter 7 was a "claim" subject to treatment in subsequent chapter 13 case notwithstanding the discharge of the debtor's personal liability). In order to receive payment on account of such claim, however, the IRS, like every other creditor, is required to file a timely proof of claim. § 502(f), Bankruptcy Code; F.R.Bankr.P. 3002(a) and (c). Although proofs of claim in a chapter 13 case must normally be filed within 90 days after the first date set for the meeting of creditors, governmental units such as the IRS have at least until 180 days after the order for relief, which, in a voluntary case, is synonymous with the filing of the petition. §§ 301 and 502(f), Bankruptcy Code. Thus, the IRS had until December 24, 1997, to file its proof of claim. As noted above, the IRS did file a timely proof of claim, but only with respect to the 1994, 1995, and 1996 tax years. No claim was filed for the years to which its lien related.
The time within which the United States may file a proof of claim may be further extended, but only on motion made "before the expiration of such period." F.R.Bankr.P. 3002(c)(2). Otherwise, enlargement is not permitted. F.R.Bankr.P. 9006(b)(3).
II.
Notwithstanding its failure to file a timely proof of claim for the 1985, 1986, 1987, and 1992 Federal income taxes or to object to the confirmation of a plan that did not provide for any payment on account of its filed lien for those tax years, the IRS now seeks relief from the automatic stay to enforce its lien against the debtors' pension rights. The debtors, not surprisingly, oppose the requested relief.
The terms of a confirmed plan are res judicata and bind even the government when it is a creditor. Dept. of Air Force v. Carolina Parachute Corp., 907 F.2d 1469, 1473-74 (4th Cir. 1990). In the Fourth Circuit, however, mere failure by a confirmed chapter 13 plan to treat a claim as secured does not defeat an otherwise valid security interest, which, in the absence of a specific proceeding brought to avoid it, may be enforced after the plan is completed. Cen-Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir. 1995).
In a supplemental memorandum filed after the hearing, the IRS clarified that it was seeking to levy only on the payments to the debtors from their respective pension plans, not on their accumulated contributions to the plan.
A.
As an initial matter, the debtors, although conceding that Mr. Rice's Federal pension is subject to the filed IRS lien notwithstanding the statutory restriction on alienation and attachment in 5 U.S.C. § 8437(e)(2), see Jones v. Internal Revenue Service (In re Jones), 206 B.R. 614 (Bankr. D.D.C. 1997), dispute that Mrs. Rice's pension is subject to the lien. In support of their position, they rely on Va. Code Ann. § 51.1-124.4, which, with certain exceptions not relevant here, exempts retirement allowances and benefits payable by the Virginia Retirement System from "execution, attachment, garnishment, or any other process whatsoever" and further, with one exception not relevant here, provides that no assignment "shall be enforceable in any court." However, the court agrees with the IRS that the only property rights exempt from levy to enforce a Federal tax lien are those specifically set forth in Federal tax lien. U.S. v. Mitchell 406 (1971). There is a separate issue, discussed below, as to what portion, if any, of Mrs. Rice's pension had vested as of the date of the chapter 7 petition, but the court need not resolve that question at this time.
Under § 362(d), Bankruptcy Code, an affected party may seek relief from the automatic stay
interest in property of such party in interest; [or] (2) with respect to a stay of an act against property under (A) the debtor does not have an equity in such property; and reorganization [.]
The IRS, as the moving party, has the burden of proof on lack of equity. § 362(g)(1), the court to make a finding of lack of equity. But even had there been a threshold showing of lack of equity, it seems clear that the pension payments are necessary to an effective reorganization. The husband's pension constitutes 41% of the family's combined monthly income and is equal to 51% of the combined monthly expenses. Although the wife is not currently drawing her pension, it is represented by counsel that she intends to retire in the near future, and will likely do so prior to completion of the plan. Once she retires, her pension will clearly be needed to replace the monthly net of $3,742.00 now contributed to the family income from her salary as a teacher.
The IRS advances the argument that income is only "necessary to an effective reorganization" if it is actually used to fund the plan, and that Mrs. Rice's income by itself is sufficient to make the required monthly payments to the trustee.9 Thus, it is argued, Mr. Rice's pension income is not "necessary," and the IRS should be entitled to levy on it. In support of this argument, the IRS relies heavily on In re Leavell, 190 B.R. 536 (Bankr. E.D. Va. 1995) (St. John, J.). But Leavell is simply not on point. The issue in Leavell was whether, in a chapter 13 case, postconfirmation wages were property of the bankruptcy estate and thereby protected by the automatic stay against wage garnishments for a postpetition debt. Leavell held that following confirmation only those postpetition earnings used to fund the plan constitute "property of the estate." The opinion did not address the issue of whether earnings used to pay the debtors' postconfirmation living expenses were "necessary" to an individual debtor's reorganization. As noted above, the protection of § 362(a)(5), Bankruptcy Code, is not limited to property of the estate, but also extends to the property of the debtor.
"Necessary to an effective reorganization," the court concludes, is not synonymous with "necessary to fund a plan." The money to fund a repayment plan in an individual debtor's chapter 13 case comes from what the debtor has left over each month after paying necessary living expenses. People have to eat before they can repay their debts. Take away the $3,100 per month that Mr. Rice draws from his pension, and the family is left with $4,436 per month. Even cutting expenses to the bone, it does not reasonably appear that the debtors could keep food on the table, pay the utility bills, operate their cars and still make the payments required by the plan. The "success" of their reorganization plainly requires that they pay both their necessary monthly living expenses and their monthly plan payments.
It is true, as the IRS points out, that the debtors are paying into the plan only $1,000 per month and that the excess of their net monthly income over expenses is $1,428, meaning that the debtors enjoy a surplus of $428 per month over and above their necessary living expenses and plan payments. Thus, had there been a threshold showing of lack of equity, the IRS would have a compelling argument that the automatic stay should be modified to the extent of permitting levy on the pension payments in an amount not to exceed $428.00 per month. As noted above, however, there has been no showing of lack of equity and, absent such a showing, § 362(d)(2) does not permit relief from the automatic stay to be granted solely because property is not necessary to an effective reorganization.
C.
Relief from stay may also, however, be granted for "cause," which includes, but is not limited to, "lack of adequate protection." § 362(d)(1), Bankruptcy Code. As the Fourth Circuit has explained, the automatic stay "gives the bankruptcy court an opportunity to harmonize the interests of both debtor and creditors while preserving the debtor's assets for repayment and reorganization of his or her obligations." Robbins v. Robbins (In re Robbins), 964 F.2d 342, 345 (4th Cir. 1992). Accordingly, in determining whether "cause" exists to modify, condition, or terminate the stay, the court "must balance potential prejudice to the bankruptcy debtor's estate against the hardships that will be incurred by the person seeking relief from the automatic stay if relief is denied." Id.
There can be little doubt that unrestricted relief from the stay to permit the IRS to levy on the debtors' pensions would torpedo the debtors' plan. That plan, as noted above, was confirmed without objection by the IRS and fully pays the only proof of claim filed by the IRS in this case. Moreover, there is no suggestion in the present case that the debtors have engaged in any inequitable conduct that prevented the IRS from recognizing or asserting its secured claim. It simply appears that the debtors — like the IRS itself — failed to focus on the fact that, although the personal liability of the debtors had been discharged by the chapter 7 petition, a lien had attached to whatever pension rights had vested on the date the chapter 7 petition was filed.10 Of course, the continuation of the stay does present some risk to the IRS with respect to the ultimate collection of its claim. That is, a pension is ordinarily payable completion of the plan, the IRS might have nothing against which it could levy. Balancing the potential loss to the IRS from that occurrence against the plan disruption that would occur if the IRS were granted carte blanche to levy on Mr. Rice's pension at this time, and Mrs. decidedly in favor of continuing the automatic stay in effect.
In oral argument, however, the IRS has urged that, even if complete relief from stay is the extent of the $428.00 per month budget surplus. A levy to that extent would recognize the IRS's legitimate interest in enforcement of its lien (and the possible loss of its collateral in the in accordance with the terms of their confirmed plan. The court's concern, however, is that once Mrs. Rice retires, the family income will be significantly reduced. While neither party pension income is usually less, and often a good deal less, than the amount the employee received as salary or wages while working. Thus, while modification of the stay is appropriate to permit limited enforcement of the lien at the present time, such enforcement will only be permitted until such time as Mrs. Rice retires. At that point, the court, on further motion by the IRS, will review the debtors' income and expenses and determine to what extent, if any, the stay should be further modified to permit enforcement against the pensions.
III.
A separate order will be entered modifying the automatic stay to permit enforcement, against Mr. Rice's pension only, of the IRS lien in an amount not to exceed $428.00 per month, and continuing only until Mrs. Rice retires.
Of course, what constitutes the taxpayer's "property" is governed by state law, and a Federal tax lien cannot attach in the absence of a property right created or arising under state law., 120 F.3d 592, 598 (5th Cir. 1997) (federal tax lien did not attach to inheritance timely disclaimed under state law). But that is not the issue here.
is $141,136. As noted above, the scheduled values represent the contribution made by the greater. In any event, the IRS has offered no evidence of the actuarial value.
benefit to which the lien might attach or whether either plan has a provision for payment to the