In re Alpa Corp.
| Citation | 11 BR 281 |
| Decision Date | 15 May 1981 |
| Docket Number | Bankruptcy No. 80-02546,Civ. No. 80-0445. |
| Parties | In re ALPA CORPORATION, a Utah Corporation, Debtor. ALPA CORPORATION, Debtor-in-Possession, Plaintiff, v. INTERNAL REVENUE SERVICE, United States of America, Defendant. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah |
Robert Wily of Salt Lake City, Utah, for debtor, Alpa Corp.
Barbara Johnsen, Salt Lake City, Utah, for Internal Revenue Service and the U.S.
Alpa Corporation is a small company engaged in the manufacturing of specialized equipment for use in the optical industry. On December 2, 1980, the Internal Revenue Service (IRS) levied upon and seized all equipment, inventory and other property on the business premises of Alpa Corporation and thereby terminated its business operations. On December 8, 1980, while the property was still in the possession of the IRS, but before it had been sold or otherwise disposed of, Alpa Corporation filed a Chapter 11 bankruptcy. On December 11, 1980, the debtor filed a complaint in the bankruptcy court to compel turnover of the property held by the IRS. The debtor also filed a motion for summary judgment in the case alleging no material facts to be in issue. The IRS responded with a motion to dismiss alleging that the Court lacked subject matter jurisdiction over the property and the cause of action pled. By stipulation of both parties, upon recognition of the urgency of the matter in that the debtor's operations were completely shut down, these motions were heard on December 12, 1980. The Court at that time ruled from the bench on the question before it, but reserved the right to supplement its ruling by written decision. This memorandum opinion is therefore issued to further supplement and explain the Court's previous ruling on the important issue of whether, in the case of a pre-bankruptcy levy by the IRS, the bankruptcy court has jurisdiction over the property seized so as to enable it to order turnover of the property under 11 U.S.C. § 542.
11 U.S.C. § 542, which outlines the authority of the Court to order a turnover of property to the trustee or debtor-in-possession, states that:
an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
Under 11 U.S.C. § 101(14), an "entity" includes a "governmental unit;" therefore, providing the property involved is "property that the trustee may use, sell, or lease under section 363," the Court may issue a turnover order against the IRS. Section 363(b) and (c) define property that the trustee may use, sell, or lease as being "property of the estate." The question, then, of whether the Court has jurisdiction over property levied upon pre-petition so as to compel turnover rests upon whether it is "property of the estate" under Section 541.
Among other subsections, not applicable here, 11 U.S.C. § 541(a) defines property of the estate as "the following property, wherever located: . . . all legal or equitable interests of the debtor in property as of the commencement of the case." The legislative history to this provision emphasizes the pervasive reach of this provision:
The scope of this paragraph is broad. It includes all kinds of property, including tangible or intangible property, causes of action see Bankruptcy Act § 70a(6), and all other forms of property currently specified in section 70a of the Bankruptcy Act § 70a, as well as property recovered by the trustee under section 542 of proposed title 11, if the property recovered was merely out of the possession of the debtor, yet remained "property of the debtor." The debtor\'s interest in property also includes "title" to property, which is an interest, just as are a possessory interest, or leasehold interest, for example.
H.R.Rep.No.95-595, 95th Cong., 1st Sess., at 367 (1977); S.Rep.No.95-989, 95th Cong., 2d Sess., at 82 (1978), U.S.Code Cong. & Admin.News 5787. Under this definition, it would appear that if the debtor had any interest at all, legal or equitable, left in the property which has been levied on, that property is "property of the estate."
The IRS argues that its levy under 26 U.S.C. § 6331 amounts to a "virtual transfer" of the property levied upon to the United States so as to prevent the property from passing to the estate of a subsequently filed bankruptcy and to preclude the bankruptcy court's jurisdiction over the property. It supports this contention with statements from pre-Code cases on the effect of a levy on property under the Internal Revenue Code and with at least one recent case decided under the Bankruptcy Code. See Phelps v. United States, 421 U.S. 330, 95 S.Ct. 1728, 44 L.Ed.2d 201 (1975); In re Pittsburgh Penguins Partners, 598 F.2d 1299 (3d Cir. 1979); United States v. Pittman, 449 F.2d 623 (7th Cir. 1971); United States v. Sullivan, 333 F.2d 100 (3d Cir. 1964); United States v. Eiland, 223 F.2d 118 (4th Cir. 1955); Bush Gardens, Inc. v. United States, 10 B.R. 506, 5 B.C.D. 1023 (D.N.J.1979).
The language relied upon includes this statement in the footnotes of Phelps v. United States, supra, 421 U.S. at 337 n. 8, 95 S.Ct. at 1733, n. 8: "In any event, the prebankruptcy levy displaced any title of the debtor and § 70a(8) is therefore inapplicable." Similar statements can be found in United States v. Pittman, supra at 625 ; United States v. Sullivan, supra at 116 ; United States v. Eiland, supra at 12 (); and In re Pittsburgh Penguins Partners, supra. Relying on these statements, the Bankruptcy Court for the District of New Jersey recently held in Bush Gardens, Inc. v. United States, supra 10 B.R. at 512, 5 B.C.D. at 1026, that since the "United States has a significantly greater interest" approaching that of ownership in property seized prior to bankruptcy for the collection of taxes, that property is not "property of the estate" under Section 541, and therefore not subject to a turnover order of the bankruptcy court. A careful examination of Phelps and its progeny, however, convinces the Court that the Bush Gardens decision is incorrect and that the debtor does indeed retain an interest sufficient to include the property in question as part of the estate subject to turnover.
The case of Phelps v. United States, supra, involved a taxpayer who transferred all of his assets to an assignee for the benefit of creditors. The assignee proceeded to convert the transferred assets to cash. The IRS then served a notice of levy on the assignee, and subsequently, the taxpayer filed bankruptcy. Upon appeal over the propriety of the issuance of a turnover order by the bankruptcy court, the United States Supreme Court held that the bankruptcy court lacked summary jurisdiction to adjudicate the controversy without the government's consent. In reaching its decision, the Court found that "the levy . . . created a custodial relationship between the assignee and the United States and thereby reduced the $38,000 to the United States' constructive possession." Id. 421 U.S. at 334, 95 S.Ct. at 1731. This made the United States a "bona fide adverse claimant" to the property held by the assignee, which, as it did not consent to adjudication of its claim in bankruptcy court, deprived the court of jurisdiction and entitled the United States to a plenary suit over its rights to the property elsewhere. Id. at 334, 95 S.Ct. at 1731. The opinion ends with the statement: "Here the assignee held as custodian for the United States, a bona fide adverse claimant." Id. at 337, 95 S.Ct. at 1733.
Initially, it is clear that the holding of Phelps has been overruled by the new Code. 28 U.S.C. § 1471 establishes the broad jurisdiction of the new bankruptcy court and disposes of the plenary-summary distinction which controlled jurisdiction under the old Act. There remains, however, the question as to what extent the Phelps case and related cases have defined the property interest of the IRS after levy under 26 U.S.C. § 6331 and what continuing effect any such determinations may have on the question now before the Court.
A close scrutiny of the Phelps case and other cases cited by the IRS reveals that these cases have never placed squarely in issue the precise extent of the IRS's property interest in levied-upon property. It also becomes apparent that, in spite of the strong language cited by the IRS, no court has ever gone so far as to state that the IRS acquires an absolute ownership interest upon levy. In fact, the provisions of 26 U.S.C. § 6331 et seq. governing levy and seizure would suggest just the opposite.
In the Phelps case, the Court there referred to the post-levy claim of the government as that of a "bona fide adverse claimant." Id. at 334, 337, 95 S.Ct. at 1731, 1733. Only the statement made in the footnotes that the "prebankruptcy levy displaced any title of the debtor" can be cited to support the contention of the IRS of a claim akin to ownership. In construing the weight and meaning of that statement, it must first be realized that this statement is clearly dictum, unnecessary in the Court's holding and unsupported by textual explanation. Secondly, to set it in its proper context, the statement appears to have been made simply to...
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