In re Basher

• Citation: 291 B.R. 357
• Decision Date: 28 March 2003
• Docket Number: Adversary No. 02-0346.,Bankruptcy No. 02-12328DWS.
• Parties: In re Mark V. BASHER, Debtor. Mark V. Basher, Plaintiff, v. United States of America, Dept. of the Treasury, Internal Revenue Service, Defendant.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

291 B.R. 357

In re Mark V. BASHER, Debtor Mark V. Basher, Plaintiff, v. United States of America, Dept. of the Treasury, Internal Revenue Service, Defendant.

Bankruptcy No. 02-12328DWS.

Adversary No. 02-0346.

United States Bankruptcy Court, E.D. Pennsylvania.

March 28, 2003.

Michael Kaliner, Esquire, Fairless Hills, PA, for Plaintiff.

Jennifer L. Best, Esquire, U.S. Department of Justice, Washington, DC, for Defendant.

Edward Sparkman, Esquire, Philadelphia, PA, Chapter 13 Trustee.

Dave P. Adams, Esquire, Office of the U.S. Trustee, Philadelphia, PA, United States Trustee.

OPINION

DIANE WEISS SIGMUND, Bankruptcy Judge.

Before the Court is the Complaint of the debtor Mark V. Basher ("Debtor") to determine secured status of the claim of the Internal Revenue Service ("IRS") pursuant to 11 U.S.C. § 506(a). Debtor seeks to reduce the secured portion of the IRS' claim based on the values he attributes to the properties to which the IRS' lien attaches in furtherance of "cram down" of the IRS under his Chapter 13 plan.¹ On December 3, 2002 I entered an Order and Memorandum Opinion, 2002 WL 31856712 (Bankr.E.D.Pa. Dec.3, 2002) ("Basher I") deciding certain of the issues raised by the Complaint² but concluding that I had not had the benefit of a clear exposition of the parties' respective views on the valuation of the Debtor's tenant by entirety interest in real property located at 70 Forrest Drive, Holland, Pennsylvania (the "Residence"). Accordingly, I requested and have now received, legal memoranda that set forth each litigant's position with respect to this issue. Rather than restate the factual findings set forth in Basher I, I shall incorporate that Opinion as though set forth herein. I thus turn directly to the legal issue left unresolved in Basher I.

DISCUSSION

I.

Acknowledging the decision of the United States Supreme Court in United States v. Craft, 535 U.S. 274, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002), the Debtor concedes that the IRS' lien attaches to his interest in the Residence notwithstanding the fact that he holds it as a tenant by the entirety with his wife Marcella and that she has no obligation with respect to the judgment giving rise to the lien. The dispute that is the focus of this Opinion is how to value that interest, a subject not addressed in Craft. According to the Debtor's analysis, the interest should be valued at zero. The IRS urges the Court to value the interest at 50% of the equity in the Residence if I conclude, as I did in Basher I, that the Debtor's transfer of an interest in the Residence upon their marriage cannot be avoided. In Basher I, I noted my uncertainty with both of the values ascribed by the litigants. 2002 WL 31856712, at *4-5. Upon review of the post-decision memoranda and the cases cited therein, I conclude that the respective values ascribed by parties to the Residence are incorrect although the IRS comes closer to reaching the correct answer.

II.

The Debtor acknowledges that he has the initial burden of going forward with his case but notes that where determinations of value arise, "burdens may shift where one party produces evidence which the other seeks to refute." Plaintiff's Memorandum of Law Pursuant to the Order of December 3, 2002 at 1. He fails to state how that observation applies to the burdens of proof here. The IRS cites to the United States Supreme Court's decision in Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) which held that when the substantive law creating a tax obligation puts the burden of proof on a taxpayer, the burden of proof on the tax claim in bankruptcy remains where the substantive law placed it and is not altered by bankruptcy. It also argues that its properly filed proof of claim is entitled to be accorded prima facie validity and requires the objecting party to produce evidence that rebuts that presumption. It appears that both parties agree that the Debtor has the initial burden of going forward. Where the parties disagree is whether the Debtor has sustained that burden by the evidence he presented. Finally, if Debtor does not meet his burden, I must determine whether the IRS' valuation should be accepted.

III.

There is another significant agreement that was identified by the parties' respective legal memoranda. In evaluating their conflicting views of the record, they concur that my legal framework for this valuation decision is Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997). In Rash, the United States Supreme Court held that the standard for valuation of a secured claim for the purpose of cram down pursuant to § 1325 of the Bankruptcy Code is replacement value. Finding the proposed disposition or use of the collateral to be of paramount importance to the valuation question, the Supreme Court noted that the valuation standard would turn on the alternative the debtor chooses — i.e., surrender of the collateral or retention and use by the debtor. A foreclosure value standard was rejected as inconsistent with the retention option permitted through the cram down power.

Of prime significance, the replacement-value standard accurately gauges the debtor's "use" of the property. It values "the creditor's interest in the collateral in light of the proposed [repayment plan] reality: no foreclosure sale and economic benefit for the debtor derived from the collateral equal to ... its [replacement] value.".

Id. at 1886 (quoting In re Winthrop Old Farm Nurseries, 50 F.3d 72, 75 (1st Cir.1995)). Like the debtor in Rash, Basher elected to retain the collateral as his Residence. The evidence is that the Debtor's marriage is sound, and that Marcella is only 45 years old and the Debtor one year older. Thus, while there are restrictions on Debtor's disposition of the Residence by reason of the tenancy by entireties ownership, there is no restriction on his use and enjoyment of the property. That actual use, rather than what he could sell his interest for, is the measure of value here.

Debtor, however, focuses on the market value of the Debtor's interest in the Residence. His evidence consisted of the testimony of his father, a real estate broker, opining that there would be limited ability to sell Debtor's interest and a life expectancy table indicating that Marcella was likely to live another 37 years so the burden on his interest to dispose of the Residence is not soon to be ameliorated. From that evidence, he argues that the Residence has no value. Like the IRS, he refers to Rash to support his position, quoting a portion of a footnote that sought to reconcile its definition of replacement value with the Ninth Circuit's view as articulated in In re Taffi, 96 F.3d 1190 (9th Cir.1996).³ However, the Debtor misses the point of that footnote which is intended to explain that by replacement value, the Court does not suggest that a creditor would be allowed to recover what it would cost the debtor to purchase the collateral brand new. Rather replacement value would be "the price a willing buyer in the debtor's ... situation would pay a willing seller." Id. (emphasis added.) The Debtor's situation here is as owner of a tenancy by entireties, not a third party purchaser. Thus, even in the footnote quoted, the focus is on value from the debtor's perspective. I therefore reject Debtor's position that his interest in the Residence has no value because of the burdens on its disposition.⁴

Moreover, even without regard to Rash, Debtor's conclusion that there is no value to his interest in the Residence is flawed. In United States v. Rodgers, 461 U.S. 677, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983), the United States Supreme Court held that section 7403 of the Internal Revenue Code, 26 U.S.C. § 7403,⁵ gave the district court the power to order the sale of a property otherwise requiring the consent of the non-debtor spouse and to direct distribution of the proceeds to the IRS on account of its lien and to the non-debtor on account of its entirety interest.⁶ In validating the power conferred upon the district court under § 7403, the Supreme Court observed that "it made considerable sense to allow the Government to seek the sale of the whole and obtain its fair share of the proceeds, rather than satisfy itself with a mere sale of the part," recognizing that "interests in property, when sold separately, may be worth significantly ... less than the sum of their parts." Id. at 694, 103 S.Ct. at 2143.⁷ Thus, at least as to this creditor, admittedly one with unique and special federal statutory rights, the value upon sale would not be zero as the Debtor contends because the IRS has the ability to seek a forced sale and would be likely to realize the actual market value of the Residence. The Debtor's interest to which the lien is attached would yield some percentage of the net proceeds to be determined by the Court giving full consideration to the property rights of the non-debtor.

IV.

Having concluded that the Debtor has not sustained his burden of establishing a zero value on the Debtor's interest in the Residence, I must determine if any other value is supported by this record. The IRS contends that I should accord 50% of the equity in the residence to the Debtor's tenancy by entireties interest. The parties agree that the Residence had a fair market value as of the petition date of $250,000. Stipulation of Facts ¶ 3. There is a mortgage on the Residence, Exhibit G-4,⁸ which had an outstanding balance as of December 31, 2001 of $148,479.45. Exhibit G-5. With an equity of $101,520.55, the IRS claims that a value of $50,720.27 should be attributed to its secured claim with respect to the Residence.

The IRS's position finds support in In re Hermann, 224 B.R. 101 (Bankr.D.Minn.1998), which valued the debtor-wife's joint tenancy interest in the couple's homestead at 50% of the total equity for "cramdown" purposes. Citing Rash, the court stated that the measure of value of...