In re Busman, Bankruptcy No. 880-0172.

• Decision Date: 25 July 1980
• Docket Number: Bankruptcy No. 880-0172.
• Parties: In re Marvin BUSMAN and Laura Busman, Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

5 B.R. 332 (1980)

In re Marvin BUSMAN and Laura Busman, Debtors.

Bankruptcy No. 880-0172.

United States Bankruptcy Court, E.D. New York.

July 25, 1980.

Donner, Fagelson, Hariton & Berka, P.C., Bay Shore, New York, for debtors.

Edward R. Korman, United States Atty., Brooklyn, New York.

DECISION

C. ALBERT PARENTE, Bankruptcy Judge.

The issue presented arises from an objection filed by the United States Attorney, on behalf of the Internal Revenue Service (IRS), opposing the confirmation of Marvin and Laura Busman's (hereafter "debtors") amended plan of arrangement under Chapter 13 of the Bankruptcy Code.

The plan provides for payment to priority creditors at one-hundred percent of their scheduled claims, without interest, over a thirty-six month period. IRS is listed in the amended plan as a priority creditor.

At the time of filing the petition, the debtors had outstanding a tax liability, including penalties and interest, in the sum of $4,050.97. IRS contends that its claim is a secured "priority" (sic) claim by virtue of having obtained tax liens on all of the debtors' personal and real property pursuant to Title 26 U.S.C. § 6321. It is further alleged that in accord with said section of the Internal Revenue Code, the tax lien encumbering debtors' real and personal property was perfected by the filing of Notice of Federal Tax Lien with the Suffolk County Clerk's Office prior to the filing of the debtors' Chapter 13 petition.

Premised thereon, IRS asserts that it is a holder of a secured priority claim, and coordinate therewith objects to the confirmation of the debtors' amended plan on the ground that the plan fails to provide for payment of post-petition interest on its secured tax claim. The objection in essence posits upon the following arguments collectively or in the alternative:

(1) That IRS is entitled to post-petition interest on its secured tax claim contending that the value of the collateral securing the tax claim exceeds the value of the claim. § 506(b).

(2) That IRS is entitled to post-petition interest pursuant to § 1325(a)(5)(B)(ii). Said statutory proviso mandates that if a Chapter 13 plan provides for payments to secured creditors over time in installments at face value, the holders of secured claims are entitled to also receive an appropriate "interest" or "discount" figure.

The text of § 506(b) of the Bankruptcy Code, as here pertinent, reads:

To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided under the agreement under which such claim arose.

The text of § 1325(a)(5)(B)(ii), as here pertinent, reads:

(5) with respect to each allowed secured claim provided for by the plan —

. . . . .

(B)(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim.

Debtors' responsive pleading seeks to rebut the IRS position by alleging that IRS is not a holder of a secured claim but rather stands in the posture of a priority creditor by virtue of a late filing of its claim, thereby invoking the prescriptive stricture of Rule 13-302, Rules of Bankruptcy Procedure, and as a causal consequence of the late filing, negating any right to post-petition interest on its tax claim. Debtors' argument is further anchored to the precepts following: (1) the tax liens may be subject to the trustee's avoiding powers contained in Chapter 5 of Title 11; and (2) the IRS may not have perfected its tax liens in the manner prescribed by the Uniform Commercial Code.

The undisputed and relatively simple fact pattern evolves into a rather complex and multi-faceted issue synthesized as follows:

(1) What is the proper classification of a claim under the Bankruptcy Code deriving from a tax lien?

(2) Did IRS in the case at bar duly perfect its tax lien in comport with the recording imperatives of state law?

(3) Is post-petition interest an allowable claim in the context of a Chapter 13 case?

(4) What is the significance and reach of Rule 13-302, Rules of Bankruptcy Procedure, as it pertains to the late filing of a secured tax claim?

(5) What is the proper rate of post-petition interest allowable on a tax claim?

Responding to the above delineated prongs of the issue ad seriatim, the Court in the first instance is directed to Title 26, § 6321 of the United States Code entitled Lien for Taxes:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

The above-cited text articulates the rule that a tax claim unpaid after notice and demand matures into a tax lien. U.S. v. Cleavenger, 325 F.Supp. 871 (N.D.Ind. 1971).

Attached to the IRS Proof of Claim is a notice for federal tax lien stating that a demand for payment has been made and the tax liability after such demand remains unpaid. On such facts and consonant with defendants' failure to rebut or disprove the IRS contention, it is probatively established that the IRS has a valid subsisting tax lien pursuant to the dictate of U.S.C. Title 26 § 6321.

Parenthetically, Section 6334 of Title 26 United States Code, exempts certain items of personal property from a tax levy, viz.:

(1) wearing apparel and school books;

(2) fuel, provisions, furniture and personal effects;

(3) books and tools of a trade, business or profession;

(4) unemployment benefits;

(5) undelivered mail;

(6) annuity or pension payments under the Railroad Retirement Act;

(7) worker's compensation;

(8) judgments for support of minor children; and

(9) minimum exemption for wages, salary and other income.

The foregoing exemptions are enumerated as germane inasmuch as the tax lien encumbers both real and personal property and thus bears upon the scope of the lien, and may affect execution and levy.

Adverting to debtors' contention that the tax lien may be subject to the avoiding powers of the trustee (§§ 545 and 546), lacking any supportive proof debtors' naked allegations are rendered probatively vacuous and clearly a non-factor in the subject dispute. Liens cannot be tacitly avoided nor can allegations be transmuted ipso facto into the essential evidentiary proof demanded by established adversary process.

The second prong of the issue encompasses the question of perfection. U.S.C. Title 26 § 6323(f) prescribes the perfection criteria in the essence following:

To perfect a tax lien, a notice of federal tax lien must be filed: (1) as to real property in the office designated by state law in which the property subject to the lien is situated; and (2) as to personal property, in the office designated by state law in which the property subject to the lien is situated.

The uncontroverted record clearly denotes due compliance by IRS with the statutory requisite of § 6323(f), supra. IRS filed the appropriate notice of federal tax lien with the Suffolk County Clerk's Office as required by state law. Bankers Trust Co. v. Equitable Life Assur. Soc. of U.S., 39 Misc.2d 1035, 242 N.Y.S.2d 441 (N.Y.County 1963); aff'd. 257 N.Y.S.2d 502, 22 A.D.2d 579 (1st Dept. 1965); rev'd. 19 N.Y.2d 552, 281 N.Y.S.2d 57, 227 N.E.2d 863 (1967).

The above findings dispel any doubt that the IRS is the holder of a perfected secured claim with respect to debtor's tax liability.

The third component of the issue focuses upon whether post-petition interest on a tax claim is allowable.

Section 502(a) governs allowance of a claim or interest. The text thereof follows:

(a) A claim or interest, proof of which is filed under § 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a partner in a partnership that is a debtor in a case under Chapter 7 of this title, objects.

Exceptions to the allowability of claims or interest appear in subdivision (b) of § 502. Paragraph (2) thereof disallows a claim to the extent that the claim is for unmatured interest as of the date of the petition. Moreover, post-petition interest is expressly barred, including any portion of prepaid interest that represents an original discounting of the claim not earned on the date of the filing of the petition.

A literal interpretation of paragraph (2) would seemingly bar all post-petition interest. This, of course, is not the case. The statute merely recites the general rule pertaining to unmatured interest. The provision further tracks the principle that interest stops running from the date of the filing of a petition in bankruptcy. More definitively, it appertains as a rule of liquidation rather than a tenet of substantive law.

Implicitly, the rule is restricted to liquidation cases wherein the law disregards for purposes of liquidation only, interest accruing after the date of the filing of the petition in bankruptcy. By ample majority, case precedent has held that interest ceases after the inception of bankruptcy, nevertheless the obligation to pay interest is deemed revived and is reinstated where the bankrupt estate is solvent, or where the collateral is sufficient to meet the cost of principal and interest. Littleton v. Kincaid, 179 F.2d 848 (4th Cir. 1950); Sexton v. Dreyfus, 219 U.S. 339, 31 S.Ct. 256, 55 L.Ed. 244 (1910).

Thus, the rule is clearly not entrenched as an absolute, nor more pointedly does it draw into its restrictive parameters the rights of secured creditors. It has always been a fundamental principle of bankruptcy law that a lien when valid in bankruptcy shall not be impaired in the administration of a...