In re Laredo, Bankruptcy No. 05 B 4620.

• Decision Date: 15 December 2005
• Docket Number: Bankruptcy No. 05 B 4620.,Adversary No. 05 A 1785.
• Citation: 334 B.R. 401
• Parties: In re Martin and Elvira LAREDO, Debtors. David E. Grochocinski, Trustee, Plaintiff, v. Martin Laredo, Elvira Laredo, and Internal Revenue Service, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

334 B.R. 401

In re Martin and Elvira LAREDO, Debtors David E. Grochocinski, Trustee, Plaintiff, v. Martin Laredo, Elvira Laredo, and Internal Revenue Service, Defendants.

Bankruptcy No. 05 B 4620.

Adversary No. 05 A 1785.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

December 15, 2005.

COPYRIGHT MATERIAL OMITTED

Arthur W. Rummler, Orland Park, IL, for Plaintiff.

Heather L. Richtarcsik, for Defendant.

David E. Grochocinski, Orland Park, IL, for Trustee.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the motion of David E. Grochocinski, Chapter 7 trustee (the "Trustee") for the estate of Martin and Elvira Laredo (collectively, the "Debtors"), for summary judgment pursuant to Federal Rule of Bankruptcy Procedure 7056 and Federal Rule of Civil Procedure 56 on the complaint filed by the Trustee, seeking a determination of the priority of liens in and claims to the proceeds of the sale of the Debtors' real property. Specifically, the Trustee requests a finding that the Debtors' homestead exemption is subordinate to both the lien of the United States Internal Revenue Service (the "IRS") and the administrative and closing expenses incurred in liquidating the real property.¹ For the reasons set forth herein, the Court finds as a matter of law that the IRS's lien takes priority over the Debtors' claim of the state law exemption pursuant to 11 U.S.C. § 522(c)(2)(B). Further, the Court finds that the distribution mechanism required by 11 U.S.C. § 724(b) subordinates the tax lien to priority claims under 11 U.S.C. §§ 507(a)(1)-(7). Thus, the Court holds that both the IRS's lien and the priority claims take precedence over the Debtors' homestead exemption and finds that there will be no funds available from the proceeds to pay the exemption. Accordingly, the Court grants the Trustee's motion for summary judgment. The Trustee may take immediate possession of the Debtors' real property without payment to the Debtors for their exemption.

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(K).

II. UNDISPUTED FACTS AND BACKGROUND

The following facts are undisputed or, as discussed infra, have been deemed admitted pursuant to Local Bankruptcy Rule 7056-2B. At the time of the filing of their petition, the Debtors were joint owners of real estate located at 336 South Cornell Avenue, Villa Park, Illinois (the "Property"), which they occupy as their primary residence. (7056-1 statement ¶ 7; Trustee's Decl. ¶ 2; Compl. ¶ 7; Debtors' and IRS's Answers ¶ 7.) The Property is encumbered by two consensual mortgage liens in favor of Countrywide Home Loans ("Countrywide") in the amounts of $224,971.21 and $25,000.00. (Summ. J. Motion ¶ 9; 7056-1 statement ¶ 8; Trustee's Decl. ¶ 3.) A non-consensual tax lien filed by the IRS in the amount of $114,842.07 also encumbers the Property. (Summ. J. Motion ¶ 10; 7056-1 statement ¶ 9; Trustee's Decl. ¶ 4; Compl. ¶ 9 and Ex. H.)

On February 11, 2005, the Debtors filed a voluntary joint petition for relief under Chapter 7 of the Bankruptcy Code. Subsequently, on June 9, 2005, the IRS timely filed its secured claim in the amount of $114,842.07, as well as an unsecured priority claim for $167,426.40. (Compl.Ex.H.) The Debtors valued the Property at $320,235.00 on Schedule A. Schedule D reflects the three liens to which the Property is subject: the first and second mortgage liens and the IRS's tax lien.² On Schedule C, the Debtors claimed a $15,000.00 homestead exemption pursuant to 735 ILCS 5/12-901.

Shortly after the bankruptcy filing, the Trustee was appointed to administer the estate and continues to serve as the duly appointed trustee. (7056-1 statement ¶ 6; Trustee's Decl. ¶ 1.) Upon a review of the Debtors' books and records, the Trustee determined that there is "significant equity" in the Property. (Trustee's Decl. ¶ 2.) On April 22, 2005, the Court authorized the Trustee to retain a real estate broker to sell the Property, with commission to be paid to the broker at the rate of 5% on the final sale price of the Property. (Summ. J. Motion ¶ 7; Trustee's Decl. ¶ 5; Compl. Ex. F.) Subsequently, on September 2, 2005, the Court granted the Trustee's application to sell the Property pursuant to 11 U.S.C. §§ 363(b) and (f). (Compl.Ex.E.) Specifically, the Court authorized the Trustee to accept an offer of $380,000.00, subject to the terms and conditions of the real estate contract. (Summ. J. Motion ¶ 8; 7056-1 statement ¶ 12; Trustee's Decl. ¶ 6; Compl. Ex. E ¶ 2.)

On August 22, 2005, the Trustee filed a complaint seeking a determination of the priority of liens in and claims to the proceeds of the sale of the Property. The Trustee contends that the Debtors' homestead exemption should be limited to those funds that remain after the payment of the consensual liens, administrative expenses, closing costs, and the IRS tax lien. Specifically, the Trustee argues that, pursuant to § 522(c)(2)(B), the Debtors may not be paid their homestead exemption until the IRS's tax lien has been satisfied in full. The Trustee further contends that, pursuant to § 724(b), all administrative expenses incurred in connection with liquidation of the Property must be paid before the tax lien can be satisfied.

On October 3, 2005, the Trustee filed the instant motion for summary judgment. He asserts that, after deductions are made from the sale price of the Property to pay the consensual liens, the real estate broker fees, and other usual and customary closing costs, the net funds will be insufficient to satisfy the IRS lien in full, and, accordingly, there will be no funds available to pay the Debtors' claimed exemption. The Trustee seeks an order permitting him to take immediate possession of the Property, without payment of any funds to the Debtors.

In response, the IRS agrees that its lien must be satisfied before any claimed homestead exemption is paid to the Debtors. The IRS requests that the Court enter summary judgment in favor of the Trustee, specifically finding that the tax lien has priority over the Debtors' homestead exemption.

The Debtors admit that their claimed exemption should be limited to those funds that remain after payment to the IRS. However, they contend that the exemption takes second position after the tax lien and should be paid before the realtor fees, closing costs, or any other administrative expenses are satisfied. The Debtors also allege that the Trustee's actions in trying to sell the Property were negligent and caused severe damage to the estate.

III. APPLICABLE STANDARDS

In order to prevail on a motion for summary judgment, the movant must meet the statutory criteria set forth in Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056. Rule 56(c) reads in part:

The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

Fed.R.Civ.P. 56(c). See also Estate of Allen v. City of Rockford, 349 F.3d 1015, 1019 (7th Cir.2003).

The primary purpose of granting a summary judgment motion is to avoid unnecessary trials when there is no genuine issue of material fact in dispute. Trautvetter v. Quick, 916 F.2d 1140, 1147 (7th Cir.1990); Farries v. Stanadyne/Chi. Div., 832 F.2d 374, 378 (7th Cir.1987) (quoting Wainwright Bank & Trust Co. v. Railroadmens Fed. Savs. & Loan Ass'n of Indianapolis, 806 F.2d 146, 149 (7th Cir.1986)). Where the material facts are not in dispute, the sole issue is whether the moving party is entitled to a judgment as a matter of law. ANR Advance Transp. Co. v. Int'l Bhd. of Teamsters, Local 710, 153 F.3d 774, 777 (7th Cir.1998). On a motion for summary judgment, "[t]he court has one task and one task only: to decide, based on the evidence of record, whether there is any material dispute of fact that requires a trial." Payne v. Pauley, 337 F.3d 767, 770 (7th Cir.2003) (internal quotation omitted).

In 1986, the United States Supreme Court decided a trilogy of cases which encourages the use of summary judgment as a means to dispose of factually unsupported claims. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The burden is on the moving party to show that no genuine issue of material fact is in dispute. Anderson, 477 U.S. at 248, 106 S.Ct. 2505; Celotex, 477 U.S. at 322, 106 S.Ct. 2548; Matsushita, 475 U.S. at 585-86, 106 S.Ct. 1348.

All reasonable inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Parkins v. Civil Constructors of Ill., Inc., 163 F.3d 1027, 1032 (7th Cir.1998). The existence of a material factual dispute is sufficient only if the disputed fact is determinative of the outcome under applicable law. Anderson, 477 U.S. at 248, 106 S.Ct. 2505; Frey v. Fraser Yachts, 29 F.3d 1153, 1156 (7th Cir.1994). "[S]ummary judgment is not an appropriate occasion for weighing the evidence; rather, the inquiry is limited to determining if there is a genuine issue for trial." Lohorn v. Michal, 913 F.2d 327, 331 (7th Cir.1990). The Seventh Circuit has noted that trial courts must remain sensitive to fact issues where they are actually demonstrated to warrant denial of summary judgment. Opp v. Wheaton Van Lines, Inc., 231 F.3d 1060, 1065-66 (7th Cir.2000); Szymanski v. Rite-Way Lawn...