In re Leavell
| Citation | 124 BR 535 |
| Decision Date | 07 March 1991 |
| Docket Number | 90-40398,Bankruptcy No. 85-40274,90-0161.,Adv. No. 90-0162 |
| Parties | In re Daniel Russell LEAVELL, Debtor. Daniel Russell LEAVELL, Plaintiff, v. UNITED STATES of America, State of Illinois, Department of Revenue, Defendants. In re William and Charmaine CHENOWETH, Debtors. William and Charmaine CHENOWETH, Plaintiffs, v. WILLIAMSON COUNTY, ILLINOIS, Bruce A. Troutman, as County Treasurer of Williamson County Illinois, Fabick Machinery Co., the United States of America, John W. Kirby, Lauderdale and Decker Insurance Agency, Ltd., a Subsidiary of Consolidated Insurance Agency, Inc., Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Southern District of Illinois |
Darrell Dunham, Carbondale, Ill., for Leavell and Chenoweth.
Robert Shaw, Mt. Vernon, Ill., for Fabick Mach.
Douglas Snoeyenbos, U.S. Atty., E. St. Louis, Ill., for U.S., Justice Dept.
Ill. Atty. Gen., for Dept. of Revenue.
These adversary proceedings present a common issue of whether federal tax liens securing nondischargeable tax debts may be avoided by Chapter 7 debtors pursuant to 11 U.S.C. § 506(d). In each instance, the debtors own real property against which federal tax liens have been filed, and the property is encumbered by a first mortgage which exceeds the value of the property alleged by the debtors. In each instance, the debtors have filed a complaint to avoid liens under § 506(d), by which they seek to avoid the tax liens as unsecured. The United States of America ("defendant") opposes avoidance of its liens, asserting that § 506(d) is not available for use by Chapter 7 debtors to avoid tax liens securing nondischargeable tax debts.
The debtors in each case have filed motions for summary judgment. The defendant responds that summary judgment for the debtors is inappropriate even if the Court finds § 506(d) to be applicable because there are factual issues concerning the value of the debtors' property and the amount of competing liens. The defendant has itself filed motions for "judgment as a matter of law" in each case, seeking dismissal of the debtors' complaints based solely on the inapplicability of § 506(d) to avoid its liens.
Debtors William and Charmaine Chenoweth filed for Chapter 7 bankruptcy relief on March 30, 1990. At the time of filing, the debtors owned real property located in Williamson County, Illinois, which was subject to a first mortgage in favor of the Peoples Bank of Marion. The debtors allege that the property has an outstanding mortgage indebtedness of approximately $65,000 and an appraised value of $55,000.
On November 6, 1989, an assessment was made against the debtors for unpaid federal income taxes for tax year 1984 in the amount of $84,213.62. Further assessments for tax years 1988 and 1985 followed on December 18, 1989, and January 8, 1990, in the amounts of $8,654.04 and $57,002.68, respectively. Notice and demand for payment was sent to the debtors. On January 18, 1990, and February 9, 1990, the defendant's tax liens were duly filed in the Williamson County recorder's office.
The remaining lien claimants named in the debtors' complaint, with the exception of Fabick Machinery Co. ("Fabick"), failed to respond, and a default judgment has been entered against them. In response to the debtors' request to admit, Fabick stipulated that it has a judgment lien against the debtors in the amount of $37,936.60, plus attorney fees, and that the debtors' property is subject to a prior mortgage which exceeds the value of the real estate. At the time of the debtors' complaint, the trustee had not abandoned the debtors' real estate as property of the estate and had evidenced no intention to do so.
Debtor Daniel Leavell filed for Chapter 11 bankruptcy relief on July 17, 1985, and, on December 12, 1985, the case was converted to one under Chapter 7. At the time of filing the debtor owned real property located in White County, Illinois, which was subject to a first mortgage in favor of the White County Bank. The debtor alleges that the property has an outstanding mortgage indebtedness of approximately $125,000 and an appraised value of $90,000.
On May 6, 1985, an assessment was made against the debtor for unpaid Form 941 taxes for the third quarter of 1984 in the amount of $15,586.18.1 Interest accrued on this assessment to the petition date of July 17, 1985, in the amount of $2,798.52. On June 17, 1985, an assessment was made for unpaid Form 941 taxes for the fourth quarter of 1984. The principal tax liability was subsequently paid but liability remains for accrued interest to the petition date in the amount of $1000.20. On June 17, 1985, an additional assessment was made for unpaid Form 941 taxes for the first quarter of 1985 in the amount of $12,549.74. Interest accrued on this assessment to the petition date in the amount of $369.25. Notice and demand for payment was sent to the debtor. On February 7, 1987, after the debtor sought bankruptcy relief and received his Chapter 7 discharge, the defendant filed its notice of federal tax liens in the White County recorder's office.
The only other defendant named in the debtor's complaint, the Illinois Department of Revenue, has elected not to oppose the relief sought by the debtor. The property that is the subject of the debtor's complaint to avoid liens was abandoned by the Chapter 7 trustee on April 26, 1990, prior to the filing of the complaint.
The defendant's argument that the debtors should not be allowed to avoid its tax liens under § 506(d) is two-pronged. The defendant first asserts that the valuation and lien avoidance provisions of § 506 are intended to facilitate the disposition of property in reorganization proceedings (Chapters 11, 12, and 13) and may not be used by Chapter 7 debtors to "strip down" secured liens to the value of the underlying collateral.2 More specifically, the defendant argues that § 506(d) lien avoidance is inappropriate to tax liens securing nondischargeable tax debts. The defendant observes that, unlike mortgage liens that attach to a specific parcel of property, tax liens attach to "all property" of the debtor, including property acquired postpetition. Since the debtors here will remain liable for their nondischargeable tax debts following discharge, the defendant asserts that avoidance of the tax liens as to the specific property alleged in the debtors' complaints cannot be justified on the basis that it will duplicate the results of a forced sale and afford the debtors a "fresh start." The defendant, accordingly, seeks denial of the lien avoidance sought by the debtors because it would benefit neither the debtors nor unsecured creditors.
A split of authority exists concerning the defendant's first argument that § 506(d) is not available to Chapter 7 debtors to avoid the unsecured portion of liens on real property. The debate centers on whether § 506(d) should be applied according to its "plain language" as allowing the avoidance of excess liens by debtors in liquidation proceedings or whether it should be read in a "holistic" context as serving merely to implement Code provisions governing disposition of property in reorganization proceedings. See In re Israel, 112 B.R. 481, 484 (Bankr.D.Conn.1990).
Section 506(a) and (d) provide for the definition and treatment of secured claims under the Code:
11 U.S.C. § 506(a), (d). Under subsection (a), a previously secured claim is bifurcated so that the claim is secured only to the extent of the value of the property which serves as collateral and the remainder of the claim, up to the amount of the original obligation, is unsecured. Subsection (d) provides that a lien securing a claim "that is not an allowed secured claim" is void, with exceptions not applicable here. Read together, § 506(a) and (d) allow for the avoidance of liens to the extent they exceed the value of the underlying security.
While nothing in § 506(d) prohibits its use by Chapter 7 debtors or limits its application to property in reorganization proceedings, courts adopting the "holistic," or minority, view hold that § 506(d) is not a stand alone avoidance provision but is, rather, an implementing provision to be used in structuring a plan of reorganization under Chapters 11, 12 and 13. See In re Dewsnup, 908 F.2d 588 (10th Cir.1990), cert. denied, ___ U.S. ___, 111 S.Ct. 949, 112 L.Ed.2d 1038; In re Lange, 120 B.R. 132 (Bankr. 9th Cir.1990). These courts cite the restrictions on lien avoidance in Chapters 11 and 13 (see 11 U.S.C. §§ 1111(b)(2), 1322(b)(2)) and assert that Congress, in providing incentives for debtors to choose reorganization rather than liquidation under the Code, could not have intended to allow debtors more in liquidation proceedings than they would receive in a reorganization. Dewsnup, 908 F.2d at 592; Lange, 120 B.R. at 135-36.3 The courts further point to the language in § 506(a) referring to "property in which the estate has an interest" as indicating that § 506(d) may not be employed to avoid liens on fully encumbered property that has been abandoned by the trustee and will not be administered by the estate. Dewsnup, 908 F.2d at 590-91; In re Maitland, 61 B.R. 130, 132-33 (Bankr.E.D.Va.1986).4
In contrast to the Dewsnup line of cases, which incorporates a policy against lien avoidance to benefit the Chapter 7 debtor, the "plain language" or majority view...
To continue reading
Request your trial