IN RE MARINE ENERGY SYSTEMS CORP.
| Decision Date | 31 March 2010 |
| Docket Number | Adversary No. 08-80017-JW.,Bankruptcy No. 97-1929-JW.,C/A No. 2:09-1367-MBS. |
| Parties | In re MARINE ENERGY SYSTEMS CORPORATION, A South Carolina Corporation, Debtor. William J. Gilliam, Appellant, v. W. Ryan Hovis, Trustee, Internal Revenue Service, South Carolina Department of Revenue, and Gilliam Exempt Family Trust, Appellees. |
| Court | U.S. District Court — District of South Carolina |
Christine A. Williams, Wyatt B. Durrette, Jr., Durrette Bradshaw, Richmond, VA, Morris Dawes Cooke, Jr., Barnwell Whaley Patterson and Helms, John B. Kern, Charleston, SC, John Douglas Barnett, US Attorneys Office, Milton G. Kimpson, SC Department of Revenue Office of General Counsel for Litigation, Columbia, SC, for Appellant.
Appellant William J. Gilliam, individually, filed for protection under Chapter 11 of the Bankruptcy Code on July 8, 1996. In November 1997 Appellant attempted to carry back certain net operating losses (NOLs) on an amended 1996 personal tax return in order to eliminate his 1993 tax liability. The amended tax return was disallowed by the Internal Revenue Service (IRS), as was a second amended return. The case was converted to a Chapter 7 liquidation on January 28, 1998. Upon conversion to Chapter 7, the trustee for Appellant's Chapter 7 bankruptcy case declined to carry back the NOLs, determining instead that the losses constituted a short term capital loss (nonbusiness bad debt) that should be carried forward to subsequent years. The IRS and South Carolina Department of Revenue (SCDOR) have filed proofs of claim against Appellant. The IRS claim against Appellant is for unpaid income taxes for 1993 and 1995, a trust fund recovery penalty for 1995, and pre-petition employment tax liabilities for 1994 through 1995. The IRS proof of claim is in the amount of $2,622,213.39.
Appellant was president and shareholder of Debtor Marine Energy Systems Corporation (MESC). MESC filed for protection under Chapter 11 of the Bankruptcy Code on March 4, 1997. The MESC action was converted to Chapter 7 on November 30, 1998. W. Ryan Hovis was appointed to serve as trustee. On March 14, 2004, the bankruptcy judge approved a settlement of Appellant and MESC's claims against an attorney and his law firm for the sum of $2.5 million. The bankruptcy judge determined that the Chapter 7 trustee would retain $100,000 of the settlement proceeds for the benefit of MESC's estate, if MESC was able to revive and fund a Chapter 11 plan. If the Chapter 11 plan was not funded, the Chapter 7 trustee was to disburse the $100,000 to Appellant. Ultimately, the Chapter 11 plan was not funded. The IRS and SCDOR served the Chapter 7 trustee with levies against the $100,000 for the tax debt they contend is owed by Appellant.
In May 2007, the IRS mistakenly filed certificates releasing the notices of federal tax liens for tax years 1993, 1995, and 1996. The IRS corrected the error in October 2007. The record contains no evidence that the IRS released tax liens, erroneously or otherwise, for the 1997 tax year or for the trust fund recovery penalty from 1995. The tax liability for the 1997 tax year and the trust fund recovery penalty for the period ending June 30, 1995 exceeded $275,000 by May 2007.
On August 22, 2007, Appellant and an attorney, purportedly representing Gilliam Exempt Family Trust (GEFT), executed a Loan and Security Agreement and UCC-1 Financing Statement in California. A revolving promissory note attached to the Loan and Security Agreement authorized GEFT to loan Appellant up to $500,000. Appellant contends that he received over $400,000 pursuant to the Loan and Security Agreement.
On or about February 11, 2008, the Chapter 7 trustee filed an adversary proceeding in bankruptcy court to determine the relative priority between the IRS and SCDOR to the funds held by the trustee for the benefit of Appellant. By consent, the IRS and SCDOR determined that the IRS's tax liens were entitled to priority over those of SCDOR. However, Appellant asserts that GEFT holds a priority position over the tax liens asserted by the IRS by virtue of the Loan and Security Agreement filed in California in August 2007, after a number of the federal tax liens were released but before the IRS corrected its error. Upon Appellant's motion, the bankruptcy judge joined GEFT as a party by order filed June 20, 2008. GEFT filed an answer to the adversary complaint but failed to engage in discovery.
The IRS filed a motion for summary judgment in bankruptcy court on January 5, 2009. GEFT did not respond in opposition to the motion. Appellant responded to the motion and disputed that the IRS has a valid lien or a lien that is otherwise senior to that asserted by GEFT. The matter came before the Honorable John E. Waites, United States Bankruptcy Judge, for a hearing on January 29, 2009. All parties were represented at the hearing. The bankruptcy court allowed some additional briefing and took the matter under advisement. On February 25, 2009, the bankruptcy judge made an oral order ruling in favor of the IRS. The bankruptcy judge issued a final order granting the IRS's motion for summary judgment on March 24, 2009. Appellant thereafter filed a notice of appeal to this court on or about April 3, 2009. The electronic docket was transferred from the bankruptcy court to this court on May 26, 2009, and entered May 26, 2009. Appellant filed his brief on June 17, 2009. The IRS filed a brief in opposition on July 9, 2009. Appellant filed a reply brief on July 24, 2009.
In reviewing the bankruptcy judge's decision on summary judgment, the court reviews findings of fact for clear error and conclusions of law de novo. See Valley Historic Ltd. P'ship v. Bank of New York, 486 F.3d 831, 835 (4th Cir.2007) (quoting Kielisch v. Educ. Credit Mgmt. Corp., 258 F.3d 315, 319 (4th Cir.2001)). Summary judgment in bankruptcy is governed by Fed. Rule Bankr.P. 7056, which incorporates the standards of Fed.R.Civ.P. 56 into bankruptcy proceedings. United Rentals, Inc. v. Angell, 592 F.3d 525, 530 (4th Cir.2010). Thus, the court must view the facts and the reasonable inferences drawn therefrom in the light most favorable to the nonmoving party. Id. (citing EEOC v. Navy Fed. Credit Union, 424 F.3d 397, 405 (4th Cir.2005)). Summary judgment is appropriate if there is no genuine issue of material fact and the moving party is entitled to a judgment as a matter of law. Id. (quoting Cline v. Wal-Mart Stores, Inc., 144 F.3d 294, 300 (4th Cir. 1998)).
The bankruptcy judge determined that the IRS's tax liens attached to the proceeds held by the Chapter 7 trustee. The bankruptcy judge noted that under 26 U.S.C. § 6321, a lien arises in favor of the United States and against the property and rights to property, whether real or personal, of any taxpayer who is liable to pay a tax and who neglects or refuses to do so. Entry 6-24, 14. The bankruptcy judge noted that the federal tax lien arises by operation of law at the time the liability is assessed and continues until the taxpayer's liability is satisfied. Id. (citing 26 U.S.C. § 6322). The bankruptcy judge further noted that a notice of tax lien is required to establish priority of the lien as to third parties; however, notice, filing, and recording are not required for the lien to be valid and effective under §§ 6321 and 6322. Id. The bankruptcy judge determined that the IRS possessed a valid tax lien that attached to the $100,000 held by the Chapter 7 trustee for the benefit of Appellant. Accordingly, SCDOR having conceded the priority of the federal tax lien, the question before the bankruptcy court was whether the federal tax lien took priority over any lien asserted by GEFT by virtue of the $400,000 loan alleged to have been advanced Appellant by GEFT under the Loan and Security Agreement.
Appellant asserted that the IRS tax liens are invalid because the IRS failed to comply with the notice requirements of 26 U.S.C. §§ 6212 and 6303. As to § 6212, the bankruptcy judge determined that no notice was required. The bankruptcy judge noted that, although § 6212 generally requires the IRS to issue a notice of deficiency to a taxpayer before a tax deficiency can be assessed, no notice was required in this case because the unpaid tax was based upon the liability reflected in Appellant's own returns. Entry 6-24, 16 (citing 26 U.S.C. § 6211(a)); Jones v. C.I.R., 338 F.3d 463, 466 (5th Cir.2003); and Perez v. United States, 312 F.3d 191, 196 (5th Cir.2002), for the proposition that a notice of deficiency is required in those situations where the amount of tax imposed by the IRS exceeds the amount of tax shown by the taxpayer on his return). The bankruptcy judge also determined that Appellant was not entitled to receive a statutory notice of deficiency prior to the assessment of the trust fund recovery penalty against him pursuant to 26 U.S.C. § 6672. Id. ()).
With respect to § 6303, the bankruptcy judge found that evidence in the record supported a finding that statutory notices of balance due were provided on the respective assessment dates for 1993, 1995, 1997, and the trust fund recovery penalty for 1995. The bankruptcy judge determined that the IRS had provided sufficient proof of valid assessments and that notice of the assessment and demand for payment had been made. Entry 6-24, 17. The bankruptcy judge concluded that the record as a whole demonstrates that the IRS complied with the requirements of § 6303. The bankruptcy judge also concluded that the IRS was not barred...
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United States v. Allahyari, C17-668 TSZ
...884 F.2d 138, 143 (4th Cir.Page 18 1989); In re Marine Energy Sys. Corp., 2009 WL 1465352, at * 13 (Bankr. D.S.C. Mar. 24, 2009), aff'd, 430 B.R. 348 (D.S.C. 2010).4 18. Because Shaun does not qualify as a holder of a security interest, he is not entitled to the protection of 26 U.S.C. § 63......
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In re Marine Energy Sys. Corp., Case Number: 97-01929-jw
...court's findings of fact to be accurate, and affirmed the judgment in favor of the United States. Gilliam v. Hovis, 430 B.R. 348, 354 (D.S.C. 2010) (Case No. 2:09-cv-01367-MBS). No subsequent appeal was ...