In re Montgomery

• Decision Date: 14 January 2015
• Docket Number: Case No. 10–10866
• Parties: In re: Shatonia Yvette Montgomery, Debtor.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Tennessee

525 B.R. 682

In re: Shatonia Yvette Montgomery, Debtor.

Case No. 10–10866

United States Bankruptcy Court, W.D. Tennessee, Eastern Division.

Signed January 14, 2015

James E. Bailey III, attorney for Chapter 13 Trustee

Ari D. Kunofsky, attorney for Internal Revenue Service

C. Jerome Teel, Jr., attorney for Debtor

MEMORANDUM OPINION RE: STANDING CHAPTER 13 TRUSTEE'S MOTION TO QUASH IRS LEVY

Jimmy L. Croom, UNITED STATES BANKRUPTCY JUDGE

This proceeding is before the Court on the Standing Chapter 13 Trustee's motion to quash a levy issued by the Internal Revenue Service (“IRS”) against a creditor in several bankruptcy cases in the Western District of Tennessee, Eastern Division. The Standing Chapter 13 Trustee (“Trustee”) alleges that the IRS levy violates the automatic stay under 11 U.S.C. § 362(a), imposes an unacceptable burden on the Trustee's office, and could imperil the debtor's fresh financial start.¹ For its part, the IRS argues that the levy does not violate the automatic stay. The Court conducted a hearing on the Trustee's motion to quash the levy and the IRS's response thereto on November 20, 2014.

For the reasons that follow, the Court concludes that the IRS levy does indeed violate the provisions of the automatic stay of 11 U.S.C. § 362. As such, the Court will grant the Trustee's motion to quash the levy, but will do so without legal prejudice to the IRS subsequently filing a motion under 11 U.S.C. § 362(d)(1) and Federal Rule of Bankruptcy Procedure 4001(a) seeking relief from the automatic stay. After notice and a hearing, and for cause shown, the Court shall grant relief from the stay.

STATUTORY AUTHORITY AND JURISDICTION

This proceeding arises in a case referred to this Court by the Standing Order of Reference, Misc. Order No. 84–30, previously entered by the United States District Court for the Western District of Tennessee, Western and Eastern Divisions. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (G), and (O). This Court has the statutory authority and jurisdiction over core proceedings pursuant to 28 U.S.C. §§ 157(b)(1) and 1334 to hear and enter a final order in this matter subject to traditional appeal rights. This memorandum opinion shall serve as the Court's findings of facts and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

FACTS

On March 28, 2014, the IRS sent a Notice of Levy on Wages, Salary, or Other Income (“Notice of Levy”) to the Trustee seeking to collect all disbursements to which a West Tennessee business entity, Highway 64 Car and Truck Sales (“Highway 64”), would be entitled, as a creditor, in all pending Chapter 13 cases in this judicial district. At the time of the levy, Highway 64 was receiving payments as a secured creditor from the Trustee in a number of cases in the Western District of Tennessee, Eastern Division. In its levy, the IRS indicated that Highway 64 owed back taxes to the federal government and the IRS was entitled to collect all amounts necessary to satisfy Highway 64's overdue tax debt. The levy did not identify any particular cases in which it believed Highway 64 was a creditor. That burden fell to the Trustee's office. The IRS levy left to the Trustee and his staff the task of:

(i) identifying whether Highway 64 was a creditor in any pending case; (ii) determining whether Highway 64 had filed a claim in any pending case; (iii) determining whether Highway 64 [had] already been paid in full in any such case; and (iv) determining whether any or sufficient funds were on hand in any such case to make a payment to Highway 64.

(Tr. Reply in Support of Mot. to Quash, ECF No. 110 at 1.)

On its own initiative, the Trustee's office determined that, on the date the levy was issued, Highway 64 was a creditor in twelve Chapter 13 bankruptcy cases with confirmed plans in the Western District of Tennessee, Eastern Division. In nine of the twelve cases, the Trustee asserts Highway 64 was not entitled to a disbursement because it had either failed to file a proof of claim or its claim had already been paid in full. In the three other cases, the undispersed amounts held by the Trustee at the time the Notice of Levy was served were as follows:

Debtor's Name	Case No.	Ch. 13 Tr.'s Balance on Hand as of 3/28	Amount Received Between 3/28 and 4/14	Amount Highway 64 Would Have Received if Disbursement was on 3/28	Amount Disbursed to Highway 64 on 4/14
Keno Palmer	13–11389	$58.93	$123.00	$0.00	$63.00
Torayo Brown	11–12607	$163.98	$340.00	$0.00	$43.00
Toneka Allen	11–12927	$349.59	$176.00	$235.00	$235.00
Totals	$572.50	$639.00	$235.00

Debtor's Case No. Ch. 13 Amount Amount Highway Amount Name Tr.'s Received 64 Would Have Disbursed Balance Between Received if to on Hand 3/28 and Disbursement Highway as of 4/14 was on 3/28 64 on 3/28 4/14Keno 13“11389 $58.93 $123.00 $0.00 $63.00 PalmerTorayo 11“12607 $163.98 $340.00 $0.00 $43.00 BrownToneka 11“12927 $349.59 $176.00 $235.00 $235.00 Allen Totals $572.50 $639.00 $235.00 $341.00

(Tr. Reply, ECF No. 110 at 3.)

As of March 28, 2014, the Trustee held a total of $572.50 attributable to the three remaining Chapter 13 cases. Because 11 U.S.C. § 1326 statutorily prohibits a Chapter 13 Trustee from making a distribution to any claimant in a particular class until there are enough funds to pay all claimants, only the $235.00 monthly payment attributable to Chapter 13 case number 11–12927, In re Toneka Allen, was subject to distribution at the time the IRS issued the levy. Based on conversations with the United States Attorney's office, the Trustee believed that the levy would probably be withdrawn. As a result, on April 14, 2014, the Trustee disbursed the $235.00 in Toneka Allen's case to Highway 64 pursuant to the terms of the confirmed plan and 11 U.S.C. § 1326.

The debtor in Chapter 13 case number 13–11389, Keno Palmer, voluntarily dismissed his case on October 3, 2014. See 11 U.S.C. § 1307(c). The Trustee made the final payment on Highway 64's claim in Toneka Allen's case after the levy was issued. According to the Trustee, there is now only one pending case in which Highway 64 is a creditor, Chapter 13 case number 11–12607, In re Torayo Brown. In that case, Highway 64 filed a proof of claim for $1,775.45 on March 15, 2012. As of the hearing in this matter, Torayo Brown had paid $1,016.00 of the principal on Highway 64's claim, and the Trustee had approximately $75.00 on hand earmarked for payment to Highway 64. The confirmed plan in Torayo Brown's case provides that Highway 64 was to receive additional payments of $54.00 per month until the remaining balance of $684.45 was fully satisfied. However, Torayo Brown has not made a plan payment since September 2014 so any further recovery seems increasingly unlikely. The Trustee has delayed moving for a case dismissal of Torayo Brown's case in order to maintain the status quo pending resolution of the present matter.

The Trustee filed a motion to quash the IRS levy on June 26, 2014. The Trustee challenges the levy on three grounds. First, the Trustee asserts the levy is an attempt to “obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate” in violation of the automatic stay under 11 U.S.C. § 362(a)(3). Second, the Trustee “believes that honoring the IRS levy against Highway 64 will create an undue hardship and cause irreparable damage to the debtor[s], as the creditor will not give credit for Trustee payments made.” (Tr. Mot. to Quash, ECF No. 84 at 2, ¶ 5.)

In support of the levy, the IRS argues that its actions do not violate the 11 U.S.C. § 362(d) automatic stay because the levy does not deplete the estate or attempt to control property of the estate. Rather, the levy merely seeks to intercept plan payments that are payable to Highway 64 as a creditor of various debtors in the Western District of Tennessee, Eastern Division: “A federal levy allows the United States to step into the taxpayer/creditor's shoes, and it only acquires whatever rights the taxpayer/creditor (i.e., Highway [64] ) possesses.” (IRS Resp. to Tr. Mot. to Quash , ECF No. 94 at 2.) Furthermore, the IRS assures the Trustee that compliance with the levy will discharge the debtors' obligations to Highway 64 pursuant to 26 U.S.C. § 6332(e).²

ANALYSIS

I. Undisbursed Funds Held by the Chapter 13 Trustee are Property of the Estate Protected by 11 U.S.C. § 362(a)(3).

The starting point of all statutory interpretation is the language of the statute itself. Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 1030, 157 L.Ed.2d 1024 (2004). In United States v. Ron Pair Enterprises, Inc., the Supreme Court provided specific guidance for interpreting the Bankruptcy Code: “The plain meaning of legislation should be conclusive, except in the rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.” 489 U.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989) (citation omitted). When “the statute's language is plain, the sole function of the courts is to enforce it according to its terms.” Id. at 241, 109 S.Ct. at 1030 (internal citation omitted).

Under 11 U.S.C. § 362(a), filing a bankruptcy petition “operates as a stay, applicable to all entities,³ of”:

(1) the commencement or continuation ... of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

...

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.

11 U.S.C. § 362(a)(1) and (3). “The automatic stay of § 362(a) applies by its terms not only to actions against the debtor, but also to actions seeking to obtain property of the bankruptcy estate.” Amedisys, Inc. v. Natl Century Fin. Enters., Inc. (In re Nat'l Century Fin....