In re Petruccelli

• Decision Date: 14 March 1990
• Docket Number: Bankruptcy No. 85-04790-B13.
• Citation: 113 BR 5
• Parties: In re John PETRUCCELLI, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of California

113 B.R. 5 (1990)

In re John PETRUCCELLI, Debtor.

Bankruptcy No. 85-04790-B13.

United States Bankruptcy Court, S.D. California.

March 14, 1990.

Radmila A. Fulton, Law Offices of Radmila A. Fulton, San Diego, Cal., for debtor.

Karen Sommers, Sp. Asst. U.S. Atty., San Diego, Cal., for I.R.S.

Harry Heid, San Diego, Cal., Chapter 13 Trustee.

ORDER ON MOTION FOR SANCTIONS UNDER 11 U.S.C. § 362(h)

PETER W. BOWIE, Bankruptcy Judge.

On September 26, 1985 debtor John Petruccelli filed his petition for relief under Chapter 13. His principal debts were tax obligations, the bulk of which were owed to the IRS for income taxes from 1974-1984, and for certain withholding taxes for 1980-1985. Debtor is a practicing attorney. The precipitating events for his bankruptcy filing involved seizures by the State of California of debtor's business and trust accounts, foreclosure on his home, and the freezing of certain assets by the IRS.

Debtor proposed his plan on October 11, 1985 to pay $1,800 per month to the trustee and a resulting dividend to unsecured creditors of 50%. The plan was confirmed by order filed January 10, 1986. Debtor thereafter substantially performed under the plan.

On April 27, 1989 debtor filed a pleading styled "Ex Parte Motion for Order to Show Cause Why the Internal Revenue Service Should be Held (sic) in Contempt and for Release of Post-Petition Levy and for Sanctions Pursuant to 11 U.S.C. Section 362(H)". Debtor has alleged that the IRS caused a levy to be made on debtor's business checking account on April 24, 1989, which debtor contends is an act in violation of 11 U.S.C. § 362.

This Court declined to consider the motion ex parte, but set it for hearing the next day. At that hearing the Court directed that the levy would stand until further order, but the bank was to disburse no funds in the interim. The Court set an evidentiary hearing for June 29, 1989, to take evidence on whether the funds in the account levied upon were "property of the estate."

At the evidentiary hearing several facts were established. The taxes sought by the IRS levy were post-petition obligations for 1986 and 1987. The funds levied upon were account funds earned post-petition by the debtor. Those account funds were also the source for debtor's payments to the Chapter 13 trustee. Indeed, the IRS agreed to release $1,800 from its levy so debtor could make his plan payment before the hearing. Following the hearing and supplemental briefing, this Court took the matter under submission. This Court has jurisdiction under 28 U.S.C. § 1334 and General Order 312-D of the United States District Court for the Southern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (O).

Section 362(a) of Title 11, United States Code, provides in pertinent part:

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title . . . operates as a stay, applicable to all entities of —

. . . . .

(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;

(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;. . . .

As courts have regularly recognized, the automatic stay operates in three specific ways. It "bars certain actions against the (1) debtor, (2) property of the debtor and (3) property of the estate." In re Johnson, 51 B.R. 439, 442 (Bankr.E.D.Pa.1985), citing In re Casgul of Nevada, Inc., 22 B.R. 65, 66 (9th Cir. BAP 1982). Actions against the debtor are barred if the actions could have been brought before the petition was filed "or if those efforts are attempts to collect on a prepetition debt." In re Johnson, 51 B.R. at 442. That portion of § 362 is not applicable to the instant proceedings because it is established that Petruccelli's debt is for taxes accruing post-petition.

The automatic stay operates similarly with respect to acts against the property of the debtor. The automatic stay applies only if the acts are to collect on prepetition debt. 11 U.S.C. § 362(a)(5); In re Johnson, supra.

The third area of operation of the automatic stay is the protection it affords to property of the estate. The protection here is much broader and prohibits acts against property of the estate regardless of "whether the debt arose before or after the filing of the petition." In re Johnson, 51 B.R. at 442. Since § 362 does not bar actions against the debtor or property of the debtor for post-petition claims, debtor here must establish that the funds in the bank account levied upon by the IRS were property of the estate before a violation of § 362 could possibly be found.

Of course, debtor does contend that the funds in the account are property of the estate. In support of his position, he cites 11 U.S.C. § 1306(a)(2). That section provides:

(a) Property of the estate includes, in addition to the property specified in section 541 of this title —

. . . . .

(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.

There is no debate about the proposition that upon the filing of a petition under Chapter 13 an estate is created. Section 1306 provides the conceptual definition of the property which comprises that estate. Post-petition earnings are clearly and expressly included within that definition. In re Adams, 12 B.R. 540, 541 (Bankr.D.Utah 1981); In re Johnson, 36 B.R. 958, 959 (Bankr.D.Utah 1983); In re Denn, 37 B.R. 33, 35 (Bankr.D.Minn.1983); In re Nash, 765 F.2d 1410, 1413-1414 (9th Cir.1985).

Debtor, however, seeks more from § 1306(a)(2). He argues not only that post-petition earnings are property of the estate, but also that they retain that character until "the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first." 11 U.S.C. § 1306(a)(2).

The IRS responds to debtor's argument by citing 11 U.S.C. § 1327(b), which describes the effect of confirmation of a Chapter 13 plan:

(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.

The IRS argues that by operation of § 1327(b), property which was property of the estate prior to confirmation vests in the debtor upon confirmation and is thus no longer property of the estate. Since the monies in debtor's account are no longer property of the estate post-confirmation, the IRS argues that the automatic stay does not bar efforts of a post-petition creditor to collect from debtor's property.

The central issue for the Court is how the terms of 11 U.S.C. § 1306(a) can or should be reconciled with the provisions of 11 U.S.C. § 1327(b). This is an issue which has troubled a number of courts in recent years. In re Littke, 105 B.R. 905, 908 (Bankr.N.D.Ind. 1989); Laughlin v. U.S.I.R.S., 98 B.R. 494, 495 (D.Neb.1989); In re Walker; 84 B.R. 888 (Bankr.D.D.C.1988); In re Aneiro, 72 B.R. 424, 429 (Bankr.S.D. Cal.1987); In re Clarke, 71 B.R. 747, 749 (Bankr.E.D.Pa.1987); In re Root, 61 B.R. 984, 985 (Bankr.D.Colo. 1986); In re Mason, 45 B.R. 498, 500 (Bankr.D.Ore.1984), aff'd, 51 B.R. 548, 550 (D.Ore 1985); In re Denn, 37 B.R. 33, 35 (Bankr.D.Minn. 1983); In re Johnson, 36 B.R. 958, 959 (Bankr.D.Utah 1983); In re Adams, 12 B.R. 540, 541 (Bankr.D.Utah 1981). As reflected in the pleadings of the parties, those courts which have considered the issue have reached differing conclusions. In re Littke, 105 B.R. 905, 908 (Bankr.N.D.Ind.1989); In re Clarke, 71 B.R. 747, 750 (Bankr.E.D.Pa. 1987).

The problem was early recognized by the court in In re Adams, 12 B.R. 540 (Bankr. D.Utah 1981). In that case the court was concerned with ascertaining what property, if any, was available in a Chapter 13 case post-confirmation which a former spouse could pursue to satisfy a nondischargeable debt for past alimony and child support. The court does not mention whether the obligation arose pre-petition or later, or whether any such obligation was treated under the confirmed plan.

The Adams court recognized that the filing of the Chapter 13 petition caused the creation of an estate the composition of which is defined by 11 U.S.C. § 1306. The court stated:

The expansive definition of Section 1306 defines "property of the estate" as it exists upon the filing of a petition. . . . Even though post-petition wages and other property normally remain in the possession and control of the debtor prior to confirmation under Section 1306(b), that property remains "property of the estate" under Section 1306(a). . . .

Circumstances change, however, upon the confirmation of a plan. . . . Under Section 1327(b), unless the plan or order of confirmation provides otherwise, "the confirmation of a plan vests all of the property of the estate in the debtor." . . .

Under these provisions, the expansive definition of "property of the estate" found in Section 1306 is pruned dramatically at confirmation. Any property which has not been designated in the plan or order of confirmation as necessary for the execution of the plan revests in the debtor, under Section 1327(b), to become "property of the debtor."

12 B.R. at 541-542.

The Adams court was candid in expressing its interest in balancing the effect of § 1327(b) with the presumed interests of the debtor. The court wrote that after considering both, "an asset line can be drawn, subsequent to confirmation, between `property of the estate' and `property of...