In re White

• Decision Date: 23 April 2007
• Docket Number: No. 06-1462.,06-1462.
• Citation: 487 F.3d 199
• Parties: In re Charles A. WHITE, Jr.; Anita D. White, Debtors. Internal Revenue Service, Creditor-Appellee, v. Charles A. White, Jr.; Anita D. White, Debtors-Appellants, and John F. Logan, Chapter 13 Trustee, Trustee.
• Court: U.S. Court of Appeals — Fourth Circuit

487 F.3d 199 In re Charles A. WHITE, Jr.; Anita D. White, Debtors.

[487 F.3d 200]

Internal Revenue Service, Creditor-Appellee,
v.
Charles A. White, Jr.; Anita D. White, Debtors-Appellants, and
John F. Logan, Chapter 13 Trustee, Trustee. No. 06-1462. United States Court of Appeals, Fourth Circuit. Argued: March 15, 2007. Decided: April 23, 2007. As Amended June 7, 2007.

[487 F.3d 201]

ARGUED: Joseph A. Bledsoe, III, Raleigh, North Carolina, for Appellants. Karen Grace Gregory, United States Department of Justice, Tax Division, Washington, DC, for Appellee. ON BRIEF: John T. Orcutt, Raleigh, North Carolina, for Appellants. George E.B. Holding, United States Attorney, Office of the United States Attorney, Raleigh, North Carolina; Eileen J. O'Connor, Assistant Attorney General, Robert W. Metzler, United States Department of Justice, Tax Division, Washington, DC, for Appellee.

Before WILLIAMS, MICHAEL, and SHEDD, Circuit Judges.

Affirmed by published opinion. Judge WILLIAMS wrote the opinion, in which Judge MICHAEL and Judge SHEDD joined.

OPINION

WILLIAMS, Circuit Judge.

Charles A. White and Anita D. White ("the Whites") appeal from the district court's reversal of the bankruptcy court's order granting their bankruptcy petition and confirming their plan of reorganization under Chapter 13 of the Bankruptcy Code. As part of their plan of reorganization, the Whites proposed to satisfy a secured claim held by the Internal Revenue Service (IRS) by surrendering part of the property securing the claim to the IRS and by paying the remaining secured value through the plan. The district court agreed with the bankruptcy court that 11 U.S.C.A. § 1325 (West 2004 & Supp. 2006)—the Code provision governing the confirmation of a payment plan under Chapter 13—in some circumstances permits a Chapter 13 debtor to partially surrender the property securing a claim. Nevertheless, the district court reversed the bankruptcy court's order and denied confirmation of the plan, concluding that the Whites' proposal to surrender property exempted from administrative levy by the IRS did not constitute a "surrender" under § 1325(a)(5)(C) because the Whites would retain the "surrendered" property.

We affirm the district court. The Whites' proposal to surrender personal property that the IRS cannot levy on and cannot otherwise collect without resort to litigation does not constitute a "surrender" under 11 U.S.C.A. § 1325(a)(5)(C). We therefore leave for another day the question of whether § 1325(a)(5) permits a plan to be confirmed when a Chapter 13 debtor surrenders only part of the property securing a claim.

I. A.

The facts of this case are undisputed. The Whites failed to pay fully their federal income taxes for the tax years 1994-2000 and 2002-2003. On October 30, 2003, the IRS filed a notice of tax lien in Wake

487 F.3d 202

County, North Carolina, with respect to the tax deficiencies for 1994-1996, perfecting a security interest for $7,006 in all of the Whites' property.

On January 13, 2004, the Whites filed a Chapter 13 bankruptcy petition in the U.S. Bankruptcy Court for the Eastern District of North Carolina. On schedules attached to the petition, the Whites listed the IRS as a creditor holding an unsecured priority claim of $1,203 and an unsecured general claim of $30,648. They did not, however, include the IRS on the schedule of secured creditors.

The IRS filed a proof of claim on April 30, 2004, in which it asserted a claim of $7,006 secured by certain of the Whites' property. Shortly thereafter, on June 8, 2004, the Chapter 13 trustee filed a motion to dismiss the Whites' bankruptcy case, contending that "[the Whites'] plan as filed is not feasible and, therefore, will not meet the requirements of 11 U.S.C. § 1325(a)(1). The Chapter 13 Plan is not feasible in that it fails to pay secured claims in full and does not provide dividends to priority and general unsecured creditors." (J.A. at 11.)¹

B.

To qualify for confirmation under Chapter 13, the Whites' plan must satisfy the requirements of § 1325(a) of the Bankruptcy Code.

The Whites' treatment of the IRS's secured claim, in particular, is governed by subsection (a)(5).² Under this provision, a plan's proposed treatment of secured claims will be confirmed if (1) the secured creditor accepts the plan, see 11 U.S.C.A. § 1325(a)(5)(A); (2) the debtor invokes the so-called "cram down"³ power, see § 1325(a)(5)(B); or (3) the debtor "surrenders"

487 F.3d 203

to the creditor the property securing the claim, see § 1325(a)(5)(C).

On June 14, 2004, the Whites sent a letter to the IRS requesting that the IRS amend its proof of claim because the Whites had decided to surrender part of property securing the IRS's $7,006 claim. The letter stated that the Whites had decided to surrender their apparel; jewelry; certain of their household goods, including their stove and refrigerator; and their 1995 Plymouth Voyager minivan—property totaling $4,533 in value. The Whites intended to retain the remaining $2,473 in property securing the IRS's tax lien, including a 1995 Chevrolet Silverado truck and two IRA accounts. (J.A. at 12.) In the letter, the Whites indicated that the value of the surrendered property should be added to the IRS's unsecured general claim and subtracted from the IRS's secured claim, reducing the secured claim to $2,473. In other words, the Whites proposed a plan that attempts to invoke both the "cram down" and "surrender" options under § 1325(a)(5).

The IRS rejected the Whites' proposed amendment to its secured claim and instead, on June 21, 2004, filed an amended proof of claim reasserting the secured $7,006 claim and asserting an unsecured priority claim of $3,896 and a general unsecured claim of $19,478.

C.

On September 24, 2004, the bankruptcy court denied the trustee's motion to dismiss the Whites' bankruptcy case. In denying the trustee's motion to dismiss, the court reasoned that 11 U.S.C.A. § 1325(a) did "not preclude [the Whites] from surrendering part of the IRS's secured claim, and treating the remaining portion of the claim as secured to the value of the retained collateral," though the court did note that in some circumstances it might be unfair to a secured creditor to allow a partial surrender of collateral. (J.A. at 21.)

On October 4, 2004, the trustee filed a motion to confirm the Whites' amended plan. The IRS then objected to confirmation of the plan on the grounds that (1) by proposing bifurcation of the IRS's secured claim, the plan failed to provide for full payment of the claim, in violation of 11 U.S.C.A. § 1325(a); (2) the plan was not feasible because the Whites proposed to surrender personal property, including their clothing and household goods, that was necessary for their continued generation of income and thus for their compliance with the plan; (3) the plan was proposed in bad faith because the Whites never actually intended to turn over the property to the IRS; and (4) the Whites were prohibited by 26 U.S.C. §§ 6311 and 6316 from paying their federal tax liabilities with personal property. The IRS also argued that it would be without any means of forcing the Whites to turn over the collateral securing its claim because the IRS is prohibited by § 6334 of the Internal Revenue Code (IRC) from levying on the "surrendered" personal property.

On December 9, 2004, the bankruptcy court denied the IRS's objection to the confirmation of the plan. The court affirmed its earlier ruling that partial surrender of the property securing a claim is permissible under § 1325(a)(5), but the court also went a step further and concluded that because the IRS asserted that it could not convert its tax lien on the secured collateral into payment because of the property's exemption from administrative levy, the IRS's claim was "not a secured claim, but . . . an unsecured claim." (J.A. at 47.)

D.

The IRS appealed the bankruptcy court's order to the district court, arguing

487 F.3d 204

that the bankruptcy court erred (1) in ruling that the IRS's claim for $7,006 was unsecured and (2) in holding that partial surrender of property in partial satisfaction of a secured claim is permitted under § 1325(a)(5). On March 6, 2006, the district court reversed the bankruptcy court's order, holding first that the IRS's $7,006 claim was not rendered unsecured by virtue of the IRS's inability to convert the lien into payment. United States v. White, 340 B.R. 761, 765 (E.D.N.C.2006). The court stated that "the IRS's inability to levy on exempt property does not destroy the lien, or make the IRS's claim unsecured. . . . This is because a federal tax lien maintains value independent of the Government's ability to proceed against the property by administrative levy, given the IRS's `considerable arsenal of collection tools.'" Id. at 764. Accordingly, the court held that the IRS's claim "remains secured even where the IRS is unable to immediately seize property secured by a federal tax lien." Id. at 767.

The district court also reversed the bankruptcy court's ruling permitting the Whites' proposed surrender of exempted personal property to the IRS. While the court agreed with the bankruptcy court...