Matter of Hawkins
| Citation | 224 BR 334 |
| Decision Date | 08 September 1998 |
| Docket Number | Bankruptcy No. 97-15883. |
| Parties | Raymond A. HAWKINS and Brunilda Hawkins, Debtors. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Eastern District of Louisiana |
William A. Neilson, New Orleans, LA, R. Travis Douglas, Fort Smith, AR, for Debtor.
Stevens E. Moore, Asst. U.S. Attorney, New Orleans, LA, Claude C. Lightfoot, Jr., Metairie, LA, Chapter 7 Trustee.
REASONS FOR ORDER
Before the court is: (1) the amended motion of the Internal Revenue Service (IRS) for retroactive relief from the automatic stay (Pl. 31); and (2) the motion of Claude C. Lightfoot, Jr., Chapter 7 trustee, for contempt and for turnover of estate property. (Pl. 38). The issues to be determined are: (1) whether the trustee has standing to attack the effectiveness of an IRS levy against a third party who owed money to the debtors; (2) if so, whether the levy was effective; and (3) whether the IRS is entitled to adequate protection on any amounts seized. The court finds that the trustee has standing to attack the effectiveness of the levy, the levy was not effective, and the IRS is not entitled to adequate protection before turning over the funds seized.
The essential facts in this case are undisputed.
1. Raymond A. Hawkins and his wife, Brunilda A. Hawkins were self-employed carnival concessionaires, who resided in Kenner, Parish of Jefferson, Louisiana.
2. On April 18, 1997, the Hawkins each entered into a concession contract with the State Fair of Texas ("State Fair") to operate amusement games from September 26, 1997 through October 19, 1997.
3. The commencement date under the terms of the contracts with the State Fair did not begin before September 26, 1997. As a result, nothing was due to the Hawkins under either contract until at least September 26, 1997, or sometime thereafter, when they performed various services and earned revenues under the contracts.
4. On September 17, 1997, Revenue Officer Deborah Montreuil issued a Notice of Levy (the "levy") to the State Fair. The levy states:
This levy requires you to turn over to us this person\'s property and rights to property (such as money, credits and bank deposits) that you have or which you are already obligated to pay this person.1
5. The levy was received by the State Fair on September 22, 1997, prior to the actual commencement date of the contracts the Hawkins had with the State Fair.
6. Revenue Officer Montreuil negotiated an informal agreement with the State Fair regarding what it would turn over to the IRS upon termination of the contracts. She confirmed her conversation by sending a statement of their agreement via a fax cover sheet on September 23, 1997.2 The agreement was negotiated before the Hawkins performed any services under their contracts.
7. The debtors filed a petition under Chanter 7 of the Bankruptcy Code on October 17, 1997.
8. On October 21, 1997, R. Travis Douglas, counsel for the debtors, called Revenue Officer Montreuil and notified her of the debtors' bankruptcy petition.
9. Also on October 21, 1997, Russell B. Smith, attorney for the State Fair, sent Revenue Officer Montreuil a copy of Smith's October 21, 1997 letter to Mr. Douglas wherein Smith advised that the State Fair would hold the funds owed to the Hawkins until Smith received an order from the Bankruptcy Court telling him what to do with the funds.3
10. On or about October 22, 1997, the State Fair inadvertently mailed a check in the amount of $19,952.07 to the IRS in response to the September 17, 1997 levy.4 This check represented the net proceeds due the debtors under their contracts with the State Fair.
11. The IRS received the check on or about October 30, 1997. Revenue Officer Montreuil was not in the office, and a different revenue officer applied the funds to the tax liability for the debtors' 1985 tax year, a year in which no lien was validly filed in the U.C.C. books of Jefferson Parish.
12. On October 31, 1997, Revenue Officer Montreuil received telephone calls from Mr. Smith and an employee of State Fair stating that the $19,952.07 check was sent in error and should be returned. The IRS did not return the funds.
13. On November 3, 1997, Brenda Esser of the IRS's Special Procedures Staff reapplied the proceeds to the tax liability for the debtors' 1991 tax year. The 1991 tax year was the only year for which the IRS had a lien filed in the U.C.C. books for the Parish of Jefferson.
14. At the Section 341 meeting, the trustee stated his intent to disclaim all assets listed on the debtors' Schedule B, except the amount due the debtors from the State Fair.
15. On January 15, 1998, the State of Louisiana filed a proof of claim in this case asserting a claim for income taxes in the total amount of $16,549.90. This claim includes a secured claim of $14,974.97 by virtue of a notice of state tax lien filed in Jefferson Parish on March 12, 1996.5
16. On March 27, 1998, the IRS filed a proof of claim in the total amount of $269,629.44, representing a secured claim of $57,900 for income taxes due for 1985 and 1991, an unsecured priority claim of $5,062.05 for income taxes due for 1995, and an unsecured general claim of $206,667.39 for income taxes, interest, and penalties due for 1985, 1986, 1987, 1988, 1989, 1990, and 1991.
17. No other proofs of claim have been filed.
The IRS argues that the trustee may not attack the effectiveness of the levy. It claims that an attack on a levy is a wrongful levy action under 26 U.S.C. § 7426(a)(1), and that "it is well settled that persons against whom is assessed the tax out of which a levy has arisen may not maintain an action under 26 U.S.C. § 7426(a)(1)".6
Section 7426 of Title 26, United States Code, provides:
(a)(1) If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.7
The IRS's argument is partially correct. There is a plethora of cases holding that the taxpayer has no cause of action under Section 7426, and that the section affords the exclusive remedy for an innocent third party whose property is confiscated by the IRS to satisfy another person's tax liability.8 Section 7426 applies in situations where the IRS levies a third person for taxes owed by a taxpayer, and the third person contends that the property levied upon is not owned by the taxpayer.9
Unfortunately for the IRS, that is not the situation before the court. Merely because a taxpayer has no claim under Section 7426 does not mean that a taxpayer has no other remedies.
The District Court in Hanna Coal Co. went on to discuss the Seventh Circuit case of In re Price,11 which held that the Bankruptcy Code, not the Internal Revenue Code, governs the award of fees for the IRS's violation of the automatic stay. The District Court pointed out that in the past, the IRS enjoyed a privileged status in levying upon the assets of a debtor in bankruptcy, which was changed in the October 5, 1994 amendment to the Bankruptcy Code that abrogated sovereign immunity as to several Code sections, including the automatic stay provisions. As eloquently stated by the District Court, "the IRS cannot restore its former status by invoking sections of the Internal Revenue Code not intended to address the special legal status of bankruptcy."12
Section 7426 of the Internal Revenue Code does not bar a trustee in bankruptcy from claiming a violation of the automatic stay. In this case, the IRS knows that it violated the automatic stay because it filed a motion for retroactive relief from the automatic stay. The IRS may not hide behind Section 7426 to prevent a trustee from obtaining the protections afforded the property of the debtor's estate by the Bankruptcy Code. The trustee has standing to attack the effectiveness of the levy.
The trustee argues that the levy was not effective because the State Fair had no property of the debtors on September 17, 1997, the date the levy was served, and the levy was not a continuing levy.
During oral argument, the attorney for the IRS basically conceded this point, admitting that "there are valid disputes as to the effectiveness of the levy between the party levied upon and the IRS."
Because this admission is somewhat opaque, and is not a definite admission that the levy was ineffective, the court will analyze the effectiveness of the levy.
Under Section 6331(a) of the Internal Revenue Code, the IRS is authorized to levy upon all property and rights to property (except property exempt by statute) belonging to a delinquent taxpayer.13 Section 6331(b) provides...
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