Opinion
No. 92-17755F
July 13, 1994
Opinion
The debtor initiated the above-captioned adversary proceeding against the Internal Revenue Service in December, 1993. The complaint is styled "Debtor's Complaint to Avoid a Filed Federal Tax Lien on Debtor's Individual Retirement Account". The defendant's answer admits the existence of the challenged lien, but denies, for a variety of reasons, that the debtor is entitled to avoid that lien.
The complaint states, in paragraph one, that it "seeks a judicial determination of the validity of a lien." More precisely, as will be discussed below, the complaint seeks to "avoid" a statutory tax lien by virtue of section 522(h) of the Code.
Were the debtor requesting to avoid the fixing of a lien pursuant to 11 U.S.C. § 522(f), the proper procedural vehicle for such relief is a motion. Fed.R.Bankr.P. 4003(c). Here, however, since the relief is sought under section 522(h), the proper procedure is to commence an adversary proceeding, even though the challenged transfer is the fixing of a lien and the relief sought is avoidance of the lien. E.g., In re Ridgley, 81 B.R. 65, 67 (Bankr.D.Or. 1987).
Before me now for resolution are the parties' cross-motions for summary judgment under Fed.R.Bankr.P. 7056. The debtor alleges that he is entitled to entry of a judgment avoiding the defendant/IRS's lien on his IRA deposit as a matter of law; the defendant asserts that lien avoidance by a debtor of a duly noticed tax lien is not permitted and judgment must be entered in its favor. In support of their respective positions, the parties have submitted memoranda, reply memoranda and supplemental memoranda.
The following facts, which are relatively modest in complexity, are agreed upon by the parties as relevant, undisputed and determinative of the legal question before me.
I.
The debtor filed a voluntary chapter 7 petition in bankruptcy on December 16, 1992. The parties agree that the debtor owes a federal tax debt to the IRS. In the debtor's complaint, he concedes that the IRS recorded a "Notice of Federal Tax Lien Under Internal Revenue Laws" with respect to this debt, and he acknowledges that the IRS presently holds a security interest on personal property of the debtor. Complaint, ¶ 2. The debtor admits that the federal tax debt is secured in favor of the IRS "to the extent of $1,549.29 plus statutory additions under law." Debtor's Motion for Summary Judgment, ¶ 2.
While the debtor agrees that statutory additions to his tax obligation have accrued, the parties have not indicated whether they agree as to the total amount owed as of the date of the debtor's bankruptcy filing. An agreement as to the precise amount owed is not necessary for me to resolve these cross-motions for summary judgment.
Apparently, this tax lien arose from a federal tax obligation owed to the United States for the tax year which ended December 31, 1983. The IRS recorded a Notice of Federal Tax Lien under applicable federal internal revenue law on or about December 16, 1987. By virtue of federal tax law, the recordation of this notice created a statutory lien against the debtor's real and personal property. 26 U.S.C. § 6321.
This section provides:
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.
26 U.S.C. § 6321.
There is no suggestion by the debtor that the instant lien has become "unenforceable by reason of lapse of time," 26 U.S.C. § 6322. Thus, the lien was still in effect at the time of the debtor's bankruptcy filing.
The parties agree that the debtor opened an Individual Retirement Trust Account in 1983 with the Berean Federal Savings Bank; as of March 1994 this account contained $3,320.34. This account is in the form of a certificate of deposit. The certificate states that it is "not transferrable except on the books of the depository institution." Declaration of Gerlean Silver, and Exs. A and B.
Mr. Silver is an assistant vice-president of the Berean Federal Savings Bank, which bank holds the deposit account for the benefit of Vinton Deming. The debtor offers Mr. Silver's affidavit, as well as two exhibits, in support of his motion for summary judgment.
Further, the debtor accepts that federal law allowed the IRS's statutory lien to attach to the debtor's IRA deposit held by the bank. Accord In re Quillard, 150 B.R. 291, 295 (Bankr. D.R.I. 1993). Deposits into IRA accounts are not listed among the property "exempt from [IRS] levy" under section 6334(a) of the Internal Revenue Code.
Section 6334(a) lists the following categories of property as exempt from IRS levy: (1) wearing apparel and school books; (2) fuel, provisions, furniture, and personal effects; (3) books and tools of a trade, business, or profession; (4) unemployment benefits; (5) undelivered mail; (6) certain annuity and pension payments; (7) workmen's compensation; (8) judgments for support of minor children; (9) minimum exemption for wages, salary, and other income; (10) certain service-connected disability payments; (11) certain public assistance payments; (12) assistance under Job Training Partnership Act; and (13) principal residence exempt in absence of certain approval or jeopardy.
However, under Pennsylvania law, 42 Pa.C.S.A. § 8124(b)(1):
Except as provided in paragraph (2), the following money or other property of the judgment debtor shall be exempt from attachment or execution on a judgment:
This exception is not applicable in this proceeding.
* * *
(ix) Any retirement or annuity fund provided for under section 401(a), 403(a) and (b), 408 or 409 of the Internal Revenue Code of 1986 . . . the appreciation thereon, the income therefrom and the benefits or annuity payable thereunder. . . .
Certain limitations on this exemption are provided by state law, but are not relevant to this dispute.
This state statute was intended to exempt from execution by a judgment creditor individual retirement accounts, contributions into which are tax deferred under the Internal Revenue Code. See Bakaric v. Bakaric, 6 D. C. 4th 380 (C.P. Mercer 1990).
In addition, 26 U.S.C. § 6323(b)(1)(A) states that the statutory tax lien is not valid with respect to "securities . . . as against a purchaser of such security who at the time of purchase did not have actual notice or knowledge of the existence of such lien . . . ." The debtor asserts that his IRA deposit is a "security", while the IRS contends that it is not so classified.
Which term is defined to include a "certificate of deposit" and a "negotiable instrument". 26 U.S.C. § 6323(h)(4).
For a variety of reasons, the parties disagree over whether the debtor is empowered to avoid the IRS's statutory lien; each relies upon various provisions of the Bankruptcy Code.
II.
As noted at the outset, the instant motions before me are cross motions for summary judgment. The general standard for deciding a Rule 56 motion for summary judgment, as applicable to this proceeding through Bankr.R. 7056, is as follows.
Rule 56(c) provides that a movant is entitled to summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." The moving party has the initial burden of producing evidence which demonstrates the absence of a genuine issue of material fact. Celotex Corporation v. Catrett, 477 U.S. 317, 325 (1986). As to materiality, the substantive law will identify which facts are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). A court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Anderson, 477 U.S. at 251. Further, it should avoid credibility determinations, as those must be left to the trial stage. Id., 477 U.S. at 255.
Moreover, the application of Rule 56 must be construed with due regard not only for the rights of persons asserting claims and defenses to summary judgment but also for the rights of movants where such claims and defenses have no such legitimate bases. Lujan v. National Wildlife Federation, 497 U.S. 871 (1990); Celotex Corp., 477 U.S. at 327. For purposes of resolving these motions only, I must accept the truth of the evidence of the non-movant offered in opposition to summary judgment; in addition, any reasonable inferences from the evidence are drawn in favor of the non-movant. Anderson, 477 U.S. at 255. However, when the moving party has carried its burden of demonstrating an absence of material facts in dispute, the non-movant must come forward with evidence showing that there is more than some metaphysical doubt as to the material facts. Matshusita Electric Industrial Co. v. Zenith Radio Corporation, 475 U.S. 574, 586 (1986). Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no "genuine issue for trial." Id.
"If the evidence is merely colorable, . . ., or is not significantly probative, . . ., summary judgment may be granted." Anderson, 477 U.S. at 249 (cites omitted). "That this is the proper focus of the inquiry is strongly suggested by the rule itself. Rule 56(e) provides that, when a properly supported motion for summary judgment is made, the adverse party `must set forth specific facts showing that there is a genuine issue for trial.'" Anderson, 477 U.S. at 250. Stated differently, once the loving party carries its burden, Rule 56(e) requires the non-moving party to "designate" specific facts showing that there is a genuine issue for trial as to each element essential to the non-moving party's case and on which that party will bear the burden at trial. Celotex Corp., 477 U.S. at 322, 324. Accord, Lujan v National Wildlife Federation. "If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party." F.R.Civ.P. 56(e). "[T]he opposing party is not entitled to hold back evidence until trial, and is not entitled to a trial on the possibility that an issue of material fact might arise if the case were to go to trial on the merits." 6-Pt.2 J. Moore, Moore's Federal Practice, ¶ 56.23 at 56-784 (2d ed. 1993) (footnotes omitted). See Lujan v. National Wildlife Federation.
The existence of cross-motions for summary judgment does not, of course, require a court to determine that summary judgment is properly awarded to a party.
III.
Both parties maintain, and I agree, that there are no material facts in dispute in this proceeding. Thus, summary judgment should be entered in favor of the party whose legal assertions are correct. Here, the particular legal question posed is whether a chapter 7 debtor may avoid a properly noticed, prepetition, statutory federal tax lien on property which is exempt from execution by a judgment creditor under state law.
The thoughtful memoranda submitted in this proceeding raise a number of issues, some of which I need not resolve. In sum, and for the following reasons, I agree with the result reached by all courts that have considered this precise issue and conclude that the debtor is not entitled to avoid the IRS's lien on his IRA deposit. E.g., In re Mattis, 93 B.R. 68 (Bankr. E.D.Pa. 1988) (Twardowski, B.J.).
A.
The parties agree that the government's lien arose pursuant to the terms of Title 26 of the United States Code, section 6321. (See footnote 3, supra.) The Bankruptcy Code differentiates among "security interests", "statutory liens" and "judicial liens." 11 U.S.C. § 101(36), (51), (53). The lien in question here arose solely by force of federal tax law, and so is classified as a statutory lien. Accord, e.g., In re Robinson, 166 B.R. 812 (Bankr. D.Vt. 1994); In re Mills, 37 B.R. 832, 834-35 (Bankr. E.D.Tenn. 1984).
Under section 522(f)(1), a debtor is authorized to avoid the fixing of a judicial lien in certain circumstances. See generally In re Simonson, 758 F.2d 103 (3d Cir. 1985). Since the defendant's lien in this instance is not a judicial lien, the provisions of section 522(f)(1) are inapplicable. E.g., In re Senyo, 82 B.R. 401, 402 (Bankr. W.D.Pa. 1988); In re Ridgley, 81 B.R. 65, 68 (Bankr. D.Or. 1987); see also in re McLean, 97 B.R. 789, 792 (Bankr. E.D.Pa.), aff'd sub nom Aikens v. Philadelphia, 100 B.R. 729 (E.D.Pa.), aff'd sub nom McLean v. City of Philadelphia, Water Rev. Bureau, 891 F.2d 474 (3d Cir. 1989).
Accordingly, the debtor seeks to avoid the IRS' lien through the provisions of section 522(h). This subsection states:
The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if —
(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and
(2) the trustee does not attempt to avoid such transfer.
The defendant does not contest the general premise that the fixing of any type of lien upon the debtor's interest in property — including a statutory lien — represents the "transfer of property of the debtor." 11 U.S.C. § 101(58) (defining "transfer"); accord, e.g., In re Ridgley, 81 B.R. at 67-68; In re Aspen Data Graphics, Inc., 109 B.R. 677, 680-81 (Bankr. E.D.Pa. 1990); In re Bistransin, 95 B.R. 29 (Bankr. W.D.Pa. 1988). Further, the IRS concedes that the chapter 7 trustee is not seeking to avoid the challenged transfer. However, the defendant does contend that two requirements of section 522(h) cannot be demonstrated in this proceeding.
First, the IRS maintains that the fixing of its statutory lien could not have been avoided by a chapter 7 trustee using the avoidance powers found in sections 544, 545, 547, 548, 549 or 724(a). If so, then a debtor may not use the provisions of section 522(h) to avoid the lien.
The only avoidance power raised by the plaintiff is that found in section 545(2). The debtor asserts that the statutory lien held by the IRS on his IRA deposit was neither perfected nor enforceable against a bona fide purchaser. See generally McLean v. City of Philadelphia, Water Rev. Bureau, 891 F.2d 474 (3d Cir. 1989). The IRS disagrees and maintains that this taxpayer's interest in his certificate of deposit cannot be sold under state law.
The debtor raises for the first time in a supplemental memorandum of law, filed after argument on these motions, that "Much of the IRS Lien Is Avoidable Under Code § 724(a) as Well." Debtor's Supplementary Memorandum on Cross-Motions for Summary Judgment, at p. 9. In so doing, he asserts facts not made a part of the record of these cross-motions.
It would be inappropriate to consider this argument, which was neither raised in the complaint or the motion for summary judgment, nor at the hearing on the motion. Thus, I determine only the debtor's avoidance powers under section 545 of the Code.
However, given that my analysis assumes arguendo that a trustee could have avoided this statutory lien under section 545(2), consideration of the avoiding powers found in section 724(a) would not affect the outcome of this proceeding.
Obviously, if a chapter 7 trustee could not avoid the IRS tax lien in this bankruptcy case, the debtor can not utilize the avoidance powers found in section 522(h). E.g., In re Sacco, 99 B.R. 647, 652 (Bankr. W.D.Pa. 1989). While it is most logical to consider this issue first, neither party has located any reported decision which expressly discusses the question of the transferability of this account, under either federal or state law. And in the context of resolving this proceeding I am reluctant to pass on a possibly novel issue, particularly one of state law.
Thus, I shall assume arguendo that a chapter 7 trustee could avoid the fixing of the IRS' statutory lien upon the debtor's interest in his IRA deposit, by virtue of section 545(2). See generally In re Robinson; In re Sierer, 121 B.R. 884, 886 (Bankr. N.D.Fla. 1990); see also Senate Report at S. 989, 95th Cong.2d Sess. 85-86 (1978).
B.
The IRS' second contention, and the one often considered by bankruptcy courts, is its position that this debtor could not have exempted his interest in this IRA account under section 522(g)(1) if the trustee had avoided the IRS's lien. By virtue of section 522(h), a debtor may only avoid transfers of property when, inter alia, the recovered property could be claimed as exempt under section 522(g)(1). If the IRS is correct and the IRA account could not be claimed as exempt, then judgment should be entered in favor of the IRS.
In terms of the provisions of section 522(g)(1), it is contested that the fixing of the IRS lien was "involuntary", see generally In re Bistransin, 95 B.R. at 31, and that the debtor did not conceal his interest in the IRA certificate of deposit. Thus, the single issue addressed at length by these parties is whether the debtor could have exempted his interest in the IRA deposit under section 522(b) if the property had not been transferred. Section 522(b) is relevant, because section 522(g) does not, by itself, establish the scope of a debtor's exemption rights. To determine the scope of an exemption, one must look to section 522(b), which may, in turn, involve an analysis of nonbankruptcy law or the bankruptcy exemptions found in section 522(d). Accord 2 Epstein, Bankruptcy, § 8-22 at 524 (1992).
Although not raised by these parties, a few courts have noted that while section 522(h) allows a debtor to avoid a transfer under sections 544 and 545 in certain circumstances "to the extent that the debtor could have exempted such property under subsection (g)(1)", section 522(g) does not expressly allow a debtor to exempt property recovered by a trustee under sections 544 and 545, E.g., In re Robinson; In re Smith, 105 B.R. 217 (Bankr. W.D.N.Y. 1989). Thus, some courts conclude that a debtor can never use the avoiding powers of a trustee under section 522(h), if avoidance is sought under sections 544 or 545.
Since the parties do not address this issue, I need not resolve it. I do note that most courts permit a debtor to use the avoiding powers of section 544 and 545 when the result would yield exempt property. E.g., McLean v. City of Philadelphia, Water Rev. Bureau; In re Mattis. To reach a different conclusion essentially deletes the reference in section 522(h) to sections 544 and 545.
Furthermore, House bill, H.R. 8200 — which evolved into the Bankruptcy Reform Act of 1978 — omitted any reference to sections 544 and 545 in its original draft of section 522(g). Nonetheless, the House Committee Report, H.R. Rep. No 95-595, 95th Cong., 1st Sess. 362-63 (1977) expressly stated that sections 522(g) and (h) were intended to afford a debtor all of the trustee's avoiding powers in certain circumstance and to exempt any recovery — to the extent allowed by section 522(b).
One commentator argues that section 522(g) does allow a debtor to exempt recoveries by a trustee under section 544 or 545. Rather than rely upon legislative history, this commentator notes that section 522(g) includes a reference to section 550 — the actual recovery provision of the Code.
Section 550, which is referenced in section 522(g), governs the trustee's recovery upon avoiding a transfer using any of the avoiding powers. Thus, by referring to section 550, section 522(g) indirectly refers to and incorporates all of the trustee's avoiding powers. In re Gingery, 48 B.R. 1000, 1002 (D.Colo. 1985) . . . . This answers the case, In re Smith . . ., in which the court mistakenly opined that section 522(g) was inapplicable to a recovery of an avoidance under section 544 because the former fails to mention the latter.
2 Epstein, Bankruptcy, § 8-22 at 524 n. 8 (1992).
For purposes of resolving this dispute, I need only assume arguendo that a chapter 7 debtor may use the trustee's avoiding powers under section 545, although no express mention of section 545 is found in section 522(g).
In other words, had the IRS not obtained any prepetition statutory lien on the debtor's interest in the IRA certificate of deposit, could the debtor have exempted his interest in this account under relevant nonbankruptcy law. See In re Swafford, 160 B.R. 246, 248 (Bankr. N.D.Ga. 1993). Nonbankruptcy law must be considered because the debtor has elected his nonbankruptcy law exemptions under section 522(b).
The debtor poses the issue as stated above, relying upon Owens v. Owens, 500 U.S. 305 (1991). Owens involved a construction of section 522(f)(1), which is phrased somewhat differently from sections 522(g) or (h). Despite this difference in phrasing, it seems to me that the plain language of section 522(g) requires a determination of the debtor's ability to exempt property upon the avoidance of the challenged transfer. The transfer in question here is the creation of the lien on the IRA deposit.
IV.
At this point in the analysis, two general principles are worth noting.
First, exempt property is defined as property of the estate which a chapter 7 trustee cannot liquidate or distribute to creditors holding allowed claims. See, e.g., Owen v. Owen, 500 U.S. 305, 308 (1991) ("An exemption is an interest withdrawn from the estate (and hence from creditors) for the benefit of the debtor"); 2 Epstein, Bankruptcy, § 8-1 at 450-51 (1992). Instead, this property is retained by or distributed to the debtor and is to be used (along with the bankruptcy discharge) to provide the debtor a "fresh start" after bankruptcy. See In re Turner, 724 F.2d 338, 341 (2d Cir. 1983); 2 Epstein, Bankruptcy, § 8-1 at 450-51 (1992). Thus, exempt property is protected from the reach even of many creditors whose claims are rendered nondischargeable by virtue of section 523. 11 U.S.C. § 522(c)(1); see 2 Epstein, Bankruptcy, § 8-1 at 455 (1992):
The effect of exempting property in bankruptcy is that, whatever the source of the exemptions, the property generally is not liable during or after the bankruptcy for any prepetition unsecured debts. Exempt property is protected even against most nondischargeable debts. The result is that "items * * * claimed as exempt * * * are subject neither to the reach of (unsecured) creditors nor to administration by the Trustee." Exempt property is removed "from the bankruptcy estate and, [even] after discharge,
from the claims of unsecured creditors" for prepetition debts.
(quoting In re Bistransin, 95 B.R. 29, 31 n. 4 (Bankr. W.D.Pa. 1989) and In re Duss, 79 B.R. 821, 823 (Bankr. W.D.Wisc. 1987) (footnotes omitted) (emphasis in original).
Second, section 522(h) was enacted to empower debtors to utilize the trustee's avoidance powers in order to protect their exemption rights. See, e.g., Deel Rent-A-Car, Inc. v. Levine, 721 F.2d 750, 757 (11th Cir. 1983); In re Mattis, 93 B.R. 68, 69 (Bankr. E.D.Pa. 1988); H.R. Rep. No 95-595, 95th Cong., 1st Sess. 362-63 (1977); 2 Epstein, Bankruptcy, § 8-23 (1992). When the avoidance of a transfer would not affect a debtor's exemption claim, then section 522(h) does not authorize the debtor to act. See, e.g., In re Henderson, 133 B.R. 813, 817 (Bankr. W.D.Tex. 1991) ("Nowhere in the Code, including Chapter 5, is the debtor granted standing to avoid tax liens on non-exempt property); In re Tash, 80 B.R. 304, 305-06 (Bankr. D.N.J. 1987).
As the debtor implicitly recognizes, most courts addressing the debtor's right to avoid tax liens have, in general, not focused upon the language of section 522(g)(1). Rather than consider expressly whether the property liened by the IRS would have been exempt under section 522(b) but for that lien, these courts have emphasized the provisions of section 522(c)(2), which state:
(c) Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose, or that is determined under section 502 of this title as if such debt had arisen, before the commencement of the case, except — . . .
(2) a debt secured by a lien that is —
(A)(i) not avoided under subsection (f) or (g) of this section or under section 544, 545, 547, 548, 549, or 724(a) of this title; and
(ii) not voided under section 506(d) of this title; or
(B) a tax lien, notice of which is properly filed. . . .
Although the legislative history surrounding section 522(c)(2) does not mention tax liens explicitly, it does make clear that the general purpose of this subsection was to ensure that exempt property would remain subject to recovery to the extent it was encumbered by valid prepetition liens. H.R. Rep. No. 595, 95th Cong., 1st Sess. 361 (1977). See, e.g., In re Bland, 793 F.2d 1172, 1173 (11th Cir. 1986); In re Quillard, 150 B.R. at 295. This principle is often stated that unavoided liens are unaffected by a bankruptcy filing. E.g., Johnson v. Home State Bank, 501 U.S. 78 (1991); Long v. Bullard, 117 U.S. 617 (1886); In re Isom, 901 P.2d 744 (9th Cir. 1990) (the bankruptcy discharge of prepetition tax obligation does not release a tax lien).
Section 522(c)(2)(A) provides an exception to the usual survival of prepetition liens after bankruptcy. If the prepetition lien is avoided under the trustee's avoiding powers, then the exempt property is free from the prepetition encumbrance. See, e.g., Walter v. U.S. Nat. Bank of Johnstown, 879 F.2d 95 (3d Cir. 1989).
However, there is a statutory exception to this exception. The clear language of section 522(c)(2)(B) allows a taxing authority with a properly noticed prepetition lien on exempt property to proceed against this exempt property once the bankruptcy stay is terminated (which will occur either by express court order under section 362(d), or when the case is closed or the debtor discharged as provided by section 362(c)). See Koppersmith v. United States, 156 B.R. 537 (Bankr. S.D.Tex. 1993); In re Quillard, 150 B.R. at 295 (concerning IRA accounts claimed by the debtor as exempt under state law); Matter of Lassiter, 104 B.R. 119, 122 n. 3 (Bankr. S.D.Iowa 1989). Indeed, as section 522(c)(2) is written, a properly noticed tax lien may proceed against exempt property even if the tax lien is avoided by a trustee. See Matter of Lassiter, 104 B.R. at 122.
Thus, the avoidance of the tax lien by a chapter 7 trustee under section 545 would preclude the taxing authority from receiving the proceeds of its collateral upon the liquidation of estate property. However, as only non-exempt property is distributed to creditors, the taxing authority whose lien has been avoided could proceed against its collateral to the extent that collateral has been claimed exempt.
Based upon section 522(c)(2)(B), courts have found it counterintuitive to construe section 522(h) to permit a debtor to avoid a tax lien on property claimed as exempt when the taxing authority holding the lien would be permitted — once the automatic stay is terminated — to recover its claim against this exempt property. Accord, e.g., In re Robinson; In re Swafford, 160 B.R. at 248; In re Quillard, 150 B.R. at 295; In re Henderson, 133 B.R. 813, 817 (Bankr. W.D.Texas 1991) ("The powers granted in § 522(h) are, in turn, limited by § 522(c)(2)(B) if a tax lien is involved"); In re Williams, 109 B.R. 179, 180-81 (Bankr. W.D.N.C. 1989); In re Mattis; In re Perry, 90 B.R. 565 (Bankr. S.D.Fla. 1988); In re Ridgley; Matter of Driscoll, 57 B.R. 322 (Bankr. W.D.Wisc. 1986); In re Gerulis, 56 B.R. 283, 287-88 (Bankr. D.Minn. 1985); see also Matter of Lassiter, 104 B.R. at 123. Contra Matter of Coan, 72 B.R. 483 (Bankr. M.D.Fla. 1987), vacated, 134 B.R. 670 (Bankr. M.D.Fla. 1991).
Indeed, the debtor cites no decisions which permit a debtor, using the provisions of section 522(h), to avoid a properly noticed tax lien.
In chapter 11, section 1107(a) allows a debtor in possession to exercise all of the avoiding powers of a trustee, including those provided in section 545. Accord In re Cambron Corp., 27 B.R. 723, 725 (Bankr. E.P.Mich. 1983); see generally In re Coastal Group, Inc., 13 F.3d 81, 84 (3d Cir. 1994). In chapter 7 or even chapter 13, a debtor is not authorized to exercise a trustee's avoidance powers, except as limited by section 522(h). See, e.g., Matter of Driscoll, 57 B.R. at 324-25. Thus, those decisions cited by the debtor here, which sustained a chapter 11 debtor's avoidance of a statutory tax lien, U.S. v. Sierer, 139 B.R. 752 (N.D.Fla. 1991); In re Zinder, 150 B.R. 239 (Bankr. C.D.Cal. 1993), do not construe section 522(h) or the effect of section 522(c)(2)(B).
In denying a chapter 7 or chapter 13 debtor's request to use section 522(h) to avoid a properly noticed prepetition tax lien, these courts implicitly or explicitly conclude that a debtor cannot claim property which is subject to a properly noticed tax lien as exempt, due to section 522(c)(2)(B). E.g., In re Mattis 93 B.R. at 70 ("[W]e hold that Congress did not intend to allow chapter 13 debtors to circumvent the effects of § 522(c)(2)(B) by invoking the trustee's avoiding power under § 545(2)").
The debtor argues that the provisions of section 522(c) are irrelevant to this dispute. He suggests that I focus only upon the precise language of section 522(h), avoid the IRS's lien, and leave perhaps for another day (and possibly another forum) the effect of lien avoidance upon the IRS's right to proceed against the IRA deposit. In so doing, the debtor maintains that section 522(c) is germane only to issues surrounding a creditor's ability to reach exempt property, not whether particular property is exempt; nor, in his view, is this subsection relevant to a debtor's ability to avoid a transfer.
Given the age of the debtor's tax liability, the debtor is almost certain to maintain that his in personam liability to the IRS is discharged under section 524. See generally 11 U.S.C. § 523(a)(1)(A), (B). Further, the debtor believes that a lien which is avoided in bankruptcy is generally rendered unenforceable after the bankruptcy case is closed. See Debtor's Answer to Defendant's Motion for Summary Judgment . . ., at 3. Thus, the result the debtor seeks by this proceeding is to render his exempt property free from the IRS's lien — a result contrary to the express provisions of section 522(c)(2)(B).
I find the debtor's contention unpersuasive. His proposed statutory construction seems either to undermine the limited purpose of section 522(h) — which is to restrict a debtor's power to avoid liens to those instances in which the avoidance of a transfer would inure solely to the debtor's benefit by increasing the amount of property available to be used by the debtor at the conclusion of the bankruptcy case — or to render section 522(c)(2)(B) meaningless. Indeed, he fails to offer any rationale why Congress intended to permit a debtor to avoid a lien which would then survive the bankruptcy filing even if avoided.
Accordingly, I agree with the result reached in decisions such as In re Mattis. Property against which a lien creditor may recover upon after bankruptcy is not "exempt" as to that creditor within the meaning of section 522(b). Cf. In re Simonson, 758 F.2d at 105 (when there are unavoidable liens which exceed the value of property, the debtor has no interest in that property which may be claimed as exempt). Thus, the debtor has no power to avoid a lien held by that creditor under section 522(h).
V.
I reach the same conclusion in this instance even if I were to accept the debtor's suggestion and omit any consideration of section 522(c).
As noted earlier, the debtor only has authority to avoid a transfer to the extent the debtor could exempt the recovered property under section 522(b). The debtor acknowledges that he has claimed the exemptions permitted him under 11 U.S.C. § 522(b)(2)(A), that is, those exemptions available to him under state, local or federal nonbankruptcy law. To the extent the debtor argues that his interest in the IRA deposit is exemptible as to the IRS, pursuant to nonbankruptcy law, I disagree.
It is long established that exemptions provided by state laws are ineffective against the execution and the creation of statutory liens of the United States for federal taxes. See, e.g., Leuschner v. First Western Bank Trust Co., 261 F.2d 705 (9th Cir. 1958); Knox v. Great West Life Assur. Co., 212 F.2d 784 (8th Cir. 1954). See generally In re Fidelity Tube Corp., 278 F.2d 776 (3d Cir. 1960), cert. denied, 364 U.S. 828 (1961); In re Jacobs, 147 B.R. 106 (Bankr. W.D.Pa. 1992). "Federal law controls the enforcement of federal tax liens." In re Williams, 109 B.R. at 180.
The underlying considerations which gave rise to 26 U.S.C. § 6321 are well understood: the federally established right to execute upon a taxpayer's property is an exercise of the constitutional power of Congress to "lay and collect taxes." Michigan v. United States, 317 U.S. 338 (1943); United States v. Second Nat. Bank of North Miami, 502 F.2d 535 (8th Cir.), cert. denied, 421 U.S. 921 (1974).
By virtue of the Supremacy Clause, the right of the federal government to collect taxes overrides a state statute providing for the exemption of property. Leuschner v. First Western Bank Trust Co. This result also obtains in the context of bankruptcy. E.g., Medaris v. United States, 884 F.2d 832 (5th Cir. 1989) (Texas statute making spouse's earning exempt from other spouse's creditors was ineffective against federal government with regard to its tax lien); In re Quillard, 150 B.R. at 295 (tax lien attaches to IRA account made exempt under state law); In re Jacobs; In re Reed, 127 B.R. 244 (Bankr. D.Haw. 1991) (state exemptions do not override reach of federal tax lien); In re May Reporting Services, Inc., 115 B.R. 652 (Bankr. D.S.D. 1990) (federal tax lien attaches to debtor's property which was otherwise exempt from levy under state law); In re Cobb Lawless Kitchens, Inc., 56 B.R. 701 (Bankr. E.D.Pa. 1986) (same).
State law is relevant in determining a taxpayer's interest in property. Accord, e.g., Aquilino v. United States, 363 U.S. 509 (1960); Medaris v. United States. But once that interest is determined, it is federal law, not state law, which determines whether the IRS may execute against the debtor's interest. E.g., U.S. v. National Bank of Commerce, 472 U.S. 713, 722 (1985); Medaris v. United States; In re Jacobs; In re Reed, 127 B.R. at 247.
Generally, 26 U.S.C. § 6334 establishes property which is exempt from levy for unpaid federal taxes. See In re Jacobs; In re Ray, 48 B.R. 534, 537 (Bankr. S.D.Ohio 1985); In re Mills, 37 B.R. 832, 835 (Bankr.E.D.Tenn. 1984). The debtor recognizes that, while state law may insulate an IRA deposit from judgment creditors, no exemption from IRS levy exists for his interest in the IRA certificate of deposit. Accord In re Quillard; In re Jacobs, 147 B.R. at 108 (debtor's interest in a pension fund is not exempt from IRS levy).
Whether the conclusion of U.S. v. Barbier, 896 F.2d 377 (9th Cir. 1990) — drawing a distinction between the ability of IRS to fix a lien upon property identified in section 6334, but not levy upon it — is persuasive is an issue not germane to this dispute.
Section 522(b)(2)(A) allows a debtor the option (in those states, such as Pennsylvania, which have not "opted out" of the federal exemptions, see generally Owen v. Owen) to exempt any property "that is exempt under Federal [nonbankruptcy] law . . . or State or local law . . . ." Property upon which a creditor may levy under nonbankruptcy law cannot be claimed as exempt, at least as to that creditor, when the debtor elects section 522(b)(2). See Matter of Driscoll, 57 B.R. at 327 n. 6 ("The debtor does receive a much smaller personal property exemption under IRC § 6334 . . . which constitutes the sole exemption which may be claimed against a valid federal tax lien"); In re Ray, 48 B.R. at 537; In re Mills, 37 B.R. at 835 (insurance proceeds which were exempt under Tennessee law were not exempt under section 522(b) from IRS levy); see also Napotnik v. Equibank, 679 F.2d 316 (3d Cir. 1982) (entireties property which a creditor may execute upon because it holds a joint claim against a debtor and his spouse may not be claimed as exempt under section 522(b)(2)(B)).
The debtor distinguishes Napotnik as construing the entireties provision of section 522(b)(2)(B) as well as the phrase "exempt from process." The Court of Appeals concluded that "exempt from process" is slightly different from the term "exempt", and that the former means "immune from process." Id., at 319.
Nonetheless, the underlying premise of Napotnik supports the notion that a debtor may not avoid a lien by asserting nonbankruptcy law exemptions in property, when nonbankruptcy law permits that creditor to execute against the debtor's interest in that very property.
The debtor argues that this construction of section 522(b) renders very little property as available for an exemption claim in bankruptcy when the IRS is a creditor. This argument is somewhat overbroad.
First, in those states permitting a debtor to choose the standard bankruptcy exemptions found in section 522(d), his exemption claim would be restricted only to the extent that the IRS held a valid prepetition lien. If there were no lien, the exemptions of section 522(d) would be available.
Second, even in those states in which the debtor must choose non-bankruptcy law exemptions, or in those instances when the debtor so elects, the limitation on the exemption claim only applies to the IRS. A trustee cannot liquidate assets for distribution to creditors who, under non-bankruptcy law, would not be entitled to execute upon these assets. Cf. In re Anthony, 82 B.R. 386 (Bankr. W.D.Pa. 1987) (trustee's report of no distribution is a determination that, after debtor's exemptions are granted, the trustee finds no value in the assets available to distribute to unsecured creditors). Furthermore, section 6334 may provide non-bankruptcy law federal exemptions vis-a-vis the IRS. See In re Ray. Compare In re Voelker, 164 B.R. 308 (Bankr. W.D.Wisc. 1993) (holding that § 6334 defines property exempt from an IRS tax lien) with U.S. v. Barbier, 896 F.2d 377 (9th Cir. 1990) (drawing a distinction between the fixing of a lien and a "levy", and concludes that § 6334 bars only the latter).
Therefore, even without considering the effect of section 522(c)(2)(B) on a debtor's ability to assert exemption claims provided in section 522(b), I conclude that this debtor cannot claim as exempt — as to the IRS — his interest in his IRA deposit. Under relevant nonbankruptcy law, the IRS was free to execute against and recover that certificate of deposit.
VI.
For all of these reasons, the debtor has no ability pursuant to section 522(h) to avoid the IRS's statutory lien on his IRA certificate of deposit at Berean Federal Savings Bank. Accordingly, judgment shall be entered in favor of defendant.