Opinion
Case No. 05-40917-WIL.
August 10, 2006
ORDER DENYING MOTION [51] OF INTERNAL REVENUE SERVICE TO DISMISS
The Court has before it the Debtor's Amended Motion [46] to Determine Unsecured Status and Avoid Lien of Internal Revenue Service Pursuant to 11 U.S.C. §§ 105(a) and 506(a), and Rule 3012 of the Federal Rules of Bankruptcy Procedure (the "Debtor's Motion"), filed on April 28, 2006, the Motion [51] of the Internal Revenue Service to Dismiss (the "IRS Motion"), filed on May 22, 2006, and the Debtor's Response [52] thereto. A hearing on this matter was held on June 22, 2006. The Court took the IRS Motion under advisement and tentatively continued the Debtor's Motion to September 29, 2006 (depending on the final determination of the IRS Motion). The Court has reviewed the pleadings and the record in this case, has had the benefit of argument of counsel, and finds as follows:
1. The Debtor filed a voluntary petition under Chapter 13 of the Bankruptcy Code on October 14, 2005. Confirmation of the Debtor's chapter 13 plan is set for October 3, 2006.
2. In her schedules, the Debtor listed real property with a value of $285,000 and a secured claim held by Chase Home Finance, LLC in the amount of $283,625.77. She also scheduled a vehicle valued at $2,165.00 and subject to a secured claim held by Ford Motor Credit in the amount of $11,977.95.
3. On February 14, 2006, the Internal Revenue Service ("IRS") filed a proof of claim, asserting a total due of $68,751.57 for unpaid income taxes for the years 2001 through 2003, as follows: secured claim in the amount of $62,883.93, priority in the amount of $4,870.93 and general unsecured in the amount of $996.71.
4. In the Debtor's Motion, she requested a declaratory ruling that the IRS's claim is secured only to the extent of $1,374.23 and against only the real property. In the IRS Motion, the IRS argued that this type of relief required an adversary proceeding.
The IRS also argued that the proper party to the suit is the United States and not an agency of the United States. At the hearing on June 22, 2006, counsel for the IRS consented to the substitution of the United States as the proper party. The Court, therefore, considers this issue resolved and has corrected the caption for this contested matter.
5. Bankruptcy Rule 7001(2) provides that an adversary proceeding is required in order to void a lien. Fed.R.Bankr.Proc. 7001(2). See also In re Gates, 214 B.R. 467, 470 (Bankr. D.Md. 1997) (requests to determine the extent of a lien or the value of collateral forming the basis of a lien are brought by adversary proceeding) (citing Wright v. Commercial Credit Corp., 178 B.R. 703 (D.E.D. Va. 1995)). One of the underlying purposes of this requirement is to afford the creditor sufficient notice that it may be deprived of an interest in property. See Hamlet v. Ocwen Federal Bank, FSB, 286 B.R. 835, 838 (Bankr. W.D. Va. 2002) (due process requires notice sufficient to apprise interested parties of the pendency of an action and afford them an opportunity to object) (citing Piedmont Trust Bank v. Linkous (In re Linkous), 990 F. 2d 160, 162 (4th Cir. 1993)).
6. However, there are other means by which a lien may be challenged, including objections to claim under Bankruptcy Rule 3001, or motions to value collateral under Bankruptcy Rule 3012 and 11 U.S.C. § 506(a). See In re Gates, 214 B.R. at 471 (formal adversary proceeding is not required for issues of value of collateral under Section 506(a) of the Bankruptcy Code) (citing Wright, 178 B.R. at 705 n. 3); see also In re Therneau, 214 B.R. 782, 785 (Bankr. E.D.N.C. 1997) (Rule 3012 allows a debtor to request valuation of collateral under Section 506(a) by motion, and seek avoidance under Section 506(d) if applicable, so long as the creditor's right to due process is satisfied).
7. The Court notes that the Debtor initially raised the question of the validity of the IRS's lien. See Debtor's Motion, ¶ 4. She did not request valuation of collateral securing the lien. In fact, it appears that the Debtor intended to skip that step and bind the parties to the "evidentiary merit" of the values reflected in the schedules and proofs of claim on file. See
Debtor's Motion, ¶ 11. However, at the hearing on June 22, 2006, counsel clarified that the validity of the IRS lien is not at issue; just the extent (i.e., amount) of the secured claim. Therefore, valuation of the collateral is required. Whether or not the Debtor provided sufficient notice to alert the IRS of her intent to void or reduce its lien is now moot in light of the appearance and participation by counsel at the hearing on June 22, 2006 and in light of the instant Order. The valuation of collateral underlying the IRS's lien is necessary for the relief requested under Section 506(a) of the Bankruptcy Code and the parties are expected to present their evidence to establish the value at the hearing scheduled for September 29, 2006.
A further note to the parties: there may be collateral at issue here in addition to the Debtor's real property and vehicle. See 26 U.S.C. § 6321 (if any person liable to pay any tax neglects or refuses to pay upon demand, that amount is a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person) (emphasis added). The Court expects the parties to be prepared to address this issue at the hearing scheduled for September 29, 2006 and to present evidence as to the value of all of the Debtor's assets.
For the foregoing reasons, it is hereby:
ORDERED, that the Motion [51] of the IRS to dismiss is denied.
SO ORDERED.