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January 25, 1999


The opinion of the court was delivered by: Seybert, District Judge.


Pending before the Court are cross-motions for summary judgment in this action brought pursuant to Title 26, United States Code, Sections 7401 and 7403, by the United States of America (hereinafter the "Government" or "Plaintiff"), with the authorization and sanction of the District Counsel of the Internal Revenue Service and the Attorney General of the United States. Plaintiff seeks to foreclose federal tax liens upon certain real property that was conveyed to Nicholas A. Alfano and Lisa Alfano (the "Defendants") by their parents, Nicholas J. Alfano and Rita Alfano (the "parents").


Defendants are the current record owners of the residence at 11 Alden Lane, Centereach, New York, where Defendant, Lisa Alfano, presently resides, the subject property at issue (hereinafter the "property"). Plaintiff is seeking to satisfy tax liens against the Defendants' parents through foreclosure sale of the property.

1. The Tax Deficiencies

In tax years 1980 and 1981, Nicholas J. Alfano and Rita Alfano each filed federal income tax returns reporting no taxable income. (Pl.'s Statement of Material Facts (hereinafter "56.1") ¶¶ 1, 2.) Nicholas J. Alfano claimed to be exempt from federal income taxes due to the vow of poverty he took as a member of the "Life Science Church" (the "Church"). (Pl's 56.1 ¶¶ 2, 4.) He filed a federal Form 1040A with the Internal Revenue Service ("IRS") in 1980 reporting earnings of $28,639.41 in wages, but owing no federal income taxes. (Pl's 56.1 ¶ 5.) Nicholas demanded a refund of federal income taxes withheld from his wages in the amount of $1,352.24. (Pl's 56.1 ¶ 5.)

Upon audit, it was determined that each parent owed federal income taxes for tax years 1980 and 1981. (Pl's 56.1 ¶ 3.) After the IRS sent Nicholas Alfano a Notice of Deficiency for income taxes due for tax year 1980, Alfano filed a petition on or about June 7, 1982, for a redetermination of the deficiency with the United States Tax Court (the "Tax Court"). (Pl's 56.1 ¶¶ 6, 8.) On May 28, 1986, the Tax Court decided that a tax deficiency existed for Nicholas J. Alfano's 1980 federal income tax, and the following day, in a similar manner, the Tax Court decided against Rita Alfano, and ordered the payment of the Alfanos' taxes along with penalties and interest. (Pl's 56.1 ¶ 9 & Ex. K.)

The IRS made final assessments against Nicholas J. Alfano and Rita Alfano for unpaid federal income taxes for calendar year 1981 on September 2, 1986 and September 10, 1986, respectively, and for calendar year 1980 on October 14, 1986. (Pl's 56.1 ¶ 10.) The Defendants contend that on October 6 and October 14, 1986, assessments were made against Nicholas J. Alfano for tax deficiencies and statutory additions for the tax years 1981 and 1980 respectively. Further, Defendants contend that assessments were made against Rita Alfano on September 10, 1986, for the 1981 tax year. (Arbeit Affidavit in Support of Summary Judgment (hereinafter "Arbeit Aff. 1") ¶ 7.) These chronological discrepancies are not material to resolution of the instant cross-motions. Notice of Federal Tax Liens were filed with the Suffolk County Clerk's Office on or about December 18, 1987. (Arbeit Aff. 1 ¶ 8.)

2. The Conveyance

During the intervening years, and specifically on October 17, 1983, the parents transferred the property to the Defendants. (Pl.'s 56.1 ¶ 14.) The conveyance was made without the passage of fair consideration, in fact, it is undisputed that the conveyance was made for zero consideration. (Pl.'s 56.1 ¶ 15.) Moreover, the Defendants did not legally assume the property's mortgage, however, they agreed to make the payments. (Pl.'s 56.1 ¶ 15E.)

Plaintiff avers that this conveyance effectively caused the parents to become insolvent. (Pl.'s 56.1 ¶ 18.) Specifically, the parents admitted that they had no assets to offset their liabilities. (Pl.'s 56.1 ¶ 18C.) It is further asserted by the Government that the parents primarily continued to live at the property and continued to deduct the home mortgage interest and real estate taxes on their joint 1984 and 1985 federal income tax returns. (Pl.'s 56. 1 ¶¶ 15-17.) The Alfanos did testify that the payment by the parents of the mortgage and taxes was effectively in lieu of a direct rent payment for occupying the property. (Pl.'s 56.1 ¶¶ 15-17.)

3. The Bankruptcy Proceeding

On or about January 30, 1991, the parents filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court, Eastern District of New York, under Case Number 091-70163-511. (Arbeit Aff. 1 ¶ 9.) Plaintiff filed a secured claim against the parents asserting an aggregate secured claim in the sum of $53,015.33. (Arbeit Aff. 1 ¶ 10.) Thereafter, the parents moved to reclassify Plaintiff's claim from secured to unsecured. (Arbeit Aff. 1 ¶ 11.) Plaintiff agreed to reduce its secured claim to the sum of $2,000.00, and the balance was reclassified as unsecured, as approved in an Order rendered by United States Bankruptcy Judge Cyganowski, on or about May 9, 1994. (Arbeit Aff. 1 ¶¶ 11, 12.) On December 21, 1994, Judge Cyganowski entered an Order confirming the Chapter 13 plan (hereinafter "Confirmation Order") and discharging Debtors Nicholas and Rita Alfano from "all debts provided for by the plan or disallowed under 11 U.S.C. § 502," except debts irrelevant herein. (Arbeit Aff. 1 Ex. F.) Plaintiff did not appeal either Order of Judge Cyganowski, although the Government was aware of the prior transfer of the property. (Defs.' 56.1 ¶¶ 9, 10.) Because of this discharge, the Defendants submit that the parents were dropped as party defendants to the instant action. (Arbeit Aff. 1 ¶ 14.)



Pursuant to Federal Rule of Civil Procedure 56(c), courts may not grant a motion for summary judgment unless "the pleadings, depositions, answers to interrogatories, and admissions on file, together with 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." Fed.R.Civ.P. 56(c). The burden of proof is on the moving party to show that there is no genuine issue of material fact, Gallo v. Prudential Residential Services, L.P., 22 F.3d 1219, 1223 (2d Cir. 1994) (citing Heyman v. Commerce & Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir. 1975)), and "all ambiguities must be resolved and all inferences drawn in favor of the party against whom summary judgment is sought." Id. (citing Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 249 (2d Cir. 1985)). "Factual disputes that are irrelevant or unnecessary will not be counted." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (citing 10A Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2725, at 93-95 (1983)).

A party opposing a motion for summary judgment "`may not rest upon the mere allegations or denials of his pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial.'" Id. at 248, 106 S.Ct. at 2510 (quoting First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 288-89, 88 S.Ct. 1575, 1592, 20 L.Ed.2d 569 (1968)). Under the law of the Second Circuit, "[w]hen no rational jury could find in favor of the nonmoving party because the evidence is so slight, there is no genuine issue of material fact and a grant of summary judgment is proper." Gallo, 22 F.3d at 1224 (citing Dister v. Continental Group, Inc., 859 F.2d 1108, 1114 (2d Cir. 1988)). It is within this framework that the Court addresses the present cross-motions for summary judgment motion.

Defendants move for summary judgment and oppose Plaintiff's motion for summary judgment on the sole ground that Plaintiff's action is barred by the doctrines of res judicata and collateral estoppel. Plaintiff moves for summary judgment under two separate and distinct theories, a pure fraudulent conveyance theory and a lien theory. If Plaintiff triumphs under either theory of recovery, and the property is sold, the Government recognizes that Defendant Long Island Savings Bank, a creditor with a valid security interest, is entitled to priority over the United States in distribution. (Way Aff. ¶ 2.) Plaintiff opposes Defendants' motion for summary judgment by asserting, in effect, that the parents' discharge in bankruptcy has no legal effect on its right to recover under either theory.


Defendants specifically contend that by agreeing to reclassify its claim in the parents' Chapter 13 bankruptcy proceeding from secured to unsecured, Plaintiff is barred, more than two years later, from foreclosing on the property. Because the Government acknowledged its awareness of the conveyance, and asserted that the liens attached to the property in 1986, Defendants maintain that Plaintiff must concede that the property was property of the bankruptcy estate, and having agreed to a reclassification of its claim, Plaintiff waived its right to aver that the tax lien continued against the property after the parents' bankruptcy was discharged.

Defendants' blanket reliance upon the doctrine of prior adjudication is unpersuasive and misapprehended. It is true that Second Circuit case law clearly recognizes that proceedings conducted in bankruptcy courts are regularly entitled to preclusive effect on subsequent proceedings with respect to issues already litigated. In re Bono, 70 B.R. 339, 342 (Bankr.E.D.N.Y. 1987) (holding that "the doctrines of collateral estoppel and res judicata apply with full force to proceedings in bankruptcy courts"); see also In re Jamesway Corp., 205 B.R. 32, 36 (Bankr.S.D.N.Y. 1996) (finding "res judicata dictates that a final judgment on the merits bars further claims by parties or their privies based on the same cause of action that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding"). Further, an order of confirmation binds the debtor and its creditors and has preclusive effect. See 11 U.S.C. § 1141(a); Sure-Snap Corp. v. State Street Bank & Trust Co., 948 F.2d 869, 873 (2d Cir. 1991) (res judicata bars any attempt by parties to reorganization hearing to relitigate matters raised or that could have been raised). However, there are statutory and judicially created limitations on the breadth of this preclusive effect.

1. Res Judicata

According to prevailing Second Circuit case law, once a final judgment has been entered on the merits of a case, "`it is a finality as to the claim or demand in controversy, concluding parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose.'" Interoceanica Corp. v. Sound Pilots, Inc., 107 F.3d 86, 90 (2nd Cir. 1997) (quoting Securities and Exch. Comm'n v. First Jersey Secs., Inc., 101 F.3d 1450, 1463 (2d Cir. 1996) (citations omitted)). Yet, res judicata may "be invoked only after careful inquiry" because, it "shields the fraud and the cheat as well as the honest person." Brown v. Felsen, 442 U.S. 127, 132, 99 S.Ct. 2205, 2210, 60 L.Ed.2d 767 (1979) (allowing creditor to assert fraud in bankruptcy proceeding as challenge to dischargeability of prior state court judgment).

"To determine whether the doctrine of res judicata bars a subsequent action, we consider whether 1) the prior decision was a final judgment on the merits, 2) the litigants were the same parties, 3) the prior court was of competent jurisdiction, and 4) the causes of action were the same." Corbett v. MacDonald Moving Services, Inc., 124 F.3d 82, 87-88 (2d Cir. 1997) (citing In re Teltronics Servs., Inc., 762 F.2d 185, 190 (2d Cir. 1985)). The court went on to add that "[i]n the bankruptcy context, we ask as well whether an independent judgment in a separate proceeding would `impair, destroy, challenge, or invalidate the enforceability or effectiveness' of the reorganization plan." Id. (quoting Sure-Snap Corp. v. State Street Bank and Trust Co., 948 F.2d 869, 875-76 (2d Cir. 1991)). This last inquiry, the court noted, "may also be viewed as an aspect of the test for identity of the causes of action." Id.

As discussed supra, bankruptcy courts are courts of competent jurisdiction which render final judgments on the merits, and the Confirmation Order was a final judgment adjudicating the parents, bankruptcy petition. However, because it cannot be gainsaid that Defendants were not parties to the bankruptcy proceeding,*fn1 the first issue that arises is whether the Defendants were in privity with their parents as it pertains to the Chapter 13 bankruptcy proceeding. "The New York Court of Appeals has stated that privity `includes those who are successors to a property interest, those who control an action although not formal parties to it, those whose interests are represented by a party to the action, and possibly coparties to a prior action.'" Ferris v. Cuevas, 118 F.3d 122, 126 (2d Cir. 1997) (quoting Watts v. Swiss Bank Corp., 27 N.Y.2d 270, 277, 317 N.Y.S.2d 315, 320 (1970)). "`Privity has also been found where a person so controlled the conduct of the prior litigation in which they were interested such that the result is res judicata against them.'" Id. at 126-27 (quoting Tamily v. General Contracting Corp., 210 A.D.2d 564, 566, 620 N.Y.S.2d 506, 509 (3d Dep't 1994) (citations omitted)).

As an initial consideration, the party asserting res judicata has the burden of establishing privity with the parties to the prior adjudication. Defendants have not addressed this issue and have therefore failed to meet their burden on this initial threshold question. Nonetheless, it is quite unlikely that the facts would support a finding a privity. Although the Defendants and their parents have a familial relationship, that alone will not automatically suffice to establish privity. See Ferris, 118 F.3d at 127 n. 6 (and cases cited therein). Further, though it could be alleged that Defendants are successors in interest to the property at issue, and thus have the requisite privity, such a conclusion would ignore the specific factual setting. The conveyance occurred prior to the IRS assessment of tax liability and because the property was not considered an asset of the parents' bankruptcy estate — the discharge of which was the determination central to the prior adjudication — the Defendants cannot allege privity as successors in interest. Nor were the Defendants' interests necessarily represented by the parents in the Chapter 13 bankruptcy proceeding, as the IRS did not assert any lien or claim against them at that time.

Considering the fourth element, whether the causes of action are the same, Defendants have once again failed to make specific factual or legal assertions to support this required element. This inquiry requires determining whether the second suit involves the same "claim" or "nucleus of operative fact." Interoceanica, 107 F.3d at 90 (citing Apparel Art Int'l, Inc. v. Amertex Enters. Ltd., 48 F.3d 576, 583 (1st Cir. 1995)). New York courts have adopted the "transactional approach" to res judicata, or claim preclusion, holding that if claims arise out of "the same `factual grouping,' `transaction,' or `series of transactions,'" they are deemed to be part of the same cause of action and the later claim will be barred without regard to whether it is based upon different legal theories or seeks different or additional relief. Board of Managers of Windridge Condominiums One v. Horn, 234 A.D.2d 249, 250, 651 N.Y.S.2d 326, 327 (2d Dep't 1996) (citing Smith v. Russell Sage College, 54 N.Y.2d 185, 192-93, 445 N.Y.S.2d 68, 71, 429 N.E.2d 746 (1981)) see also Davidson v. Capuano, 792 F.2d 275, 278 (2d Cir. 1986).

The claims asserted and the underlying transactions are facially dissimilar, yet both stem from the parents' tax liability. The initial action, the Chapter 13 bankruptcy proceeding, resulted in a bankruptcy plan and a subsequent discharge. A Chapter 13 confirmation plan binds the debtors and creditors, and subject to exceptions, vests all property of the estate in the debtor, and the subsequent confirmation order discharges all debts, subject to exceptions. See 11 U.S.C. § 1327, 1328. The case at bar is brought by the Government to set aside a fraudulent conveyance of the property and to foreclose federal tax liens.

Corbett counsels to inquire whether the judgment resulting from the instant motions would impair, destroy, challenge, or invalidate the enforceability or effectiveness of the reorganization plan. Corbett, 124 F.3d at 87. As will be discussed infra, and as Plaintiff agrees, the parents' personal tax liability was discharged in bankruptcy, and as such, a decision foreclosing on the property will not invalidate or destroy the concluded Chapter 13 proceeding. Further, at the bankruptcy proceeding, neither the debtors nor the creditors claimed or addressed the property as an asset of the bankruptcy estate. Conversely, disposition of the property is central to the instant claim. The evidence and factual issues supporting the Government's fraudulent conveyance claim bear little resemblance to the claims asserted at the bankruptcy proceeding.

Accordingly, because Defendants having failed to support their blanket assertion of res judicata, specifically with respect to the elements of privity and same causes of action, this defense will not lie.

2. Collateral Estoppel

Collateral estoppel bars the relitigation of issues actually litigated and decided in the prior proceeding, as long as that determination was essential to the judgment. Central Hudson Gas & Elec. v. Empresa Naviera Santa S.A., 56 F.3d 359, 368 (2d Cir. 1995); see also, Johnson v. Watkins, 101 F.3d 792, 795 (2d Cir. 1996) (stating that "collateral estoppel has been narrowly tailored to ensure that it applies only where circumstances indicate the issue estopped from further consideration was thoroughly explored in the prior proceeding, and that the resulting judgment thus has some indicia of correctness"). Thus the "narrower principle" of collateral estoppel, makes conclusive the determination of an issue in a prior proceeding "in subsequent suits based on a different cause of action involving a party to the prior litigation." Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979). "[T]he whole premise of collateral estoppel is that once an issue has been resolved in a prior proceeding, there is no further factfinding function to be performed." Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 336 n. 23, 99 S.Ct. 645, 654 n. 23, 58 L.Ed.2d 552 (1979).

The Second Circuit has enunciated four elements which must be met in order for collateral estoppel to apply: (1) the issues at both proceedings must be identical; (2) the relevant issues were actually litigated and decided in the prior proceeding; (3) there must have been full and fair opportunity for litigation of the issues in the prior proceeding; and (4) the issues were necessary to support a valid and final judgment on the merits. Central Hudson, 56 F.3d at 368. In addition, a court must also engage in a fairness analysis to determine "whether controlling facts or legal principles have changed significantly since the [prior] judgment [and] . . . whether other special circumstances warrant an exception to the normal rules of preclusion." Montana, 440 U.S. at 155, 99 S.Ct. at 974-75. The party seeking the benefit of collateral estoppel bears the burden of establishing the necessary elements. Dowling v. United States, 493 U.S. 342, 350, 110 S.Ct. 668, 673, 107 L.Ed.2d 708 (1990); In re Sokol, 113 F.3d 303, 306 (2d Cir. 1997).

As will become evident infra, the determinative issue in this action is whether the parents fraudulently conveyed the property to the Defendants, an issue never decided or raised in the bankruptcy proceeding. Thus, in Barristers Abstract Corp. v. Caulfield, 241 A.D.2d 472, 660 N.Y.S.2d 62, 62 (2d Dep't 1997), the court held that neither res judicata nor collateral estoppel barred an action to set aside the transfer of real property as fraudulent where a prior decision in the transferor's bankruptcy case did not resolve the ultimate question of fact, whether the transfer was made with intent to hinder creditors. The Appellate Division so held even though the issue of fraudulent conveyance was raised, but not decided, by the bankruptcy court. Id.

Defendants' contention appears to be that the issue decided at the bankruptcy proceeding was the discharge of all debts of the parents' estate. This included all property of the estate including all legal and equitable interests of the debtor in property as of the commencement of the bankruptcy proceeding, which, Defendants assert, must have included their interest in the property at issue, especially in light of the Government's allegation that it attached a lien on the property in 1986. Yet, the specific issue of the legitimacy of the conveyance and whether it was in fact an asset of the bankruptcy estate was never raised or litigated in the bankruptcy proceeding, and therefore, collateral estoppel is inapposite. Moreover, due to the in rem lien characteristics and the Second Circuit's holding that pre-petition fraudulent disposition of property is not property of the estate until judicial determination, see In re Colonial Realty Co., 980 F.2d 125 (2d Cir. 1992), as discussed within, Defendants' collateral estoppel defense is futile.

However, although articulated as a defense based solely upon collateral estoppel and res judicata, Defendants' legal argument proffered appears to encompass issues of waiver, satisfaction and discharge, and as such, will be considered in the Court's examination of Plaintiff's summary judgment motion.


In support of its motion for summary judgment, Plaintiff asserts a tax lien and a fraudulent conveyance theory. These theories will be addressed seriatim.

It is important to note at this juncture that many, if not all, of the arguments raised by Plaintiff are neither addressed nor challenged by Defendants, and although it is not the Court's role to champion the position of either party, the issues raised are of sufficient juridical importance and personal gravity to warrant thorough analysis. To order the foreclosure of an individual's residence, on what amounts to little more than uncontested papers, and predicated upon someone else's seventeen year old tax liability, gives this Court great pause for concern.

1. Was the Action Timely Commenced

Although it was not raised in Defendants' papers, and although many courts have been reluctant to consider statutes of limitations issues sua sponte, see Davis v. Bryan, 810 F.2d 42, 44 (2d Cir. 1987), the Court will briefly touch upon the subject. The New York State statute of limitations applicable to fraudulent conveyances does not apply to the United States. The United States acts in its sovereign capacity when it brings suit to set aside a fraudulent conveyance or to enforce a tax lien. When acting in such capacity, the Government is not bound by state statutes of limitations or subject to the defense of laches. United States v. Summerlin, 310 U.S. 414, 416-17, 60 S.Ct. 1019, 1020, 84 L.Ed. 1283 (1940) (holding United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights); see also United States v. RePass, 688 F.2d 154, 158 (2d Cir. 1982) (finding laches is not available against the United States); United States v. Podell, 572 F.2d 31, 35 (2nd Cir. 1978) (holding United States is not subject to any statutes of limitation, unless Congress specifically provides otherwise); United States v. Carney, 796 F. Supp. 700, 703 (E.D.N.Y. 1992) (holding state statute of limitations for New York's Debtor and Creditor Law is not applicable against the government).

The Government assessed the federal income tax liability against the parents in September and October of 1986, and initiated this action in September of 1996, within the combined 11-year period under 26 U.S.C. § 6502(a)(1) and 6901(c)(1). Therefore, Plaintiff's action was timely commenced.

2. Plaintiff's Standing to Pursue this Action

The Court also examines the Government's right to commence an action pursuant to a federal tax lien against a party who is not the delinquent taxpayer, notwithstanding Defendant's failure to raise the issue. Plaintiff maintains that its power to pursue this action springs from 26 U.S.C. § 7401 and 7403. The government may pursue outstanding tax liens in district courts pursuant to 26 U.S.C. § 7403. Further, 26 U.S.C. § 6331(a) provides in relevant part, "[i]f any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax . . . by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax." See In re Jones, 206 B.R. 614, 617 (Bankr.D.C. 1997) (observing that pursuant to § 6331, a tax levy can be made on either property belonging to the taxpayer or on property subject to a tax lien as in the case of property the debtor has conveyed to another before levy has been attempted). Applicable Supreme Court precedent upholds the United States' authority to take action against a transferee of property to collect outstanding tax liens. United States v. Rodgers, 461 U.S. 677, 694 n. 18, 103 S.Ct. 2132, 2142 n. 18, 76 L.Ed.2d 236 (1983) (interpreting Section 7403 to reach the entire property in which a delinquent taxpayer has or had any "right, title, or interest"); see also Kathy B. Enters., Inc. v. United States, 779 F.2d 1413, 1415 (9th Cir. 1986) (affirming district court's ruling that IRS could proceed against transferee of taxpayer's property prior to taxpayer's discharge in bankruptcy); United States v. Nicholson, No. Civ. A. 97-CV-3309, 1998 WL 437267, at *4 (E.D.Pa. July 15, 1998) (holding that "26 U.S.C. § 6901(a) provides a summary administrative procedure for the collection of an existing tax liability from transferees of the taxpayer's property," and this is not the government's exclusive remedy); United States v. Perrina, 877 F. Supp. 215, 217 (D.N.J. 1994) (stating the "United States as a creditor has the right, like any other creditor, to bring an action either to enforce a lien under 26 U.S.C. § 7403 or against the transferee of a taxpayer for a fraudulent conveyance").

Specifically, the Supreme Court held that Section 7403 does grant the district court the power to order the sale of a property to satisfy an outstanding lien, but "that its exercise is limited to some degree by equitable discretion." Rodgers, 461 U.S. at 680, 103 S.Ct. at 2136.

One other statutory provision bears noting. From the bankruptcy laws, 11 U.S.C. § 524(e) provides that the "discharge of a debt of a debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt," also supporting the authority of the Government to proceed against the Defendants notwithstanding the parents' bankruptcy discharge.

Accordingly, Plaintiff has standing to bring this action against Defendants.

3. The Tax Lien And The Bankruptcy Proceeding

It is undisputed that the Government filed a valid tax lien against the parents prior to their entering into bankruptcy protection. It is also uncontested that at the time of the bankruptcy proceeding the Government was aware of the prior conveyance of the property, although it was apparently never mentioned by the parents or the IRS. Plaintiff initially asserted a secured claim against the parents in the full amount of the tax deficiency and later agreed to reduce the secured claim to $2,000.00, the apparent amount of assets in the bankruptcy estate. The bankruptcy plan was confirmed, effectively discharging the debtors of all outstanding debts. Although it seems a natural inclination to conclude that the bankruptcy proceeding therefore discharged the parents' tax liability, the Government asserts two separate legal theories to dispel this reasoning. The lien theory concedes that the parents in personam liability to the IRS was discharged in bankruptcy, yet asserts an in rem claim against the property.

The Government cites to In re Isom, 901 F.2d 744 (9th Cir. 1990) for the proposition that a bankruptcy discharge does not destroy a United States tax lien. This is generally a correct statement of law. The Ninth Circuit specifically held that "26 U.S.C. § 6325(a)(1) does not require the I.R.S. to release valid tax liens when the underlying tax debt is discharged in bankruptcy." Id. at 745. To properly analyze its relevance to the instant action requires a more detailed understanding of the applicable tax provisions.

A tax lien arises from Section 6321 of Title 26 of the United States Code, which 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. This language "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce, 472 U.S. 713, 719-20, 105 S.Ct. 2919, 2924, 86 L.Ed.2d 565 (1985) (citations omitted). The lien shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time. See 26 U.S.C. § 6322; see also United States v. City of New Britain, 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954) (describing lien as choate "when the identity of the lienor, the property subject to the lien, and the amount of the lien are established" and the federal tax lien, as a general lien when attached at the time of assessment to all of the taxpayer's property, was thus perfected). "A federal tax lien becomes a lien on all property of the debtor, so the property need not be described." In re LMS Holding Co., 50 F.3d 1526, 1530 (10th Cir. 1995).

A lien is released when "the liability for the amount assessed, together with all interest in respect thereof, has been fully satisfied or becomes legally unenforceable," and the Secretary shall thereafter within 30 days issue a certificate of release. See 26 U.S.C. § 6325(a)(1).

Therefore, the initial issue is whether the Government's acquiescence to the reclassification of its secured claim to an unsecured claim, and Defendants' subsequent discharge in bankruptcy, satisfies the requirement of § 6325. Or stated in another fashion, though Isom stands for the proposition that the IRS is not required to release valid tax liens when the underlying tax debt is discharged in bankruptcy, is the same result required when the IRS agrees to a reclassification of its debt from secured to unsecured, prior to discharge.

The first line of cases, representing the vast weight of opinion, espouse the result achieved in Isom. A good starting analysis of the issue begins with In re Leavell, 124 B.R. 535, 540 (Bankr.S.D.Ill. 1991), wherein the court recited the general rule, "[o]nce the taxpayer files for bankruptcy and receives a discharge, he is relieved of personal liability for dischargeable tax debts. The debtor's discharge does not automatically invalidate tax liens securing dischargeable debts, and these liens continue beyond bankruptcy as a charge upon the debtor's property if not disallowed or avoided." Id. (citing In re Leslie, 103 B.R. 775 (Bankr.S.D.W.Va. 1989) & In re Dillard, 118 B.R. 89 (Bankr.N.D.Ill. 1990)).

This reasoning was followed by In re Stephenson, 96 B.R. 388 (Bankr.S.D.Fla. 1988), as the court upheld the federal tax lien recorded against the debtors' homestead prior to their Chapter 7 filing, even though the underlying tax obligation was discharged in bankruptcy. Id. at 389 (citing Verran v. U.S. Treasury Dep't, 623 F.2d 477, 479 (6th Cir. 1980)) (holding the IRS could collect unpaid tax liability from property owned by debtors prior to their petition in bankruptcy to the extent the government possessed a valid lien upon such property); see also In re Sills, 82 F.3d 111, 113 (5th Cir. 1996) (affirming validity of IRS tax lien and finding claim that lien is unenforceable to be meritless); In re Aylward, 208 B.R. 565 (Bankr.M.D.Fla. 1997) (Chapter 11 debtor claimed tax lien was unenforceable, because, in part, it was not perfected as required by the Bankruptcy Code, however, the court looked to the applicable IRS Code in determining that the lien was enforceable and the debtor's discharge only protected personal debt and not property); In re Doviak, 161 B.R. 379, 381 (Bankr. E.D.Tex. 1993) (disallowing debtor's motion to "strip down" IRS tax lien, in part, because debtor's in rem liability survived debtor's bankruptcy discharge and Congress carved out tax liens as an exception to the general lien avoidance provisions of § 522); In re Cennamo, 147 B.R. 540, 542 (Bankr.C.D.Ca. 1992) (wherein both parties conceded that the debtor's discharge operated only as a discharge of the in personam liability to the IRS and did not eliminate the pre-petition tax liens, as the IRS retained a legally enforceable in rem claim); In re Hanson, 132 B.R. 406, 410 (Bankr.E.D.Mo. 1991) (holding when the IRS obtained its tax lien, it obtained rights against the debtor's property to secure payment of the underlying tax obligations in addition to the rights the IRS had against the debtors personally, which alone were discharged in bankruptcy); In re Rench, 129 B.R. 649, 651 (Bankr.Kan. 1991) (concluding that IRS lien is a statutory lien and although the debtors' liabilities for the tax years are dischargeable, the federal tax liens for those years remain enforceable against any assets acquired before the bankruptcy petition was filed); In re Gerulis, 56 B.R. 283 (Bankr.D.Minn. 1985) (holding debt of debtors to IRS is discharged, while IRS liens are not).

The distinction correctly advanced by the Government concerns the extent and nature of the discharge that results from a bankruptcy proceeding. A discharge in bankruptcy "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived." 11 U.S.C. § 524(a)(2) (emphasis added). Therefore, "discharge does not affect liability in rem and prepetition liens remain enforceable after discharge." In re Wrenn, 40 F.3d 1162, 1164 (11th Cir. 1994) (citing 3 Collier on Bankruptcy ¶ 524.02[1] (Lawrence P. King ed., 15th ed. 1994); Dewsnup v. Timm, 502 U.S. 410, 418, 112 S.Ct. 773, 778, 116 L.Ed.2d 903 (1992); Johnson v. Home State Bank, 501 U.S. 78, 81-83, 111 S.Ct. 2150, 2153, 115 L.Ed.2d 66 (1991); Isom, 901 F.2d at 745; In re Thomas, 883 F.2d 991, 997 (11th Cir. 1989); Estate of Lellock v. Prudential Ins. Co., 811 F.2d 186, 189 (3d Cir. 1987)) See also In re Harmon, 101 F.3d 574, 581 (8th Cir. 1996) ("No one suggests that the discharge provisions remove a lien from the debtor's property or make a lien unenforceable in rem.").

Also instructive is In re Dillard, wherein the court framed the issue as "whether the IRS must release its tax lien on Plaintiffs' property when the tax obligations which gave rise to that lien are dischargeable in bankruptcy." 118 B.R. at 91. The court analogized a tax lien to a secured creditor's lien and looked to established precedent for the axiom that valid liens that have not been disallowed or avoided survive the discharge of the underlying debt. See, e.g. In re Lindsey, 823 F.2d 189 (7th Cir. 1987); Matter of Tarnow, 749 F.2d 464 (7th Cir. 1984); In re Ryan, 100 B.R. 411 (Bankr.N.D.Ill. 1989).

By obtaining a tax lien, the IRS became a secured creditor under 11 U.S.C. § 506(a). Dillard, 118 B.R. at 92. "[T]he IRS's rights against the liened property survive the bankruptcy notwithstanding the fact that the underlying obligations are dischargeable." Id. (citing Lindsey, 823 F.2d at 191 ("The main purpose served by section 506 is to put the secured creditor who chooses to pursue his rights in bankruptcy in the same position that he would occupy if he had decided to bypass bankruptcy.")).

The court went on to consider whether the obligations discharged in bankruptcy were therefore "legally unenforceable" within 26 U.S.C. § 6325(a)(1). Id. at 92. Concurring with the reasoning of Isom and its progeny, the court looked to the specific language of 26 U.S.C. § 6325(a)(1) and 11 U.S.C. § 524(a)(2) and explained that

  [t]he language of 11 U.S.C. § 524 specifically speaks
  of enjoining efforts to collect a debt as a `personal
  liability' of the debtor. When the IRS obtained its
  tax lien it obtained rights against the liened
  property to secure payment of the tax obligations.
  Such rights were in addition to the rights it had
  against [the debtors] personally. As the language of
  . . . § 524(a)(2) and the [precedent] indicate,
  rights against taxpayers personally are affected by
  the bankruptcy discharge, but in rem lien rights
  are not. Because a lien holder retains ability to
  enforce pre-petition dischargeable obligations
  against the liened property even after bankruptcy
  discharge, the debtor's obligation survives the
  discharge to the extent it is secured by the liened
  property. . . . Although the lien holder cannot
  enforce the obligations for unpaid debts personally
  against the debtor, even following discharge the IRS
  can pursue its rights against the liened property. .
  . . To be truly `unenforceable' under
  26 U.S.C. § 6325(a) means that all of the creditor's remedies to
  satisfy a prepetition obligation must be
  extinguished. Since only [the debtors'] personal
  liability for the tax obligations was extinguished by
  the bankruptcy discharge, survival of the lien means
  that the obligation is not wholly `unenforceable'.

Id. at 93.

There seems to be a divergence of opinion as to whether the creditor's action post discharge is necessarily an action in rem. For if it is, it would seem logical to require the lien to have identified and/or attached to the specific property at the inception of the lien. This is not a problem in the majority of the cases which often involve creditors as mortgagees. However, as in the case at bar, where the tax lien was not recorded as a lien against the particular property but only against the parents, an action to enforce the lien in rem may be inapposite. Of course, this distinction may go more to the definitional use of the term, for "it is true that, in a strict sense, a proceeding in rem is one taken directly against property, and has for its object the disposition of property, . . . but, in a larger and more general sense, the terms are applied to actions between parties, where the direct object is to reach and dispose of property owned by them, or of some interest therein." Black's Law Dictionary 793 (6th ed. 1990).

The court in Isom came to a similar conclusion for a different reason. Although the Ninth Circuit affirmed the Ninth Circuit Bankruptcy Appellate Panel's ("BAP") decision, it rejected the distinction as one between an action in personam and an action in rem, because although

  this result makes sense in the bankruptcy discharge
  context, it might not make sense if applied in other
  contexts. For example, if a taxpayer prevails in a
  court action against the IRS and is discharged of
  personal liability, the IRS would not necessarily be
  required to release the liens under the BAP's
  reasoning. The better approach is to determine the
  legal enforceability of the liability by referring to
  the relevant law affecting the liens. In this case we
  refer to the bankruptcy code to determine if the
  liability is legally enforceable.

Isom, 901 F.2d at 746 n. 3. Thus the lien prevailed not because it was enforced via an action in rem, but because liability for the amount assessed as against the debtor's property survived, notwithstanding the discharge of the debtor's personal liability. See also Thomas, 883 F.2d at 997 (section 506(d)(1) "codif[ies] the rule of Long v. Bullard — which previously had been purely a judge-made rule of bankruptcy law — permitting liens to pass through bankruptcy unaffected"). It appears that the reasoning in Isom is sound, and the better approach is the lien survives as against the property of the debtor.

In addition, the applicable treasury regulation pertaining to release of a lien adds the word "entire" to modify liability so that a lien is released "whenever [the Secretary] finds that the entire liability for the tax has been satisfied or has become unenforceable as a matter of law. . . ." In re Burns, 974 F.2d 1064, 1065 (9th Cir. 1992) (citing Treas. Reg. § 301.6325-1(a)) (emphasis added).

Defendants herein never moved for a release of the IRS lien and never satisfied the methods in which an IRS tax lien can be released: "(1) the tax lien becomes unenforceable by operation of time, (2) the debt which is the basis of the lien is paid in full or (3) an Offer in Compromise is accepted by the IRS which would settle the debt and any tax lien associated with the debt would be no longer enforceable and have to be released." In re Robert Turner Optical, Inc., Bankr. No. 93-01004, 1994 WL 779352, at *4 (Bankr. N.D.Ala. Sept.8, 1994) (upholding validity of federal tax lien).

Defendants contend that the Government's action in allowing the debt to be reclassified as unsecured effectively waived its right to collect the balance. However, no evidence has been put forth suggesting that the Government's actions amounted to acceptance of an offer in compromise in settlement of the total tax liability. See In re Pearson, 214 B.R. 156, 160-61 (Bankr. N.D.Ohio 1997) (finding IRS' adjustment of proof of claim from secured to unsecured did not constitute settlement requiring removal of underlying lien). There is a marked distinction between a voluntary consensual release and a discharge in bankruptcy. A creditor's acceptance of a reorganization plan is not an "unambiguously manifested assent to the release of the nondebtor from liability on its debt." In re Arrowmill Dev. Corp., 211 B.R. 497, 507 (Bankr.D.N.J. 1997); see also First Fidelity Bank v. McAteer, 985 F.2d 114, 118 (3d Cir. 1993) ("a bankruptcy discharge arises by operation of federal bankruptcy law, not by contractual consent of the creditors"). Apparently, the Defendants did not file an adversary proceeding to suggest any grounds under 11 U.S.C. § 545 for the avoidance of the IRS' statutory lien.

The factual setting and analysis of In re Deppisch is also germane to the instant case. 227 B.R. 806, 808-09, 1998 WL 910048, at *3 (Bankr.S.D.Ohio 1998). The IRS filed a tax lien and the taxpayer filed for bankruptcy under Chapter 7. Pursuant thereto, the IRS entered into an "Agreed Order of Dischargeability," yet eight months later it levied the debtor's IRA account. Id., at 807. The court granted the government's summary judgment motion in an action by the debtor for damages for violation of the bankruptcy discharge. Id. The court concluded that the debtor's tax liability was transformed into a statutory lien once the tax assessment was made. Id. at 808-09, 1998 WL 910048, at *3 (citing United States v. Carlin, 948 F. Supp. 271 (S.D.N.Y. 1996)). Although the underlying debt was discharged in bankruptcy, it does not render the liability for the amount assessed subject to a valid lien legally unenforceable, and therefore, the pre-petition federal tax lien continues in force. Id. (citing Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886) (discharge in bankruptcy did not release a pre-petition lien of a mortgage); Johnson, (bankruptcy discharge only extinguishes in personam and not in rem action against the debtor); Dewsnup, (IRS cannot proceed to collect from the debtor personally, it may satisfy the lien by levying against the debtor's property)).

Finally, in United States v. Uria, 180 B.R. 688 (S.D.Fla. 1995), the district court reversed the ruling of the bankruptcy judge releasing the federal tax liens as unenforceable. The debtors filed separate petitions for bankruptcy and an adversary complaint to determine dischargeability of tax liability. The debtors specifically objected to granting the liens secured claim status and they alleged that pursuant to 11 U.S.C. § 506(d), to the extent the federal tax lien secures a claim that is not an allowed secured claim, it may be avoided. Although the district court judge acknowledged that it was hard to "conceptualize why the federal tax liens should be allowed to survive bankruptcy after the underlying liability is discharged," id. at 692, binding precedent and strict statutory interpretation mandated that eventuality. Thus, although the debtors tax liability was discharged, there was evidence of equity to which the federal liens could attach, the equity in the debtors' home, and therefore, the liens were enforceable and survived the discharge. Id. at 693.

Part of the conceptual difficulty may arise from the interplay between a discharge of the debtor's debt and an extinguishment of the creditor's claim. The key point is that although a debtor's debt may be personally discharged in bankruptcy, the underlying debt is not extinguished. See In re Conston, Inc., 181 B.R. 769, 772 (D.Del. 1995) (finding "discharge . . . does not cause the underlying debt to vanish" and IRS priority claim may be asserted in a second Chapter 11 case, because, in part, nothing in the bankruptcy code suggest that confirmation of a reorganization plan relieves the IRS from following its collection procedures) (and cases cited therein).

Further, Chapter 13 reorganization looks to the confirmation of the plan as the critical point in time. "The basic framework of [reorganization] chapters contemplates the revesting of estate property in reorganized debtors `free and clear of all claims and interests of creditors, equity security holders, and of the general partners of the debtor,' provided that the property was `dealt with by the plan.'" In re Dever, 164 B.R. 132, 138 (Bankr.C.D.Ca. 1994) (citing 11 U.S.C. ยง 1141(c), 1227(c) & 1327(c)). Here, the property at issue was conveyed prior to the filing of the ...

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