By: Donald L Swanson
Here’s a new and interesting opinion from the Ninth Circuit Court of Appeals: Hutchinson v. Salven, Case No. 19-60065 (filed 10/19/2021).
The opinion involves these facts:
- the IRS files a $162,000 tax lien for penalties against Debtors’ homestead;
- Debtors then file their Chapter 7 bankruptcy and attempt to avoid the penalties lien to preserve their homestead rights; and
- The Chapter 7 Trustee acts, independently, to avoid the same lien and preserve it for the bankruptcy estate.
The case sets up a conflict between the following provisions of the Bankruptcy Code:
- § 552(h) authorizes a debtor to avoid transfers on exempt assets when the trustee does not attempt to do so;
- § 522(c)(2)(B) makes exempt assets subject to “a tax lien, notice of which is properly filed”; and
- § 551 preserves avoided transfers for the bankruptcy estate.
The Conflict Resolved
The Ninth Circuit’s opinion resolves such conflict as follows:
- Debtors cannot avoid the lien because § 522(c)(2)(B) subordinates their homestead exemption to “properly filed” tax liens;
- The Trustee acts, independently, to avoid the same IRS lien under § 724(a) [fn.1] and § 726(a)(4) [fn. 2]—and does in fact avoid that lien—which means the Debtors have no power to do so under § 522(h); and
- Under the facts of this case, preservation of the avoided lien for the bankruptcy estate under § 551 takes precedence over a debtor’s exemption interest under § 522.
What follows is a summary of the Ninth Circuit’s opinion.
Debtors file a voluntary Chapter 7 bankruptcy, in which the penalties portion of the IRS claim is a general unsecured claim for $162,000.
Then, Plaintiffs file their adversary proceeding against the United States and the Chapter 7 Trustee to avoid the IRS’s lien securing the penalties claim, asserting:
- the Trustee could have avoided such lien but did not do so—which gives Debtors the right to do so under § 522(h) because the lien impairs their homestead exemption; and
- any avoided lien on Debtors’ homestead should be preserved for the benefit of Debtors’ homestead exemption.
The Chapter 7 Trustee files a cross-claim against the IRS, asserting his right, as Trustee, to (i) avoid the lien securing IRS’s penalties claim, and (ii) preserve the avoided lien for the benefit of the bankruptcy estate under § 551.
The IRS moves to dismiss Debtor’s complaint, for failing to state a claim on which relief could be granted.
Meanwhile, the Trustee settles with the IRS, avoiding IRS’s lien securing penalties.
The Bankruptcy Court grants IRS’s motion and dismisses Debtors’ Complaint. Debtors appeal to the Ninth Circuit BAP, which affirms. Debtors then appeal to the Ninth Circuit Court of Appeals.
The Ninth Circuit Court of Appeals also affirms. Here are its reasons.
Section 522(c)(2)(B) states that property exempted from the estate remains subject to properly filed tax liens.
The Ninth Circuit holds: “Congress has denied debtors the right to remove tax liens from their otherwise exempt property” so that a debtor “may not avoid the lien for his tax penalties” under § 522(h).
Such a rule can create this disparity: a trustee might be able to avoid tax liens, while debtors cannot. But that’s ok because, “Congress could logically have wanted to allow tax penalties to be avoided if that would benefit unsecured creditors,” while “eschewing benefiting debtors who had incurred those penalties by failing to pay their taxes.”
Accordingly, Debtors cannot avoid a properly filed tax lien, even if that lien would be avoidable by the trustee.
–The Trustee Acts
Debtors cannot avoid the penalties tax lien under § 522(h) because the trustee has already avoided the lien.
An essential element of a debtor’s right to avoid a transfer under § 522(h)(2) is this: “the trustee does not attempt to avoid such transfer.”
In this case, the trustee does attempt to avoid the IRS’s penalties lien—and is successful. Accordingly, Debtors have no right under § 522(h) to avoid the lien on their own.
–Preservation for Estate
Debtors argue that any avoidance by the Trustee should be preserved for the benefit of their homestead exemption—not for the benefit of the bankruptcy estate.
The Ninth Circuit rejects this argument because of § 551, which explicitly preserves the avoided lien for the benefit of the bankruptcy estate.
Debtors argue that § 522(i)(2) preserves an avoided transfer “for the benefit of the debtor to the extent that the debtor may exempt such property.” The Ninth Circuit rejects this argument because, a debtor’s rights under § 522(i)(2) are also subject to § 522(c)(2)(B)’s “bright-line rule” that a debtor cannot avoid a tax lien on exempt property.
Hutchinson v. Salven is an interesting opinion that applies obscure laws (§ 522(c)(2)(B) & § 724(a)) about tax lien avoidance and exemption claims of individual debtors.
Footnote 1. Sec. 724(a) provides: “The trustee may avoid a lien that secures a claim of a kind specified in section 726(a)(4) of this title.
Footnote 2. Sec. 726(a)(4) references: “any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim.”
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