Charles L. Walker, III and Margit H Walker

NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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: 	Chapter 	13
In re: 	:
: 	Case No. 	17-36804 (CGM)
Charles L. Walker, III, and 	:
Margit H. Walker, 	:
:
Debtors. 	:
:
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MEMORANDUM DECISION GRANTING MOTION TO BIFURCATE AND VOID
A P P E A R A N C E S:
Andrea B. Malin
Genova & Malin, Attorneys
The Hampton Center
1136 Route 9
Wappingers Falls, NY 12590
(845) 298-1600
Samuel Dolinger
Geoffrey S. Berman
United States Attorney for the
Southern District of New York
86 Chambers Street, Third Floor
New York, New York 10007
(212) 637-2677
CECELIA G. MORRIS
CHIEF UNITED STATES BANKRUPTCY JUDGE
Now before the Court is a motion to “strip-down” a federal tax lien against personal
property pursuant to 11 U.S.C. § 506(a) and (d).
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Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. §
157(a), and the Amended Standing Order of Reference signed by Chief Judge Loretta A. Preska
dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(A) (matters
concerning the administration of the estate); 157(b)(2)(K) (determinations of the validity, extent,
or priority of liens).
Background
Charles L. Walker, III, and Margit H. Walker (“Debtors”) filed for chapter 13 bankruptcy
relief on October 26, 2017 (the “Petition”). Bankr. Pet., ECF No. 1.1 In the Petition, Debtors
listed assets of real property located at 200 Van Wyck Lake Road, Fishkill, NY (the “Real
Property”) and a Florida timeshare, a 2012 Volkswagen Jetta, a 2003 Nissan Frontier, household
goods and furnishing, three firearms, wedding jewelry, a dog, three bank accounts, two 401(k)
accounts, and a 529 education account (collectively the “Personal Property”). Id. Debtors value
the Personal Property at $73,775.95. Id. The Debtors are surrendering the Real Property
through their chapter 13 plan. Mem. Mot. to Bifurcate at 8, ECF No. 20. The Petition lists the
Internal Revenue Service (“IRS”) as a secured creditor holding four separate income tax liens for
tax years 2010, 2011, 2012, and 2013. Id. On November 2, 2017, the IRS filed a secured claim
in the amount of $185,974.73 (“Claim No. 2-1”). Claim No. 2-1, ECF Claims Register.
On February 9, 2018, Debtors filed a motion to void and bifurcate the IRS’ tax lien
pursuant to 11 U.S.C. § 506(a) and (d) and an objection to claim pursuant to 11 U.S.C. §
502(a)(1) and Federal Rule of Bankruptcy Procedure 3007 (the “Motion to Bifurcate and Void”).
Mot. To Bifurcate, ECF No. 19. The Debtors seek to reduce Claim No. 2-1 to a secured claim of
1 Unless otherwise indicated, all citations and/or references to documents and exhibits are to the docket of In re
Walker, Case No. 17-36804 (CGM) (Bankr. S.D.N.Y. Oct. 26, 2017).
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$73,775.95, which is the value of the Debtors’ Personal Property, and to pay the reduced amount
through a chapter 13 plan of reorganization. Mot. to Bifurcate at 2-5. Debtors argue that the
$112,198.78 – which is the difference between the IRS’ original secured claim amount of
$185,974.73 and the value of the Debtors’ Personal Property – may be reclassified from a
secured claim to a general unsecured claim and that portion of the IRS lien is avoided. Id.; Mem.
Mot. To Bifurcate at 14-15, ECF No. 20.
In opposition, the IRS argues that the Motion to Void and Bifurcate should be denied as
there is a discrepancy between the line-items of Personal Property, which add up to $72,525.95
in the Petition, and the total amount asserted herein of $73,775.95. Opp’n at 3-2, ECF No. 27.
The IRS further objects on three grounds: (1) § 506(d) can be used to only void liens securing
claims that are not allowed and it is undisputed that the IRS has an allowed tax lien in this case
that may not be reduced or voided, Id. 5-10; (2) § 1325(a)(5)(B) guards against modification of
the IRS’ tax claim through a chapter 13 plan, which has not been confirmed, Id. 11-14; and (3)
an IRS tax lien enjoys special protections as a bankruptcy discharge does not destroy a United
States tax lien and the IRS is able to seek in rem relief against a debtor’s property. Id. 14-16.
At the hearing held April 10, 2018, oral argument was held and the Court reserved this
written decision to consider whether an IRS tax lien is exempt from the application of 11 U.S.C.
§§ 506(a), (d) and 1322 when a debtor’s only assets are personal property.
Discussion
At the hearing held on April 10, 2018, the Court reserved this decision to consider
whether the IRS’ tax lien may be “stripped down” against the value of the Personal Property. Tr.
April 10, 2018 at 8, ECF No. 31. In error, an administrative entry dated April 10, 2018, states
that the Motion to Bifurcate and Void is denied. ECF, In re Walker, Case No. 17-36804 (CGM)
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(Bankr. S.D.N.Y. Oct. 26, 2017). As the Court did not render a final determination on the
Motion to Bifurcate and Void on April 10, 2018, the record will be amended as necessary to
reflect this written decision pursuant to Federal Rule of Civil Procedure 60(a). Fed. R. Civ. P
60(a) (“The court may correct a clerical mistake … whenever one is found in … part of the
record. The court may do so on motion or on its own.”).
A secured creditor’s lien may not be avoided under 11 U.S.C. § 506(d)
Debtors’ Motion to Bifurcate and Void seeks to reduce the IRS’ tax lien down to the
value of the Personal Property pursuant to 11 U.S.C. § 506(a) and (d). These two code
provisions provide as follows:
(a)(1) An allowed claim of a creditor secured by a lien on property in which the
estate has an interest … is a secured claim to the extent of the value of such
creditor’s interest in the estate's interest in such property … and is an unsecured
claim to the extent that the value of such creditor's interest … is less than the
amount of such allowed claim.”
…
(d) To the extent that a lien secures a claim against the debtor that is not an
allowed secured claim, such lien is void …
11 U.S.C. § 506(a)(1), (d).
While § 506(a) and (d) once worked in tandem to authorize “lien-stripping,”2 this is no
longer the case. Quinones v. United States (In re Quinones), 2017 Bankr. LEXIS 4434, at *19
(Bankr. D.P.R. Dec. 29, 2017). The Supreme Court’s holding in Dewsnup v. Timm, 502 U.S.
410 (1992), foreclosed § 506(d)’s application as a statutory basis to void a creditor’s lien.3
Dewsnup v. Timm, 502 U.S. 410, 417 (1992) (“Therefore, we hold that § 506(d) does not allow
2 Variants of this phrase are a “strip-down” wherein an undersecured creditor’s lien is reduced to the equity value
held by the Debtor in the collateral (after the amount of any superior lien is deducted from the fair market value of
the collateral), and, a “strip-off” wherein a wholly-unsecured creditors lien is removed from collateral in which there
is no equity value. Johnson v. IRS (In re Johnson), 386 B.R. 171, 173 (Bankr. W.D. Pa. 2008).
3 While Dewsnup’s holding was limited to chapter 7 cases, courts considering lien avoidance issues after Dewsnup
moved away from § 506(d) as a voiding power in reorganization cases. See In re Bellamy, 962 F.2d 176, 183 (2d
Cir. 1992); Sapos v. Provident Inst. of Sav., 967 F.2d 918, 925 (3d Cir. 1992).
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petitioner to ‘strip down’ respondents’ lien, because respondents’ claim is secured by a lien and
has been fully allowed pursuant to § 502.”). Prior to the Supreme Court’s ruling in Dewsnup v.
Timm, the application of § 506(d) “had been generally understood to mean that a debtor or
trustee could ask the court to void a lien associated with an undersecured claim to the extent that
[the lien] exceeded the amount of the allowed secured claim, thereby limiting the lien to the
secured portion.” Dever v. IRS (In re Dever), 164 B.R. 132, 135 (Bankr. C.D. Cal. 1994).
Section 506(d) now serves the reduced function of voiding a lien only when the claim it secures
has not been allowed. Bank of Am., N.A. v. Caulkett, 135 S. Ct. 1995, *59 (2015) (“There is scant
support for the view that §506(d) applies differently depending on whether a lien was partially or
wholly underwater.”).
Section 506(d)’s omission as a statutory basis for avoiding a lien is well reasoned:
In addition to the fact lien stripping under section 506(d) is simply not necessary
in the chapter 11, 12 and 13 context, it is also not warranted. First, there is no
principled way to conclude that, although section 506(d) does not authorize lien
stripping in chapter 7 cases, it has a different meaning in chapter 11, 12 and 13
matters. Pursuant to section 103(a), the provisions of section 506 apply in each of
chapters 7, 11, 12 and 13 and no basis exists to alter the meaning of the provision
depending on the chapter in which it is applied.
Second, section 506(d) contains none of the safeguards to be found in sections
1129(b), 1225 and 1325 governing the treatment of secured claims and lien rights.
The fairness of any particular adjustment to the lien rights of a secured creditor
depends on factors that section 506(d) does not begin to probe. In contrast, section
1129(b), for example, contains a host of requirements that are extremely sensitive
to context. In addition, it would make no sense to conclude that, whereas a plan
proponent is expressly authorized to adjust the lien rights of a secured creditor
under section 1123(b)(5) subject to certain enumerated exceptions, that authority
is likewise duplicated in section 506(d) but without the limitations contained in
section 1123(b)(5) regarding first priority liens on a debtor’s principal residence.
The better view is that section 506(d) does not authorize lien stripping. Rather, the
ability to adjust the lien rights of secured creditors is provided for elsewhere in the
Code.
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In re IRS of the Dep’t of the Treasury of the United States v. Johnson, 415 B.R. 159, 167
(W.D. Pa. 2009) (quoting 4 COLLIER BANKRUPTCY MANUAL P 506.06[1][c])
(emphasis in original); see also Woolsey v. Citibank, N.A. (In re Woolsey), 696 F.3d
1266, 1278 (10th Cir. 2012) (noting that out of all the circuit courts approving of lien
stripping in reorganization cases, not a single one relies on § 506(d)).
Here, Claim No. 2-1 filed by the IRS is secured by the IRS’ tax lien and is an allowed
claim. As § 506(d)’s reduced function is to void a lien when the claim is secures has not been
allowed, the Motion to Bifurcate and Void must be denied under § 506(d).
The facts and issues presented in this case bear similarity to those presented in In re
Garrido-Yarnis, 545 B.R. 459, 460 (Bankr. S.D.N.Y. 2016), in which a chapter 13 debtor moved
to avoid an IRS tax lien against her primary residence under § 506(d). In In re Garrido-Yarnis,
the Court applied a well-established standard in this Circuit: a chapter 13 debtor is able to void a
junior mortgage lien in its entirety when the junior mortgage lien is wholly unsecured. Pond v.
Farm Specialist Realty (In re Pond), 252 F.3d 122, 125 (2d Cir. 2001). Applying the Pond
standard, the Court held that a chapter 13 debtor may not void an IRS tax lien from his or her
principal residence if there is one dollar of value in personal property for the tax lien to attach to.
In re Garrido-Yarnis, 545 B.R. 459, 461 (Bankr. S.D.N.Y. 2016) (citing Nobelman, 508 U.S. at
328-29). The Court reasoned that unlike mortgage liens that attach to specific parcel or parcels of
real property, a federal tax lien created under 26 U.S.C. § 6321 creates a single lien on all of a
debtor’s real and personal property.4 Id.
4 “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.
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The IRS petitions the Court to apply In re Garrido-Yarnis’ holding to the facts and issues
raised in this case and deny the Motion to Bifurcate and Void in its entirety. While this case and
In re Garrido-Yarnis both concern an IRS tax lien created under 26 U.S.C. § 6321, In re
Garrido-Yarnis did not resolve whether an IRS tax lien may be modified and treated under a plan
of reorganization.
Claim No. 2-1 filed by the IRS is not protected by the anti-modification provision of §
1322(b)(2) and may be modified
While Dewsnup foreclosed a debtor’s ability to “strip down” a secured creditor’s lien
under § 506(d), chapter 13 debtors are still able to modify a secured creditor’s lien through §
506(a) and a plan of reorganization. E.g., In re Bellamy, 962 F.2d 176, 183 (2d Cir. 1992)
(“[A]llowing Chapter 13 debtors to strip down an undersecured residential mortgagee’s claim
forwards the legislative purpose of furthering reorganizations for individuals with regular income
to enable them to retain their homes.”); Sapos v. Provident Inst. of Sav., 967 F.2d 918, 925 (3d
Cir. 1992) (“Accordingly, we hold that the Dewsnup Court’s interpretation of section 506 in a
chapter 7 liquidation does not apply in this chapter 13 reorganization.”). Instead of relying on §
506(d), “lien stripping is executed in the following manner in a chapter 13 case: a lien is
bifurcated into secured and unsecured claims under § 506(a) and then an allowed secured claim
can be modified under §1322(b)(2) in conjunction with a debtor’s confirmed plan of
reorganization.” In re IRS of the Dep’t of the Treasury of the United States v. Johnson, 415 B.R.
159, 168-69 (W.D. Pa. 2009); accord Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122,
127 (2d Cir. 2001); see also 11 U.S.C. §§ 1322(b)(2) (contents of plan) and 1325 (confirmation
of plan).
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While 26 U.S.C. § 6321 confers upon the IRS a single lien on all of a debtor’s real and
personal property for nonpayment of taxes, the IRS is not afforded any added protection or
special status that guards against modification of a creditor’s lien rights through a chapter 13
plan. In re IRS of the Dep’t of the Treasury of the United States v. Johnson, 415 B.R. 159, 170
(W.D. Pa. 2009); see also Brinson v. United States (In re Brinson), 485 B.R. 890, 902 (Bankr.
N.D. Ill. 2013); 11 U.S.C. § 1322(b)(2). As relevant here, 11 U.S.C. § 1322(b)(2), known as the
antimodification provision, provides that a chapter 13 plan may “modify the rights of holders of
secured claims, other than a claim secured only by a security interest in real property that is the
debtor’s principal residence.” 11 U.S.C. § 1322(b)(2)(emphasis added). The antimodification
provision was enacted to protect mortgagees, not a government agency such as the IRS. Pond v.
Farm Specialist Realty (In re Pond), 252 F.3d 122, 125 n.4 (2d Cir. 2001) (“The legislative
history of Section 1322(b)(2) suggests that Congress sought to protect claims secured by a
debtor’s principal residence ‘to encourage the flow of capital into the home lending market.’”)
(quoting Nobelman v. American Sav. Bank, 508 U.S. 324, 332 (1993) (Stevens, J., concurring)).
As Claim No. 2-1 filed by the IRS is secured by the Debtors’ real and personal property
in this case, it is not subject to the anti-modification exception that protects mortgagees. For this
reason, the Court finds that Claim No. 2-1 may be bifurcated into secured and unsecured claims
pursuant to 11 U.S.C. § 506(a). Once the value of the Debtors’ Personal Property is determined,
Claim No. 2-1 and the underlying tax lien is subject to modification under 11 U.S.C. §§
1322(b)(2) and 1325. The IRS will retain its lien on the Personal Property until such time as the
earlier of payment in full or when a chapter 13 plan is performed.5 See Brinson v. United States
5By General Order M-518, the Bankruptcy Court for the Southern District of New York incorporated a model
chapter 13 plan effective December 1, 2017. Section 3.5 of the model chapter 13 plan provides that the “holder of
any claim … will retain its Lien on the property of the estate until such time as the earlier of (i) payments in full, or
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(In re Brinson), 485 B.R. 890, 902 (Bankr. N.D. Ill. 2013) (“A lien cannot be avoided before
discharge is entered under 11 U.S.C. § 1328.”).
Conclusion
For the foregoing reasons, the Court grants the Debtors’ Motion to Bifurcate and Void.
Debtors shall submit a separate order consistent with this decision.
(ii) the Plan is performed; and (b) will retain its Lien on non-estate property.” Form Chapter 13 Plan, available at
http://www.nysb.uscourts.gov/chapter-13-filing-and-plan-information.
Dated: August 6, 2018
Poughkeepsie, New York
/s/ Cecelia G. Morris
_______________________
Hon. Cecelia G. Morris
Chief U.S. Bankruptcy Judge
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