On November 7, 2017, I posted on the case of In re Nomillini in which the debtor sought to limit the secured claim of the IRS based on the confirmation of his chapter 13 plan. The Ninth Circuit, in an unpublished opinion dated December 18, 2018, denied the debtor’s motion to cut off the rights of the IRS lien in debtor’s property. Here, the debtor’s plan did not seek to limit the rights of the IRS as a secured creditor. The court relied on the normal rule that a lien against a debtor passes through the bankruptcy unaltered absent a specific attack on the lien as a part of the bankruptcy proceeding.
read more...The Ninth Circuit stated the general rule as follows:
For a debtor to avoid a creditor’s lien or otherwise modify the creditor’s in rem rights, the debtor’s confirmed plan must do so explicitly and provide the creditor with adequate notice that its interests may be impacted. Id. at 873. Any ambiguity in the plan will be interpreted against the debtor. Id. at 867.
Mr. Nomillini did not mention the IRS lien in his chapter 13 plan. He gave no notice to the IRS during his bankruptcy proceeding that he sought to reduce or eliminate its lien on his property. He sold his home. He entered into an agreement with the IRS that its lien would attach to the proceeds. The sale of the home brought a greater price than anticipated by the IRS when it filed its original lien. Based on the sale price, the IRS amended its claim to increase the amount of its lien claim to match the proceeds. Mr. Nomillini sought to limit the IRS lien claim to the amount of the original claim. He then brought an action seeking to avoid the IRS lien to the extent that it exceeded the original claim. The lower courts dismissed the case and the 9th Circuit affirmed.
Lien claims not only pass through bankruptcy unimpacted (absent a specific challenge) but the amount of a lien claim can change during or after a bankruptcy as the value of the property increases or decreases. When the IRS filed its original claim in this case, it had to value its lien claim and claim any portion not covered by equity in Mr. Nomillini’s property as an unsecured claim. Here, the value of the secured property turned out to be low either because the IRS made a wrong determination at the outset or because the property continued to increase in value. In either event the debtor does not receive a windfall because of the low value in the initial claim.
Once the property was sold, the value of the property was set and the IRS amended its claim up to the amount of the sales proceeds. The Ninth Circuit joins the lower courts in determining that the IRS has the right to do this. Had the property sold for less than the amount of the lien claim that the IRS made, the value of the lien claim would have decreased rather than increased. For this reason creditors often seek to protect themselves from a downward movement of value in secured property by seeking adequate protection. The IRS does not do this often because of the time involved to seek adequate protection and, in cases in which its lien is secured by real property, because of the difficulty in proving that the property will decrease in value.
The case resolves the issue in a manner consistent with existing law. The lesson here is that the value of a lien claim is not fixed at the time of filing bankruptcy.
I worked on the appellate brief to the 9th Cir., and the decision misses the point in a Chapter 13 bankruptcy. The lien is merely a placeholder during the term of the plan, to assure plan performance. Once the amount of the allowed secured claim is paid through the plan, the lien serves no purpose and should be avoided as a matter of course. It is the bargain the debtor strikes when filing under Chapter 13 (and presumably an individual 11). To illustrate, if the value of the property securing the collateral decreased during the plan, could the debtor move to decrease the value of the allowed secured claim, and thereby pay less under the plan? How often could an allowed secured claim be amended under this scenario? Poorly reasoned decision.
“The sale of the home brought a greater price than anticipated by the IRS when it filed its original lien.”
I thought the amount of tax owing, and interest and penalties thereon, would be a lien regardless of whether the IRS files a notice of the lien. When the IRS chose to file a notice, why did they state an amount less than the amounts they allege to be owing?
If some new event or “discovery” caused the IRS to allege that additional amounts were owing, why should they be allowed to amend a notice of lien instead of filing a new notice for the additional lien? Surely the taxpayer should be given an opportunity to be denied a new CDP hearing and be denied a new Tax Court case because the 5th Amendment right to due process is evaded when new liens concern the same tax period as old liens. Though the result is the same, the evasion of the 5th Amendment deserves clarification.
@Norman:
1. You are correct that the lien arises automatically as a matter of law. The IRS does not “file a lien” but instead files a “Notice of Tax Lien” (NFTL). The NFTL just brings to light what was then a secret lien. However, the IRS takes the position that the secret tax lien is insufficient to give the IRS claim secured status. So here the IRS had a secured claim because it had filed the NFTL, not because the tax lien was extant as a matter of law.
2. To answer your question about amounts secured by the lien, here are two quick answers: (a) section 6320(b)(2) allows only one CDP hearing per tax period. So even if the IRS files a new NFTL for the same tax period, that does not trigger a new CDP right. (b) go read Stevens v. United States, 49 F.3d 331 (7th Cir. 1995) for a good explanation of why the IRS is entitled to claim accrued interest and penalties even when the those amounts are not even formally assessed, much less reflected in any NFTL or Notice of Levy.
Then it sounds like the IRS would be motivated to file a Notice for less than the full amount of the lien, because they can file an additional Notice later and evade the process of CDP and Tax Court. For example if the taxpayer doesn’t owe any tax, the IRS could file a Notice for a lien of $1.00, concede after calendar call in Tax Court, and then file a Notice for a lien of $1,000,000.00. The average victim will not be able to comply with Flora. The IRS will use offset power to seize every amount of refund owing to the taxpayer for the rest of her life.
When the IRS assesses a new penalty while CDP or Tax Court is in process, the same problem occurs. Furthermore if the IRS asserts an intent to concede the new penalty but reneges on its assertion (for example by issuing a Notice of Intent to Levy after a Notice of Filing of Tax Lien, or vice-versa), the same problem occurs. If the IRS closes one CDP hearing without issuing a Notice of Determination, and closes another CDP hearing with a Notice of Determination, but the amount of money involved in the hearing without a Notice of Determination is larger than the amount involved in the hearing with a Notice of Determination, the same problem occurs — though one of those two CDP hearings shouldn’t have been allowed to get started and the taxpayer should have got the shaft earlier.