CECELIA G. MORRIS, Chief 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).
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).
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.
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 $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.
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) (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.").
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:
11 U.S.C. § 506(a)(1), (d).
While § 506(a) and (d) once worked in tandem to authorize "lien-stripping,"
Section 506(d)'s omission as a statutory basis for avoiding a lien is well reasoned:
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.
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.
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).
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
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.
For the foregoing reasons, the Court grants the Debtors' Motion to Bifurcate and Void. Debtors shall submit a separate order consistent with this decision.
