VS. ADV. NO. 90-0341








This matter is before the Court on cross-Motions for Summary Judgment of the plaintiffs and the defendant Internal Revenue Service ("the IRS"). The plaintiffs maintain that certain tax liens of the IRS are void pursuant to 11 U.S.C. '506(d); the IRS contends that '506(d) does not operate to void its lien. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(K).

The plaintiffs filed their Chapter 7 petition in this Court on April 2, 1990. Property of the bankruptcy estate includes a house and lot in Perry County. The real property is subject to a first mortgage in favor of Commercial Credit, Inc., with an approximate outstanding balance at the time of filing of $35,000.00. The fair market value of the property on the date of filing was approximately $32,000.00. The plaintiffs have each claimed a $5000.00 homestead exemption pursuant to KRS 427.160. The IRS has filed notices of federal tax liens for the plaintiffs' income tax liabilities for 1982, 1983 and 1986. The Commonwealth of Kentucky Revenue Cabinet ("the Cabinet") also asserted tax claims against the plaintiffs for income taxes for 1982 and 1983. The property has not been abandoned by the trustee.

This proceeding was initiated by the filing of the plaintiffs' Complaint on November 7, 1990 against the IRS and the Cabinet. The Cabinet filed its Answer and Disclaimer on December 13, 1990, stating that it did not intend to enforce its lien and asking to be dismissed. The IRS filed its Answer on December 13, 1990, as well. On January 2, 1991, the plaintiffs filed a Motion for Judgment on the Pleadings as to the Cabinet. This Court sustained that Motion and entered an Order in that regard on January 31, 1991. This Court found that the Cabinet's lien was void and the underlying tax claims for the years 1982 and 1983 were dischargeable. The Cabinet was directed to release its lien.

This Court entered a second Order on January 31, 1991, declaring the plaintiffs' federal income tax liabilities for 1982 and 1983 to be dischargeable and directing the plaintiffs and the IRS to submit cross-motions for partial summary judgment on the issue of whether federal tax liens may be voided pursuant to 11 U.S.C. '506(d). The plaintiffs filed their Motion for Summary Judgment on February 1, 1991. The IRS filed its Motion for Partial Summary Judgment on February 21, 1991.

The statutory provision at issue herein provides as follows:

'506. Determination of secured status.

. . . . . . . . . . . . .

(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void unless---

(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or

(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.

The plaintiffs argue that pursuant to '506(d) any lien that secures a claim against the debtor that is not an allowed secured claim is a void lien. They point out that '506(a) renders a claim secured to the extent of the value of the creditor's interest in the estate's interest in the property, and unsecured to the extent that the value of the creditor's interest is less than the amount of the secured claim. All parties agree that the plaintiffs have no equity in the property after the first mortgage claim is satisfied. The plaintiffs therefore contend that any claim the IRS may have is unsecured.

In support of their position, the plaintiffs have cited two unpublished decisions of this Court, Carter Brashear v. Farmers Home Administration, Adv. 84-0237, and In re Gary and Gloria Hyden, Case No. 88-00063. The plaintiffs maintain that pursuant to the rulings in these cases, the lien of the IRS should be found void and should be required to be removed. The IRS counters with reference to a recent decision of the Tenth Circuit Court of Appeals, In re Dewsnup, 908 F.2d 588 (10th Cir. 1990), which did not allow '506(d) to be employed to void the unsecured portion of liens on real property. In that case the debtors sought to redeem the real estate in question. It was not their primary residence and had been abandoned by the Chapter 7 trustee pursuant to 11 U.S.C. '554. At 589.

The Dewsnup court agreed with other courts holding the view that debtors must be denied relief under '506(d) for reasons including the following:

1) that abandoned property is not administered by the estate and therefore sections 506(a) and (d) have no application; 2) that allowing this relief inequitably gives debtors more in a Chapter 7 liquidation than they would receive in the reorganization chapters; and finally, 3) that allowing avoidance pursuant to section 506(d) renders the redemption provision found in Code section 722 meaningless.

At 589-590. The court reasoned that '506 was intended as an incentive for prospective bankruptcy petitioners to file under one of the reorganization chapters, and that to employ it in a Chapter 7 case in which the property had been abandoned gave the debtors more than what they were entitled to under the Code. At 591-592. In the case at bar the property has not been formally abandoned by the trustee, but, as the IRS points out, the first mortgage lien exceeds the value of the property. Pursuant to 11 U.S.C. '554, therefore, it qualifies for abandonment as it is "of inconsequential value and benefit to the estate". In the same vein, it is not "property in which the estate has an interest" pursuant to '506(a).

This Court agrees with the interpretation of '506(d) put forth in the Dewsnup decision. The application of '506(d) in a Chapter 7 case would not be precluded, however, in a situation where such application was warranted, as where there are sufficient assets to allow distribution to unsecured creditors and, thus, the determination of the amount of unsecured claims would be required. In consideration of all the foregoing, it is therefore the opinion of this Court that the defendant Internal Revenue Service's Motion for Partial Summary Judgment should be SUSTAINED and the plaintiffs' Motion for Summary Judgment should be OVERRULED. An Order reflecting this opinion will be entered accordingly.


By the Court -







Copies to:

John T. Hamilton, Esq.

David Middleton, Esq.

Stuart M. Fischbein, Esq.