MEMORANDUM OPINION

This case is before the court on the objection of the chapter 7 trustee to allowance of the claim of the Internal Revenue Service (“IRS”) as a secured claim.

FINDINGS OF FACT:

The IRS has filed two claims, claim no. 8 and claim no. 14, which amends claim no. 8 and reduces the claim of the IRS to $4,519.65, of which $3,569.88 is claimed as secured and $947.77 is admittedly unsecured.

The secured portion of the claim represents a 100% civil penalty assessed August 17, 1987 against Johnetta Watkins for withholding taxes owed for the tax period ending September 30, 1986. The court infers from the record that prior to 9/30/86 Johnetta Wadkins was the responsible party of a business and failed to remit taxes withheld from the wages of employees.

On October 10, 1987 the IRS caused to be recorded in the Fayette County Clerk’s office a tax lien notice for unpaid withholding taxes in the amount of $5,126.72. This tax lien, which would have expired on 9/16/93, unless renewed, was renewed by a new notice of tax lien filed in the Fayette County Clerk’s office on 6/24/93, again in the amount of $5,126.72. The latter lien was in effect against Johnetta Wadkins when she and her present husband, Eddie Lee Anderson, filed a joint petition for relief under chapter 7 of the Bankruptcy Code in this court on July 8, 1996.

Apparently some of this tax obligation has been paid because claim no. 14 fixes the amount of withholding taxes presently owed by Johnetta Wadkins and secured by the IRS lien as $3,569.88.

In 1994, prior to bankruptcy, and apparently prior to her marriage to Eddie Lee Anderson, Johnetta Wadkins suffered personal injuries in an automobile accident. In January 1995 she filed an action in the Fayette Circuit Court, Civil Action No. 95-CI-392, for damages for personal injuries suffered in the automobile accident. Prior to bankruptcy the suit was settled for $35,000, excluding $10,000 for Personal Injury Protection (“PIP”) which she received in 1994 and 1995. The lawsuit was dismissed as settled on April 17, 1996.

Between the date of the settlement of the personal injury action in April of 1996 and the date of bankruptcy on July 8, 1996, numerous payments were made to creditors from the settlement proceeds and perhaps from other sources of income.

On September 26, 1996 the chapter 7 trustee filed an adversary proceeding against Craig A. Banta, M.D. to avoid as preferential a payment in the amount of $3,550 made to Dr. Banta on April 15, 1996. The complaint alleges that on January 24, 1996 the debtors assigned to Dr. Banta $3,550 of the personal injury settlement proceeds in satisfaction of an antecedent debt in that amount and that the payment made on April 15, 1996 was pursuant to the January 24, 1996 assignment. Dr. Banta’s answer to the complaint in the adversary proceeding reveals the assignment was recorded on January 30, 1995 in the Fayette County Clerk’s office, Book 230 at page 258, and that the $3,550 payment was made by counsel for Ms. Wadkins from the settlement proceeds prior to delivery of any of the settlement proceeds to Ms. Wadkins.

The trustee’s adversary proceeding against Dr. Banta was settled by the payment by Dr. Banta of $2,000 to the bankruptcy estate. After notice and a hearing, there being no objections, the settlement was approved by the court on December 17, 1996.

It appears from the record the trustee may have recovered without suit $500 from Pam Miller in satisfaction of an alleged preferential payment of $1,000. The trustee has recovered a total of $2,500 of the disbursements made by the debtors from the settlement proceeds. Many of the disbursements made by the debtors were payments of less than $600 on consumer debts, which the trustee is precluded from recovering by title 11 U.S.C. § 547(c)(8), and which are for amounts too small to warrant attempts at recovery under the Kentucky preference statute KRS 378.060 and KRS 378.070, as made applicable by title 11 U.S.C. § 544(b). See Amended Statement of Financial Affairs, Item 10, filed by debtors on October 11, 1996, Docket No. 23-1, and Amendment to Statement of Financial Affairs, Item 4, filed by debtors on July 30, 1996, Docket No. 14-1.

The IRS takes the position it has a prior lien on the proceeds of these preference recoveries, as evidenced by its filed tax liens.

CONCLUSIONS OF LAW:

It seems unlikely the statutory lien of the IRS under title 28 U.S.C. § 6321 would attach to a debtor’s rights in a personal injury action prior to settlement of the case. However, once the case was settled and the settlement monies were paid to counsel for the debtor, the lien would have attached to the debtor’s rights in the settlement monies at that point in time. Consequently, the IRS lien attached prior to the disbursement of these monies to Dr. Banta and Ms. Miller.

Therefore, when the trustee recovered as preferential a portion of the payments disbursed to Dr. Banta and Ms. Miller, the monies so recovered are subject to the IRS lien which attached to the monies prior to bankruptcy. The IRS claim is secured to the extent of the amount of such monies recovered by the trustee.

However, pursuant to title 11 U.S.C. § 724, the IRS lien on these funds recovered by the trustee is subordinate to the administrative expenses in the case, to wit, the trustee’s commissions and the fee of the attorney for the trustee.

Dated this _____ day of April 2000

By the court –

________________________________
JOE LEE, U.S. BANKRUPTCY JUDGE

Copies to:

James D. Lyon, Trustee

Charles Keen, Attorney for IRS

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

JOHNETTA WADKINS ANDERSON CASE NO. 96-51395

EDDIE LEE ANDERSON

DEBTORS

ORDER

In conformity with the memorandum opinion of the court his day entered, the objection of the trustee to allowance of the claim of the IRS, as amended, as a secured claim is overruled.

Dated this 18^th day of April 2000

By the court –

________________________________
JOE LEE, U.S. BANKRUPTCY JUDGE

Copies to:

James D. Lyon, Trustee

Charles Keen, Attorney for IRS