IN RE: SANDRA TILLMAN V. LAWRENCE WARFIELD

FILED
FOR PUBLICATION
NOV 18 2022
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
No. 21-16034
_In re: SANDRA J. TILLMAN,

Debtor, D.C. No.
3:20-cv-08204-DWL
_____________________
UNITED STATES OF AMERICA,
OPINION
Appellant,
v.

LAWRENCE J. WARFIELD,
Trustee; SANDRA J. TILLMAN,

Appellees.

Appeal from the United States District Court
for the District of Arizona
Dominic Lanza, District Judge, Presiding

Argued and Submitted July 5, 2022
Seattle, Washington

Before: CLIFTON and BUMATAY, Circuit Judges, and
CHEN, * District Judge.

Opinion by Judge Chen;
Dissent by Judge Bumatay

__________________
*
The Honorable Edward M. Chen, United States District Judge for the
Northern District of California, sitting by designation.
 SUMMARY **

Bankruptcy

The panel reversed the district court’s decision affirming
the bankruptcy court’s summary judgment in favor of a
Chapter 7 trustee who brought an adversary proceeding
seeking to avoid an Internal Revenue Service tax lien on
property subject to a homestead exemption and to preserve
the value of the lien for the benefit of the bankruptcy estate.

The IRS held a secured claim on the debtor’s real
property arising from a tax penalty lien. The debtor claimed
a $150,000 homestead exemption in the property under
Arizona law. The trustee sought to avoid the tax penalty lien
on the debtor’s exempt property and preserve it for the
benefit of the estate pursuant to 11 U.S.C. §§ 724(a) and 551.

The panel held that § 724(a) concerns the trustee’s
avoidance of qualifying liens attached to the property of the
estate at the time of distribution. When a debtor exempts a
property interest under 11 U.S.C. § 522, the exemption
withdraws that property interest from the bankruptcy estate
and, thus, from the reach of the trustee for distribution to
creditors. Accordingly, because exempt property is not
“property of the estate” which may be “distributed,” a trustee
may not avoid a lien under § 724(a) attached to exempt
property which is no longer part of the estate. The panel held
that because a trustee may not avoid a tax lien attached to
exempt property through § 724(a), it follows that a trustee is
not permitted to preserve the tax lien for the benefit of the

**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
estate under § 551, which provides for automatic
preservation of certain avoided liens, including liens avoided
under § 724(a). The panel concluded that its holding was
consistent with Hutchinson v. IRS (In re Hutchinson), 15
F.4th 1229 (9th Cir. 2021), in which the court was not called
upon to resolve any dispute as to the applicability of § 724(a)
to the property at issue. The panel reversed and remanded
to the district court with instructions for further proceedings.

Dissenting, Judge Bumatay wrote that the panel should
have affirmed the trustee’s avoidance of the IRS tax penalty
lien because the Bankruptcy Code creates no exception to
the trustee’s avoidance power for liens on exempt
property. Judge Bumatay wrote that under the plain text of
§§ 724(a) and 726(a)(4), a trustee has the authority to avoid
a federal tax penalty lien, and estate property does not evolve
over the course of a bankruptcy proceeding. Rather, exempt
property is protected from prepetition debts, but it is not
wholly removed from the bankruptcy estate.

COUNSEL

Matthew S. Johnshoy (argued), Francesca Ugolini, and Ellen
Page DelSole, Attorneys; David A. Hubbert, Deputy
Assistant Attorney General; United States Department of
Justice, Tax Division; Washington, D.C.; for Appellant.

Terry A. Dake (argued), Terry A, Dake Ltd, Phoenix,
Arizona, for Appellee Lawrence J. Warfield.

Thomas H. Allen, Allen Barnes & Jones PLC, Phoenix,
Arizona, for Appellee Sandra J. Tillman.
 UNITED STATES V. WARFIELD 1

OPINION

CHEN, District Judge:

Sandra J. Tillman (the “Debtor”) purchased a house in
Prescott, Arizona (the “Prescott Property”). The Internal
Revenue Service (“IRS” or “the government”) held a
secured claim on the Prescott Property arising from a tax
penalty lien. Thereafter, Debtor filed a petition for Chapter
7 bankruptcy and claimed a $150,000 homestead exemption
in the house under Arizona law. Appellee Trustee Lawrence
J. Warfield (the “Trustee”) instituted an adversary
proceeding to avoid the IRS’s tax lien on the exempt
property and to preserve the value of the lien for the benefit
of the bankruptcy estate. The Bankruptcy Court granted
summary judgment to the Trustee and the District Court
affirmed. The government appealed.

We are presented with a matter of first impression: may
a trustee use 11 U.S.C. §§ 724(a) and 551 to avoid and
preserve a tax penalty lien on a debtor’s exempt property for
the benefit of the bankruptcy estate? We hold that a trustee
may not. Therefore, we reverse the decision of the District
Court affirming the Bankruptcy Court.

I. BACKGROUND

A. LEGAL BACKGROUND

At the outset, we briefly summarize the terminology and
statutory provisions of the Bankruptcy Code relevant to this
dispute.

First, after a bankruptcy petition is filed, a bankruptcy
estate is formed consisting of specified property interests of
the debtor. 11 U.S.C. § 541(a).
2 UNITED STATES V. WARFIELD

Second, in some circumstances, a debtor may exempt
property from the bankruptcy estate, thereby removing it
from the bankruptcy estate. Mwangi v. Wells Fargo Bank,
N.A. (In re Mwangi), 764 F.3d 1168, 1175–76 & n.4 (9th Cir.
2014). In such circumstances, the debtor generally retains
the exempt property, and the exempt property cannot be used
by the bankruptcy estate to satisfy the claims of unsecured
creditors. Owen v. Owen, 500 U.S. 305, 308 (1991). Section
522 of the Bankruptcy Code enumerates exemptions
available to an individual debtor in bankruptcy, but
§ 522(b)(1) also authorizes state legislatures to “opt out” of
the § 522 exemption scheme and provide their own
exemption schemes. “If a State opts out, then its debtors are
limited to the exemptions provided by state law.” Owen, 500
U.S. at 308.

As relevant here, Arizona has opted out of the § 522
exemptions and provides its own set of exemptions to
Arizona residents. Arizona Revised Statutes (“A.R.S.”) §
33-1133(B). Among other things, Arizona provides a
homestead exemption that permits a resident to exempt her
“interest in real property . . . in which [she] resides,” up to
$150,000 “in value.” Id. § 33-1101(A)(1) (2004 version,
effective prior to Jan. 1, 2022). Arizona, however, provides
that consensual loans, such as mortgages, are not “subject to
or affected by” the homestead exemption. A.R.S. § 33-
1104(D). Thus, depending on the value of the property, a
mortgage can diminish the amount of the homestead
exemption available to the homeowners. Notably, the
Arizona homestead exemption does not provide for any
reduction in the exemption amount for tax liens.

Third, the Bankruptcy Code limits a debtor’s ability to
shield exempted property from liability for certain pre-
petition debts. Section § 522(c) provides:
 UNITED STATES V. WARFIELD 3

(c) Unless the case is dismissed, property
exempted under this section is not liable
during or after the case for any debt of the
debtor that arose . . . before the
commencement of the case, except—
...
(2) a debt secured by a lien that is—

(A)(i) not avoided under subsection
(f) or (g) of this section or under
section 544, 545, 547, 548, 549, or
724(a) of this title; and

(ii) not void under section 506(d)
of this title; or

(B) a tax lien, notice of which is
properly filed . . . .

11 U.S.C. § 522(c) (emphasis added). In short, § 522(c)
provides that a debtor remains liable for certain debts
secured by liens, such as tax liens, even if the debtor has
otherwise exempted property from the reach of unsecured
creditors. Of note, an IRS tax lien lies “upon all property
and rights to property, whether real or personal, belonging to
such person.” 26 U.S.C. § 6321.

Fourth, under § 724(a) of the Bankruptcy Code, a trustee
may “avoid” a “lien that secures a claim of a kind specified
in section 726(a)(4)” for the estate. Section 726 deals
generally with distribution of property of the estate, and
§ 726(a)(4), as relevant here, addresses claims for non-
compensatory penalties. 11 U.S.C. § 726(a)(4) (addressing
“payment of any allowed claim, whether secured or
unsecured, for any fine, penalty, or forfeiture, or for
multiple, exemplary, or punitive damages, arising before the
4 UNITED STATES V. WARFIELD

earlier of the order for relief or the appointment of a trustee,
to the extent that such fine, penalty, forfeiture, or damages
are not compensation for actual pecuniary loss suffered by
the holder of such claim”).

Fifth, if a trustee avoids a lien using § 724(a), the lien’s
priority position is automatically “preserved for the benefit
of the estate but only with respect to property of the estate.”
11 U.S.C. § 551. Thus, generally, once the trustee avoids a
lien against property of the estate, he steps into the shoes of
the lienholder and can recover that property interest for the
estate, thereby increasing the property of the estate available
to satisfy claims of unsecured creditors. Retail Clerks
Welfare Trust v. McCarty (In re Van de Kamp’s Dutch
Bakeries), 908 F.2d 517, 519 (9th Cir. 1990).

B. FACTUAL BACKGROUND

Having described the relevant statutory provisions, we
now turn to the facts of this case.

In 2015, Debtor purchased a residence in Prescott,
Arizona and granted a mortgage to Bank of America. The
Prescott Property became the Debtor’s homestead under
Arizona law. See A.R.S. § 33-1101 (2004 version, effective
prior to Jan. 1, 2022). The Debtor owed income tax for 2015
but failed to timely file a return or pay her 2015 taxes. The
IRS assessed Debtor’s 2015 income tax liability and related
penalties and interest. Debtor eventually fully paid the
original tax liability but did not fully pay the penalties and
interest, which initially totaled over $18,000. On December
24, 2018, the IRS recorded a notice of a federal tax lien (the
“IRS Tax Lien”) securing the penalties against the Prescott
Property.
 UNITED STATES V. WARFIELD 5

On January 30, 2019, Debtor filed a Chapter 7
bankruptcy petition in the U.S. Bankruptcy Court for the
District of Arizona. The IRS filed a claim for Debtor’s 2015
tax liabilities and indicated its claim was secured by the IRS
Tax Lien it had filed. Debtor claimed a homestead
exemption of up to $150,000 on the Prescott Property under
A.R.S. § 33-101, which the Bankruptcy Court permitted.
that time, the Debtor’s mortgage was for $364,381 and the
IRS’s secured tax lien was for $24,686.26.

C. PROCEDURAL BACKGROUND

Thereafter, the Trustee filed the adversary proceeding
currently at issue and sought a summary judgment order: (1)
avoiding the federal tax lien on the Prescott Property
pursuant to 11 U.S.C. § 724(a), and (2) preserving the value
of the avoided federal tax lien on the Prescott Property for
the benefit of the bankruptcy estate pursuant to 11 U.S.C.
§ 551. The government responded that lien avoidance under
§ 724(a) and preservation under § 551 did not apply to liens
encumbering exempt property, such as the Prescott Property,
which was subject to Arizona’s homestead exemption. The
Debtor also intervened and asserted her right to an increased
exemption under § 522(g).

The Bankruptcy Court granted the Trustee’s summary
judgment motion, holding that the Trustee could avoid the
portion of the federal tax lien securing the tax penalties and
interest under § 724(a) and that the value of the lien was
preserved for the estate’s benefit under § 551.

The Bankruptcy Court rejected the government’s
argument that lien avoidance under § 724(a) and
preservation under § 551 for the benefit of the bankruptcy
estate did not apply to the Debtor’s exempted homestead
property. Specifically, the Bankruptcy Court found that the
6 UNITED STATES V. WARFIELD

IRS held a secured claim for a tax penalty, which is of the
kind specified in § 726(a)(4), and was, thus, subject to
avoidance by the Trustee under § 724(a). It observed that
the IRS Tax Lien was held against the Prescott Property,
which the Debtor claimed exempt under Arizona’s
homestead exemption—and which the Bankruptcy Court
had previously granted—but that the grant of this exemption
did not preclude the Trustee from avoiding the lien and
preserving it for the benefit of the estate.

The Bankruptcy Court quoted Heintz v. Carey (In re
Heintz) for the proposition that Ҥ 551 does not exclude
exempt property from preservation” and that “[a]n avoided
interest or lien encumbering exempt property is
automatically preserved for the benefit of the estate under
§ 551.” 198 B.R. 581, 586 (B.A.P. 9th Cir. 1996). Relying
on Heintz, the Bankruptcy Court concluded that the Debtor’s
homestead was property of the bankruptcy estate at the
commencement of the case and remained property of the
estate for purposes of § 551 even after the Debtor’s
homestead exemption was allowed.

The Bankruptcy Court further reasoned that, under
Arizona law, the Debtor’s exemption was limited to an
“interest” in her homestead, up to $150,000, equal to the
property’s value after subtracting both the value of the
mortgage lien and the value of the federal tax lien. The court
explained that Arizona’s exemption laws explicitly excluded
the value of consensual liens, such as her mortgage, from the
amount of the Debtor’s homestead exemption. And, as to
the federal tax lien, the court observed that Arizona’s
exemption laws were “ineffective” against the federal tax
lien. The Bankruptcy Court held this ineffectiveness meant
the Debtor’s homestead exemption did not include “the
value of the lien positions occupied by [Bank of America] or
the IRS,” and it was only the Debtor’s equity beyond the
 UNITED STATES V. WARFIELD 7

mortgage and tax lien that the Debtor was entitled to exempt.
Thus, the Bankruptcy Court concluded that “[a]t all relevant
times, the IRS’s Tax Lien encumbered property of the
estate.”

Accordingly, the court explained that “[t]he trustee may
avoid the IRS’s Tax Lien under § 724(a),” and “[u]pon
avoidance of the IRS’s Tax Lien, the IRS’s Tax Lien is
preserved for the benefit of [the] bankruptcy estate under
§ 551.” 1

In so concluding, the Bankruptcy Court also rejected the
government’s argument that the court’s holding would cause
inequitable results for the Debtor, because the Debtor’s
exemption could be reduced twice as a result of the same
lien—first, as a deduction from the amount that Debtor could
exempt, and then, again, when the Debtor is required to
satisfy the value of the lien to the IRS. The Bankruptcy
Court reasoned that the Debtor would not have to unfairly
pay twice on the same lien because the IRS Tax Lien “never
attached to the Debtor’s homestead exemption.” “[T]he
value of the Debtor’s exemption was always subordinate to
the Tax Lien” and “[w]hen the Tax Lien is avoided, the
Trustee steps into that avoided position.” Therefore, the
court explained, “[i]f it so happens that the IRS’s now
unsecured claim is also nondischargeable, it is no different
than any other nondischargeable claim which will need to be
paid by the Debtor.”

The government appealed the Bankruptcy Court’s grant
of summary judgment to Trustee, and the District Court
__________________
1
The Bankruptcy Court also rejected the IRS and Debtor’s argument that
the avoided lien is preserved for the benefit of the debtor under § 522(g)
instead of for the benefit of the estate under § 551. This argument is not
re-asserted on appeal.
8 UNITED STATES V. WARFIELD

affirmed in full. The District Court, also relying on Heintz,
concluded that § 551’s “property of the estate” limitation did
not prevent the Trustee’s avoidance and preservation of the
IRS lien, and found that the Debtor was only entitled to use
Arizona’s homestead exemption to exempt unencumbered
property – i.e., the exemption excluded the mortgage and the
IRS lien. The District Court agreed with the Bankruptcy
Court that the IRS’s tax lien never attached to Debtor’s
exemption. This appeal followed.

D. INTERVENING DEVELOPMENTS

During the pendency of the appeal from the adversary
proceeding, on July 9, 2020, Debtor found a buyer for the
Prescott Property and moved for approval to sell. The
Bankruptcy Court permitted the sale of the Prescott Property
for $475,000, of which Debtor was ordered to pay
$378,062.78 to Bank of America to cover the cost of the
mortgage. The Bankruptcy Court ordered the Trustee, after
paying costs and the mortgage, to set aside a portion of the
proceeds equal to the total value of the IRS’s tax lien,
$26,771, pending the outcome of the litigation now before
this Court. The remaining proceeds of the sale after costs,
approximately $30,000, were provided to Debtor as the
value of her homestead exemption.

II. JURISDICTION AND STANDARD OF REVIEW

The government timely appealed the District Court’s
affirmance of the Bankruptcy Court’s grant of summary
judgment to the Trustee. We have jurisdiction over this
appeal pursuant to 28 U.S.C. §§ 158(d), 1291. See SS
Farms, L.P. v. Sharp (In re SK Foods, L.P.), 676 F.3d 798,
802 (9th Cir. 2012).
 UNITED STATES V. WARFIELD 9

We review de novo the district court’s decision on appeal
from a bankruptcy court. Decker v. Tramiel (In re JTS
Corp.), 617 F.3d 1102, 1109 (9th Cir. 2010). “We apply the
same standard of review applied by the district court” and
“review [the] bankruptcy court decision independently and
without deference to the district court’s decision.” Id.; see
Galam v. Carmel (In re Larry’s Apt., L.L.C.), 249 F.3d 832,
836 (9th Cir. 2001) (citing Robertson v. Peters (In re
Weisman), 5 F.3d 417, 419 (9th Cir. 1993)). As such, “[t]he
bankruptcy court’s findings of fact are reviewed for clear
error, while its conclusions of law are reviewed de novo.” In
re JTS Corp., 617 F.3d at 1109 (quoting Leichty v. Neary (In
re Strand), 375 F.3d 854, 857 (9th Cir. 2004)).

III. DISCUSSION

A. AVOIDANCE AND PRESERVATION UNDER
§§ 724(a), 551

The government argues that the Bankruptcy Court erred
in holding that the Trustee could avoid a tax lien for penalties
on the Debtor’s exempt homestead property under 11 U.S.C.
§ 724(a) and then use 11 U.S.C. § 551 to take the value of
the lien from the Debtor’s exemption and preserve it for the
benefit of the bankruptcy estate. In the government’s view,
the Bankruptcy Court erred because the Debtor’s homestead
exemption withdrew her exempt property from the property
of the estate. Therefore, the government contends, the
Trustee cannot use § 724(a) and § 551 to avoid and preserve
a lien on exempted property, because such property is not
property of the estate.

1. Parameters of § 724(a)

The parties do not dispute that the tax penalty lien at
issue here is the type of lien contemplated for avoidance by
10 UNITED STATES V. WARFIELD

a trustee under § 724(a). Under § 724(a), “[t]he trustee may
avoid a lien that secures a claim of a kind specified in section
726(a)(4) of this title.” 11 U.S.C. § 724(a). Section
726(a)(4), in turn, specifies “property of the estate shall be
distributed . . . in payment of any allowed claim, whether
secured or unsecured, for any fine or forfeiture or for
multiple, exemplary, or punitive damages, arising before the
earlier of the order for relief or the appointment of a trustee
. . .” 11 U.S.C. § 726(a)(4). Under 11 U.S.C. § 551, “[a]ny
transfer avoided under section . . . 724(a) of this title . . . is
preserved for the benefit of the estate but only with respect
to property of the estate.” 11 U.S.C. § 551. The trustee’s
power under § 551 is thus predicated on its power first to
avoid the tax lien under § 724(a). The key question here is
whether the Debtor’s exempted property—her homestead
exemption under Arizona law—is subject to the Trustee’s
avoidance of the tax lien under § 724(a) and the ensuing
preservation of the tax lien under § 551. It is not.

Property interests held by the estate evolve over the
course of bankruptcy proceedings. Section 541(a)(1) of the
Bankruptcy Code explains that the filing of a bankruptcy
case “creates an estate . . . comprised of” the debtor’s
specified property interests “as of the commencement of the
case.” 11 U.S.C. § 541(a). However, the holdings of the
estate do not remain static after the commencement of the
bankruptcy case. The term “estate” refers to the property at
a particular point in time—such as at the commencement of
the case as referred to in § 541(a)(1)—rather than the estate
in perpetuity. See Owen, 500 U.S. at 308 (“An estate in
bankruptcy consists of all the interests in property, legal and
equitable, possessed by the debtor at the time of filing, as
well as those interests recovered or recoverable through
transfer and lien avoidance provisions.”).
 UNITED STATES V. WARFIELD 11

Section 541(a) provides that a trustee may increase the
property of the estate if the trustee can recover non-debtor
interests in property through the various transfer and lien
avoidance provisions in the Bankruptcy Code. See 11 U.S.C
§ 541(a)(3)–(7).

Conversely, the property interests of the estate may be
reduced during the course of bankruptcy proceedings, such
as through a judicially authorized sale of assets, payment of
expenses related to the administration of the estate, or
payment of a debtor’s unexpired lease obligations. See 11
U.S.C. § 363(b) (sale of property of the estate); Tamm v.
U.S.T. (In re Hokulani Square, Inc.), 776 F.3d 1083, 1085
(9th Cir. 2015) (describing a secured creditor’s purchase of
estate property via credit bid, such that “the creditors get the
property, and the estate’s debt is reduced by the amount of
the bid”); 11 U.S.C. § 503 (allowance of administrative
expenses); 11 U.S.C. § 365 (payment on unexpired leases).

Additionally, the property interests of the estate may be
reduced by a judicially authorized exemption. See 11 U.S.C.
§ 522. Although initially “[a]n estate in bankruptcy consists
of all the interests in property legal and equitable, possessed
by the debtor at the time of filing,” “[a]n exemption is an
interest withdrawn from the estate (and hence from the
creditors) for the benefit of the debtor.” Owen, 500 U.S. at
308 (emphasis added). Likewise, § 522 of the Bankruptcy
Code “authorizes a debtor to exempt certain property from
the bankruptcy estate so that it may not be reached by the
trustee in bankruptcy.” DeMarah v. United States (In re
DeMarah), 62 F.3d 1248, 1250 (9th Cir. 1995). Indeed,
§ 522(b)(1) expressly states that “[n]otwithstanding section
541 of this title”—the statutory provision describing the
property interests that comprise the estate at the
commencement of proceedings—“an individual debtor may
exempt from property of the estate the property” listed in the
12 UNITED STATES V. WARFIELD

relevant subsections of § 522. 11 U.S.C. § 522(b)(1)
(emphasis added).

We have consistently recognized that authorized
exemptions modify the property interests of the estate. After
the commencement of bankruptcy proceedings, property
interests which are exempted by a debtor are “withdrawn
from the estate,” Gebhart v. Gaughan (In re Gebhart), 621
F.3d 1206, 1210 (9th Cir. 2010), (quoting Owen, 500 U.S. at
308) and are no longer property of the estate. See In re
Kahan, 28 F.3d 79, 81 (9th Cir. 1994) (“The bankruptcy
estate includes all of the debtor’s interests in property at the
commencement of the case, except property that the debtor
elects to exempt based on applicable federal or state law.”)
(citing 11 U.S.C. §§ 541(a), 522(b)(2)). “The general rule is
that exempt property immediately revests in the debtor.” In
re Mwangi, 764 F.3d at 1175. 2 See In re Gebhart, 621 F.3d
at 1210 (“This principle is consistent with the text of the
Bankruptcy Code, which defines exempt property as
property that, unlike all the debtor’s other property, does not
belong to the bankruptcy estate.”) (citing 11 U.S.C.
§ 522(b)(1)); S. Rep. No. 95-989, at 52 (1978), as reprinted
in 1978 U.S.C.C.A.N. 5787, 5838 (recognizing that exempt
property “ceases to be property of the estate”)); see also
Owen, 500 U.S. at 308 (recognizing that the relationship
between a debtor’s exempt property and property of the
estate may change, such that “[n]o property can be exempted

__________________
2
Where an asset itself is exempt, the asset immediately revests in the
debtor upon the end of the objection period. In re Mwangi, 764 F.3d
at1175–76. When the exemption consists of an interest in an asset, the
asset remains in the estate while “only an ‘interest’ in the property equal
to the value of the exemption claimed at filing is removed from the
estate.” Id. at 1174–75 (citation omitted).
 UNITED STATES V. WARFIELD 13

(and thereby immunized) . . . unless it first falls within the
bankruptcy estate”) (emphasis added).

Recognizing the dynamic nature of the bankruptcy estate
through the pendency of bankruptcy proceedings, we must
analyze the text of the avoidance provision at issue here, 11
U.S.C. § 724(a), and interpret it in context to determine
whether the Trustee may avoid a tax lien on the Debtor’s
exempt property. In re Consol. Freightways Corp. of
Delaware, 564 F.3d 1161, 1165 (9th Cir. 2009) (“[O]ur
examination must begin with the words of the provision
itself. Of course, that does not mean that we limit ourselves
to the provision in perfect isolation. We must, instead,
construe that [Bankruptcy Code] provision with the statutory
scheme in which it is embedded.” (internal citations
omitted)).

Examining the statutory text in this context, under
§ 724(a), “[t]he trustee may avoid a lien that secures a claim
of a kind specified in section 726(a)(4) of this title.” 11
U.S.C. § 724(a). Section 726(a)(4), in turn, specifies that
“property of the estate shall be distributed . . . in payment of
any allowed claim, whether secured or unsecured, for any
fine or forfeiture or for multiple, exemplary, or punitive
damages, arising before the earlier of the order for relief or
the appointment of a trustee . . . .” 11 U.S.C. § 726(a)(4)
(emphasis added); see also id. § 726 (statutory section is
titled “Distribution of property of the estate”). Thus,
§ 724(a) applies to property that is part of the estate at the
time of distribution based on its express reference to
§ 726(a)(4). See Einstein/Noah Bagel Corp. v. Smith (In re
BCE W., L.P.), 319 F.3d 1166, 1171 (9th Cir. 2003)
(“Statutory construction of the Bankruptcy Code is ‘a
holistic endeavor’ requiring consideration of the entire
statutory scheme.”) (quoting United Sav. Ass’n of Texas v.
14 UNITED STATES V. WARFIELD

Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371
(1988)).

The statutory context makes this clear. First, § 724 deals
with the “treatment of certain liens” at the point in time that
property of the estate is to be distributed to creditors. See,
e.g., § 724(b) (“Property in which the estate has an interest
and is subject to a lien that is not avoidable . . . and secures
an allowed claim for a tax, or proceeds of such property,
shall be distributed . . . .”); § 724(c) (“If more than one
holder of a claim is entitled to distribution . . . distribution to
such holders under such paragraph shall be in the same order
as distribution to such holders would have been other than
under this section.”) (emphases added). Hence, § 724(a)
operates on the bankruptcy estate not at the commencement
of the proceedings but at a later stage—distribution.

Second, § 724(a) only permits lien avoidance of a lien
that secures an “allowed claim.” 11 U.S.C. § 726(a)(4). By
definition, the Bankruptcy Code provides that an allowed
claim is one in which sufficient proof has been provided to
the bankruptcy court after the commencement of
proceedings and any objections to the proof of claim have
been resolved. See 11 U.S.C. § 502(a).

Thus, it is clear from the express language of § 724(a)
and its cross-reference to § 726(a)(4), as well as the statutory
context provided by §§ 724 and 726, that § 724(a) concerns
the trustee’s avoidance of qualifying liens attached to the
property of the estate at the time of distribution.

When a debtor properly exempts a property interest
under § 522, the exemption withdraws that property interest
from the estate and, thus, from the reach of the trustee for
distribution to creditors. See Owen, 500 U.S. at 308; In re
DeMarah, 62 F.3d at 1250. Such an exempted property
 UNITED STATES V. WARFIELD 15

interest revests with the debtor and no longer belongs to the
estate. In re Gebhart, 621 F.3d at 1210. Accordingly,
because exempt property is not “property of estate” which
may be “distributed,” we conclude that a trustee may not
avoid a lien under § 724(a) (that secures the kind of claim
specified in § 726(a)(4)) attached to exempt property which
is no longer part of the estate.

2. Prior Rulings

This holding is consistent with our prior rulings. We
have not previously had the occasion to expressly address
whether a trustee may use § 724(a) to avoid a lien which is
not secured by property of the estate, such as a lien secured
only by a debtor’s exempt property. The district court in
DeMarah v. United States, 188 B.R. 426, 431 (E.D. Cal.
1993), aff’d, 62 F.3d 1248 (9th Cir. 1995), concluded (as we
do here) that § 724(a) lien avoidance actions are limited to
property of the estate, explaining

The trustee’s avoiding powers under Section 724(a)
are limited to the types of liens secured by claims
specified in Section 726(a)(4). Section 726(a)(4)
concerns non-compensatory tax penalty claims.
However, § 726(a)(4) does not stand in isolation, it
is a part of Section 726 which is concerned only with
“property of the estate.” 11 U.S.C. § 726(a)(4)
allows the trustee to avoid claims for penalties
against the property of the estate. The avoiding
powers of Debtor, like those of the trustee, are
limited to penalty claims against property of the
estate.

Id. In affirming the district court’s holding in DeMarah, we
neither reached nor cast doubt on the district court’s analysis
that lien avoidance actions under § 724(a) are limited to liens
16 UNITED STATES V. WARFIELD

on property of the estate. See In re DeMarah, 62 F.3d at
1252.

In DeMarah, we addressed whether a debtor could assert
a trustee’s avoidance and preservation authority against a tax
lien on the debtor’s exempt property for the debtor’s own
benefit. We affirmed the district court’s decision that a
debtor could not do so by acknowledging that, even if
avoidance of a tax lien on exempt property under § 724 in
the first instance were permissible, the debtor could not
ultimately escape liability for the tax lien on his exempt
property because § 522(c)(2)(B) “brings back the whole of
any tax lien” on the exempt property. In re DeMarah, 62
F.3d at 1252. In so noting, we observed that the outcome—
that a debtor may not avoid and preserve a tax lien on exempt
property for his own benefit—is the same whether the
analysis is based on a finding that the policies behind §§ 724
and 726 prevent avoidance of liens on tax penalties attached
to exempt property, or whether the analysis is based on the
statutory language of § 522(c) preventing a debtor from
avoiding a tax lien penalty. Id. We recognized two district
court decisions that interpreted § 724(a) differently, but we
did not need to decide which interpretation was correct
because both confirmed the relevant holding that a debtor
could not escape liability for a tax penalty lien. Id. (citing In
re Carlton, 19 B.R. 73, 75 (D.N.M. 1982); In re Gerulis, 56
B.R. 283, 287 (Bankr. D. Minn. 1985)).

Because a trustee may not avoid a tax lien attached to
exempt property through § 724(a), it follows that a trustee is
not permitted to preserve the tax lien for the benefit of the
estate under § 551. Section 551 provides for automatic
preservation of certain avoided liens, including liens avoided
under § 724(a). See In re Van de Kamp’s Dutch Bakeries,
908 F.2d at 519; 11 U.S.C. § 551. But where there is no
 UNITED STATES V. WARFIELD 17

avoidance under § 724(a), there is no avoided lien for the
trustee to preserve. 3

In summary, we conclude that § 724(a) does not permit
a trustee to avoid a tax lien secured by exempt property
because such securing property is not property of the estate.
__________________
3
Having assumed that the Trustee could use § 724(a) to avoid the tax
lien on the Debtor’s exempt property, the Bankruptcy Court focused on
whether the Trustee could then preserve the value of the avoided lien for
the benefit of the estate under § 551. The Bankruptcy Court relied on
the Bankruptcy Appellate Panel’s decision in In re Heintz, 198 B.R. 581,
583 (B.A.P. 9th Cir. 1996) addressing “[w]hether an avoided lien is
preserved for the benefit of the estate pursuant to § 551 when the avoided
lien encumbers exempt property.” The BAP construed § 551’s language
that an avoided lien “is preserved for the benefit of the estate but only
with respect to property of the estate” to apply to property of the estate
as defined as what was held by the estate at the commencement of
proceedings. Id. at 585–86. The BAP explained that “the fact that
property was removed from the estate after a case is commenced,
through exemption or some other means, does not change the fact that it
was property of the estate as of the commencement of the case.” Id. at
585. Therefore, the BAP concluded, “[g]iven that all exempt property is
property of the estate as of the commencement of the case, we conclude
that § 551 does not exclude exempt property from preservation. An
avoided interest or lien encumbering exempt property is automatically
preserved for the benefit of the estate under § 551.” Id. at 586.
The government urges us to declare Heintz wrongly decided. The
government requests a categorical rule that § 551 never applies to exempt
property. It is unnecessary for us to decide this issue. As we have
already explained, the Bankruptcy Court erred in overlooking the
predicate question of whether § 724(a) permits avoidance of tax liens
attached to exempt property. Because we hold that § 724(a) does not
allow the Trustee to avoid a lien on exempt property, there is no avoided
lien to which § 551’s preservation power could apply. Thus, § 551 does
not apply here and we need not construe the provision.
The dissent errs in stating that the majority relies on § 551 and its
reference to “with respect to property of the estate” in determining that
the tax penalty lien on exempt property is immune from avoidance.
Dissent at 30. Our holding only addresses the predicate question of the
application of § 724(a), not the scope of § 551.
18 UNITED STATES V. WARFIELD

Accordingly, because a trustee may not use § 724(a) to avoid
the lien, the trustee does not trigger operation of § 551’s
automatic preservation authority.

In reaching our holding, we conclude that the
Bankruptcy Court erred by overlooking the key question of
first impression before us: whether a trustee may use
§ 724(a) to avoid a lien secured by a debtor’s exempt
property. The Bankruptcy Court did not analyze this
question. Instead, the Bankruptcy Court appears to have
assumed that the Trustee could use § 724(a) to avoid a lien
on the Debtor’s exempt property. 4

Specifically, the Bankruptcy Court noted that in In re
Bolden, 327 B.R. 657, 665 (Bankr. C. D. Cal. 2005), the
“bankruptcy court refused to order the abandonment of
debtor’s exempt homestead where IRS penalty tax liens
could be avoided for the benefit of the bankruptcy estate.”
But in Bolden the government did not dispute that the trustee
could avoid a tax penalty lien on exempt property under
§ 724(a). Indeed, Bolden noted that “[i]n this case, the
__________________
4
The Bankruptcy Court suggested that the IRS tax lien never attached to
Debtor’s exempt property because the IRS tax lien was simply deducted
from the value that Debtor could exempt under Arizona law. This
analysis was incorrect for two reasons. First, it fails to properly apply
binding federal law making clear that an IRS tax lien attaches to all of a
debtor’s property interests, with no carve-out for exempt property, and
that an exemption authorized under the Bankruptcy Code remains liable
for tax penalty liens. See 26 U.S.C. § 6321; 11 U.S.C. § 522(c)(2)(B);
In re DeMarah, 62 F.3d at 1251. Second, the Bankruptcy Court
misapplied state law, as Arizona’s homestead exemption statute does not
deduct the value of tax liens from the amount that a debtor may exempt.
See A.R.S. § 33-1101(A)(1). Indeed, the Arizona statute does state that
a “consensual lien, including a mortgage,” “shall not be subject to” the
homestead exemption, but makes no such statement as to tax liens. Id. §
33-1104(D). Thus, the Bankruptcy Court’s suggestion that the IRS tax
lien never attached to the Debtor’s exempt property is incorrect.
 UNITED STATES V. WARFIELD 19

trustee . . . is seeking, with the cooperation of the IRS, to
avoid the penalty portion of the IRS tax liens in order to
benefit unsecured creditors of the estate.” 327 B.R. 663 n.5
(emphasis added). There is no indication in the Bolden
decision that any party challenged the propriety of the
trustee’s avoidance of tax penalties on exempt property; the
bankruptcy court in Bolden was not presented with and,
therefore, did not address this question.

Similarly, the Bankruptcy Court cited approvingly to In
re Gill, 574 B.R. 709 (9th Cir. BAP 2017) for the BAP’s
rejection of a debtor’s request for an order requiring the
estate to abandon the debtor’s homestead exemption and
determination that the trustee could avoid an IRS tax lien
under § 724(a) and create value for the estate by preserving
the value of the tax lien through § 551 for the benefit of the
estate. But, again, in Gill there was no dispute as to the
propriety of the trustee’s authority to avoid a lien under
§ 724(a) on exempt property, as there was evidence that the
IRS consented to the avoidance, and there is no indication
that the debtor challenged the avoidance. See 574 B.R. at
717. Thus, because the courts in Bolden and Gill were not
presented with and did not decide the question of whether
§ 724(a) applies to a debtor’s exempt property, the
Bankruptcy Court’s reliance on those decisions was
misplaced.

Our analysis and holding here are consistent with our
recent decision in Hutchinson v. IRS (In re Hutchinson), 15
F.4th 1229 (9th Cir. 2021). In Hutchinson, the government
and the trustee of the estate entered into a stipulated
judgment in which the trustee “and the Government agreed
that the ‘penalty portions’ of certain of ‘the IRS’s liens’
against Plaintiffs’ [] residence ‘are avoided pursuant to 11
U.S.C. § 724(a).’” Id. at 1232. The debtors asserted an
entitlement to a homestead exemption of up to $100,000 in
20 UNITED STATES V. WARFIELD

the residence under California law. Id. The debtors did not
contest the agreement between the government and the
trustee to avoid the IRS’s tax penalty lien against the
debtor’s property, including the exempt property under
§ 724(a). Rather than contest the legality of the agreement
as applied to the exempt property, the debtors sought to take
advantage of the § 724(a) avoidance agreement between the
government and trustee by seeking to preserve the avoided
lien for the benefit of the debtors. Id. (“Plaintiffs alleged
that, to the extent the liens were avoided, they should be
preserved ‘for the benefit of the Plaintiffs.’”). The debtors
argued that they should be able to parlay the government and
trustee’s § 724(a) avoidance agreement into assets for
themselves by using § 522(i)(2), which allows a debtor to
preserve a lien avoided by a trustee under § 724(a) “for the
benefit of the debtor to the extent that the debtor may exempt
such property” under the relevant subsection. See id. at 1234
(citing 11 U.S.C. § 522(i)(2)) (emphasis added). The
debtors contended that because the government and trustee’s
§ 724(a) avoidance agreement concerned debtors’ exempt
homestead property interest, the debtors had satisfied the
requirements of § 522(i)(2) and were entitled to preserve the
avoided lien for the benefit of the debtors. Id.

We rejected the debtors’ attempt to preserve the value of
the tax lien for their own benefit, applying our holding in
DeMarah that § 522(c)(2)(B) “makes quite clear . . . that
debtors cannot use exemption authority to escape tax liens.”
Id. at 1235. We further observed that Ҥ 522(c)(2)(B) would
operate, vis-à-vis a debtor, to preserve ‘tax lien[s]’ against
otherwise exempt property regardless of whether the trustee
had avoided them.” Id. (emphasis and alteration in the
original). Considering the clear and unambiguous language
of § 522(c)(2)(B), we explained that “it would be completely
contradictory to then construe § 522(i)(2) (or § 522(g), for
that matter) as allowing a debtor, after a trustee has avoided
 UNITED STATES V. WARFIELD 21

the tax lien, to then preserve the avoided lien ‘for the benefit
of the debtor’ by claiming an exemption under § 522(g). Id.
(emphases in original). “Such a result—having the trustee
avoid the lien only to turn over the benefits to the debtor,
whose exempt property would then be free of the lien—
would create precisely the kind of end-run
around § 522(c)(2)(B) that we rejected in DeMarah.” Id. at
1236. We, therefore, rejected the debtors’ theory that
§§ 522(i)(2) or 522(g) could be used by the debtors to
transform a tax lien for which they were responsible into an
asset which they could protect for their own benefit. Id.
(“The only way to read these provisions sensibly together is
to conclude that, with respect to a tax lien covered by
§ 522(c)(2)(B), a debtor may not invoke § 522(i)(2) in order
to override § 551’s otherwise applicable rule that, after the
trustee avoids a lien under § 724(a), the lien ‘is preserved for
the benefit of the estate.’”) (citation omitted).

We do not disturb Hutchinson’s careful reasoning and
construction of § 522(i)(2). In Hutchinson, we accepted the
government and the trustee’s stipulated agreement that the
trustee could avoid the tax lien on debtor’s property under
§ 724(a), including the portion of the property which was
exempted under California law. No party objected to the
stipulated agreement and no argument was presented to us
as to whether the trustee could avoid a lien on debtor’s
exempt property under § 724(a). Indeed, the debtors
accepted the premise that § 724(a) could be used by the
trustee to avoid a lien on debtors’ exempt property and
attempted to transform that premise into an argument that the
debtors could preserve the avoided lien for the debtors’
benefit. The parties did not present us with the question of
whether § 724(a) could be used to avoid a lien on exempt
property.
22 UNITED STATES V. WARFIELD

Thus, in Hutchinson we were not called upon to resolve
any dispute as to the applicability of § 724(a) to the property
at issue, and, abiding by the party presentation principle, we
had no occasion nor any need to address the question. See
United States v. Sineneng-Smith, 140 S. Ct. 1575, 1579
(2020) (“As a general rule, our system is designed around
the premise that parties represented by competent counsel
know what is best for them, and are responsible for
advancing the facts and argument entitling them to relief.”)
(cleaned up). Accordingly, nothing in our decision here
conflicts with our analysis or holding in Hutchinson. 5
Indeed, Hutchinson’s holding that “a debtor may not invoke
§ 522(i)(2) in order to override § 551’s otherwise applicable
rule that, after the trustee avoids a lien under § 724(a), the
lien ‘is preserved for the benefit of the estate,’” 15 F.4th at
1236, applies with full force.

B. APPLICATION

We conclude that the Trustee may not use § 724(a) to
avoid the $26,771 IRS tax penalty lien on the Debtor’s
exempt interest in the Prescott Property and, accordingly,
cannot preserve the value of the tax penalty lien for the
benefit of the estate through § 551. Once the Bankruptcy
Court allowed the Debtor’s homestead exemption under
Arizona law, the Debtor withdrew her exempted property
interest from the property of the estate. Therefore, the
Debtor’s exempt homestead interest in the Prescott Property

__________________
5
In Hutchinson, having accepted the undisputed fact that the trustee and
government entered an uncontested stipulated judgment through which
the trustee avoided the tax penalty liens on the property at issue under
§ 724(a), we referenced Heintz for the notion that § 551 operated to
preserve those liens avoided by stipulation for the benefit of the estate.
15 F.4th at 1234. As noted previously, we do not address Heintz’s
interpretation of § 551 here.
 UNITED STATES V. WARFIELD 23

is no longer property of the estate and, therefore, is not
property to which § 724(a) applies.

Accordingly, the Debtor is entitled to exempt up to the
full $150,000 value of the homestead exemption interest
permitted under the applicable version of Arizona’s
exemption law, A.R.S. § 33-1101(A)(1) (2004 version,
effective prior to Jan. 1, 2022), after accounting for the
Debtor’s responsibility for her consensual loan, the Bank of
America mortgage, id. § 33-1104(D). The value of the
Debtor’s homestead exemption is not subject to a deduction
of the IRS tax penalty lien. However, as compelled by our
holding in DeMarah, the Debtor takes her exempt interest in
the Prescott Property subject to the IRS tax penalty lien. See
62 F.3d at 1252 (“We hold that Congress has denied debtors
the right to remove tax liens from their otherwise exempt
property. See 11 U.S.C. § 522(c)(2)(B). Moreover, we hold
that even the penalty portion of the tax lien remains fixed on
that property. We see nothing capricious or absurd about
that. It simply adds to the taxpayer’s incentive to render unto
the government that which is its due.”).

Moreover, the Bankruptcy Court’s holding that permits
the Trustee to avoid the IRS’s tax lien on the exempt
property and to apply the value of the lien for the benefit of
the bankruptcy estate, while the exempt homestead of the
Debtor remains encumbered by the tax lien, creates a
troubling result: the Debtor is burdened twice by the same
debt, resulting in a double penalty. The first penalty flows
from the Bankruptcy Court’s holding that the Trustee’s
avoidance and preservation of the tax lien on the Debtor’s
exempt property reduced the value of the exemption by the
amount of the tax lien. The second penalty flows from the
operation of 11 U.S.C. § 522(c)(2)(B) and our binding
precedent that a tax lien remains attached to property which
is exempted. See In re DeMarah, 62 F.3d at 1251 (“[I]t is
24 UNITED STATES V. WARFIELD

pellucid that property exempted from the estate remains
subject to tax liens.”). In effect, the Debtor is required to pay
twice on the same tax lien: first, in the reduction of value in
her homestead exemption by the value of the lien (here
amounting to $26,771), and then, a second time, when she is
required to pay off the lien that survives and remains
attached to her already reduced exempt property (for another
$26,771). 6 That makes her worse off, with regard to the tax
lien debt, than she was before she filed the bankruptcy
petition.

This result cannot be what is intended by the Bankruptcy
Code, which is aimed at giving the debtor a “fresh start,”
subject to the decision of Congress to maintain a debtor’s
responsibility for a tax lien. See In re DeMarah, 62 F.3d at
1252 (“11 U.S.C. § 522 allows debtors to exempt stated
property from the bankrupt estate so that they may have a
fresh start. It also provides for the survival of tax liens on
that property. 11 U.S.C. § 522(c)(2)(B). In defining fresh
start, Congress took cognizance of the fact that tax liens
would survive.”) (quoting In re Isom, 901 F.2d 744, 746 (9th
Cir. 1990))).

That fresh start would hardly be served by doubling the
burden of the previously existing tax lien on the debtor. We
are not aware of any policy rationale articulated by
__________________
6
The Bankruptcy Court purported to resolve this double penalty by
concluding the “tax lien position against the [Prescott] Property never
attached to the Debtor’s homestead exemption,” such that “[w]hen the
lien is avoided, the Trustee steps into that avoided position.” The
Bankruptcy Court held that the Trustee’s avoidance and preservation of
the tax lien extinguished the tax lien. This conclusion, however,
conflicts with § 522(c)(2)(B) and our binding authority holding that a tax
lien remains attached to exempt property. See In re DeMarah, 62 F.3d
at 1251. Therefore, the Bankruptcy Court did not resolve the double
penalty. See infra § III(A)(2).
 UNITED STATES V. WARFIELD 25

Congress, nor endorsed in any of our previous decisions, that
supports the view that a debtor should pay twice on a tax
penalty lien. Our holding provides that the Debtor will be
subject to the IRS tax lien once—as a surviving lien on her
homestead exemption. It thus vindicates the debtor’s
homestead exemption under Arizona law, which reduces the
value available to exempt by the value of a mortgage, but not
by the value of an IRS tax lien. See A.R.S. §§ 33-
1101(A)(1), 33-1104(D).

It seems highly unlikely to us that our dissenting
colleague’s bankruptcy professor would countenance an
interpretation of bankruptcy law that imposed a double
penalty on the debtor. See Dissent at 27. That the dissent’s
interpretation of the statute produces such a perverse result
provides powerful reason to reject that interpretation.

At the same time, our holding does not disturb the
application of § 724(a) to non-exempt property of the estate
and is consistent with our recognition that “‘Congress could
logically have wanted to allow tax penalties to be avoided if
that would benefit unsecured creditors,’ while ‘eschew[ing]
benefiting debtors who incurred those penalties by failing to
pay their taxes.’” In re Hutchinson, 15 F.4th at 1233
(quoting In re DeMarah, 62 F.3d at 1252). Indeed, we do
not quibble with the dissent’s assertion that “the asset
remains estate property” when a statute “does not allow the
debtor to exempt the entire property interest, but instead
permits exemption of an interest in the property up to a
particular dollar amount.” Dissent at 33 (citing In re
Mwangi, 764 F.3d at 1172–73). But while the trustee may
certainly avoid the tax lien on non-exempt property that
remains in the estate, the circumstances of this case—
specifically, the fact that the mortgage on the Prescott
Property renders any lien on the estate’s portion of the
26 UNITED STATES V. WARFIELD

property valueless—demarcate our holding to only the
application of § 724(a) to exempt property.

IV. CONCLUSION

The Trustee may not use 11 U.S.C. § 724(a) to avoid the
$26,771 IRS tax penalty lien on the Debtor’s exempt interest
in the Prescott Property and, therefore, cannot preserve the
value of the tax penalty lien for the benefit of the estate
through § 551. Accordingly, the Debtor is entitled to exempt
up to the full value of the homestead exemption interest
permitted under the applicable version of Arizona’s
exemption law, after accounting for the Debtor’s
responsibility for her mortgage. A.R.S. §§ 33-1101(A)(1),
33-1104(D). The value of the Debtor’s homestead
exemption is not subject to a deduction of the IRS tax
penalty lien. However, the Debtor takes her exempt interest
in the Prescott Property subject to the IRS tax penalty lien.

REVERSED and REMANDED to the District Court
with instructions for further proceedings consistent with this
order.
 UNITED STATES V. WARFIELD 27

BUMATAY, Circuit Judge, dissenting:

As my bankruptcy professor once said, a bankruptcy
case is like dividing a pie. See Elizabeth Warren,
Bankruptcy Policy, 54 U. Chi. L. Rev. 775, 785 (1987). The
pie owner promises different slices of the pie to others—
sometimes in exchange for other items, sometimes as a
payment for other debts. And sometimes, the pie owner
overpromises—leaving not enough pie to go around. All
those promised pie must then get in line and try to claim their
piece. In bankruptcy, a trustee steps in and distributes the
slices in the order of priority set by law and approved by a
bankruptcy judge.

The Bankruptcy Code also grants a trustee a special
authority. It allows the trustee to “avoid” a federal tax
penalty lien and “preserve” the lien for the benefit of the
bankruptcy estate. See 11 U.S.C. §§ 724(a), 726, 551. That
means, in divvying up the pie, the trustee may save the piece
belonging to the IRS for a debtor’s failure to pay taxes and
hold it for others in line. This increases the amount of pie
for distribution to others.

In this case, the IRS challenges the trustee’s express
avoidance authority. The IRS contends that a trustee can’t
avoid a federal tax lien on “exempt” property. Exempt
property is generally the piece of the pie that a debtor gets to
keep throughout the bankruptcy. But the Bankruptcy Code
creates no exception to the trustee’s avoidance power for
liens on exempt property. So we should have affirmed the
trustee’s avoidance of the IRS tax penalty lien here.

In invalidating the trustee’s avoidance authority, the
majority is more concerned with the Bankruptcy Code’s
“troubling result” than its text. Maj. Op. at 24. It lets
concerns over the consequences of avoidance override the
28 UNITED STATES V. WARFIELD

statutory text and it nullifies the trustee’s avoidance power
to prevent these consequences. But because our duty is to
follow the text of the Bankruptcy Code no matter how the
pie gets sliced, I respectfully dissent.

I.

“The plain text of the Bankruptcy Code begins and ends
our analysis.” Puerto Rico v. Franklin Cal. Tax-Free Tr.,
579 U.S. 115, 125 (2016). The Bankruptcy Code is
straightforward; by its ordinary meaning, a trustee may
avoid an IRS tax penalty lien and preserve it for the benefit
of the bankruptcy estate. See 11 U.S.C. §§ 724(a), 726, 551.
Our precedent confirms that. See Hutchinson v. United
States (In re Hutchinson), 15 F.4th 1229, 1234 (9th Cir.
2021). And nothing in the Code sets aside the trustee’s
avoidance authority just because the tax penalty lien attaches
to exempt property.

A.

Under the Bankruptcy Code, a trustee may avoid a
federal tax penalty lien in distributing the property of the
estate. Section 724 of the Code provides that “[t]he trustee
may avoid a lien that secures a claim of a kind specified in
section 726(a)(4) of this title.” 11 U.S.C. § 724. In this
context, “avoid[ance]” means that the trustee may take the
slice of pie reserved for a specific lienholder and distribute
it to others in line. See Retail Clerks Welfare Tr. v. McCarty
(In re Van de Kamp’s Dutch Bakeries), 908 F.2d 517, 519
(9th Cir. 1990) (explaining the “well-established principle
that a trustee who avoids an interest succeeds to the priority
that interest enjoyed over competing interests”). Avoidance
increases the property of the estate available to satisfy claims
of unsecured creditors. See id. In other words, instead of a
lienholder being at the front of the line, the holder must wait
 UNITED STATES V. WARFIELD 29

for a share like everyone else, which increases the amount of
pie for others.

The Code then specifies the types of claims a trustee may
avoid. The trustee’s avoidance power applies to:

[A]ny allowed claim, whether secured or unsecured,
for any fine, penalty, or forfeiture, or for multiple,
exemplary, or punitive damages, arising before the
earlier of the order for relief or the appointment of a
trustee, to the extent that such fine, penalty,
forfeiture, or damages are not compensation for
actual pecuniary loss suffered by the holder of such
claim[.]

11 U.S.C. § 726(a)(4). In short, a trustee has the authority to
avoid any claim for non-compensatory penalties, including
a federal tax penalty lien. See Hutchinson, 15 F.4th at 1232
(By stipulation, “the Government agreed that the ‘penalty
portions’ of certain of ‘the IRS’s liens’ against . . . [the]
residence ‘are avoided pursuant to 11 U.S.C. § 724(a).’”);
Gill v. Kirresh (In re Gill), 574 B.R. 709, 716 (9th Cir. BAP
2017) (“Taken together, §§ 724(a) and 726(a)(4) allow a
chapter 7 trustee . . . to avoid a lien to the extent the lien
secures the claim for a penalty, including a tax penalty.”).

Next, when a trustee avoids a transfer, the transfer is
automatically preserved for the benefit of the estate. That’s
because under § 551 of the Code “[a]ny transfer avoided
under section . . . 724(a) . . . is preserved for the benefit of
the estate but only with respect to property of the estate.” 11
U.S.C. § 551. So when a trustee avoids the penalty portions
of the tax liens under § 724(a), “it follows that, under the
plain language of § 551, those liens are preserved for the
benefit of the estate.” Hutchinson, 15 F.4th at 1234. Doing
so expands the pie available for unsecured creditors. As
30 UNITED STATES V. WARFIELD

we’ve said, “Congress created avoidances of
noncompensatory penalties to protect unsecured creditors
from the debtor’s wrongdoing.” DeMarah v. United States
(In re DeMarah), 62 F.3d 1248, 1252 (9th Cir. 1995)
(simplified). Avoiding the tax penalty and preserving it for
the estate “benefit[s] unsecured creditors” by allowing the
amount on the penalty to go to them instead of the IRS. Id.

So as a straightforward matter of text and precedent, the
answer here is simple: a trustee may avoid a federal tax lien
and preserve it for the benefit of the estate. We’ve already
endorsed this view in Hutchinson, where we clearly stated:
“a trustee is ‘expressly authorized . . . to avoid, subordinate
and preserve the penalty portion of the IRS’s tax lien for the
benefit of the estate’s unsecured creditors.’” Id. at 1233
(quoting Gill, 574 B.R. at 716).

Here, the bankruptcy court and the district court both
concluded that the trustee was permitted to avoid the IRS
penalty lien on Sandra Tillman’s house and preserve its
value for Tillman’s bankruptcy estate. Based on the above
authorities, we should have easily affirmed here. And as
discussed below, it makes no difference that a portion of the
value of Tillman’s house was exempt property.

B.

Contrary to the IRS and majority’s view, the trustee’s
authority to avoid a federal tax penalty lien isn’t nullified
because it encumbers exempt property. The majority
incorporates § 726’s reference to the distribution of the
“property of the estate” to bar a trustee’s avoidance
authority. The IRS instead relies on § 551’s limitation of
preservation of liens “only with respect to property of the
estate.” In both cases, they insist that “exempt property”
isn’t “property of the estate” and so a trustee can’t avoid a
 UNITED STATES V. WARFIELD 31

lien on exempt property. In the majority’s view, estate
property “evolve[s] over the course of bankruptcy
proceedings” and a lien on exempt property somehow
disappears from such property. Maj. Op. 10. No matter the
supposed statutory basis for curbing a trustee’s avoidance
power, because a tax penalty lien on exempt property is
undoubtedly “property of the estate,” the IRS and majority’s
view is incorrect.

To understand why the majority’s “evolution” idea is
mistaken, some background in bankruptcy is necessary. The
Supreme Court has helpfully summarized where exempt
property falls into the bankruptcy scheme:

Chapter 7 of the Bankruptcy Code gives an insolvent
debtor the opportunity to discharge his debts by
liquidating his assets to pay his creditors. 11 U.S.C.
§§ 704(a)(1), 726, 727. The filing of a bankruptcy
petition under Chapter 7 creates a bankruptcy
“estate” generally comprising all of the debtor’s
property. § 541(a)(1). The estate is placed under the
control of a trustee, who is responsible for managing
liquidation of the estate’s assets and distribution of
the proceeds. § 704(a)(1). The Code authorizes the
debtor to “exempt,” however, certain kinds of
property from the estate, enabling him to retain those
assets post-bankruptcy. § 522(b)(1). Except in
particular situations specified in the Code, exempt
property “is not liable” for the payment of “any
[prepetition] debt” or “any administrative expense.”
§ 522(c), (k).

Law v. Siegel, 571 U.S. 415, 417–18 (2014). In other words,
with some statutory exceptions, exempt property is
“immunized against liability for prebankruptcy debts.”
Owen v. Owen, 500 U.S. 305, 308 (1991). Thus, the Court
32 UNITED STATES V. WARFIELD

only describes exempt property as protected from prepetition
debts, but not wholly removed from the bankruptcy estate.

The Code specifies what property is exempted and even
allows States to set their own criteria for exemptions. 11
U.S.C. § 522(b)(3)(A), (d). Many States have set a
“homestead exemption” that is more generous than under
federal law. Law, 571 U.S. at 418. At the time of this case,
Arizona permitted a person to keep “interest in real property
. . . in which the person resides,” up to $150,000 in value,
subject to any “recorded consensual lien,” such as a
mortgage. Ariz. Rev. Stat. §§ 33-1101(A)(1), 33-1105(D)
(2004). Thus, up to $150,000 in equity from an Arizona
home is generally immune from prepetition debts.

The question then is whether a tax penalty lien on exempt
property constitutes “property of the estate.” The answer is
easily yes. The Code defines “property of the estate,” in
relevant part, as consisting of “all legal or equitable interests
of the debtor in property as of the commencement of the
case.” 11 U.S.C. § 541(a)(1) (emphasis added). Defining
the property of the estate in this way creates a “sharp
cleavage between the prepetition and postpetition worlds
with regard to estate property.” Charles Jordan Tabb, Law
of Bankruptcy 404 (5th ed. 2020). The Code “takes a
snapshot of the debtor’s assets at the moment of filing,
bringing all of those assets into the estate,” and then “settles
the debtor’s financipal affairs, assets and liabilities alike, as
of th[at] time.” Id.

Under the straightforward language of § 541(a)(1),
“property of the estate” includes all property at the filing of
the bankruptcy petition, including what’s later claimed
exempt. As the Court has clearly stated, “[a]n estate in
bankruptcy consists of all the interest in property, legal and
equitable, possessed by the debtor at the time of filing, as
 UNITED STATES V. WARFIELD 33

well as those interests recovered or recoverable through
transfer and lien avoidance provisions.” Owen, 500 U.S. at
308 (emphasis added). So exempt property and its
encumbrances must be “property of the estate”; after all,
“[n]o property can be exempted (and thereby
immunized) . . . unless it first falls within the bankruptcy
estate.” Id. at 308 (simplified). Thus, it is well-settled that
“[a]ll of the debtor’s property[] as . . . defined in section 541
of the Bankruptcy Code, as of the commencement of a case
. . . , including property which may be claimed as exempt,
becomes property of the estate.” 4 Collier Bankruptcy
Practice Guide ¶ 74.02[1] (1st ed. 2022).

It is a misconception to think that a lien on exempt
homestead property is immediately removed from the
bankruptcy estate. Rather,

[I]f the statute permitting the debtor to claim a
particular exemption does not allow the debtor to
exempt the entire property interest, but instead
permits exemption of an interest in the property up to
a particular dollar amount, . . . . [then] the asset
remains estate property, and the estate does not
relinquish the property until it is administered in the
bankruptcy, the trustee abandons the property, or the
bankruptcy case is closed.

Mwangi v. Wells Fargo, N.A. (In re Mwangi), 764 F.3d
1168, 1172–73 (9th Cir. 2014) (simplified). This case
provides a good example of why this so. The IRS tax penalty
lien is on all of Tillman’s house. In contrast, Arizona law
only allows Tillman to exempt a portion of the value of the
house. Thus, in no way does the homestead exemption
remove the entirety of Tillman’s house or its lien from the
bankruptcy estate. The lien on the house always remains
part of the bankruptcy estate even if a specific dollar amount
34 UNITED STATES V. WARFIELD

of the house’s value is protected from pre-petition debts. So
there’s no reason to treat the lien on the exempt property as
removed from the bankruptcy estate for § 551 purposes.

This too makes intuitive sense with the pie analogy.
Exempt property generally means that a debtor gets to keep
a small piece of the pie even after the pie is divvied up among
the creditors—no matter what. The pie is “set” at the time
of the bankruptcy filing. And when a slice of the pie is saved
for the debtor, that piece remains within the pie until
distribution. Contrary to the majority’s view then, the size
of the pie does not “evolve” during the bankruptcy
proceedings based on exempt property. See Maj. Op. 10.
Rather, exempt property only tells us what assets a debtor
may “retain . . . post-bankruptcy,” Law, 571 U.S. at 417, or
which slice of pie is left for the debtor at the end of
bankruptcy proceedings.

Moreover, even under the majority’s “evolving”
bankruptcy estate thesis, the majority doesn’t explain why a
lien on both exempt and non-exempt property, like the tax
lien on Tillman’s residence, falls out of the bankruptcy
estate. If any part of Tillman’s house remains non-exempt
estate property, then any lien on the house necessarily
remains estate property. So, under any theory of bankruptcy
law, the IRS tax lien here is property of the estate.

Thus, a trustee retains authority to avoid and preserve a
tax penalty lien, even when it attaches to exempt property.
As we’ve recently acknowledged, “regardless of whether the
debtor claims an exemption, any interest of the debtor in
property at the commencement of the bankruptcy case is
‘property of the estate’ as that phrase is used in § 551.”
Hutchinson, 15 F.4th at 1234 (referencing the holding of
Heintz v. Carey (In re Heintz), 198 B.R. 581, 585–86 (9th
Cir. BAP 1996)).
 UNITED STATES V. WARFIELD 35

Indeed, it is hard to square the majority’s holding with
Hutchinson. Hutchinson assumed—over and over—the
trustee’s authority to avoid and preserve a tax penalty lien on
exempt property. While explaining why a debtor could not
avoid a properly filed tax penalty lien, Hutchinson
repeatedly contrasted the case with the trustee’s ability to
avoid the lien under § 724(a). See, e.g., Hutchinson, 15 F.4th
at 1233 (“We acknowledged in DeMarah that this reading of
the code could lead to a disparity in which trustees might be
able to avoid such liens under § 724(a), while debtors
cannot.”) (simplified); id. at 1234 (“Under our binding
decision in DeMarah, Plaintiffs cannot invoke § 522(h) to
avoid a properly filed tax lien, even if that lien would be
avoidable by the trustee under § 724(a).”) (emphasis added).
Even though the trustee’s avoidance power wasn’t the
precise issue in Hutchinson, “[w]ell-reasoned dicta is the law
of the circuit.” Li v. Holder, 738 F.3d 1160, 1164 n.2 (9th
Cir. 2013) (simplified).

The majority justifies the departure from precedent and
statutory text based on the fear of a so-called “double
penalty.” See Maj. Op. 23–26. The majority contends that
allowing the trustee to avoid the penalty lien here would lead
to the “troubling result” of penalizing Tillman twice. Id. at
24. That’s because the bankruptcy judge reduced her
homestead exemption by the amount of the lien even though
the IRS may still seek the value of the lien from her after
bankruptcy. 7 But even if the trustee’s tax penalty avoidance

__________________
7
The Code appears to permit a tax lien on a debtor’s exempt property to
remain post-bankruptcy, which means that IRS may still collect on the
penalty. See 11 U.S.C. § 522(c)(2)(B). But I take no position on whether
the bankruptcy court was correct to deduct the amount of the tax penalty
lien from Tillman’s homestead exemption. That question is immaterial
to the question before us, which is whether the trustee is permitted to
avoid the tax lien in the first place.
36 UNITED STATES V. WARFIELD

here creates a “double penalty,” we cannot circumvent the
plain text of the Bankruptcy Code or our precedent to avoid
those concerns. This is an issue for Congress—not for us—
to resolve.

II.

Because the Code and our caselaw require affirming
here, I respectfully dissent.