Gill v. Kirresh (In Re Gill)

FILED 1 ORDERED PUBLISHED SEP 26 2017 SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT 4 5 In re: ) BAP No. OR-16-1300-BJuF ) 6 CECIL C. GILL, ) Bk. No. 3:16-bk-30589-RLD ) 7 Debtor. ) ) 8 ) CECIL C. GILL, ) 9 ) Appellant, ) 10 ) v. ) O P I N I O N 11 ) RANA KIRRESH; STEPHEN P. ) 12 ARNOT, Chapter 7 Trustee, ) ) 13 Appellees. ) ______________________________) 14 Submitted Without Oral Argument 15 on July 27, 2017 16 Filed - September 26, 2017 17 Appeal from the United States Bankruptcy Court for the District of Oregon 18 Honorable Randall L. Dunn, Bankruptcy Judge, Presiding 19 20 Appearances: Appellant Cecil C. Gill, pro se, on brief; Appellee Stephen P. Arnot, Chapter 7 Trustee, pro 21 se, on brief.1 22 23 Before: BRAND, JURY and FARIS, Bankruptcy Judges. 24 25 26 27 1 28 Appellee Rana Kirresh did not appear in this appeal. 1 BRAND, Bankruptcy Judge: 2 3 Chapter 72 debtor Cecil Gill appeals an order denying his 4 motion to compel the chapter 7 trustee to abandon the estate’s 5 interest in Debtor’s residence (“Residence”), which was subject to 6 a tax lien by the Internal Revenue Service (“IRS”). A portion of 7 the IRS’s lien included penalties assessed for Debtor’s failure to 8 pay income taxes. The bankruptcy court determined that, because 9 the chapter 7 trustee could avoid and preserve the penalty portion 10 of the lien for the benefit of unsecured creditors, “substantial 11 value” existed in the Residence precluding abandonment. 12 Whether the chapter 7 trustee could avoid and preserve the 13 penalty portion of the IRS’s tax lien against the Residence is an 14 issue of first impression before the Panel. We conclude that he 15 could, and we AFFIRM. 16 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 17 In 2009, Debtor purchased his Residence in the Murray Hill 18 area of Beaverton, Oregon for $310,000. Rana Kirresh holds the 19 promissory note secured by the Residence. Debtor defaulted on the 20 note in or around May 2015. 21 Debtor converted his chapter 13 bankruptcy case to chapter 7 22 on April 18, 2016. Stephen Arnot was appointed as the chapter 7 23 trustee. Debtor received a discharge on July 26, 2016. 24 In his schedules, Debtor valued the Residence at $500,000 and 25 claimed a total of $128,034.78 in unsecured nonpriority debt, 26 27 2 Unless specified otherwise, all chapter, code and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 28 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. -2- 1 including $80,000 in student loans. Thus, approximately $48,000 2 of Debtor’s unsecured nonpriority debt was subject to discharge. 3 Prior to the conversion of Debtor’s case, Kirresh filed a 4 $368,558.57 secured proof of claim, which included several years 5 of delinquent property taxes. The IRS filed an amended proof of 6 claim for $211,586.87, of which $161,530 was a secured claim that 7 included $48,276.33 in tax penalties. The IRS’s secured tax lien 8 against the Residence was filed in 2015 and covered tax 9 assessments made during the years 2009 through 2013 for unpaid 10 income taxes from years 2005 through 2011. 11 A. Motion for relief from stay 12 Kirresh later moved for relief from stay to proceed with 13 foreclosure on the Residence. By this time, the total debt owed 14 to her was approximately $371,000. Kirresh alleged that, between 15 her lien and the IRS lien, the Residence was underwater and there 16 was no equity for Debtor. 17 Debtor opposed the stay relief motion, contending that 18 Kirresh’s lien was adequately protected because the Residence was 19 “valued higher than the amount claimed by Creditor ($500,000)” and 20 “continue[d] to increase.” Debtor disputed Kirresh’s assertion 21 that no equity existed in the collateral beyond the delinquent 22 property tax, Kirresh’s lien and the IRS lien. 23 Kirresh and Trustee ultimately entered into a stipulated 24 order on the stay relief motion allowing Trustee six months to 25 sell the Residence. The court approved Trustee’s application to 26 employ Steve Kaer, an Oregon licensed broker and realtor, to sell 27 the Residence. Kaer intended to list the property for $539,000; 28 Kaer’s commission on any sale would be 6%. -3- 1 B. Debtor’s motion to compel Trustee’s abandonment of the Residence 2 3 Debtor then moved to compel Trustee to abandon the estate’s 4 interest in the Residence (“Motion to Abandon”). Debtor again 5 valued the Residence at $500,000 and argued that, because the 6 amount of debt against it was in excess of $650,000 (including 7 liens, Debtor’s claimed $40,000 homestead exemption and proposed 8 administrative fees), it was burdensome or of inconsequential 9 value and benefit to the estate and should be abandoned. 10 Trustee opposed the Motion to Abandon, contending that 11 abandonment of the Residence was inappropriate because unsecured 12 creditors stood to receive approximately $48,000. As Trustee 13 explained, he intended to sell the Residence for at least $500,000 14 free and clear of the IRS’s tax lien under § 363(f) and pay off 15 the $371,000 first lien, with the IRS lien attaching only to the 16 remaining sale proceeds to the extent available. Pursuant to 17 §§ 724(a), 726(a)(4) and 551, he could then avoid, subordinate and 18 preserve the penalty portion of the IRS tax lien ($48,276.33) 19 against the remaining sale proceeds and distribute those funds to 20 unsecured creditors. 21 As for Debtor’s claimed homestead exemption, Trustee argued 22 that it was subject to the IRS’s lien to the full extent of the 23 Residence and was not exempt to the extent of the lien. Thus, 24 unless the lien was satisfied, no proceeds were available for 25 Debtor’s homestead exemption. 26 In response, Debtor stated that his $500,000 valuation of the 27 Residence was based on his analysis of the history of similar 28 properties sold in the surrounding areas and was the value he -4- 1 hoped to realize after the completion of deferred maintenance. 2 Before the evidentiary hearing on the Motion to Abandon, 3 Debtor and Trustee submitted various exhibits. Trustee included a 4 list of comparable properties that were for sale or had sold in 5 the past 12 months. The comparable list was supported by a 6 declaration from Kaer. Kaer opined that, based on his review of 7 the comparable properties, the Residence’s value was $539,000, 8 taking into consideration its current condition, including the 9 need for a new roof and siding. Debtor submitted his declaration 10 along with a property report from Classic Realty Group (“Classic 11 Report”) and a recent bid for replacement of the Residence’s roof, 12 siding and gutters. The Classic Report provided a “Current 13 Estimated Value” of the Residence of $516,720 and a “Comp Analysis 14 Value” of $434,039. The bid for replacement of the roof, siding 15 and gutters was $74,991. 16 1. Evidentiary hearing on the Motion to Abandon 17 Kaer was the only witness to testify at the evidentiary 18 hearing. Kaer testified that he began selling homes in the Murray 19 Hill area shortly after its development in 1968; however, he had 20 not personally sold any homes in that area in the past 12 months. 21 Kaer explained how he determined his $539,000 valuation for 22 the Residence and the factors involved when creating a list of 23 comparables. Kaer stated that his valuation considered roof 24 repairs, but he did not factor in replacement of the siding 25 because he believed that a good coat of paint would repair it. 26 Kaer further explained that after a physical inspection of the 27 Residence, he believed it also needed interior painting and carpet 28 cleaning. -5- 1 Overall, Kaer thought the Classic Report offered by Debtor 2 was a fine report, but he questioned its accuracy because it did 3 not use comparables exclusively from the Murray Hill area; only 4 three of the seven homes listed were located in Murray Hill. On 5 cross-examination, Kaer conceded he was not entirely sure what 6 parameters were used to compile his list of comparables because 7 his staff had put it together. He further conceded that, just 8 like the Classic Report, at least some of the comps used were not 9 located in Murray Hill. 10 In closing argument, Trustee explained the sale process for 11 the Residence and what the estate could expect to receive from the 12 proceeds based on a hypothetical sale price of $500,000. Although 13 no one from the IRS testified, Trustee made an offer of proof that 14 the IRS had consented to the sale free and clear of its lien and 15 would file an amended proof of claim once the amount of sale 16 proceeds were determined, which would then adjust the secured 17 portion of the tax and penalties due from the estate.3 18 The bankruptcy court rejected Debtor’s declaratory testimony 19 that his $500,000 valuation was based on a repaired home. The 20 court opined that for valuing real property one generally takes 21 the value for a pristine house and discounts it down for the cost 22 of necessary repairs. When Debtor expressed his concern that no 23 one had discussed the Classic Report during the hearing, the court 24 responded that was because no one from Classic came to testify and 25 be cross-examined. Without any testimony from a Classic witness, 26 3 Once the secured IRS claim matched the proceeds on hand, 27 any equity freed up by avoiding the penalties associated with the tax lien would be available for distribution to the estate and 28 would not be consumed by the lien for other non-penalty taxes. -6- 1 it was not clear what factors went into the Classic Report’s 2 figures. 3 2. The court’s ruling on the Motion to Abandon 4 The bankruptcy court announced its ruling on the Motion to 5 Abandon from the bench, stating its findings and conclusions. 6 After considering the three valuations offered into evidence, the 7 court found the Residence’s value to be $500,000 as stated by 8 Debtor. Based on that value, the court concluded that Trustee’s 9 sale of the Residence would benefit the estate. Accordingly, the 10 Motion to Abandon was denied. Debtor timely appealed the 11 subsequent order.4 12 II. JURISDICTION 13 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 14 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158. 15 III. ISSUES 16 1. Did the bankruptcy court err in determining the value of the 17 Residence? 18 2. Could Trustee avoid and preserve the penalty portion of the 19 IRS’s tax lien for the benefit of the estate? 20 IV. STANDARDS OF REVIEW 21 The bankruptcy court’s decision to authorize or deny 22 abandonment is reviewed for an abuse of discretion. Viet Vu v. 23 Kendall (In re Viet Vu), 245 B.R. 644, 647 (9th Cir. BAP 2000). 24 A bankruptcy court abuses its discretion if it applies the wrong 25 legal standard or its findings are illogical, implausible or 26 4 In conjunction with the order denying the Motion to 27 Abandon, the court entered an order compelling Debtor to turn over the Residence to Trustee. Debtor’s appeal of the turnover order 28 (16-1289) was ultimately dismissed for his failure to prosecute. -7- 1 without support in the record. TrafficSchool.com, Inc. v. Edriver 2 Inc., 653 F.3d 820, 832 (9th Cir. 2011). 3 A bankruptcy court’s valuation of property is a finding of 4 fact reviewed under the clearly erroneous standard. Arnold & 5 Baker Farms v. United States (In re Arnold & Baker Farms), 85 F.3d 6 1415, 1421 (9th Cir. 1996). A finding is clearly erroneous if it 7 is “illogical, implausible, or without support in the record.” 8 Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010). 9 The bankruptcy court’s interpretation of the Bankruptcy Code 10 is a question of law we review de novo. Bendetti v. Gunness (In 11 re Gunness), 505 B.R. 1, 4 (9th Cir. BAP 2014). 12 V. DISCUSSION 13 A. Abandonment under § 554(b) 14 Section 554(b) provides that “[o]n request of a party in 15 interest and after notice and a hearing, the court may order the 16 trustee to abandon any property of the estate that is burdensome 17 to the estate or that is of inconsequential value and benefit to 18 the estate.” The moving party has the burden of establishing that 19 the property at issue is burdensome or of inconsequential value 20 and benefit to the estate. In re Viet Vu, 245 B.R. at 647. 21 An order to compel abandonment is “the exception, not the 22 rule.” Id. (citing Morgan v. K.C. Mach. & Tool Co. (In re K.C. 23 Mach. & Tool Co.), 816 F.2d 238, 246 (6th Cir. 1987)). Compelled 24 abandonment under § 554(b) is generally reserved for instances 25 where a trustee is merely churning property worthless to the 26 estate just to increase fees. Id. 27 /// 28 /// -8- 1 B. The bankruptcy court did not abuse its discretion in denying the Motion to Abandon. 2 3 At the heart of the Motion to Abandon was the bankruptcy 4 court’s valuation of the Residence and whether Trustee could avoid 5 and preserve the tax penalties for the benefit of the estate. 6 Debtor contends that the bankruptcy court erred on both of these 7 issues. 8 1. The bankruptcy court did not clearly err in determining the value of the Residence. 9 10 First, Debtor takes issue with the court’s factual finding of 11 value. The court considered three types of evidence in relation 12 to valuation: (1) the Kaer comparable analysis; (2) the Classic 13 Report; and (3) Debtor’s valuation of the Residence on his 14 Schedule A. Debtor contends the court should not have afforded 15 any weight to Kaer’s analysis because: (1) he first declared that 16 the siding needed to be replaced, but later testified that it only 17 needed to be painted; (2) he did not prepare his comparables list 18 and could not describe what parameters were used to determine the 19 comparables; (3) his comparables list included properties not 20 located in Murray Hill; (4) he had not sold a home in Murray Hill 21 in the past 12 months; and (5) he lacked knowledge about the 22 Residence and the Murray Hill area. 23 Given the court’s valuation ruling, Debtor’s argument makes 24 little sense. It rejected Kaer’s $539,000 valuation for the 25 Residence, finding that it was “a little high” because it did not 26 27 28 -9- 1 give adequate market effect to the siding issues.5 2 After considering the evidence, the court agreed with 3 Debtor’s $500,000 valuation of the Residence: 4 In any event, based on all the — of the factors, I’m prepared to find the value of the property at the value 5 stated by Mr. Gill in his schedules at half a million dollars. He’s the one who lives there, has an idea as 6 to the condition of the property. And when he filed his case, I assume he did his best to provide the 7 appropriate value, and that’s the value he gave it. So that’s the value I would apply . . . to the property at 8 the present time. 9 Hr’g Tr. (Sept. 7, 2016) 5:24-6:7. The court further determined 10 that Debtor’s $500,000 valuation took into consideration the 11 possible cost of repairs. 12 Debtor contends that the court erred in using his valuation 13 for the Residence; he is not a valuation expert and he had 14 continuously represented to the court that his $500,000 valuation 15 did not include the necessary repairs to the roof, siding and 16 gutters, which totaled approximately $75,000. Debtor contends the 17 logical approach would have been to deduct the cost of the 18 repairs, which would have provided a value for the Residence of 19 $425,000. In that case, Debtor contends that the approximate 20 $25,000 balance left in sale proceeds (after paying broker fees 21 and Kirresh) was of no value to the estate. 22 The court twice rejected Debtor’s testimony that his $500,000 23 valuation did not include any cost of repairs. As the court 24 explained, to ascertain a value for real property, one generally 25 considers the value of a pristine home and discounts it down for 26 5 The court also gave little weight to the Classic Report’s 27 values of $516,720 and $434,039, because no broker testified as to what factors went into the report or explained the difference in 28 the two values. Debtor does not contest this. -10- 1 necessary repairs. This approach is not an illogical one. 2 We further note that at a time when it suited Debtor’s 3 purpose to place a higher value on the Residence, such as in 4 opposition to Kirresh’s stay relief motion, Debtor claimed that 5 Kirresh’s $500,000 valuation of the Residence (which she likely 6 obtained from Debtor’s schedules) was too low, that the 7 Residence’s value was continuing to increase, and that equity 8 likely existed in the Residence beyond the delinquent property 9 tax, Kirresh’s lien and the IRS lien. 10 In light of the record, we conclude that the bankruptcy 11 court’s rejection of Debtor’s testimony that his $500,000 12 valuation was based on a repaired home was not clearly erroneous. 13 We further conclude that its $500,000 valuation for the Residence 14 was not illogical, implausible or without support in the record. 15 2. Trustee could avoid and preserve the penalty portion of the IRS’s tax lien for the benefit of the estate. 16 17 The bankruptcy court did not make explicit findings regarding 18 Trustee’s ability to avoid, subordinate and preserve the possible 19 $48,276.33 in tax penalties for the estate under §§ 724(a), 20 726(a)(4) and 551. Yet, by finding that at a value of $500,000 21 there was “substantial value” for the estate’s unsecured creditors 22 with Trustee’s sale of the Residence free and clear of the IRS’s 23 lien under § 363(f), it implicitly determined that Trustee could 24 do as he intended based on those statutes. If the court had not 25 determined so, then Debtor’s claimed homestead exemption would 26 have exhausted the remaining equity after paying Kirresh, leaving 27 nothing for unsecured creditors and making abandonment 28 appropriate. -11- 1 Surprisingly, there is a dearth of case law on this precise 2 issue. However, we conclude that the Code expressly authorized 3 Trustee to avoid, subordinate and preserve the penalty portion of 4 the IRS’s tax lien for the benefit of the estate’s unsecured 5 creditors. 6 Under § 724(a), the chapter 7 trustee may avoid a lien that 7 secures a claim of a kind specified in § 726(a)(4). Section 8 726(a)(4) subordinates any allowed claim, “whether secured or 9 unsecured, for any . . . penalty . . . arising before the earlier 10 of the order for relief or the appointment of a trustee, to the 11 extent that such . . . penalty . . . [is] not compensation for 12 actual pecuniary loss suffered by the holder of such claim.” 13 Taken together, §§ 724(a) and 726(a)(4) allow a chapter 7 trustee 14 (but not the debtor or a third party) to avoid a lien to the 15 extent the lien secures the claim for a penalty, including a tax 16 penalty. Holloway v. Internal Revenue Serv. (In re Odom Antennas, 17 Inc.), 340 F.3d 705, 708 (8th Cir. 2003); In re Bolden, 327 B.R. 18 657, 664 (Bankr. C.D. Cal. 2005) (denying debtor’s motion to 19 compel abandonment of estate property because the avoided tax 20 penalties could be preserved for the benefit of the estate and a 21 distribution paid to unsecured creditors).6 22 Further, § 5517 accords the chapter 7 trustee the statutory 23 6 24 It is undisputed that the tax penalties here were assessed against Debtor before the order for relief as a penalty and not as 25 compensation for actual pecuniary loss. The penalties were punitive in nature and assessed to punish Debtor’s failure to pay 26 income taxes. 7 27 Section 551 provides that any transfer avoided under section 724(a) is preserved for the benefit of the estate but only 28 (continued...) -12- 1 right to preserve any liens avoided under § 724(a) for the benefit 2 of the estate. In re Bolden, 327 B.R. at 664; 4 Norton Bankr. Law 3 & Practice 3d § 83:2 (2017) (Sections 724(a), 726(a)(4) and 551 4 authorize chapter 7 trustee to avoid liens on property securing 5 debts imposed upon the debtor for punitive purposes, thereby 6 effecting the release of additional funds to satisfy obligations 7 to unsecured creditors); 5 Collier on Bankruptcy ¶ 551.01 (Alan N. 8 Resnick & Henry J. Sommer, eds., 16th ed. 2015). 9 The purpose of § 724(a) is to protect unsecured creditors 10 from the debtor’s wrongdoing. In re Bolden, 327 B.R. at 664; Rice 11 v. Internal Revenue Serv. (In re Odom Antennas, Inc.), 258 B.R. 12 376, 384 (Bankr. E.D. Ark. 2001), aff’d, 340 F.3d 705 (8th Cir. 13 2003). Enforcement of penalties against a debtor’s estate serves 14 not to punish the delinquent taxpayers, but rather their entirely 15 innocent creditors. Innocent creditors should not be punished for 16 the actions of delinquent debtor taxpayers. Simonson v. 17 Granquist, 369 U.S. 38, 41 (1962); In re Bolden, 327 B.R. at 664. 18 “By avoiding the penalty portions of the tax liens and preserving 19 them for the benefit of the creditors, the estate is enriched 20 while the IRS still obtains the principal portion of its liens, 21 with interest, in the order and priority of each respective lien.” 22 In re Bolden, 327 B.R. at 665. 23 Debtor cites no authority contrary to Holloway and Bolden and 24 asserts only two arguments. He first contends that Trustee 25 offered no evidence of an agreement with the IRS for the sale of 26 27 7 (...continued) 28 with respect to property of the estate. -13- 1 the Residence free and clear of its lien and allowing him to 2 subordinate the penalty portion of the lien. No one from the IRS 3 testified at the evidentiary hearing about whether it consented to 4 the sale free and clear, but Trustee did make an offer of proof 5 that he had the IRS’s consent and that the IRS would file an 6 amended proof of claim once the amount of sale proceeds were 7 determined, which would then adjust the secured portion of the tax 8 and penalties due from the estate. Moreover, according to 9 Trustee, such sales are commonplace. 10 As for subordination of the penalty portion of the tax lien, 11 it is clear by operation of §§ 724(a) and 726(a)(4) that a penalty 12 which is secured by a tax lien is automatically demoted in a 13 chapter 7 case from the highest priority to the lowest priority, 14 payable only after general unsecured creditors are paid in full. 15 Thus, the Code compels subordination of such penalties; no consent 16 from the IRS is necessary. 17 Next, Debtor attempts to distinguish Bolden, arguing in that 18 case the IRS had eight secured tax liens against the debtor’s 19 residence as opposed to one. 327 B.R. at 659. This is a 20 distinction without a difference. As Trustee counters, assuming 21 he can sell the Residence for at least $500,000, which appeared 22 plausible at the time the bankruptcy court made its decision, the 23 estate stands to receive up to $48,000 from the avoided and 24 preserved penalties. This would be true whether the IRS has one 25 lien or eight liens totaling the same amount. 26 Not including Debtor’s student loans, his scheduled unsecured 27 nonpriority debt totaled approximately $48,000. With a sale of 28 the Residence at $500,000 and Trustee’s ability to avoid, -14- 1 subordinate and preserve the penalty portions of the IRS’s tax 2 lien (and interest thereon), unsecured creditors stand to receive 3 up to $48,000 from the sale, minus Trustee’s fees and other 4 administrative expenses. The Residence was not burdensome or of 5 inconsequential value and benefit to the estate, as required by 6 § 554(b). It was, as the bankruptcy court found, of “substantial 7 value” to the estate. Accordingly, we conclude that the 8 bankruptcy court did not abuse its discretion in denying the 9 Motion to Abandon. 10 VI. CONCLUSION 11 For the foregoing reasons, we AFFIRM. 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -15-