Hutchinson v. United States (In re Hutchinson)

15 F.4th 1229

IN RE Leonard E. HUTCHINSON; Sonya C. Hutchinson, Debtors,

Leonard E. Hutchinson; Sonya C. Hutchinson, Plaintiffs-Appellants,

v.United States of America, Department of Treasury, Internal Revenue Service; James Salven, Chapter 7 Trustee, Defendants-Appellees.

No. 19-60065

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 13, 2020 San Francisco, California

Filed October 19, 2021

Amended December 23, 2021

David R. Jenkins (argued), David R. Jenkins APC, Fresno, California, for Debtors-Appellants.

Robert J. Branman (argued) and Bruce R. Ellisen, Attorneys, Tax Division; David A. Hubbert, Deputy Assistant Attorney General; Richard E. Zuckerman, Principal Deputy Assistant Attorney; McGregor W. Scott, United States Attorney; Tax Division, United States Department of Justice, Washington, D.C., for Appellee United States of America.

Russell W. Reynolds (argued) and Kelsey A. Seib, Coleman & Horowitt LLP, Fresno, California, for Appellee James Salven.

Before: Ferdinand F. Fernandez, Kim McLane Wardlaw, and Daniel P. Collins, Circuit Judges.

COLLINS, Circuit Judge:

Plaintiffs Leonard E. Hutchinson and Sonya C. Hutchinson, Chapter 7 debtors, appeal from the decision of the Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") affirming the bankruptcy court's dismissal with prejudice of their adversary complaint concerning certain tax liens asserted by the Internal Revenue Service ("IRS"). We affirm.

I

In 2011, the IRS recorded liens for unpaid taxes, interest, and penalties against Plaintiffs’ residence in Orosi, California. After Plaintiffs filed for Chapter 7 bankruptcy in June 2017, the IRS in August 2017 filed a proof of claim for both the secured and unsecured portions of its then-existing claim for unpaid taxes, interest, and penalties. The portion of the claim that was secured by the liens on Plaintiffs’ home and attributable only to penalties was over $162,000.

However, even before the IRS filed that claim, Plaintiffs preemptively filed the instant adversary proceeding against the United States and the Chapter 7 Trustee appointed in their case, James Salven. In the first cause of action in their complaint, Plaintiffs asserted that, because the IRS's claim for penalties was a "claim of a kind specified in section 726(a)(4)" of Title 11 of the U.S. Code, the "lien that secures" that penalties claim was subject to avoidance by the trustee under § 724(a). See 11 U.S.C § 724(a) ("The trustee may avoid a lien that secures a claim of a kind specified in section 726(a)(4) of this title."); see also id . § 726(a)(4) (generally describing claims "for any fine, penalty, or forfeiture"). Plaintiffs alleged that, because Salven had not attempted to avoid the IRS's penalties claim, Plaintiffs were empowered to do so under 11 U.S.C. § 522(h). See id . § 522(h) (describing certain circumstances in which a "debtor may avoid a transfer of property of the debtor" if "the trustee does not attempt to avoid such transfer"); id . § 101(54) (broadly defining "transfer" to include, for example, the "creation of a lien"). Plaintiffs therefore sought to "avoid the lien" securing the penalties claim to the extent that it encumbered their Orosi home and to the extent of the "lesser" of the amount of the penalties claim or the amount of Plaintiffs’ homestead exemption (which was $100,000). See Law v. Siegel , 571 U.S. 415, 417–18, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014) (noting that the "Bankruptcy Code provides that a debtor may exempt certain assets from the bankruptcy estate," and that one such exemption, "commonly known as the ‘homestead exemption,’ " protects a specified amount of "equity in the debtor's residence"). In their second cause of action, Plaintiffs alleged that, to the extent the liens were avoided, they should be preserved "for the benefit of the Plaintiffs."

Salven filed an answer to the complaint, together with a cross-claim against the United States. In his first cause of action, Salven asserted the right, as trustee, to avoid the liens securing the IRS's penalties claim. In his second cause of action, Salven alleged that, to the extent that the liens were avoided, their value should be recovered for the benefit of the bankruptcy estate.

The Government filed a motion to dismiss Plaintiffs’ adversary complaint, which the bankruptcy court granted in January 2018. Hutchinson v. United States (In re Hutchinson ), 579 B.R. 860, 865 (Bankr. E.D. Cal. 2018). Plaintiffs appealed to the BAP, but the BAP dismissed the appeal as interlocutory in light of Salven's still-pending cross-claim against the Government. In February 2019, the bankruptcy court entered a stipulated judgment in which Salven and the Government agreed that the "penalty portions" of certain of "the IRS's liens" against Plaintiffs’ Orosi residence "are avoided pursuant to 11 U.S.C. § 724(a)." Given the resulting final judgment in the adversary proceeding, Plaintiffs again appealed to the BAP, which affirmed the dismissal of their adversary complaint.

Plaintiffs timely appealed to this court, and we have jurisdiction under 28 U.S.C. § 158(d)(1). We review the BAP's decision de novo, and we review the underlying bankruptcy court decision using the same standard of review the BAP did. Tracht Gut, LLC v. L.A. Cnty. Treasurer & Tax Collector (In re Tracht Gut, LLC ), 836 F.3d 1146, 1150 (9th Cir. 2016). Because the underlying decision was a dismissal for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), our review of that decision is de novo. Id . ; see also FED . R. BANKR . P. 7012(b) (stating that FED . R. CIV . P. 12(b) "applies in adversary proceedings" in bankruptcy court).

II

Section 522(h) does not authorize Plaintiffs to avoid the liens that secure the IRS's penalties claim, and their first cause of action was therefore properly dismissed for failure to state a claim.

In theory, a debtor's ability to avoid certain "transfer[s]" of property under § 522(h) could extend to tax liens. See DeMarah v. United States (In re DeMarah ), 62 F.3d 1248, 1250 (9th Cir. 1995) (citing In re Ridgley , 81 B.R. 65, 67 (Bankr. D. Or. 1987) ); see also City of El Paso v. Am. W. Airlines (In re Am. W. Airlines, Inc. ), 217 F.3d 1161, 1165 (9th Cir. 2000) ("Because a tax lien is an involuntary parting of an interest in property, it qualifies as a transfer within the meaning of the Bankruptcy Code."); 11 U.S.C. § 101(54) ("transfer" includes the "creation of a lien," "the retention of title as a security interest," and "each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with ... property; or ... an interest in property"). Under the terms of § 522(h), a transfer (including a lien) can be avoided by the debtor if (1) the transfer is "avoidable by the trustee under section ... 724(a)"; (2) the "trustee does not attempt to avoid such transfer"; and (3) "the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer." 11 U.S.C. § 522(h) ; see also DeMarah , 62 F.3d at 1250. The third of these requirements, in turn, has several components. One of them is that "the debtor could have exempted such property" under § 522(b) "if such property had not been transferred." See 11 U.S.C. § 522(g).¹ Plaintiffs contend that they meet that requirement because § 522(b) allows them to exempt their interest in their principal residence up to the extent of their $100,000 homestead exemption under California law. See id . § 522(b)(3)(A) ; CAL. CODE CIV. P. § 704.730(a)(2), (b) (2017) (setting applicable "homestead exemption" at "$100,000"); see generally Law v. Siegel , 571 U.S. at 418, 134 S.Ct. 1188.

However, we held in DeMarah that, because § 522(c)(2)(B) states that otherwise "exempt[ ]" property remains subject to "a tax lien, notice of which is properly filed," see 11 U.S.C. § 522(c)(2)(B), any "property exempted from the estate remains subject to tax liens," DeMarah , 62 F.3d at 1251. Because, under § 522(c)(2)(B), "Congress has denied debtors the right to remove tax liens from their otherwise exempt property," we held that a debtor "may not avoid the lien for his tax penalties" under § 522(h). Id . at 1252.

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. Id . (reserving the question of whether a "trustee could avoid the penalty portion of tax liens on nonexempt property"); cf . Gill v. Kirresh (In re Gill ), 574 B.R. 709, 716 (B.A.P. 9th Cir. 2017) (holding that 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"). But we explained 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 had incurred those penalties by failing to pay their taxes." DeMarah , 62 F.3d at 1252 (emphasis added).

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). Plaintiffs contend in their brief that "the DeMarah Court failed to properly construe the relevant provisions of the Bankruptcy Code in reaching its decision," but as a three-judge panel we lack the authority to reconsider DeMarah ’s clear and directly applicable holding. See Miller v. Gammie , 335 F.3d 889, 899–900 (9th Cir. 2003) (en banc).

In all events, Plaintiffs’ effort to invoke § 522(h) fails for a second, and independent reason. As noted earlier, here the trustee did "attempt to avoid" the tax lien to the extent that it secured the penalties claim, see 11 U.S.C. § 522(h)(2), and he largely succeeded in that effort. See supra at ––––. Because this clear requirement of § 522(h) was not met here, Plaintiffs...