In re Fielding

522 B.R. 888

In re Earnest David FIELDING, and Linda Kay Fielding, Debtors.

No. 13–43212–DML–13.

United States Bankruptcy Court, N.D. Texas, Fort Worth Division.

Signed Dec. 31, 2014.

St. Clair Newbern, III, Law Offices of St. Clair Newbern III, P.C., Fort Worth, TX, for Debtors.

Pam Bassel, Fort Worth, TX, for Trustee.

Lance Justin Erickson, McCarthy, Holthus & Ackerman, L.L.C., Plano, TX, Andrew David Goldberg, Rosicki Rosicki & Associates, P.C., Plainview, N.Y., Donna K. Webb, U.S. Attorney Office, Fort Worth, TX, Elizabeth Weller, Linebarger, Goggan, Blair & Sampson, LLP, Michael Y. Kim, Scott Viscuso, PLLC, Howard Marc Spector, Spector & Johnson, PLLC, Dallas, TX, for Creditor.

MEMORANDUM OPINION AND ORDER

D. MICHAEL LYNN, Bankruptcy Judge.

Before the court is the Limited Objection of IRS to Motion and Notice of Intention to Sell Debtor's [sic] Homestead (305 Canyon Creek Trial, Fort Worth, TX) Free and Clear of All Liens, Claims, and Encumbrances (docket no.¹ 136, the “Objection to Motion to Sell”). By the Objection to Motion to Sell, the IRS objected to, among other things, the manner in which Debtors proposed to allocate the proceeds received from the sale of their Homestead² to their IRS debt.³ On September 22, 2014 the court entered the Order Approving

Debtor's Motion and Notice of Intention to Sell Debtor's Homestead (305 Canyon Creek Trail, Fort Worth, TX) Free and Clear of All Liens, Claims, and Encumbrances and to Shorten Notice to 14 Days

(docket no. 141, the “Order”) to facilitate the sale of Debtors' Homestead, but ordered that the proceeds, which Debtors proposed to pay to the IRS be paid into the Registry of the United States Bankruptcy Court until further order of the court. Order at 2.

On October 8, 2014, Debtors filed the Brief in Support of the Designation of Payments to the IRS (docket no. 151, the “Brief”) seeking further guidance from the court with respect to the proceeds. That same day, the court heard argument (the “Hearing”) from Debtors' counsel and the opposing party, the IRS, (collectively, the “Parties”) regarding the disposition of the proceeds and took the matter under advisement. After consideration of arguments put forth at the Hearing, as well as the pleadings and authorities filed by the Parties, the court has reached the following conclusions.

This matter is subject to the court's core jurisdiction. 28 U.S.C. §§ 1334 and 157(b)(2)(A), (L), and (O). This memorandum opinion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr.P. 9014, 7052.

I. Background

On July 15, 2013, Debtors filed a petition in this court for relief under chapter 13 of the Bankruptcy Code.⁴ Debtors filed their chapter 13 plan on that same day (docket no. 2). The standing chapter 13 trustee and the IRS objected to Debtors' Plan, which was never confirmed. On January 13, 2014 Debtors filed an amended chapter 13 plan (docket no. 48, the “Amended Plan”), to which the trustee and IRS objected. Through the Amended Plan, Debtors have proposed to sell assets, both exempt and non-exempt, to reduce the debt owed to the IRS. Amended Plan at 11. The Plan has not yet been confirmed.

On September 5, 2014 Debtors filed the Motion to Sell. In the Motion to Sell, Debtors requested the court to approve the sale of their Homestead, the Proceeds of which were to be applied to debt owed to the IRS.⁵ On September 17, 2014, the IRS filed its Amended Claim against Debtors in the amount of $539,885.26.⁶ The IRS has a lien for the secured amount of the Amended Claim against all of Debtors' real and personal property. Brief ¶ 5.

On September 18, 2014, the IRS filed the Objection to Motion to Sell, objecting to the manner in which Debtors proposed to distribute the Proceeds. In doing so, the IRS argues that it has the right to allocate payments received in satisfaction of the Amended Claim in accordance with its existing policies and procedures. Shortly thereafter, the court issued the Order. The Order effectively transferred the lien the IRS had on the Homestead to the funds held in the registry of the court. The Brief followed.

II. Discussion

The Brief presents the court with the issue of whether a debtor may apply, at his or her own discretion, proceeds from the sale of an exempt asset to tax debt owed to the IRS. Debtors urge they may allocate the funds as they choose⁷ ; Debtors believe to hold otherwise would frustrate the overall purpose of selling an asset to pay down secured debt as well as jeopardize the success of their Amended Plan, as they would continue to incur penalties and interest. The IRS renews its objections from the Objection to Motion to Sell and maintains it has the right to apply payments to portions of debt according to its existing policies and procedures.⁸ The IRS also suggests, in any event, that Debtors' payment of the Proceeds is not “voluntary” and that only “voluntary” payments may be subject to designation at Debtors' discretion.

A. Applicability of Energy Resources to a Chapter 13 Case

In 1990, the Supreme Court held that a bankruptcy court had authority to order the IRS to apply tax payments made by chapter 11 debtor corporations as designated by such debtor corporations, when the designation was necessary to effectuate a successful reorganization. United States v. Energy Res. Co., Inc., 495 U.S. 545, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990). Debtors suggest the holding and rationale in Energy Resources is applicable to their chapter 13 Case, effectively allowing the court to order the IRS to apply the Proceeds as Debtors choose to allocate them. Brief ¶¶ 12, 19. The IRS does not believe such a broad interpretation is appropriate and would limit the holding in Energy Resources to the case's facts.

In Energy Resources, the Court considered two cases involving debtor corporations that had filed for reorganization under chapter 11 of the Code. One of the debtor corporations had an approved plan with a provision allowing the corporation to apply its tax payments to first extinguish the “trust fund”⁹ portion of the debt before the payment of the non-trust fund portion. Energy Resources, 495 U.S. at 547, 110 S.Ct. 2139. The other debtor corporation had similarly created a trust through its confirmed plan to pay federal tax debt. Id. at 547–48, 110 S.Ct. 2139. The trustee of the trust successfully petitioned the bankruptcy court to order the IRS to apply the payments to trust fund debt. Both cases were consolidated on appeal by the First Circuit, which held bankruptcy courts “had the authority to order the IRS to apply an ‘involuntary’ payment made by a chapter 11 debtor to trust fund tax liabilities if the Bankruptcy Court concluded that this designation was necessary to ensure the success of the reorganization.” Id. at 548, 110 S.Ct. 2139. The Supreme Court affirmed, avoiding the issue of whether the payment was “voluntary” or “involuntary,” which will be addressed in a subsequent section of this opinion. Id. at 548–49, 110 S.Ct. 2139.

Both the case at bar and Energy Resources involve reorganizations under the Code, albeit in different chapters. As stated in Energy Resources, both debtor corporations' plans of reorganization involved provisions providing for the allocation of payments to trust fund debt before paying off remaining tax debt. The manner in which Debtors wish to designate and pay their tax debts are aligned with those of the debtor corporations in Energy Resources. Specifically, the Amended Plan provides that “Debtors intend to sell assets against which IRS has a lien in order to pay the secured and priority claims of IRS.” Amended Plan at 11.

The Court found reason for its holding in Energy Resources in sections 105 and 1123 of the Code, stating “these statutory directives are consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.” Id. at 449, 110 S.Ct. 2139 (citations omitted). Specifically, section 105(a) states—

(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

11 U.S.C. § 105(a).

Section 1123(b) provides that—

(b) Subject to subsection (a) of this section, a plan may—

...

(5) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims; and

(6) include any other appropriate provision not inconsistent with the applicable provisions of this title.

11 U.S.C. § 1123(b)(5), (6).

Thus, the Court determined that the Code gives bankruptcy courts authority to approve reorganization plans, including those that contain provisions not expressly recognized in the Code. It should be noted that section 105(a) encompasses the ability of bankruptcy courts in any chapter, not specifically a chapter 11. Therefore, the Court's analysis with respect to section 105(a) seems to apply to the case at bar. Additionally, as Debtors point out, the Code includes a similar provision to section 1123(b)(6) that is applicable to chapter 13 cases. Brief ¶ 20. Section 1322(b)(l 1) is the equivalent to 1123(b)(6) and states that a chapter 13 plan may include also any provision not inconsistent with another section of title 11. 11 U.S.C. § 1322(b)(11).

This court would not be the first to find that Energy Resources applies more broadly to cases with plans of reorganization. See In re Klaska, 152 B.R. 248, 251 (Bankr.C.D.Ill.1993) (“Certainly, Chapter 13 is a reorganization chapter, and Energy Resources refers generally to ‘reorganization plans' ......