Nomellini v. U.S. Internal Revenue Serv. (In re Nomellini)

534 B.R. 166

In re Drew Nomellini, Debtor.

Drew Nomellini, Plaintiff

v.United States of America Internal Revenue Service and State of California Franchise Tax Board, Defendants.

Case No. 11–61177–ASW

Adv. Pro. No. 14–05083–ASW

United States Bankruptcy Court, N.D. California.

Signed June 25, 2015

Renee C. Mendoza, Cathleen Cooper Moran, Moran Law Group, Inc., Mountain View, CA, for Plaintiff.

Thomas M. Newman, Karen Yiu, Office of the Attorney General, San Francisco, CA, Melody T. Scullary, California Franchise

Tax Board, Rancho Cordova, CA, for Defendants.

MEMORANDUM DECISION RE: DEFENDANT'S MOTION TO DISMISS AND PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

Arthur S. Weissbrodt, U.S. Bankruptcy Judge

Before the Court are two motions. The first is a motion to dismiss under Fed. R. Civ. P. 12(b)(6) filed by Defendant United States of America, Internal Revenue Service (“IRS”), which is represented by attorney Thomas Newman. The second is a motion for summary judgment filed by Plaintiff and Debtor Drew Nomellini, who is represented by attorney Cathleen Moran. For the reasons explained below, the Court grants the IRS's motion to dismiss and denies Plaintiff's motion for summary judgment.

I. FACTS

In this adversary proceeding, Debtor seeks a determination of the extent of the IRS' interest in the proceeds of Debtor's real property. Debtor's originally filed schedules listed the value of his real property at 520 St. Claire Drive, Palo Alto, CA (the “Property”) as $950,000 as of the petition date of December 6, 2011. Schedule D shows a first deed of trust in the amount of $980,190.24. Debtor also listed personal property worth $10,000.

The IRS filed a proof of claim on January 4, 2012 in the total amount of $214,520.27, based on taxes due for the years 2003–2006. The IRS listed $10,000 as secured and $204,520.27 as unsecured. The IRS's valuation of its secured claim was based entirely on the value of Debtor's personal property, because the schedules indicated there was no equity in the Property to which the IRS's lien attached. Attached to the proof of claim was a copy of a federal tax lien that was recorded on August 13, 2009. The IRS has been paid $10,000 on its original secured claim.

Debtor's Second Amended Plan filed January 18, 2012 was confirmed by order entered February 29, 2012. The plan lists the IRS in paragraph 2(b) as a creditor with an allowed secured claim, with collateral valued at $10,000. The plan provides, with respect to the allowed secured claims listed in paragraph 2(b):

The valuations shown above will be binding unless a timely objection to confirmation is filed. Secured claims will be allowed for the value of the collateral or the amount of the claim, whichever is less, and will be paid the adequate protection payments and the interest rates shown above. If an interest rate is not specified, 7% per annum will be paid. The remainder of the amount owing, if any, will be allowed as a general unsecured claim paid under the provisions of 2(d).

The Second Amended Plan provided that property of the estate would re-vest in Debtor upon discharge or dismissal and did not provide for the sale of the Property. On May 14, 2014, Debtor filed a second amended motion to modify the plan, which the Court granted on June 6, 2014. Among other things, the modified plan provided for the Property to be sold within eight months from the date the modification was approved, and for estate property to re-vest in the Debtor upon confirmation. Shortly thereafter, Debtor filed a motion to sell the Property for $2,175,000, $1,039,919.84 of which was to be disbursed to Debtor. The IRS immediately amended its proof of claim to provide that the entire amount of its claim was secured. Debtor objected to the amended proof of claim. The parties agreed to let the sale close, with proceeds to be distributed pending further order of this court. Thereafter, Debtor filed this adversary proceeding.

The IRS moves to dismiss the complaint on the grounds that as a matter of law, the confirmation of the modified plan did not bind the IRS to the value of its original claim because Debtor gave no notice in the motion to modify that the sale was for a price sufficient to satisfy the IRS's lien or that Debtor intended to avoid the IRS's lien.

Debtor contends that the IRS is bound by the confirmation of the Debtor's plan, which fixed the amount of the secured claim at $10,000.

II. STANDARD ON MOTION TO DISMISS

Under Fed. R. Civ. P. 12(b)(6) (applicable in bankruptcy via Fed. R. Bankr. P. 7012 ), a court must dismiss a Complaint if it fails to state a claim upon which relief can be granted. To survive a Fed. R. Civ. P. 12(b)(6) motion to dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This standard requires the plaintiff to allege facts that add up to “more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Plaintiff must provide “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id.

In deciding whether the plaintiff has stated a claim upon which relief can be granted, the Court must assume that the plaintiff's allegations are true and must draw all reasonable inferences in favor of the nonmoving party. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987).

III. SUMMARY JUDGMENT STANDARD

Summary judgment shall be rendered by the Court if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56, incorporated in bankruptcy via Fed. R. Bank. P. Rule 7056 ; Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 584–85, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). All inferences must be drawn against the moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158–59, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970) ; United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962). Where a rational trier of fact could not find for the non-moving party based on the record as a whole, there is no “genuine issue for trial.” Matsushita Elec. Indus. Co., 475 U.S. at 587, 106 S.Ct. 1348.

IV. ANALYSIS

Although framed in different ways—one as a motion to dismiss under Fed. R. Civ. P. 12(b)(6) and the other a motion for summary judgment under Fed. R. Civ. P. 56, the parties' motions both require this Court to determine, on undisputed facts, the legal effect of the confirmed plan on the IRS's lien. As explained below, confirmation of Debtor's plan did not modify the IRS's in rem lien rights when no notice was given that the value of the Property had substantially increased or that Debtor intended to avoid the balance of the IRS's statutory lien. In re Brawders, 503 F.3d 856 (9th Cir.2007) ; see also United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010).

The issue here is whether, under the provisions of Debtor's confirmed plan, the IRS is entitled to any of the proceeds of the sale of Debtor's real property based on the federal tax lien recorded August 13, 2009, when the IRS has already been paid the full amount of its allowed secured claim as set forth in the confirmed plan.

The Court finds that binding Ninth Circuit authority, as set forth in Brawders, controls the outcome. In Brawders, the Ninth Circuit BAP reversed and remanded the bankruptcy court's finding that, upon plan confirmation, debtors' residence re-vested in them free of any lien interest held by Ventura County on account of its pre-petition claims, where the plan provided for the County's secured claim but did not purport to affect the County's lien. In re Brawders, 325 B.R. 405 (9th Cir. BAP 2005). The Ninth Circuit Court of Appeals affirmed the BAP and adopted the BAP's opinion and reasoning. Brawders, 503 F.3d at 859.

The BAP reasoned that although principles of res judicata and finality can make even “illegal” provisions of a Chapter 13 plan binding, this proposition is subject to “major limitations.”

First, a debtor asserting res judicata “has the burden of proof on all elements and bears the risk of non-persuasion.” Id. at 867 (citation omitted).

Second, a plan must clearly state its intended effect; if it fails to do so, the plan may not have res judicata effect. If the plan provisions are ambiguous, any ambiguity is interpreted against the debtor and may reflect that the court that originally confirmed the plan did not make a final determination of the matter. Id.

Third, under principles of due process, the affected creditor must have adequate notice that its interests are being impacted. Id.

These limitations are especially important when secured claims are involved because “liens ordinarily pass through bankruptcy unaffected, regardless whether the creditor holding that lien ignores the bankruptcy case, or files an unsecured claim when it meant to file a secured claim, or files an untimely claim after the bar date has passed.” Id. at 867–68 (citing In re Bisch, 159 B.R. 546, 550 (9th Cir. BAP 1993) ) (additional citations omitted).

In Brawders, based on the foregoing principles, the BAP (and the Ninth Circuit) held that the confirmed plan affected only the County's claim against the bankruptcy estate, but did not affect the County's in rem rights. This holding was based on the fact that the plan did not explicitly put the County on notice that its in rem rights were being affected, nor did the debtors bring an adversary proceeding seeking a declaratory judgment or partial lien avoidance limiting the County's in rem rights.

Here, the lien at issue is based on a Notice of Federal Tax Lien recorded against the Property,...