United States ex rel. Internal Revenue Serv. v. Austin (In re Austin)

583 B.R. 480

IN RE: Scott S. AUSTIN; Anna M. Austin, formerly known as Anna DeFalco Debtors

United States of America, on behalf of the Internal Revenue Service, Creditor–Appellant

v.Scott S. Austin; Anna M. Austin, Debtors–Appellees

No. 17–6024

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: February 23, 2018

Filed: April 9, 2018

Adam Grissom Breeze, Galloway, Johnson, Tompkins, Burr & Smit, St. Louis, MO, for Debtor.

Gretchen Ellen Nygaard, U.S. Department of Justice, Washington, DC, for Creditor–Appellant.

Before SALADINO, Chief Judge, SHODEEN and SANBERG, Bankruptcy Judges.

SANBERG, Bankruptcy Judge.

The Appellant, United States of America, appeals the July 24, 2017, order of the Bankruptcy Court sustaining the Debtors' objection to a proof of claim filed by the Internal Revenue Service. We have jurisdiction over this appeal from the final order of the Bankruptcy Court. See 28 U.S.C. § 158(b).

For the reasons stated below, we reverse.

STANDARD OF REVIEW

The question of whether substantial evidence was presented in support of the objection as a matter of law sufficient to rebut the Internal Revenue Service's ("IRS") proof of claim is reviewed de novo . Fed. R. Bankr. P. 8013 ; Halverson v. Estate of Cameron (In re Mathiason) , 16 F.3d 234, 235 (8th Cir. 1994) ; Dove–Nation v. eCast Settlement Corp. (In re Dove–Nation ), 318 B.R. 147, 150 (B.A.P. 8th Cir. 2004). We review the Bankruptcy Court's findings of fact for clear error and its conclusions of law de novo. Brown v. I.R.S. (In re Brown) , 82 F.3d 801, 805 (8th Cir. 1996), abrogated on other grounds by Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) ; Keating v. C.I.R., 544 F.3d 900 (8th Cir. 2008), Blodgett v. C.I.R. , 394 F.3d 1030, 1035 (8th Cir. 2005) (finding in the context of proving tax loss, which is entitled to a presumption of correctness, that "we review de novo the legal question of whether a taxpayer produced sufficient evidence to shift the burden of proof").

BACKGROUND

The Debtors, Scott S. and Anna M. Austin ("Austins" or "Appellees"), filed a voluntary petition under Chapter 13 of the Bankruptcy Code with the Bankruptcy Court for the Eastern District of Missouri on December 8, 2014. In their schedules, the Austins listed two pending worker's compensation claims as contingent and unliquidated exempt property. These claims were valued at $0.00 or an "unknown value." The Austins listed the IRS as a secured creditor. The IRS filed proof of claim no. 5–1, asserting in part a secured claim as a result of a tax lien.

On January 9, 2015, the Austins filed an objection to claim no. 5–1 ("January Objection"). They objected to the amount of the IRS's priority claim and the amount of the claim listed as secured. They argued that no value should be attributable to their worker's compensation claims in determining the secured portion of the IRS's claim. They also argued, in the alternative, that since there were neither settlement offers nor a basis to determine the value of the worker's compensation claims, the present value of the worker's compensation claims should be $0.

On July 13, 2015, the Bankruptcy Court held a hearing on the January Objection. No evidence was presented at this hearing and the matter was taken under submission.

On September 18, 2015, the Bankruptcy Court overruled the Austins' January Objection and held that the Austins had failed to meet their burden to produce substantial evidence to rebut the IRS's claim. The Bankruptcy Court disagreed with the Austins' assertion that their worker's compensation claims had no value. In re Austin, 538 B.R. 543 (Bankr. E.D. Mo. 2015) (" Austin 1"). Rather, the Bankruptcy Court held that because the claims were being pursued at the time the petition was filed, they must have had some value. Id. at 546. Therefore, the Bankruptcy Court overruled the Austin's objection. Id. at 546–547.

In the meantime, on July 28, 2015 (while Austin 1 was under submission), the Austins negotiated a settlement of the worker's compensation claims for $21,448.80. After attorneys' fees, the Austins received a net settlement of $15,661.60.

The IRS learned of the settlement, and on October 13, 2015, filed an amended claim, No. 5–3, which included as part of its secured claim the amount of $15,661.60 for the value of the worker's compensation settlement.

The Austins again objected to the IRS's claim, specifically to the value of the IRS lien against the worker's compensation claims. In support of their objection, on July 26, 2016, the Austins filed an affidavit of Michael Smallwood¹ ("Smallwood Affidavit"), the Austins' worker's compensation attorney, who opined that the worker's compensation claims had a "nuisance" value of $3,000.00 on the petition date.

In response, the IRS argued that the Smallwood Affidavit was not substantial evidence sufficient to overcome the prima facie validity of the IRS's claim. Further, the IRS argued that the value of the worker's compensation claims should be the amount that the claim settled for, though it was several months after the Austins' petition date.

After hearing oral arguments, on August 22, 2016, without taking evidence or hearing testimony, the Bankruptcy Court took the matter under submission.

On July 24, 2017, the Bankruptcy Court ruled that the Smallwood Affidavit was "substantial evidence" of the value of the worker's compensation claims, sufficient to rebut the prima facie validity of the IRS's claim. The Bankruptcy Court reasoned that the affidavit was from the attorney who litigated the matter himself. Further, the Bankruptcy Court stated that the "IRS has not provided additional evidence to prove why it believes the true value of the claim should be the actual settlement amount." The Bankruptcy Court therefore sustained the Austins' objection and valued the worker's compensation claims at $3,000, and reduced the IRS's secured claim by $12,661.00.

The IRS timely filed this appeal.

ISSUES ON APPEAL

On appeal, the IRS argues that the Bankruptcy Court erred in finding that the Austins presented substantial evidence in support of their objection. The IRS argues that the single affidavit of the worker's compensation counsel, the Smallwood Affidavit, filed in support of their objection did not constitute ‘substantial evidence’ in rebutting the IRS's claim. Rather, the Smallwood Affidavit contains uncorroborated and self-serving hearsay statements and the IRS did not have the opportunity for cross-examination.

The Austins argue in response that the IRS did not preserve for appeal, and therefore waived any argument, on the issue of the sufficiency of evidence of the Smallwood Affidavit. The Austins also argue that the Bankruptcy Code does not prescribe any particular method of valuation, but instead leaves valuation questions to judges on a case-by-case basis. According to the Austins, the Smallwood Affidavit is sufficient proof of the value of the claim because Mr. Smallwood handled the case and is an experienced worker's compensation attorney; he is in the best position to value the claims as of the petition date.

DISCUSSION

The IRS's Claim

We first note that there is no dispute about the amount of the IRS's claim or that the federal tax lien is a valid lien against the proceeds of the workers compensation claims. Therefore, we do not address those issues. Rather, the issue is the value of the lien on the worker's compensation claims pursuant to 11 U.S.C. § 506(a)(1).

Section 506(a)(1) states that a claim is a "... secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ...." 11 U.S.C. § 506(a)(1). The Austins argue that this amount is $3,000, the value asserted in the Smallwood Affidavit. The IRS disagrees and asserts that the Austins failed to present substantial evidence to overcome the presumptive validity of the IRS claim which valued the amount secured by the worker's compensation claims to be $15,661.60, the amount the Austins received in the settlement, after attorneys' fees were deducted.

Burden of Proof

A creditor of the debtors may file a proof of claim and it is deemed allowed, unless a party in interest objects. 11 U.S.C. § 502(a). A proof of claim that comports with the requirements of Bankruptcy Rule 3001(f) constitutes prima facie evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f) ; In re Dove–Nation , 318 B.R. at 152 ; Kimmons v. Innovative Software Designs, Inc. (In re Innovative Software Designs, Inc.) , 253 B.R. 40, 44 (8th Cir. BAP 2000). The filing of an objection does not deprive the proof of claim of a presumptive validity unless the objection is supported by substantial evidence. McDaniel v. Riverside Co. Dept. of Child Support & Serv. (In re McDaniel) , 264 B.R. 531, 533 (8th Cir. BAP 2001), (citing In re Brown , 82 F.3d 801, 805 (8th Cir. 1996) ).

Further, as part of its burden of producing substantial evidence to rebut the presumptive validity, the objecting party bears the burden of producing substantial evidence as to the value of the collateral securing any portion of the claim. 11 U.S.C. § 506 ; In re Heritage Highgate Inc., 679 F.3d 132, 140 (3rd Cir. 2012) (citing In re Robertson , 135 B.R. 350, 352 (Bankr. E.D. Ark. 1992). This is because the claim is secured only to the extent of the value of the collateral, pursuant to Section 506. Wright v. Standard Consumer USA Inc. (In re Wright ), 492 F.3d 829, 830 (7th Cir. 2007) ; Taffi v. U.S. , (In re Taffi ) 96 F.3d 1190, 1192 (9th Cir. 1996).

Here, the Bankruptcy Court determined that the value of the worker's compensation claim was $3,000 based on the Smallwood Affidavit provided by the Austins, and that the Smallwood Affidavit constituted substantial evidence rebutting the presumptive validity of the IRS's claim. The IRS disagreed.

While the Austins argue that the IRS did not preserve the issue of the sufficiency of the evidence for appeal and therefore waived the...