DAVID T. THUMA, Bankruptcy Judge.
Before the Court is the reorganized debtor's motion for a summary judgment avoiding the Internal Revenue Service's tax liens to the extent they secure penalties that accrued after the lien notices were filed. The facts are not in dispute. After reviewing the statutes and case law, the Court rules that the tax liens are valid and non-avoidable. The Court therefore will deny the motion and grant the IRS summary judgment on this issue.
The following facts are not in genuine dispute:
Debtor has been in business since 1983, installing swimming pools in New Mexico and neighboring states. Debtor has no real estate but owns construction equipment, vehicles, and other personal property. Debtor's principal place of business is in Rio Rancho, New Mexico.
The IRS filed the following Notices of Federal Tax Liens (together, the "Notices") relating to Debtor's unpaid taxes:
Each notice was filed in Sandoval County, New Mexico, identified Debtor as the taxpayer, and properly listed Debtor's Rio Rancho, New Mexico address. Each Notice included the following:
Debtor filed a voluntary Chapter 11 petition on May 28, 2015. The Court confirmed Debtor's plan of reorganization on December 18, 2015.
The IRS timely filed a proof of claim in this case for $377,975.48,
Debtor objected to the proof of claim on a number of grounds. The sole remaining issue is whether the IRS's secured claim includes pre-petition penalties that accrued after the Notices were filed.
Summary Judgment Standards.
Summary judgment is appropriate 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 judgment as a matter of law. Fed. R. Civ. P. 56. "[A] party seeking summary judgment always bears the initial responsibility of informing the ... court of the basis for its motion, and ... [must] demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In determining whether summary judgment should be granted, the Court will view the record in the light most favorable to the party opposing summary judgment. Harris v. Beneficial Oklahoma, Inc. (In re Harris), 209 B.R. 990, 995 (10
To deny a motion for summary judgment, genuine factual issues must exist that "can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). "[A] party opposing a properly supported motion for summary judgment may not rest upon the mere allegations or denials ..., but must set forth specific facts showing that there is a genuine issue for trial." Wilson v. Village of Los Lunas, 572 Fed. Appx. 635, 640 (10
"After giving notice and a reasonable time to respond, the court may: (1) grant summary judgment for a nonmovant...." Fed. R. Civ. P. 56(f)(1). At a status conference, the parties represented that they sought to have this matter resolved by summary judgment, rather than go to final hearing.
Debtor admits the Notices were properly filed in the correct county, thereby perfecting the IRS's lien for the amounts stated in the Notices. Debtor argues, however, that penalties accruing after the filing date were never properly perfected and may be avoided under 11 U.S.C. § 544.
Under 11 U.S.C. § 544:
"The so-called `strong arm' powers of § 544(a)(1) grant the trustee the status of a hypothetical lien creditor once the bankruptcy petition has been filed." In re Hicks, 491 F.3d 1136, 1140 (10th Cir. 2007). In LMS Holding Co. v. Core-Mark Mid-Continent, Inc., 50 F.3d 1520 (10th Cir. 1995), the Tenth Circuit stated that "Pursuant to 11 U.S.C. § 544(a)(1), a debtor-in-possession ... may assert the rights of a hypothetical lien creditor once it files a bankruptcy petition." 50 F.3d at 1523. "Congress afforded trustees the power to avoid any transfer or obligation that a hypothetical creditor with an unsatisfied judicial lien on the debtor's property could avoid under relevant ... nonbankruptcy law." In re Haberman, 516 F.3d 1207, 1210 (10th Cir. 2008).
Using § 544(a), a chapter 11 debtor in possession can generally take priority over, and avoid, liens that are unperfected as of the date of the bankruptcy petition. See In re Roser, 613 F.3d 1240, 1243 (10th Cir. 2010) ("He can avoid any lien inferior to his interest in an asset of the bankruptcy estate"); In re HDI Partners, 202 B.R. 524, 528 (Bankr. S.D. Fla. 1996) (same).
Section 545 Lien Avoidance.
Debtor's motion is based on § 544(a). There is some question whether § 544(a) can be used to avoid statutory liens. See, e.g., In re Green Pastures Christian Ministries, Inc., 437 B.R. 465, 471 (Bankr. N.D. Ga. 2010) ("[S]ection 544 provides no ground or basis for avoiding a federal tax lien that is not provided under section 545(2).... [i]ndeed, it could be argued that `§ 545 is the exclusive avoidance provision for statutory liens....'") (internal citations omitted); Ducote v. United States (Matter of de la Vergne), 156 B.R. 773, 775 (Bankr. E.D. La. 1993) (section 545, rather than §544, is applicable to statutory liens). Section 545 provides:
The Tenth Circuit has ruled that § 544 may be used to avoid statutory liens. See In re LMS Holding Co., 50 F.3d at 1527, n. 2 ("In their summary judgment motion debtors relied on 11 U.S.C. § 544; the bankruptcy and district courts also applied § 544. While we believe that the more specific provision for avoidance of statutory liens under § 545 is applicable here, either section provides the same avoidance power.").
The Court will assume for the purposes of this opinion that Debtor is proceeding under both §§ 544 and 545, and has the right under one or both of those sections to avoid unperfected federal tax liens on personal property.
Federal Tax Liens.
26 U.S.C. § 6321 governs the creation of a federal tax lien:
"A tax lien in favor of the United States arises by operation of law if a person is unable to pay a tax liability after demand for payment is made. The lien attaches to all real and personal property of the taxpayer. Moreover, this statutory lien is perfected against a taxpayer without the necessity of filing a Notice of Federal Tax Lien." In re Berg, 188 B.R. 615, 618 (9th Cir. BAP 1995), aff'd, 121 F.3d 535 (9th Cir. 1997) (internal citations omitted).
26 U.S.C. § 6323(a) governs the perfection of federal tax liens as to certain third parties. It provides:
A federal tax lien is perfected as to certain third parties when the notice is filed. United States v. Ultra Dimensions, 803 F.Supp.2d 596, 599-600 (E.D. Tex. 2011). "Congress has determined in enacting 26 U.S.C. § 6323(a) that, once a notice of the federal tax lien has been filed under 26 U.S.C. § 6323(f), the IRS tax lien shall have priority over the subsequent lien of a competing judgment lien holder ..." United States v. Hopkins, 927 F.Supp.2d 1120, 1165-66 (D.N.M. 2013). It is undisputed that the Notices were properly filed pre-petition.
Avoidance governed by federal law.
The rights of a judicial lien creditor over federal tax liens is determined by federal law. See In re Berg, 121 F.3d at 537 ("As the liens are created by federal law, the validity, durability, and qualified exceptions thereto are also determined by federal law. We have no occasion to look to the law of a particular state on bona fide purchasers (BFPs) or holders in due course. Federal law alone is decisive."); In re Tracey, 394 B.R. 635, 640 (1st Cir. BAP 2008) (same).
Lien perfection extends to penalties accruing after the Notices were filed.
A filed federal tax lien secures penalties and interest accruing thereafter. See 26 U.S.C. § 6321 ("the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien"). Courts have uniformly so held. See In re Wesley, 455 B.R. 383, 385 (Bankr. D.N.J. 2011) ("It is clear from a plain reading of the statuary language that Congress intended for federal tax liens to include amounts in excess of the actual unpaid tax by including the phrase `any interest, additional amount, addition to tax, or assessable penalty" in the wording of the statute."); In re Demarah, 62 F.3d 1248, 1251-52 (9th Cir. 1995) ("[t]he whole amount owed is covered by the lien ... the internal revenue code [does not] distinguish between the tax and any penalty or interest when it provides for the imposition of the liens"); United States v. Rogers, 558 F.Supp.2d 774, 791 (N.D. Ohio 2008) ("The amount of the lien under § 6321 extends to accruals beyond the date of assessment."); In re Malke, 2005 WL 1670722, at *2 (Bankr. M.D. Fla.) ("[A] notice is simply what it says — notice of the lien and the obligation it arises from in the amount owed at that time.").
Moreover, the entire lien, including accruing penalties and interest, is perfected when the notice is filed. I.R.C. § 6323(a) ("The lien imposed by section 6321 shall not be valid as against any ... judgment lien creditor until notice thereof which meets the requirement of subsection (f) has been filed by the Secretary") (emphasis added).
In In re Ike Martin Co., Inc., 49 B.R. 13 (Bankr. D. Kan. 1985), the Kansas bankruptcy court addressed the relative priority of penalties on a perfected federal tax lien and a later judgment lien creditor. The court held that the after-accruing penalties took priority over a judgment lien creditor, 49 B.R. at 16, and that once a lien is perfected by filing the notice, the perfection includes after-accruing penalties and interest.
Debtor argues that a bona fide purchaser
A notice of federal tax lien need not be updated with the continuously accruing penalties and interest. In re Malke, 2005 WL 1670722, at *2 (Bankr. M.D. Fla.) ("[I]t is obvious any notice of a tax lien will only be able to provide a snapshot of the amounts due and owing under this provision on that date ... a notice is simply what it says—notice of the lien and the obligation it arises from in the amount owed at that time."); Home Sav. & Loan Co. of Youngstown OH v. Acme Arsena Co., 2010 WL 148087, at *3 (N.D. Ohio 2010).
In general, § 544 cannot be used to avoid liens for which there is record or constructive notice. See 5 Collier on Bankruptcy, ¶ 544.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). A buyer of Debtor's property would have notice of after-accruing penalties or interest. See, e.g., In re Hudgins, 967 F.2d 973, 976 (4th Cir. 1992) ("It is hornbook law that every purchaser is expected to search for recorded encumbrances on the property; that is, he is held to have constructive knowledge of recorded liens. Thus, the validity of a tax lien in bankruptcy must depend on the constructive notice that the lien would give a purchaser."); In re Borges, 510 B.R. 306, 323 (10th B.A.P. 2014) ("Notice to a person which will preclude BFP status may ... be constructive. Constructive notice includes both record notice, such as that provided by the recording acts, and inquiry notice, arising from facts as ought to put a prudent person upon inquiry as to the title.") (analyzing New Mexico law). Moreover, the Internal Revenue Code and associated regulations provide a way to determine how much is owed in penalties and interest.
Debtor argues that if after-accruing penalties were secured by the tax lien, a "hypothetical" bona fide purchaser's due process rights would be violated because they might buy encumbered property without knowledge of the accruing penalties.
Assuming without deciding that a hypothetical bona fide purchaser has due process rights could be violated, there would be no such violation here. Such a buyer would have actual or constructive notice that the IRS tax liens secure penalties accruing after the Notices were filed.
The IRS's claim is perfected as to penalties accruing after the Notices were filed, so Debtor may not avoid the penalties under § 544. The Court will deny Debtor's motion for summary judgment, and grant summary judgment on this issue in favor of the IRS. The Court will enter a separate order consistent with this opinion.