Opinion
Civil Action No. 3:00-CV-2028-D
November 25, 2002
MEMORANDUM OPINION
This is an action by plaintiff Hexin E. McPhee ("McPhee") under 26 U.S.C. § 7426 to recover proceeds in the amount of $45,864.24 that he maintains the Internal Revenue Service ("IRS") wrongfully obtained from the sale of his residence at 321 Crooked Tree Court, Coppell, Texas ("Residence") to satisfy a tax lien that secured the recovery of unpaid income taxes owed by his former wife, Debra McPhee ("Debra"). Following a bench trial at which all evidence on all issues was to be introduced, the court issued two opinions in this case, see McPhee v. IRS, 2002 WL 1477433 (N.D. Tex. July 5, 2002) (Fitzwater, J.) (" McPhee I"), and McPhee v. IRS, 2002 WL 31045978 (N.D. Tex. Sept. 10, 2002) (Fitzwater, J.) (opinion denying reconsideration) (" McPhee II"), in which it held that McPhee had failed to prove by clear and convincing evidence that the Residence was his separate property. E.g., McPhee I, 2002 WL 1477433, at *1. In McPhee I the court directed the parties to stipulate to the extent of the IRS' lien rights in the Residence, or (absent agreement) to brief the remaining issues concerning the extent of the IRS' rights. The parties have been unable to reach agreement and have submitted briefing on this issue.
McPhee concedes this. See P. Br. in Support Valuation of Lien at 3 ("The court has previously heard all relevant testimony regarding this matter.").
I
The court assumes familiarity with its prior rulings in McPhee I and McPhee II and will only recount the facts pertinent to the present decision. While McPhee and Debra were married, but separated, Debra failed to pay income taxes to the IRS. The couple reconciled in Texas, and McPhee became aware that Debra owed these taxes. Two weeks before the couple divorced in Texas, the IRS filed a lien on the Residence as a result of Debra's arrearage. The divorce decree awarded McPhee the Residence, subject to any debts that the property might have, but the decree also made Debra responsible for her share of income taxes that accrued during her separation from McPhee.
After the divorce became final, Debra filed for chapter 13 bankruptcy protection. She did not list any real property in Texas on her schedules. The IRS filed a proof of claim that stated that it was owed $55,918.39 unsecured, $0.00 secured, and $5,894.73 priority unsecured. Later, McPhee paid the IRS $45,864.24 to obtain a release of its lien so that he could sell the Residence. The IRS maintains that Debra owed $49,958.64 in unpaid taxes, and that its lien in the Residence extended to that amount, minus $2,524.05 credited to McPhee for principal paid on the mortgage loan after the couple's divorce, resulting in an indebtedness of $47,434.59.
II
The question now before the court is whether the IRS' lien interest extends to the full amount (or more) than McPhee paid to obtain release of the lien. If the amount of the lien is equal to or greater than what McPhee paid, he is entitled to no relief in this suit.
The parties quarrel over several theories, and McPhee argues extensively that Debra's chapter 13 bankruptcy extinguished the IRS' lien against the Residence, giving the lien a value of $0.00. If McPhee is incorrect about the effect of Debra's bankruptcy, however, the court need only decide if he has proved by a preponderance of the evidence that his payment of $45,864.24 to the IRS exceeded what Debra owed and what was secured by the lien. The court holds that Debra's bankruptcy did not extinguish the lien and that McPhee has failed to prove that his $45,864.24 payment exceeded the IRS' lien in the Residence.
Generally, statutory liens pass through the bankruptcy process unaffected. See In re Simmons, 765 F.2d 547, 556-57 (5th Cir. 1985) (addressing statutory liens that are valid under state law); accord In re Deutchman, 192 F.3d 457, 460 (4th Cir. 1999) ("[a] bankruptcy discharge extinguishes only in personam claims against the debtor(s), but generally has no effect on an in rem claim against the debtor's property." (quoting Cen Pen Corp. v. Hanson, 58 F.3d 89, 92 (4th Cir. 1995))). It is well settled that, when a debtor's plan does not address a creditor's secured lien, "the lien simply passes through the bankruptcy and remains enforceable in rem after the discharge is granted and the case closed." In re Kuebler, 156 B.R. 1012, 1017 (Bankr. E.D. Ark. 1993); see In re Junes, 99 B.R. 978, 981 (Bankr. 9th Cir. 1989). Debra did not own an interest in the Residence at the time she filed for bankruptcy and therefore did not list this property in her schedules. Her interest had been divested via the divorce decree. The IRS therefore correctly asserted in her bankruptcy that it did not have a secured interest in Debra's bankruptcy estate. As in Kuebler, Debra's chapter 13 plan provided no treatment for the IRS' secured claim, and the IRS retained its tax lien on the Residence. See Kuebler, 156 B.R. at 1017. Therefore, the lien against the Residence remains.
The issue therefore becomes what is the extent of the lien. McPhee paid the sum of $45,864.24 to the IRS to obtain release of the lien. He contends primarily that the lien had a value of $0.00 after Debra's bankruptcy. He also maintains that, even if he is incorrect and the lien is not voided due to Debra's bankruptcy, the value of the lien was established at her bankruptcy. McPhee argues that he has not been given credit for reducing the mortgage from the date of the couple's divorce to the date the Residence was sold, an amount of $4,668.14. He also posits that he is entitled to $99,000 in appreciation and mortgage reduction. McPhee further argues on various grounds that Debra's bankruptcy reduced her indebtedness to the IRS in the sum of $5,894.73, which Debra has already paid
The IRS responds that McPhee and Debra had homestead interests in the Residence at the time the lien arose and that such an interest is valued according to the tables promulgated under 26 U.S.C. § 7520. These tables are used to determine the present value of future interests in property. According to the IRS, based on McPhee's and Debra's respective dates of birth, McPhee's homestead interest that was compensable on the sale of the Residence was 45.93% of the net sales proceeds of $92,396.22. Debra's 54.07% interest equaled $49,958.64. Even if McPhee paid $4,668.13 to reduce the first mortgage, these payments benefited both McPhee's and Debra's interests, and he should receive credit for 54.07% of these payments ($2,524.05). Because McPhee paid only $45,864.24 to the IRS, and it is owed $47,434.59 even after credits are given to him, he is not entitled to any recovery in this lawsuit. The IRS contends that McPhee is not entitled to credit for payments made on the Compass Bank loan because inter alia that the loan related to his California residence, was not secured by the Residence, and did not have a superior position over the IRS' tax lien. It contends that although $14,049.00 of loans proceeds were applied at closing toward the Residence, he is not entitled to a credit against the IRS lien because these payments are akin to community property wages.
Apart from arguments that are now immaterial in view of the court's rulings concerning the effect of Debra's bankruptcy, McPhee maintains in reply that the record evidence is insufficient to make the homestead interest present value calculations due the absence of evidence about McPhee's and Debra's ages at certain relevant times, and that no assumptions can be made about McPhee's and Debra's relative homestead interests except that they had equal interests. This deficiency in proof does not, however, support a finding against the IRS' position, because McPhee has the burden of proof in this case. Therefore, the absence of necessary evidence dictates judgment against McPhee's position, not in his favor.
McPhee also argues that Debra should receive no benefit for payments he made after their divorce to reduce the amount of the first mortgage. The IRS' calculations, however, have reduced Debra's interest in the Residence by $2,524.05 (57.04% of the sum of $4,668.13 by which he reduced the first mortgage) to reflect the proper credit for these payments. Even after this reduction, McPhee's payment was not equal to or greater than the IRS' lien interest.
Concerning the Compass Bank loan, McPhee maintains he was obligated to pay off the loan with monies that were not community property, that the loan had to be repaid, and that any transfer or sale of the Residence was subject to the repayment. These arguments do not adequately counter the IRS' position that the Compass Bank loan related to his California residence, was not secured by the Residence, and did not have a superior position over the IRS' tax lien. The fact that McPhee was required to pay off a personal loan from the proceeds of the Residence does not mean that the payment benefited Debra's homestead interest or reduced the value of the IRS' lien. McPhee has not shown by a preponderance of the evidence that he is entitled to any credits greater than those that the IRS has accorded him under its calculations.
Accordingly, because McPhee's interpretation of the effect of Debra's bankruptcy is legally incorrect and he has failed to carry his burden of proof concerning the extent of Debra's interest in the Residence, he has not proved that he is entitled to relief in this case. A judgment in favor of defendants is filed contemporaneously with the filing of this opinion.