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Internal Revenue Service of the Dep't of the Treasury of the United States of America v. Johnson

March 31, 2009

IN RE: INTERNAL REVENUE SERVICE OF THE DEPARTMENT OF THE TREASURY OF THE UNITED STATES OF AMERICA, APPELLANT,
v.
KIRK G. JOHNSON, APPELLEE.



(Appeal Related to Bankruptcy Nos. 05-35220-TPA; 07- 02077-TPA).

The opinion of the court was delivered by: Judge Nora Barry Fischer

I. INTRODUCTION

Pending before the Court is an appeal of an April 18, 2008 Memorandum Opinion and Order of the Bankruptcy Court in Adversary Proceeding No. 07-2077. (Docket No. 1). Appellant Internal Revenue Service ("IRS") appeals the Bankruptcy Court's Order permitting the debtor, Kirk G. Johnson ("Debtor" or "Johnson") to "strip off" the IRS' federal tax lien from his real property. Based on the following, the decision of the Bankruptcy Court is AFFIRMED, as the record demonstrates that the Bankruptcy Court did not err in stripping the federal tax lien in accordance with Johnson's Chapter 11 Amended Plan of Reorganization and as authorized by §§ 506(a) and 1123(b)(5) of the Bankruptcy Code.

II. BACKGROUND

Johnson filed a voluntary Chapter 11 petition on October 10, 2005. As recognized by the Bankruptcy Court, Johnson "operates a business proprietorship known as 'KJ Transit.'" In re Johnson, 386 B.R. 171, 172 (Bkrtcy.W.D.Pa. 2008). In addition, [Johnson] owns and resides at real property located at 4008 Turnwood Lane, Coraopolis, Pa. ("the Real Property"). The Real Property possessed a fair market value of $279,000 as of the date the bankruptcy petition was filed. As of that same date, the Real Property was subject to a purchase money first mortgage lien in the amount of $279,440 held by Mortgage Electronic Registration Systems, Inc. ("the MERS Mortgage") and a county real estate tax lien in the amount of $215.61 ("the County Lien"). The MERS Mortgage and the County Lien therefore collectively exceed the fair market value of the Real Property and both of them predate any lien held by the IRS. The Debtor also owns various items of personal property with a total fair market value of $53,595.83 ("the Personal Property"). Other than the lien of the IRS, the only item of the Personal Property subject to a lien is a 2002 Lincoln Navigator. As of the Petition date, the fair market value of that vehicle was $18,675. At that time the vehicle was subject to a security interest in favor of M. & T. Credit Services, LLC in the amount of $12,221 ("the M & T Lien") superior to the lien of the IRS. ... Debtor's total equity in all of the Personal Property was $41,374.88.

Johnson, 386 B.R. at 172-73.

The IRS was listed as a secured creditor on Schedule D of Johnson's Chapter 11 petition for its federal tax lien. The IRS filed an Amended Proof of Claim on February 17, 2006, asserting that its federal tax lien entitled it to a secured claim in the amount of $178,673.05 and an unsecured priority claim of $2,374.71, for a total claim of $181,047.76 against all of Johnson's personal and real property. (Docket No. 1-2 at ¶ 6). Johnson filed his Chapter 11 Plan of Reorganization, Summary of Chapter 11 Plan, and Disclosure Statement with the Bankruptcy Court on February 5, 2007. (Bankr.No. 05-35220-TPA, Docket Nos. 86-88).*fn1 Thereafter, on February 20, 2007, Johnson initiated an adversary proceeding against the IRS to determine the nature and validity of the tax lien by filing an adversary complaint. (Docket No. 1-2).

Johnson's adversary complaint against the IRS sought, among other things, to strip the IRS' lien from the real property (as ordered in In re Johnson, 386 B.R. at 172). (Docket No. 1-2). On April 17, 2007, the IRS stipulated that it was entitled to an allowed secured claim of $41,374.88, an allowed unsecured priority claim of $30,595.00, and a general unsecured claim of $109,079.88. (Bankr.No. 05-35220-TPA, Docket No. 112). This stipulation was approved by the Bankruptcy Court on April 23, 2007. (Id. at 112). However, the stipulation did not resolve whether the lien of the IRS would be stripped from the real property.

Johnson filed his Chapter 11 Amended Plan of Reorganization ("Amended Plan") on May 1, 2007, which was confirmed by the Bankruptcy Court on May 3, 2007. (Bankr.No. 05-35220-TPA, Docket Nos. 125-26). Many of the provisions of the Amended Plan are pertinent to this matter. The Internal Revenue Service is defined as "Internal Revenue Service of the Department of the Treasury of the United States of America" at section 1.15. (Bankr.No. 05-35220-TPA, Docket No. 125 at § 1.15). The IRS' federal tax lien is treated in three separate classes under section II "Classification of Claims and Interests" in the Amended Plan. Section 2.02, Class 2, provides that "[t]he allowed secured claim of the Internal Revenue Service which is secured by a lien on [Johnson's] assets, to the extent that such claim is an allowed, non-voidable, and unavoidable secured claim under the [Bankruptcy] Code." (Id. at § 2.02). All allowed unsecured priority claims of the IRS are designated as Class 7 claims and all allowed unsecured claims which are not priority claims are designated as Class 11 claims under sections 2.07 and 2.11 of the Amended Plan, respectively. (Id. at §§ 2.07, 2.11). Moreover, section 4.02 delineates the treatment of the IRS' impaired secured claims under the Amended Plan, i.e., the treatment of the allowed secured claims in Class 2. Specifically, section 4.02 provides the following:

4.02 CLASS 2 - Unless the holder of Class 2 claim and the Debtor agree to other treatment, the Internal Revenue Service shall retain the lien which secures its allowed Class 2 Claim and shall be paid 100 percent of its allowed claim with interest at an annual rate of 8 percent in seventy-two equal monthly installments commencing on the Plan Effective Date. The Debtor and the IRS have entered into a stipulation which has been approved by the Court regarding payment of this claim. A copy of the stipulation is attached hereto as Appendix "A". (Id. at § 4.02). Likewise, section 4.05 describes the treatment accorded to Class 7 claims.

4.05 CLASS 7 - Unless the holder of Class 7 Claim and the Debtor agree to other treatment (see Appendix "A"), the Internal Revenue Service shall be paid 100 percent of its allowed Class 7 claim with interest at the annual rate of 8 percent in seventy-two equal monthly installments commencing on the Plan Effective Date. (Id. at § 4.05). The treatment of Class 11 claims is set forth in section 4.10.

4.10 CLASS 11 - Each holder of an allowed Class 11 unsecured claim which is not a Priority Claim shall be paid a total of thirty percent (30%) of such allowed claim in full satisfaction of allowed claim, as follows:

a. Plan month 48: 4% d. Plan month: 78: 9%

b. Plan month 60: 4% e. Plan month: 84: 9%

c. Plan month 72: 4%

(Id. at § 4.10).

Both sections 4.02 and 4.05 reference Appendix "A." Attached as Appendix "A" to the Amended Plan is the Stipulation and Agreement entered into between Johnson and the IRS on April 17, 2007 and approved by the Bankruptcy Court on April 23, 2007. (Id. at 10-11). Pursuant to the Stipulation and Agreement, the parties agreed that the IRS' prepetition claim in the total amount of $181,047.76 would be paid in accordance with the following:

1. The secured and priority claims totaling $71,968 together with interest thereon at the rate of 8 percent per annum, shall be paid in monthly installments of $1,262 over a seventy-two month period.

a. The first such installment shall be due on the plan effective date, and each subsequent payment shall be due on the same day of each month thereafter until such time as the amount ...


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