NACBA's 1st Annual NACBA WEEK

Jurisdiction: Bankr. S.D. Ala.

Date: Nov. 02, 2024

 

Holding: The bankruptcy court held that the IRS’s perfected pre-petition tax lien on the debtor’s property entitled it to unclaimed funds held by the court, superseding the debtor’s right to those funds under 11 U.S.C. §1326(a)(2).

 

Facts: Stacey Lavell Foster filed a Chapter 13 bankruptcy case but failed to confirm a plan, leading to the dismissal of her case. The Chapter 13 trustee transferred unclaimed funds to the court’s registry after Foster failed to negotiate refund checks. Both Foster and the IRS claimed entitlement to the funds, with the IRS citing its pre-petition tax lien. The court ruled in favor of the IRS, granting its application for the funds.

Analysis: The court analyzed the interplay between 11 U.S.C. §1326(a)(2), which governs the disposition of Chapter 13 funds upon dismissal, and 26 U.S.C. §6321, which grants the IRS a lien on all non-exempt property of the debtor.

Ms. Foster relied on In re Acosta, 2018 WL 3245174, 2018 Bankr. LEXIS 2008 (Bankr. D.P.R. July 3, 2018), where a court held that debtors retain a superior right to unclaimed funds, emphasizing statutory construction and public policy favoring the debtor’s fresh start. The Acosta court reasoned that §1326(a)(2)’s plain language overrides the IRS lien, asserting that funds returned to the debtor merely restore the pre-bankruptcy status quo.

The court in Foster, however, found the reasoning in Acosta unpersuasive. It aligned with decisions like In re Pruitt, 2008 Bankr. LEXIS 1571, 2008 WL 2079145 (Bankr. M.D. Ala. May 15, 2008); In re Brown, 280 B.R. 231 (Bankr. E.D. Wis. 2002); and In re Beam, 192 F.3d 941 (9th Cir. 1999), which emphasized that federal tax liens attach to all non-exempt property unless explicitly exempt under 26 U.S.C. §6334. These cases concluded that §1326(a)(2) does not shield funds from IRS liens.

The court noted that while the issue is unsettled among jurisdictions, the IRS’s broad lien powers and compliance with due process supported its claim. Public policy considerations did not outweigh clear statutory priorities.

Tips: Monitor Jurisdictional Trends: Be aware that courts are split on this issue, with some jurisdictions favoring the debtor’s right to unclaimed funds (Acosta) and others upholding the IRS’s lien (Pruitt, Brown, Beam). Research relevant case law in your jurisdiction before advising clients.

Prioritize Federal Tax Liens: Always verify the existence and scope of federal tax liens, as they may supersede debtor claims under §1326(a)(2), even in pre-confirmation dismissal cases.

The National Consumer Bankruptcy Rights Center (NCBRC) is a 501(c)(3) organization dedicated to protecting the integrity of the bankruptcy system and preserving the rights of consumer bankruptcy debtors. NCBRC provides assistance either by working directly with debtors’ attorneys or by filing amicus briefs in courts throughout the country. Consider supporting NCBRC today!

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