592 B.R. 729
Bankr. W.D. Wash.2018Background
- Debtor William Selander (Chapter 7) co-owned a residence sold by the trustee for $825,000; after mortgage and closing costs the trustee received $198,846.39, of which $125,000 was allocated as Debtor's Washington homestead exemption.
- Umpqua Bank held a senior judgment lien; the IRS had a tax lien junior to Umpqua but recorded against the property and filed a secured claim.
- Trustee had negotiated a carve-out from Umpqua (greater of 25% or $15,000 of net proceeds) and obtained court approval to sell; the sale stipulation expressly provided Debtor would receive $125,000 for the homestead exemption.
- Trustee moved to subordinate the IRS tax lien under 11 U.S.C. § 724(b) to permit surcharging the $125,000 exempt proceeds to pay administrative costs (including trustee’s statutory sale fee).
- The IRS and U.S. Trustee opposed: IRS argued § 724(b) does not apply to exempt property in which the estate has no interest and that § 522(k) bars charging exempt property for administrative expenses; U.S. Trustee also raised disclosure and accounting concerns.
- Court took the motion under advisement and denied the trustee’s request, ordering the $125,000 homestead proceeds remitted to the IRS pursuant to its claim.
Issues
| Issue | Trustee's Argument | IRS/U.S. Trustee Argument | Held |
|---|---|---|---|
| Whether trustee may use § 724(b) to subordinate an IRS tax lien and surcharge a debtor's allowed homestead exemption to pay administrative sale costs and trustee fees | § 724(b) permits subordination of a tax lien on property in which the estate has an interest to pay administrative expenses; here the IRS claim is a tax lien on the homestead proceeds, so trustee can subordinate it and recoup costs | § 522(k) makes exempt property not liable for administrative expenses; the estate has no interest in the exempt $125,000 so § 724(b) (which applies to property of the estate) cannot be used to surcharge the exemption | Denied: § 724(b) applies only to property in which the estate has an interest; a claimed exemption removes the property from the estate and § 522(k) bars surcharging exempt funds. Trustee must remit the $125,000 to the IRS under its lien. |
Key Cases Cited
- United States v. Rodgers, 461 U.S. 677 (supremacy clause means federal tax liens can defeat state homestead exemptions)
- Law v. Siegel, 571 U.S. 415 (exempt property generally not liable for administrative expenses absent narrow exceptions)
- Schwab v. Reilly, 560 U.S. 770 (effect of claimed exemptions on estate interests)
- Gebhardt v. Gaughan (In re Gebhardt), 621 F.3d 1206 (Ninth Circuit on effect of exemptions removing property from estate)
- Alsberg v. Robertson (In re Alsberg), 68 F.3d 312 (exemptions remove property from the estate)
- In re Laredo, 334 B.R. 401 (Bankr. N.D. Ill.) (held administrative sale costs can be paid ahead of tax lien where lien encumbers available net equity — relied on by trustee but factually distinguishable)
- In re Clark, 116 B.R. 672 (Bankr. W.D. Wis.) (tax lien may attach to exempt homestead interest to extent judgment lienors lack reach)
- Reeves v. Callaway (In re Reeves), [citation="546 F. App'x 235"] (trustee may sell encumbered residence subject to carveouts where IRS and others agree)