Michael E Hindes
INTERNAL REVENUE SERVICE
Office of the United States Attorney
445 Broadway, Room 218
Albany, NY 12207
CATHLEEN CLARK, ESQ.
BOYLE LEGAL, LLC
Attorney for Debtor Michael E. Hindes
64 2nd Street
Troy, NY 12180
MICHAEL LEO BOYLE, ESQ.
So Ordered.
Signed this 31 day of March, 2026.
Patrick G. Radel
United States Bankruptcy Judge
Presently pending are (1) a Motion for Violation of the Automatic Stay (“Motion for Violation“), filed by Debtor (Docket No. 63); and (2) a Motion to Annul the Automatic Stay to ratify an Internal Revenue Service (“IRS“) levy and/or enforce tax liens on undistributed funds held by the Chapter 13 Trustee (“Motion to Annul“), filed by the IRS. (Docket No. 70). Debtor opposes the Motion to Annul. (Docket No. 73). The IRS opposes the Motion for Violation. (Docket No. 74).
This Court heard oral argument on January 13, 2026, in Albany, New York, with Debtor and the IRS appearing through their above-referenced counsel and being heard. After oral argument, this Court granted the IRS‘s Motion to Annul and denied Debtor‘s Motion for Violation.
The following reasons support this Court‘s decision.
Jurisdiction
The Court has core jurisdiction over the parties and the subject matter of this contested matter in accordance with
Background
On April 1, 2024, Debtor, by and through counsel, filed a Voluntary Petition under Chapter 13 of the United States Bankruptcy Code. (Docket No. 1). Debtor‘s petition indicates his monthly income, in the amount of $2,043, is solely from Social
On August 7, 2025, the Honorable Robert E. Littlefield, Jr., United States Bankruptcy Judge,3 held a confirmation hearing and denied Debtor‘s Chapter 13 Plan due to infeasibility. (Docket No. 49). During the hearing, the Debtor expressed a desire to convert his case to a case under Chapter 7. Id. Judge Littlefield stated that once the order denying confirmation was entered he would sua sponte convert Debtor‘s case to Chapter 7. Id. Judge Littlefield entered an order converting the case on August 11, 2025. (Docket No. 51).
At the time of conversion, the Chapter 13 Trustee was holding $5,250 in undistributed Plan payments. (See Docket No. 74). On or about August 8, 2025 (prior to entry of the Order converting the case to Chapter 7), the IRS faxed a Notice of Levy to the Chapter 13 Trustee‘s Office requesting turnover of the undistributed funds.
On October 28, 2025, Debtor filed a Motion for Sanctions for Violation of the Automatic Stay against the IRS. (Docket No. 63). On November 25, 2025, the IRS filed a motion to annul the automatic stay to ratify its levy and collect the pre-
On December 16, 2025, the IRS filed an objection to Debtor‘s Motion for Violation and Debtor filed an objection to the IRS‘s Motion to Annul. (See Docket Nos. 73 & 74). The IRS filed a reply in further support of its Motion to Annul on December 22, 2025. (Docket No. 78). Debtor filed a reply in further support of his Motion for Sanctions on December 30, 2025. (Docket No. 82).
Debtor argues that he is entitled to the undistributed funds because, after conversion to Chapter 7, post-petition income and earnings become the Debtor‘s property. (Docket No. 63). Thus, Debtor contends, the IRS‘s attempt to collect their debt violated the stay.
The IRS acknowledges that it should have sought stay relief before enforcing its lien against the funds held by the Trustee, but contends that this error was harmless because Debtor would have had no viable defense to a pre-levy motion to lift the stay or to a motion to enforce the IRS‘s tax lien. (Docket No. 74). To wit, because the scope of the federal tax lien is all encompassing and the Debtor used his social security benefits to fund his Chapter 13 plan, the IRS contends that its rights to the undistributed funds are superior to Debtor‘s rights under the Bankruptcy Code. (Docket No. 70). Therefore, the IRS argues, retroactive relief from the automatic stay is warranted.
“The Bankruptcy Code empowers bankruptcy courts to take measures that grant relief from the automatic stay, including ‘terminating, annulling, modifying, or conditioning’ the stay, under certain circumstances.” E. Refractories Co. v. Forty Eight Insulations Inc., 157 F.3d 169, 172 (2d Cir. 1998) (internal citations omitted).
“Of the four enumerated types of relief in
“In the Second Circuit, and in the absence of relief to the contrary, actions taken in violation of the stay are void from the outset.” In re Crichlow, 666 B.R. 441, 449 (Bankr. E.D.N.Y. 2024). The party that has violated the stay must validate the action retroactively and make a prima facie showing of cause. See id. at 449, 451.
In considering a request for retroactive stay relief, courts in this Circuit use the following factors identified in In re Stockwell:
- (1) If the creditor had actual or constructive knowledge of the bankruptcy filing and, therefore, of the stay;
- (2) If the debtor has acted in bad faith;
- (3) If there was equity in the property of the estate;
- (4) If the property was necessary for an effective reorganization;
- (5) If grounds for relief from the stay existed and a motion, if filed, would likely have been granted prior to the automatic stay violation;
- (6) If failure to grant retroactive relief would cause unnecessary expense to the creditor; and
- (7) If the creditor has detrimentally changed its position on the basis of the action taken.
262 B.R. 275 (Bankr. D. Vt. 2001).
While courts grant retroactive relief sparingly, “a determination to annul the automatic stay is inherently tied to the facts and circumstances of the particular situation.” Crichlow, 666 B.R. at 450. Courts are “advised to adopt a holistic approach, where the facts of each [case] will determine whether relief is appropriate under the circumstances.” Id. at 451 (quoting In re Thomas, 639 B.R. 285, 293 (Bankr. S.D.N.Y. 2022)); see also In re Cunningham, 506 B.R. 334, 344 (Bankr. E.D.N.Y. 2014) (“Although the factors in Stockwell and Soares may be consulted, the Second Circuit has not explicitly set forth particular factors that bankruptcy courts must analyze before granting relief from the automatic stay.” (internal quotation marks omitted)); In re Marketxt Holdings, Corp., 428 B.R. 579, 589 (S.D.N.Y. 2010) (“The Bankruptcy Court focused on the Stockwell factors that it considered relevant to its analysis.“); In re Myers, 491 F.3d 120, 129 (3d Cir. 2007) (“Other courts have observed that the most important factors in making this determination are (1) whether the creditor was aware of the filing or encouraged violation of the stay; (2) whether the debtor engaged in inequitable, unreasonable, or dishonest behavior; and (3) whether the creditor would be prejudiced.“).
As to the second factor, this case is Debtor‘s fourth bankruptcy filing.4 Debtor‘s two most recent cases were dismissed for failure to make plan payments. (See 14-11738-1-rel; 16-11692-1-rel). Moreover, the IRS‘s claim has increased significantly over the years, whereas the Debtor‘s monthly income has decreased.5 Debtor‘s Chapter 13 plan proposed paying $350 per month for sixty months totaling $21,000 (an amount far below the IRS‘s priority tax debt totaling $40,075.73). (See Docket No. 70).
The above-mentioned actions suggest the Debtor has not acted in good faith. See Cunningham, 506 B.R. at 344 (finding bad faith when “[t]he [d]ebtor has not described any change in circumstances that. . .would have enabled the [d]ebtor‘s third bankruptcy case to conclude any differently than the previous two cases). Accordingly, the second Stockwell factor weighs in favor of annulling the stay. See id. (“Court‘s have granted nunc pro tunc stay relief based upon a debtor‘s bad faith alone.“).
As to the fourth factor, the undistributed funds are not necessary for an effective reorganization. Before the case was converted, an effective reorganization was not possible; Debtor‘s plan was infeasible and there was no indication that the case would become feasible. Upon conversion to a Chapter 7 liquidation, the Debtor is no longer in a chapter meant for reorganization. Thus, the funds are not necessary for an effective reorganization and this factor supports annulling the stay.
As to the fifth factor, Debtor argues that the Tax Levy would not have been approved initially, and the IRS has not demonstrated it is at risk for lack of adequate protection. (Docket No. 73).
The IRS filed a Proof of Claim for $324,813.92 due to unpaid tax liabilities and civil penalties, and, of that amount, $155,763 is secured through a Notice of Federal Tax Lien recorded with Rensselaer County on November 10, 2008. (See Docket No. 70). Pursuant to
Ordinarily, upon dismissal of a chapter 13 or conversion of a chapter 13 to a chapter 7, the debtor is entitled to undistributed funds held by the Chapter 13 Trustee. See
Here, Judge Littlefield states that he intended to enter an order sua sponte granting conversion to a chapter 7 upon entry of an order denying confirmation. There was no objection to this action during the hearing or afterwards. The order converting the case was entered four days after the hearing and three days after the IRS served the levy. Once the order was entered, the undistributed funds were no longer a part of the Debtor‘s bankruptcy estate. Given this timeline and the fact that federal tax liens attach to “all property and rights to property,” if the IRS had brought a motion for relief stay to obtain the undistributed funds after the hearing but before the order converting the case was entered, Judge Littlefield would have granted the motion. See
What is more, over the course of the Debtor‘s plan he intended to pay $21,000 to the Trustee using Social Security Benefits—the IRS‘s collateral. Indeed, the Debtor made plan payments with the IRS‘s collateral totaling $5,250 before the case was converted. Furthermore, the plan did not propose to pay the IRS‘s priority claim in full. These actions resulted in a decrease in the value of the IRS‘s lien interest in its collateral and the Debtor did not propose or initiate adequate protection to the IRS in exchange for spending its collateral. Accordingly, the fifth Stockwell factor weighs in favor of annulling the stay.
Lastly, the Court finds that the government would be unduly prejudiced if the Court does not grant retroactive stay relief. Specifically, the IRS would incur additional, unnecessary expenses if the Court were to deny relief. The IRS would need to file another levy to obtain the undistributed funds from the Trustee and further defend itself against the Debtor‘s Motion for Violation of the Automatic Stay. Additionally, to deny the annulment of the automatic stay would essentially permit the Debtor to use the automatic stay “as a shield to attack a result” that the Debtor finds unfavorable but was, in fact, inevitable. See In re MarketXT Holdings Corp., 2009 WL 2957809, at *4; see generally In re Trammell, 584 B.R. 824, 832 (Bankr. E.D. Tenn. 2018) (finding that not granting retroactive stay relief would unduly prejudice the IRS because the debtor‘s MLB disability pension benefits
Accordingly, the sixth Stockwell factor weighs in favor of annulling the stay.
Based on the facts and circumstances of the matter and duly weighing the Stockwell factors, cause exists to grant retroactive stay relief.
The IRS‘s Motion to Annul the Automatic Stay (Docket No. 70) is GRANTED and Debtor‘s Motion for Sanctions (Docket No. 63) is DENIED. The Chapter 13 Trustee is authorized, and directed, to release the undisbursed funds to the IRS pursuant to its levy.
###