United States v. Houghton (In Re Szwyd)United States v. Houghton (In Re Szwyd)
MEMORANDUM AND ORDER REGARDING BANKRUPTCY APPEAL (Dkt. No. 3)
7. BACKGROUND
This is an appeal of an order of the bankruptcy court dated April 14, 2008, ordering the United States to marshal certain of the debtor’s assets to satisfy its tax liens in order to preserve some funds for unsecured creditors.
The Debtor, Edward Szwyd, filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. The case was converted to Chapter 7, and the appellee was appointed as trustee. At the time of his petition, the Debtor owned two pieces of real property. One was a parcel located at 80 Maple Avenue in Great Barrington, Massachusetts (the “Maple Avenue Property”). The second piece of real property is his residence, located at 366 North Plain Road in Great Barrington, Massachusetts (the “Residence”), which has a current market value of $450,000 and is subject to a first mortgage of approximately $225,000 held by Greylock Federal Credit Union.
Title to the Residence was, at least nominally, held by a trust when the Debtor filed for bankruptcy. The bankruptcy court previously ruled, and the Bankruptcy Appellate Panel affirmed, that the trust was terminated by operation of Massachusetts law prior to the bankruptcy filing when the debtor became the sole trustee and sole beneficiary of the trust, such that his legal and equitable interests merged.
Houghton v. Szwyd (In re Szwyd),
The Trustee sold the Maple Street Property for $72,000. After paying the mortgage balance, closing costs, and his own interim fees, the Trustee -was left with $25,000. Prior to the date the Debtor filed for bankruptcy protection, the United States had recorded two tax liens now totaling $133,359.88. Much of the Debtor’s tax deficiency is attributable to his practice of withholding for himself money from his employees’ paychecks that should have been paid to the IRS. The Debtor also owes his fifteen unsecured creditors a total of $537,491.37.
II. DISCUSSION
This court has jurisdiction to review Bankruptcy Judge Boroffs order requiring the United States to marshal pursuant to 28 U.S.C. § 158(a). As discussed below, this court rejects the government’s assertion that sovereign immunity prevents both the bankruptcy court and this court from exercising jurisdiction over this matter. Whether the bankruptcy court has power to order the government to marshal is a question of law; therefore, this court reviews the bankruptcy order de
novo. Brandt v. Repco Printers & Lithographics (In re Healthco Int’l),
Marshaling is an equitable doctrine that prevents “a senior lienor from destroying the rights of a junior lienor or a creditor having less security,” by requiring that, where there is one creditor who can satisfy his claim from two funds and another creditor who can satisfy his claims from only one of the two funds, the first creditor must look first to the fund that only it can access.
Meyer v. United States,
Though federal courts invoke the doctrine, state law is generally understood to govern its application.
In re Dig It, Inc.,
As Judge Boroff correctly concluded, each of these elements is met in this case. As to the first element, there is no controversy: Szwyd is the debtor. One of the funds, the proceeds from the sale of the Maple Street Property, is common and available to both the unsecured creditors,
As to the third element, the value of the Residence and the Debtor’s equity are sufficient that the government will be able to satisfy the full amount of its tax lien, and at least some amount of the accruing interest, from the proceeds of the sale of the Residence. Though there may be some hurdles to obtaining the sale of the Residence, the sale of the Residence will yield the government more than the $25,000 available following the sale of the Maple Street Property. Thus, the third element is satisfied as to the only relevant senior lienholder in this analysis: the United States government.
The government argues that the Debtor should also be considered a creditor with an interest in the Residence, one who would be prejudiced by the order to marshal because he would be entitled to any funds remaining after all the tax liens have been paid. The government has cited no authority to support this position, and its argument is at odds with the very concept of marshaling as recognized by Massachusetts law. Marshaling will almost always result in a greater amount of funds flowing to creditors, with a smaller residue for the Debtor. This virtually inevitable reality cannot form the basis of any legitimate objection to marshaling.
Finally, it is worth noting again that marshaling is an equitable doctrine. Even where the three elements are met, a court is not required to order a senior lienor to marshal. In reaching his decision, Bankruptcy Judge Boroff considered the Debtor’s starkly reprehensible conduct — his theft of his employees’ withheld taxes — when concluding that the tax liens should be fully paid from the proceeds of the sale of his residence. This court agrees that equitable considerations powerfully support the underlying decision here.
Having concluded that Massachusetts law permits marshaling in this case, the court turns to the government’s federal law objections to its application.
In its appeal of Judge Boroff’s order, the government argues (1) that sovereign immunity shields the United States from marshaling; (2) an order requiring the government to marshal violates the Anti-Injunction Act; and (3) judicial estoppel should have prevented the Trustee from seeking marshaling because he had previously sought payment pursuant to 28 U.S.C. § 724(b). 1
A. Sovereign Immunity.
Section 106(a) of the Bankruptcy Code waives sovereign immunity as to other enumerated sections of the Code. 11 U.S.C. § 106. “There is no doubt that § 106 is an express waiver of sovereign immunity,” sufficient to meet the stringent standard for finding such a waiver.
United States v. Torres (In re Torres),
The government’s arguments notwithstanding, two enumerated sections together authorize the bankruptcy court’s order. First, § 105 gives bankruptcy courts broad equitable powers to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].” 11 U.S.C. § 105(a). By 1994 these powers included the power to order a party to marshal assets.
See e.g. Meyer v. United States,
B. The Anti-Injunction Act.
The government has also invoked the Anti-Injunction Act, arguing that it bars the bankruptcy court’s order to marshal. The Anti-Injunction Act provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any persons,” subject to certain exceptions not applicable here. 26 U.S.C. § 7421(a). Its applicability in the bankruptcy context is disputed. In one line of cases, cited by the government, courts have from time to time invoked the Anti-Injunction Act to prevent bankruptcy court actions, based on the absence of an express provision in the Bankruptcy Code superceding the Anti-Injunction Act.
American Bicycle Ass’n v. United States (In re American Bicycle Ass’n),
It is significant that only one of the cases cited, In re Becker’s Motor, involved an action by the bankruptcy court aimed at preventing the IRS from collecting directly from the debtor. The others cases all involved IRS actions aimed at collecting taxes from individuals other than the debt- or before the bankruptcy court. It is not hard to see how reviewing courts might be much more concerned about Bankruptcy orders that might interfere with IRS actions against third parties.
The more relevant and persuasive line of cases reasons that the bankruptcy code is a “complete scheme governing bankruptcy which overrides the general policy” embodied in the Anti-Injunction Act.
Bostwick v. United States,
C. Judicial Estoppel.
The doctrine of judicial estoppel prevents “a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase.”
Thore v. Howe,
The government’s argument is unpersuasive for the simple reason that the Trustee’s positions were not inconsistent. The Trustee did not argue that § 724 would not apply if the Maple Street Property fund was the only one available. Nor did he deny the validity of the government’s tax lien. He merely requested that the government satisfy its lien from another available source, one it must reach in order to be fully paid; that position is not inconsistent with § 724.
III. CONCLUSION
While the decision detailed above is anchored on what is, at least for the court, the fairest and most compelling interpretation of the law, a question still remains. Why is the government, whose mission is to protect the interests of the citizenry, ignoring those interests in the name of a dubious technicality, and being so petty? It is undisputed that the government’s claim can be entirely satisfied out of the fund to which it alone has access. Taking this approach would leave a pittance for a very modest distribution to the unsecured creditors. Yet the government insists, for no apparent practical reason, on snatching even this away. Why is the government playing the proverbial dog in the manger?
When the court at oral argument directed this question (in essence) to government counsel, no substantive response was offered. Counsel merely reiterated the principle that the bankruptcy court in this context lacked the power to order the government to be sensible and humane, and, if a precedent were established recognizing this power, unspecified but dreadful consequences might result. It appears counsel forgot that sometimes the best way to avoid an unhelpful precedent is to exercise common sense.
For the reasons set forth above, the ruling of the bankruptcy judge dated April 14, 2008 is hereby AFFIRMED. This ap
It is So Ordered.
Notes
. The government has also asked this court to vacate a portion of Note 2 of Bankruptcy Judge Boroff's Memorandum of Decision on Defendants’ Motion for Reconsideration asserting that it unfairly impugns the reputations of the government's lawyers.
Houghton
v.
United States Dep't of Treasury IRS (In re Szwyd),