Geisler v. Internal Revenue Service (In re Geisler)

Citations: 539 B.R. 253; 2015 WL 5602656Docket: Civil Action No. 15-154

Court: District Court, W.D. Pennsylvania; September 23, 2015; Federal District Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Debtor Michael S. Geisler appeals the dismissal of his adversary proceeding complaint by the bankruptcy court, which sought to void nearly $700,000 in federal tax liens held by the IRS. The bankruptcy court dismissed the complaint with prejudice, ruling that Supreme Court precedent barred Geisler from reducing the IRS’s lien to the value of the collateral or stripping it down in a Chapter 7 case. Upon de novo review, the court upheld the bankruptcy court’s conclusion regarding Geisler’s failure to state a claim. 

Geisler initially filed for Chapter 13 bankruptcy on February 20, 2013, reporting $13,800 in personal property and listing an IRS tax lien of the same amount. The IRS subsequently filed a proof of claim totaling $969,419.20, with portions secured, unsecured priority, and unsecured general. Documentation indicated a federal tax lien recorded in 2002 and refiled in 2007. Geisler's case converted to Chapter 11 on May 13, 2013, with the IRS amending its claim to $977,244.31, which went unchallenged.

After another conversion to Chapter 7 on January 31, 2014, Geisler filed the adversary proceeding, seeking to limit the IRS's secured claim to $13,800 and release the remainder. He also initiated similar proceedings against state departments but later withdrew those. The IRS filed a motion to dismiss Geisler’s complaint, which the bankruptcy court granted. Geisler then appealed the dismissal order, which is within the jurisdiction of this court under 28 U.S.C. § 158.

The adversary proceeding initiated by Geisler against the IRS, seeking to determine the validity and extent of tax liens, is categorized as a core proceeding under 28 U.S.C. § 157(b)(2)(E). In appeals from final orders in core proceedings, district courts review bankruptcy court findings of fact for clear error and conclusions of law de novo. Geisler commenced his adversary proceeding on May 9, 2014, after his bankruptcy case was converted to Chapter 7, with the trustee indicating no assets for distribution. Geisler claimed that the IRS filed fifteen federal tax liens totaling $694,139.71 but only attached documentation for one lien of $13,800.00 in its proofs of claim, arguing that this limited the IRS’s secured claim to that amount. He requested the bankruptcy court to reduce the significant tax liabilities to this lesser amount. The IRS moved to dismiss the complaint, asserting a lack of subject-matter jurisdiction and arguing that determining the nature of its claim would be merely advisory due to the no-asset status of Geisler's Chapter 7 case. The IRS referenced the Supreme Court decision in Dewsnup v. Timm, which prohibits Chapter 7 debtors from reducing secured claims to the value of collateral. Geisler contended that the IRS's proof of claim constituted a judicial admission regarding the extent of its secured claim. He maintained that if any part of the IRS's claims remained non-dischargeable, the IRS could issue new tax liens afterward. Ultimately, the bankruptcy court ruled that Geisler's complaint did not create a case or controversy and failed to state a claim based on the Dewsnup precedent.

In Dewsnup v. Timm, the Supreme Court addressed whether a debtor can "strip down" a creditor's lien to the value of the collateral when it is less than the secured claim amount, interpreting 11 U.S.C. § 506(d). The Court determined that § 506(d) does not allow such stripping, as the lien secures a fully allowed claim under § 502. It emphasized that liens generally survive bankruptcy unaffected, consistent with pre-Code principles. In a no-asset Chapter 7 case, the claim allowance process is not triggered, making the IRS’s position valid that no case or controversy arises. The bankruptcy court dismissed Geisler’s adversary complaint with prejudice, affirming that Dewsnup prohibits stripping down an allowed secured claim under § 506(d). The court agreed with the bankruptcy court that the matter is resolved by Dewsnup, reiterating that an allowed secured claim, defined as one permitted under § 502 and secured by a lien with recourse to collateral, cannot be stripped down. Additionally, a proof of claim is deemed allowed unless objected to by a party in interest.

Section 506(a)(1) establishes that a creditor's allowed claim secured by a lien on bankruptcy estate property is categorized as a secured claim up to the value of the creditor's interest in that property, with any excess amount treated as an unsecured claim. In Dewsnup, the Supreme Court determined that the term "allowed secured claim" in § 506(d) does not align with the definition of secured claims in § 506(a)(1). The Court rejected the notion that a Chapter 7 debtor could void a lien for the portion of a claim that is unsecured, thus preventing the bifurcation of claims as sought by Geisler involving the IRS's lien. The IRS's claim was deemed allowed under § 502(a)(1) since it was not objected to after being reported by the trustee. The IRS's lien for unpaid taxes is acknowledged as secured by Geisler. According to Dewsnup, the IRS has an allowed secured claim for its full claim amount, irrespective of the secured and unsecured portions. Consequently, Geisler's request to void the unsecured portion of the IRS's claim is denied, leading to the dismissal of his adversary proceeding with prejudice. Geisler's argument that the IRS's proof of claim indicated a disparity between the lien's total and the value of the secured property is rendered irrelevant by the Dewsnup decision. The ruling confirmed that the lien-voiding provisions of § 506(d) do not permit the relief Geisler seeks, aligning with the precedent set in Dewsnup.

The Supreme Court's decision in Dewsnup established that § 506(d) does not permit a Chapter 7 debtor to reduce a creditor’s lien to the value of the creditor’s interest in the property, as defined by § 506(a)(1). Instead, a claim secured by a lien and fully allowed under § 502 is considered an "allowed secured claim" under § 506(d), which cannot be stripped down to the value of the collateral. The Court clarified that the term "allowed secured claim" in § 506(d) differs from "secured claim" in § 506(a)(1), meaning that the classification of a claim into secured, unsecured, or priority portions under § 506(a)(1) does not affect the application of § 506(d). 

In reaffirming this holding in Caulkett, the Supreme Court ruled that a lien cannot be stripped even when the collateral holds no value for a junior lienholder. The debtor's argument that the Bank of America’s junior mortgage lien was void under § 506(d) due to lack of collateral value was rejected. The Court emphasized that liens remain intact through Chapter 7 bankruptcy proceedings, including federal tax liens, which are generally unaffected. Even if a debt is discharged, the debtor retains personal liability for the lien, and in rem actions against the secured property remain applicable.

Geisler seeks to reduce IRS tax liens to $13,800, the value of his personal property in his bankruptcy petition, and to have any tax debts exceeding this amount deemed satisfied or released. However, based on the precedents set in Dewsnup and Caulkett, the court concludes that Geisler cannot achieve the relief he desires. Liens held by the IRS above $13,800 will remain unaffected by Geisler's bankruptcy case because they are allowed and secured claims, and cannot be voided under § 506(d). The court finds that any potential amendment to Geisler’s adversary complaint would be futile due to its legal insufficiency. Consequently, the court affirms the dismissal of the adversary complaint with prejudice, stating that Geisler's attempt to reduce the IRS liens is not legally viable, and the complaint does not present a claim for which relief can be granted. An appropriate order will follow this opinion.