Guest Post -- Ryan v. U.S. (In re Ryan) Case Note

Guest Post -- Ryan v. U.S. (In re Ryan) Case Note

Posted By Sulaiman Law Group, Ltd. || 8-Jul-2013

This case note was authored by Sulaiman Law Group, Ltd's Penelope N. Bach. Ms. Bach is an attorney in the firm's bankruptcy practice. As can be seen from Ms. Bach's case note, debtors in Chapter 13 bankruptcies that are seeking to void IRS liens should look to the provisions of Chapter 13, not Chapter 5 of the U.S. Bankruptcy Code. Although the court's opinion in Ryan v. U.S. eliminates §506 as an avenue for this maneuver, savvy practitioners will look to 11 U.S.C. §1322 for other avenues to accomplish this goal. 

Ryan v. U.S. (In re Ryan)

Appellate Case Number: 12-3398

Decided: July 8, 2013

Ruling:

Seventh Circuit Court of Appeals affirmed the decision of the Honorable A. Benjamin Goldgar from the Bankruptcy Court for the Northern District of Illinois holding that the Bankruptcy Court's interpretation of section 506(d) as stated in Dewsnup v. Timm,502 U.S. 410 (1992) applies in Chapter 13 cases as well as Chapter 7 cases.

Procedural Context:

On direct appeal to the 7th Circuit Court of Appeals, Patrick J. Ryan appealed from the United States Bankruptcy Court order entered by the Honorable Judge A. Benjamin Goldgar on October 2, 2012 in case 11-A-1793

Facts

On August 23, 2011, Patrick J. Ryan filed a voluntary petition under Chapter 13 of the Bankruptcy Code. At the time of filing, Ryan had minimal personal possessions and significant tax liabilities for the years of 2006-2010.

Ryan claimed that because his personal possessions were only valued at $1,625.00, his tax lien from 2009 should be reduced to the amount of $1,625.00. Therefore, the remainder of the tax liens would be treated as unsecured pursuant to 11 USC 506(a), which allows bifurcation of loans into secured and unsecured portions. Ryan further argued that, pursuant to 11 U.S.C. §506(d), he should be allowed to void the lien on the unsecured portion of the IRS claim.

The United States (IRS) conceded that pursuant to 506(a), their secured lien was limited to the $1,625.00 for purposes of plan confirmation, but argued that 506(d) did not grant the Bankruptcy Court authority to void the remainder of the federal tax lien. The Bankruptcy Court agreed with the United States (IRS).

Analysis

In Dewsnup v. Timm, the United States Supreme Court held that 506(a) and 506(d) did not have to be read together, because the term "allowed secured claim" in § 506(d) was not defined by reference to § 506(a). Instead, the Court determined that, consistent with pre-Code rules that liens pass through bankruptcy unaffected, the term "allowed secured claim" in § 506(d) means a claim that is, first, allowed under § 502 and, second, secured by a lien enforceable under state law, without regard to whether that claim would have been deemed secured or unsecured under § 506(a). Dewsnup v. Timm, 502 U.S. 410 (1992).

Under Dewsnup, Ryan would not be entitled to void the IRS lien. Ryan argued that Dewsnup did not apply to his case because Dewsnup was a Chapter 7 case and Ryan's case was a Chapter 13, citing Thompson v. General Motors Acceptance Corp. LLC, 566 F.3d 699, 705 (7th Cir. 2009). However, 11 USC 103(a) states that, "except as provided in section 1161 of this title, chapters 1, 3, and 5 of this title apply in a case under chapter 7, 11, 12, or 13 of this title . . ." Since §1161 is not applicable to Chapter 13 cases, and §506 is part of Chapter 5 of the code, §506(d) applies equally to Chapter 7 and Chapter 13 cases.

The next argument that Ryan made was that the Court in Dewsnup indicated an anti-modification clause. The Appellate Court stated that there was no basis in law or fact for this argument.

The final argument advanced by Ryan was that 506(d) should be interpreted differently in a Chapter 13, in order to fulfill the purpose of the Chapter 13. There are three problems with this argument: 1) Chapter 13 provides alternative means for voiding liens, 2) §506(d) does not distinguish claims under Chapter 7 from those under Chapter 13, and 3) the rule against multiple interpretations of the same statute is well entrenched.

Bankruptcy Court's Ruling Affirmed

(Penelope N. Bach, Sulaiman Law Group)