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In re Nomellini

United States District Court, N.D. California, San Jose Division

September 7, 2017



          EDWARD J. DAVILA, United States District Judge


         In this bankruptcy appeal, chapter 13 debtor Drew Nomellini (“Debtor”) seeks a determination of the Internal Revenue Service's (“IRS”) interest, if any, in the proceeds of the sale of Debtor's real property located at 520 St. Claire Drive, Palo Alto, California (the “Real Property”). The appeal presents a single issue: whether the Bankruptcy Court correctly determined that confirmation of the Debtor's chapter 13 plan, either originally or as modified, did not strip or otherwise modify the in rem rights of the IRS arising from a pre-petition tax lien recorded against the debtor's Real Property. This Court affirms the Bankruptcy Court's determination.


         After Debtor, a construction contractor, failed to pay federal income taxes for tax years 2003 through 2006, the IRS filed a notice of Federal Tax Lien (“NFTL”) with Santa Clara County, California. The NFTL gave notice of a statutory lien in favor of the United States against Debtor's real and personal property to secure payment of Debtor's unpaid tax liability, then totaling $173, 851.62. The IRS also recorded the NFTL against the Real Property.

         In December of 2011, Debtor filed a petition for relief under chapter 13 of the Bankruptcy Code. Debtor's schedules listed his Real Property as an asset valued at $950, 000, as well as personal property with an aggregate value of $10, 000. On Schedule D, Debtor listed four creditors with secured claims: Wachovia Bank with a first mortgage secured by the Real Property in the approximate amount of $980, 190; the IRS with a claim of approximately $214, 000; and judgment lien creditors, Midland Funding LLC (“Midland”) and American Express Bank FSB (“AmEx”) holding claims of approximately $4, 900 and $9, 485, respectively. The mortgage amount exceeded the value of the Real Property, and thus the Real Property was “underwater, ” even without taking into account the IRS lien.

         In his initial petition, Debtor proposed to pay Wachovia more than $28, 000 in pre-petition mortgage arrears as a secured claim to be paid through the plan and to make his on-going mortgage payments to Wachovia. The plan provided that Debtor would value and avoid the Midland and AmEx judgment liens encumbering his Real Property, and as a result, that he would pay those claims as general unsecured claims. This initial plan identified IRS as the holder of a secured claim, but did not explicitly refer to the IRS lien, nor provide any information regarding the amount of the IRS claim or the value of any collateral securing it.

         In January of 2012, the IRS objected to confirmation of the plan and filed a proof of claim in the amount of $214, 520.27. The IRS proof of claim listed $10, 000 as a secured claim and $204, 520.27 as an unsecured claim. The IRS's valuation of the secured claim was based on the value of Debtor's scheduled personal property because the Debtor's schedules indicated that there was no equity in the Real Property. Memorandum Decision of Bankruptcy Court dated June 25, 2015, p.2.

         Debtor amended his proposed plan twice. The Second Amended Plan (“Plan”), filed January 18, 2012, made no changes to the proposed treatment of Wachovia, Midland and AmEx.

         In paragraph 2(b), the Plan listed the IRS as a creditor with an allowed secured claim with collateral valued at $10, 000. The Plan provided:

The valuations shown above will be binding unless a timely objection to confirmation is filed. Secured claims will be allowed for the value of the collateral or the amount of the claim, whichever is less. . . . The remainder of the amount owing, if any, will be allowed as a general unsecured claim paid under the provisions ¶2(d).

         See Trustee's Supplemental Appendix, Tab 34. With respect to the remaining creditors, the Plan specifically noted that “debtor will value the judgment liens of American Express Bank/Legal Recovery Law Offices, Inc. and Midland Funding/Hunt & Henriques and avoid these liens. Any claim will be paid pursuant to section 2d.” Id. In contrast, the Plan made no mention of the IRS lien or that the lien would be avoided. The Plan provided that the Real Property would re-vest in Debtor upon discharge or dismissal of the bankruptcy.

         Approximately one month later, Debtor filed motions to value and avoid the Midland and AmEx liens against the Real Property. Debtor never filed a similar motion to value and avoid the IRS lien against the Real Property.

         On February 29, 2012, the Bankruptcy Court confirmed Debtor's Plan. On March 27, 2012, the Bankruptcy Court entered orders granting Debtor's ...

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