From yesterday's Indiana Lawyer: article link. The piece does not address consumer/residential foreclosure attorneys, but my understanding is that the story is the same and perhaps even worse due to the ongoing federal foreclosure moratorium. Meanwhile, commercial foreclosures, which are not subject to a moratorium, also remain surprisingly low here in Indiana.
Southern District Of Indiana Opinion Explains Why Federal Tax Liens Are Not Terminated In Bankruptcy
Lesson. A bankruptcy discharge can eliminate a tax payer’s personal liability for unpaid income taxes, but it will not extinguish a pre-existing tax lien on the tax payer’s real estate.
Case cite. United States v. Webb, 486 F. Supp. 3d 1238 (S.D. Ind. 2020) PDF
Legal issue. Whether federal income tax liens that attached to real estate belonging to bankruptcy debtors as of the date of the bankruptcy petition were unaffected by the bankruptcy.
Vital facts. The IRS filed notices of tax liens with the Hendricks County Recorder in 2010 against the Webbs related to certain tax assessments. The Webbs filed for bankruptcy in 2013, and one of the assets they scheduled was their residence. Later in 2013, the Webbs received a bankruptcy discharge. In 2014, the IRS mistakenly abated the tax assessments and mistakenly released the tax liens. The IRS corrected these mistakes in 2016 by reversing the abatement and filing revocations of the tax lien releases..
Procedural history. In this action before United States District Judge Hanlon, the USA, on behalf of the IRS, filed a motion for summary judgment to enforce its tax liens.
The Court noted that “a federal tax lien arises when ‘any person liable to pay any tax neglects or refuses to pay the same after demand.’” 26 U.S.C. § 6321.
Moreover, a “lien automatically ‘arise[s] at the time the assessment [of a tax] is made.’” 26 U.S.C. § 6322.
Such liens “attach to ‘all property and rights to property’ owned by the delinquent taxpayer during the life of the lien, 26 U.S.C. § 6321, and continue ‘until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time.’” 26 U.S.C. § 6322.
Further, the Court in its opinion noted that prior federal courts have held that a taxing authority's existing lien upon property at the time of bankruptcy is not released or affected by the discharge. “Tax liens survive bankruptcy and may be enforced in rem even after the debtor has been discharged.”
Holding. The District Court granted the IRS’s summary judgment motion. The tax liens “remained intact.”
Policy/rationale. The Webbs asserted that the tax liens could not be reinstated because the tax assessments were discharged through bankruptcy. However, the discharge only extinguished one mode of enforcement, specifically an action against the Webbs for personal liability. The bankruptcy did not, however, disturb the in rem action against the Webbs’ real estate. In other words, the discharge terminated the underlying tax assessments against the Webbs individually but did not affect the right of the IRS to pursue relief for those assessment against the Webbs’ real estate. The Court emphasized the policy that federal tax liens have a “broad reach.”
The Court’s opinion discussed the Webbs’ other contentions concerning the mistaken releases and various bankruptcy-related matters. Please read the opinion if you have further interest in the Webb case.
- An “In Rem” Judgment Limits Collection To The Mortgaged Property
- Mortgage Liens Survive Chapter 7 Bankruptcy Discharge, Allowing In Rem Foreclosures
- Subsequent Federal And State Income Tax Liens: Priority And Redemption
My practice includes representing lenders, as well as their mortgage loan servicers, entangled in lien priority and title claim disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at firstname.lastname@example.org. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.
Lesson. Domesticating an out-of-state judgment in Indiana is typically an easy and indefensible process, unless the original court lacked jurisdiction to enter the judgment in the first place.
Legal issue. Whether a judgment creditor could domesticate and collect an Ohio judgment in Indiana.
Vital facts. Following construction-related litigation in Ohio, the judgment creditor (plaintiff) filed an action in Indiana against the judgment debtor (defendant) to domesticate and collect on the Ohio judgment. (Judgment Creditor also asserted claims against other defendants to pierce the corporate veil.)
Procedural history. Judgment Debtor filed a motion to dismiss the Indiana action on the basis that the judgment was not eligible for domestication because the Ohio court lacked personal jurisdiction. The trial court denied the motion. Judgment Debtor then filed a motion for summary judgment on the same basis that was denied. Following a bench trial, the court entered an order domesticating the Ohio judgment, and Judgment Debtor appealed.
Key rules. The Indiana Court of Appeals in Ferrand first noted that, under Indiana law, “a judgment of a sister state is presumed to be valid but is ‘open to collateral attack for want of personal jurisdiction or subject matter jurisdiction.’” Judgment debtors carry the burden of rebutting this presumption.
“In assessing a claim that a foreign judgment is void for lack of personal jurisdiction, [Indiana courts] apply the law of the state where the judgment was rendered.”
At issue in Ferrand were principles of “long-arm” jurisdiction from Ohio Revised Code 2307.382. (In Indiana, Trial Rule 4.4(A) governs long-arm jurisdiction.) Without going into detail, there are rules rooted in constitutional law that govern whether a court has personal jurisdiction (power) over an out-of-state defendant. To learn more, please read the opinion.
Holding. The Court held that the Ohio court lacked personal jurisdiction over Judgment Debtor and that the Ohio judgment was, accordingly, void.
Policy/rationale. The Court examined the evidence pertinent to the procedural issues and concluded that Ohio’s long-arm statute did not confer personal jurisdiction over Judgment Debtor. For purposes of this blog, an analysis of the technicalities is not altogether important. What is significant, however, is that a foreign judgment may not be automatically enforceable in Indiana. Although the underlying merits of the judgment cannot be attacked, judgment debtors still can defend the action on the basis that the foreign court lacked jurisdiction (power) to enter the judgment in the first place—assuming the circumstances as applied to the foreign court’s procedural law warrant such a defense.
As an aside, the Judgment Creditor in Ferrand did not avail itself of Indiana’s user-friendly (my term) statute to domesticate the Ohio judgment: Indiana Code 34-54-11. As noted below, I’ve written about this procedure previously. The Court in Ferrand did not mention this statute, and Judgment Creditor proceeded instead to file a new cause of action seeking a judgment to domesticate. I’m not here to say that was wrong—just that the parties, the trial court, and the Court of Appeals did not address it. I suspect the reason behind Judgment Creditor’s tactic was that its action was not limited to domestication but included separate claims against third parties that warranted a new lawsuit.
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Part of my practice involves representing judgment creditors in their efforts to collect debts. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at email@example.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.