Wirum v. United States of America et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
MYLES A. HOOVER, No. 07-11588
Debtor(s).
______________________________________/
ANDREA A. WIRUM, Trustee,
Plaintiff(s),
v. A.P. No. 08-1068
MYLES A. HOOVER, et al.,
Defendant(s).
_______________________________________/
Memorandum After Trial
_________________
Debtor Myles A. Hoover is an amiable elderly gentlemen who evidently has not been fond of paying
taxes. His residence at 1368 Calistoga Road in Santa Rosa is encumbered by a throng of state and federal
payroll, sales, and income tax liens far beyond its value. For reasons not exactly clear to the court, plaintiff
Andrea Wirum, the chapter 7 trustee of Hoover’s bankruptcy estate, sold the property free and clear of liens.
She has now decided she has no claim to the net proceeds of about $263,000.00. Hoover has come forward
with a set of calculations arguing that he is entitled to about $38,000.00 from the proceeds. Both the federal
and state taxing authorities vigorously oppose Hoover receiving a dime.
Entered on Docket
December 17, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 08-01068 Doc# 30 Filed: 12/17/08 Entered: 12/17/08 15:45:10 Page 1 of 3

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1It is interesting to note that the ability of the tax authorities to collect anything from the judgment liens
depends on the willingness of Hoover to avoid them. If he takes no action, the judgment liens must be
honored and paid. If he avoids them, the tax authorities might have a crack at them pursuant to §
522(c)(2)(B). Of course, Hoover has no incentive to avoid the liens if he thinks the tax authorities will take all
the proceeds.
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Hoover’s theory is this: He has claimed the residence as exempt under California homestead law.
There were a few judgment liens on the property which were senior to some of the tax liens. Those liens are
avoidable by him pursuant to § 522(f)(1)(A) of the Bankruptcy Code. Liens avoided by him pursuant to §
522(f)(1)(A) are preserved for his benefit pursuant to § 522(i)(2). Therefore, he is entitled to proceeds
attributable to the judgment liens notwithstanding that his homestead rights are junior to all of the tax liens.
There is a significant flaw in this argument, however. Hoover has not avoided any of the judgment
liens. He claims that their default in this adversary proceeding is the functional equivalent, but the court sees
no basis for this leap of procedure. He filed no cross-claims against the judgment lien creditors, and in any
event judgment liens are avoided by motion pursuant to Rule 4003(d) of the Federal Rules of Bankruptcy
Procedure.
Even if he had avoided the judgment liens, exempted property is liable during or after the case for
debts secured by tax liens pursuant to § 522(c)(2)(B). It therefore appears that the tax claimants might have
a means of collecting from the proceeds of the judgment liens if Hoover avoided them. This issue is not
before the court.
All parties seem to assume that because the defaults of the judgment lien creditors have been entered
the judgment lien creditors have forfeited all rights in the proceeds. However, there is not the slightest hint that
any of them are in any way invalid. The court is not required to disregard them, and doing so would give the
tax claimants an unfair windfall.1 They, after all, have no right to avoid judgment liens. Entry of judgment after
default is a matter of discretion, not right. In re Beltran,
182 B.R. 820, 823 (9th Cir. BAP 1995).
Case: 08-01068 Doc# 30 Filed: 12/17/08 Entered: 12/17/08 15:45:10 Page 2 of 3

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The court has reviewed the proposed distribution scheme urged by Hoover and finds it to be the
proper way to distribute the proceeds, except that those amounts attributable to the judgments of Wilson,
Western Pacific and Palmer Systems shall be paid to those creditors and not to Hoover.
This memorandum constitutes the court’s findings and conclusions pursuant to FRCP 52(a)
and FRBP 7052. Counsel for Wirum shall submit an appropriate form of judgment forthwith.
Dated: December 17, 2008
SAlan Jaroslovsky
U.S. Bankruptcy Judge
Case: 08-01068 Doc# 30 Filed: 12/17/08 Entered: 12/17/08 15:45:10 Page 3 of 3