IN RE SZWYD

HENRY BOROFF, Bankruptcy Judge

In this Adversary Proceeding, the Chapter 7 trustee in bankruptcy requests that the Court compel the United States to marshal certain assets of the debtor on which the United States holds tax liens, in order to preserve funds of the bankruptcy estate for unsecured creditors. Now before this Court is the "United States' Motion to Dismiss" (the "Motion to Dismiss") filed by the Defendant United States Department of Justice on behalf of the United States Department of the Treasury and the Internal Revenue Service (together, the "United States" or the "IRS"), pursuant to Fed.R.Bankr.P. 7012(b)(6). The United States contends that the Complaint fails to state a claim upon which relief can be granted because the United States cannot and should not be compelled to marshal assets, generally and in this case in particular.

I. FACTS AND TRAVEL OF THE CASE

Federal Rule of Civil Procedure 12(b)(6) (motion to dismiss for failure to state a claim) is made applicable to adversary proceedings in bankruptcy cases through Federal Rule of Bankruptcy Procedure 7012(b) incorporating Rule 12(b)(6) by reference. Case law under Fed.R.Civ.P. 12(b)(6) is well-settled. A court will "assume the truth of all well-pleaded facts and indulge all reasonable inferences that fit the plaintiff's stated theory of liability." Santander De Puerto Rico v. Lopez, 324 F.3d 12, 15 (1st Cir. 2003) (citing Rogan v. Menino, 175 F.3d 75, 77 (1st Cir. 1999)). Dismissal under Rule 12(b)(6) will only be permitted if "the factual averments do not justify recovery on some theory adumbrated in the complaint."Arruda v. Sears, Roebuck Co., 310 F.3d 13, 18 (1st Cir. 2002) (quoting Rogan, 175 F.3d at 77). Accordingly, although on its face there appear to be no material factual disputes, the Court, for these purposes, will assume the truth of all facts averred by the Plaintiff.

On October 16, 2005 (the "Petition Date"), the Debtor filed for relief under Chapter 13 of the Bankruptcy Code. The case was subsequently converted to Chapter 7 and attorney Jack E. Houghton, Jr. (the "Trustee") was appointed as the Chapter 7 trustee.

Unless otherwise stated, all statutory references are to Title 11 of the United States Code, §§ 101 et seq. (the "Bankruptcy Code" or the "Code").

On the Petition Date, the Debtor was the sole owner of two parcels of real property listed on his bankruptcy Schedule A. The first, located at 366 North Plain Road in Great Barrington, Massachusetts, is the Debtor's residence (the "Residence"). In 1996, the Debtor recorded a declaration of homestead for this property pursuant to Massachusetts General Law (M.G.L.) ch. 188, § 1 (the "Homestead Exemption"). According to the Debtor's schedules, the current market value of the Residence is $450,000; and it is encumbered by a first mortgage in favor of Greylock Federal Credit Union in the approximate amount of $225,000. The second parcel is located at 80 Maple Avenue in Great Barrington, Massachusetts (the "Maple Avenue Property"). That property was listed on the Debtor's schedules with a current market value of $40,000, but encumbered by a mortgage held by Berkshire Bank with an approximate balance of $14,000.

Prior to the filing of the bankruptcy case, the real estate was owned by a trust. See In re Szwyd, 346 B.R. 290 (Bankr. D. Mass. 2006), aff'd sub nom., Houghton v. Szwyd, 370 B.R. 882 (1st Cir. B.A.P. 2007). In Szwyd, this Court ruled, that, because the Debtor had become, prepetition, the sole trustee and sole beneficiary of that trust, his legal and equitable interests had merged and the trust was terminated as a matter of Massachusetts law.

In the course of his liquidation of estate assets, the Trustee sold the Maple Avenue Property for the sum of $72,000. After payment of the mortgage balance to Berkshire Bank, closing costs, and an award of interim fees in the case, the estate was left with approximately $25,000 remaining from the sale proceeds.

As of the Petition Date, there were also two recorded tax liens against the Debtor in favor of the United States. According to an Amended Proof of Claim filed by the IRS, the liens secure claims now totaling $133,359.88. The United States also holds unsecured priority claims totaling $2,586.05 and unsecured general claims totaling $2,385.73.

Both liens are recorded in the Southern Berkshire Registry of Deeds in Great Barrington, Massachusetts. The first, in the amount of $31,062.66, was recorded on February 12, 2002 in Registry Book 1299, Page 15. The second, in the amount of $24,584.23, was recorded on August 9, 2002 in Registry Book 1342, Page 106.

II. POSITION OF THE PARTIES

Pursuant to § 544(a), the Trustee, as a hypothetical lienholder as of the Petition Date, requests, as might any junior lienholder, that the United States marshal its collateral. He argues that the bankruptcy estate will otherwise be irreparably harmed because all of the remaining proceeds from the sale of the Maple Avenue Property would then be turned over to the IRS, but the Trustee would be unable to sell the Residence on account of the Homestead Exemption — thereby leaving nothing available for unsecured creditors. The Trustee contends that both the Bankruptcy Code and Massachusetts state law permit the IRS to levy upon and sell the Residence notwithstanding the Homestead Exemption. Thus, the IRS has access to an asset of the Debtor that it alone can reach. In addition, because the total of the IRS liens is in excess of the remaining proceeds from the sale of the Maple Avenue Property, the Trustee contends that, in order to fully satisfy its lien claims, the IRS will be forced to levy upon the Residence in any event. Therefore, the Trustee maintains, equity demands that the IRS look first to the Residence, leaving the proceeds from the Maple Avenue Property to be distributed to the other creditors who would otherwise be left with nothing.

Section 544(a) of the Bankruptcy Code states:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by —

(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;

(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or

(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

11 U.S.C. § 544(a).

Debtor's Schedule F reports fifteen (15) unsecured creditors with a combined total of $537,491.37 in unsecured debt.

The IRS does not disagree with the Trustee's contention that the United States has the statutory and legal authority to satisfy its liens and claims against the Residence notwithstanding the Homestead Exemption. However, the IRS argues that it cannot and should not be forced to turn first to the Residence when there exist more easily accessible assets in the bankruptcy estate which can be applied to its lien claims. First, the IRS argues that, as a matter of law, the doctrine of marshaling cannot be applied against the United States. Second, the IRS maintains that, even if the marshaling doctrine is applicable to the United States as a matter of law, general unsecured creditors cannot invoke the doctrine — and that the Trustee, even with his hypothetical lienholder status, is nothing more than an entity stepping into the shoes of the unsecured creditors. Third, the United States argues that applying the doctrine to this case in particular would be inequitable because it would prejudice both the Debtor and the United States. And fourth, the United States asserts that the principles of judicial estoppel preclude the Trustee from employing the doctrine of marshaling.

Counsel for The Debtor, although seemingly in agreement with the United States' arguments in favor of the Motion to Dismiss, did not provide supplemental briefs or participate in the discussion at the September 19, 2007 and December 7, 2007 hearings, other than to clarify that the hearings were solely to address the Motion to Dismiss and not to provide a final ruling on the adversary proceeding itself.
The Debtor denies the Trustee's claim that Massachusetts law permits the IRS to pierce the Homestead Exemption to satisfy the Debtor's outstanding tax liens. As set forth in his November 13, 2006 Answer to the Trustee's Complaint, the Debtor claims the Trustee is:

"acting in a mean-spirited manner, as the IRS can choose not to enforce a right it has, if any based on its policies, procedures and regulations. The Trustee is asking the Court to ignore the purpose of the body of law comprising Bankruptcy, by denying the Debtor a Fresh Start, with a home for his family."

The Debtor filed a Supplemental Pre-Trial Stipulation with the Court on September 18, 2007, wherein he shared the United States' position that as a matter of law the Trustee cannot force the IRS to marshal against specific assets of the Debtor. The Debtor further stated that Massachusetts law does not allow the Homestead Exemption to be overriden to satisfy general tax obligations. Additionally, the Debtor contends that the tax liens did not attach to the Residence because they were filed against the Debtor personally and not against the the trust that was its legal owner — a curious argument indeed in light of the Debtor's contrary argument which succeeded in his entitlement to the Homestead Exemption itself. See In re Szwyd, supra. In any event, the validity of the tax liens on the petition date is beyond the scope of the instant Motion to Dismiss and was not addressed at the hearings.

III. DISCUSSION

A. The Doctrine of Marshaling

It is beyond refutation that bankruptcy courts have the equitable power to order the marshaling of assets in a bankruptcy case or proceeding. In re Larry's Equip. Serv., Inc., 23 B.R. 132, 133 (Bankr. D. Me. 1982). The doctrine of marshaling "rests upon the principle that a creditor having two funds to satisfy his debt, may not by his application of them to his demand, defeat another creditor, who may resort to only one of the funds." Meyer v. United States, 375 U.S. 233, 236 (1963) (quoting Sowell v. Fed. Reserve Bank, 268 U.S. 449, 456-57 (1925)). As stated in Meyer,

[Marshaling] is founded . . . in equity, being designed to promote fair dealing and justice. Its purpose is to prevent the arbitrary action of a senior lienor from destroying the rights of a junior lienor or a creditor having less security.

375 U.S. at 238. Thus, the marshaling doctrine requires that a senior lienholder resort first to assets unavailable to the junior lienholder to prevent the "inequity which would otherwise result from the unnecessary elimination of the junior lienholder's security with the increased likelihood the junior creditor would be unable to satisfy its claim." Shedoudy et al. v. Beverly Surgical Supply Co. et al., 100 Cal. App. 3d 730, 733 (1980).

Marshaling is generally understood by reference to state law since the rights of lienholders typically arise in a non-bankruptcy venue. In re Dig It, Inc., 129 B.R. 65, 67 (Bankr. D. S.C. 1991) (citations omitted). Massachusetts law requires that a junior lienor seeking to apply the marshaling doctrine prove the existence of: "(1) a common debtor; (2) two separate funds, one of which is a common fund available to both creditors and one of which is available only to the senior creditor; and (3) no detriment or prejudice to the senior creditor if he is required to pursue the fund to which he alone can look." In re T.H.B. Corp., 85 B.R. 192, 196 (Bankr. D. Mass. 1988) (citations omitted). The burden for demonstrating the propriety of marshaling in a particular case is upon whomever seeks the benefit therefrom, Johnson v. Wilson, 145 Wash. 515, 518 (1927), and courts traditionally require that the doctrine be applied only when it can be equitably employed as to all parties with an interest in the property. Meyer, 375 U.S. at 237. Here, that would include the Debtor. In re United Retail Corp., 33 B.R. 150, 153 (Bankr. D. Haw. 1983). Considering the foregoing, this Court will address each of the IRS arguments in turn.

1. Marshaling as Applied to the United States

The IRS contends that the doctrine of marshaling, as a matter of law, cannot be applied to the United States. This Court does not believe that application of a per se rule of such breadth is warranted.

The IRS cites to five cases outside of this Circuit as authority for its assertion that the United States is immune to the marshaling doctrine: United States v. Herman, 310 F.2d 846, 848 (2nd Cir. 1962) (stating that the Court would not "subject the government to a requirement that it marshall [sic] assets in favor of junior lienors, as this would create an extreme burden on the collection of revenue, unauthorized by statute."); In re Ackerman II, 424 F.2d 1148, 1150 (9th Cir. 1970) (holding that a junior lienor cannot invoke the marshaling doctrine to prevent the United States from enforcing tax liens against property as to do so would create a "substantial burden, unauthorized by statute, upon the collection of federal revenue."); United States v. Eshelman, 663 F. Supp. 285, 288 (D. Del. 1987); First of Am. Bank v. Alt, 848 F. Supp. 1343, 1351 (W.D. Mich. 1993); and Northinaton v. United States, 30 A.F.T.R.2d. (RIA) 72-5832, at *4 (W.D.Tex. 1972).

This Court does not read Herman to state squarely the broad rule which the IRS suggests. The Herman ruling is one in dicta, labeling the marshaling issue in that case merely as a "miscellaneous" contention by the appellant and noting that, were the government subject to a marshaling requirement, an "extreme burden" on revenue collection would result. 310 F.2d at 848. The Courts in Ackerman, Eshelman, Alt, and Northington, all cite to the Herman Court when stating that the marshaling doctrine cannot be applied to the United States.

This Court rejects any reading of Herman as establishing a per se rule prohibiting marshaling against governmental taxing authorities and believes that the language of Herman was, appropriately, a case-specific decision. See In re Bame, 279 B.R. 833, 837-38 (8th Cir. B.A.P. 2002). As the Bame Court stated,

Rather, each case [ Ackerman and Herman] specifically states that based upon the facts of the case the imposition of marshaling on the government would create a burden on the collection of revenue. Ackerman, 424 F.2d at 1150 ("substantial burden") and Herman, 310 F.2d at 848 ("extreme burden"). Each case can be interpreted as applying a balancing test to determine that the imposition of marshaling was not appropriate under the circumstances of the case, rather than imposing a per se rule. . . . Accordingly, we decline to hold that the application of marshaling to governmental taxing authorities is per se prohibited. Rather, we conclude that marshaling must be evaluated on a case by case basis, regardless of whether a taxing authority is involved.

Id. at 838.

Furthermore, it has been specifically held in this Circuit that marshaling can be applied against the United States. As quoted by the District Court in Maine Associates v. United States,

Where the federal government has a lien on both real estate and personal property, it cannot exhaust the value of the real estate before proceeding to the personal property to the complete exclusion of the specific liens [of the other claimants].

53 B.R. 489, 492 (D. Me. 1985) (quoting In re Ann Arbor Brewing Co., 110 F.Supp. 111, 116 (E.D. Mich. 1951) and citing United States v. Lord, 155 F.Supp. 105 (D. N.H. 1957)).

The IRS describes the rulings of Maine Associates and Lord, as standing "upon tenuous authority" because Lord and Ann Arbor Brewing, the cases upon which Maine Associates relied, do not reference any authority for their conclusion in support of marshaling. United States Supplemental Brief, p. 8 n. 3. However, the Herman case, which the United States first cites as authority for its position and which is also cited as authority byAckerman, Eschelman, Alt and Northington, similarly does not provide authority for its conclusion that the government cannot be required to marshal its assets. Thus, the "tenuous authority" upon which the United States claims the Maine Associates court relied, is no more "tenuous" than that upon which the United States now relies.

Further, the IRS contends that the doctrine of marshaling should not be applied to the United States because of the "substantial burdens" it would place upon the government. Here, the IRS either misstates or misunderstands the doctrine itself. Where the senior lienholder would be prejudiced by an order to marshal assets, the doctrine is unavailable to its proponent. The doctrine itself avoids the harm that the United States fears. Accordingly, there is no reason to shelve the doctrine and lose the opportunity to employ it in cases that are appropriate for its use.

In this case, the Trustee argues, and, for purposes of the Motion to Dismiss, the Court must accept that there are two available assets to satisfy the IRS tax liens: the sale proceeds being held by the bankruptcy estate and the Residence. Although the Debtor has stated that he intends to contest whether the United States may satisfy its claims from the equity in the Residence notwithstanding the Homestead Exemption, the United States itself concedes that any opposition would be futile. See M.G.L. ch. 188, § 1 (Massachusetts homestead exemption does not protect the property from a "sale for taxes"). Nor would payment to the United States be materially delayed or the IRS be drawn into otherwise unnecessary litigation if it was required to look first to the Residence. The remaining proceeds of the sale of the Maple Avenue Property now in the hands of the Trustee — approximately $25,000 — is not enough to satisfy even one-fifth of the liens which the IRS claims. Therefore, in order to wholly satisfy its interests, the IRS must look to the Residence anyway. Conversely, there is more than enough equity in the Residence to fully cover the IRS tax liens without resort to the funds held by the Trustee.

United States v. Rodgers, 461 U.S. 677, 701 (1983); See also Davenport v. United States, 136 B.R. 125, 127-28 (Bankr. W.D. Ky. 1991) (citing United States v. Bess, 357 U.S. 51 (1958).

This Court cannot quarrel with the IRS view that the United States has been drawn into unnecessary litigation. But that litigation is not so much its fight with the Debor, as the instant dispute with the Trustee over application of the marshaling doctrine. Had the IRS not held to its position, the United States would likely have collected payment in full on its lien claims long ago. Furthermore, courts have ruled that the delay involved in foreclosure is not the kind of injury to senior creditors that would preclude marshaling. See In re Hale, 141 B.R. 225, 228 (Bankr. N.D. Fla. 1992) (citing In re Multiple Serv. Ind., 18 B.R. 635, 637 (Bankr. E.D. Wis. 1982).

2. Standing to Seek Imposition of the Marshaling Doctrine

Traditionally, marshaling has been applied in cases where two secured creditors, one senior to the other, hold claims to a single piece of collateral. Massachusetts law specifically recognizes the right of junior lien creditors to invoke the marshaling doctrine. In re Paulding, Inc., 76 B.R. 7, 8 (Bankr. D. Mass. 1987). The doctrine is unavailable, however, for use by unsecured creditors. First Nat. Bank of Boston v. Proctor, 40 F.2d 841, 844 (1st Cir. 1930).

The IRS argues that the Trustee does not have standing to invoke the marshaling doctrine because he stands in the shoes of unsecured creditors. In this, the IRS misunderstands the import of § 544(a). The Trustee has the status of a hypothetical lien creditor and it is irrelevant that the final beneficiaries of that status may include unsecured creditors.

The IRS urges this Court to adopt a position similar to that of the court in Fed. Land Bank of Columbia v. Tidwell, wherein the trustee's marshaling request, claiming standing as a hypothetical lien creditor under § 544, was denied because that court held that § 544(a) in that context "would be a use of the strong-arm clause not contemplated by Congress." 40 B.R. 66, 70-71 (Bankr. M.D. Ga. 1984). This Court respectfully disagrees and believes that the better view is that stated by those courts who have ruled, in direct contrast to Tidwell, that a trustee's status as a hypothetical judicial lienholder grants the Trustee the standing to seek application of the marshaling doctrine. In re Spectra Prism Ind., Inc., 28 B.R. 397, 399 (9th Cir. B.A.P. 1983); In re: Wilmot Mining Co., 167 B.R. 806, 811 (Bankr. W.D. Pa. 1994); In re Hale, 141 B.R. 225, 227 (Bankr. N.D.Fla. 1992);In re Vermont Toy Works, Inc., 135 B.R. 762, 768 (D. Vt. 1991);In re C B Oil Co., 72 B.R. 228, 229-30 (Bankr. N.D. Ohio 1987) (citing In re Tampa Chain Co., Inc., 53 B.R. 772 (Bankr. S.D.N.Y. 1985). As the Ninth Circuit BAP noted in Spectra Prism,

The question of a trustee's status as a hypothetical judicial lienholder under § 544 was previously dealt with by § 70 of the Bankruptcy Act. The legislative history of the "strong-arm clause" indicates that the basic purpose underlying the section was to avoid the "evil" of secret liens and transfers of the debtor's property. 45 Cong. Rec. 2277 (1910). However, that basic purpose is not its sole purpose. Concerning § 70(c), the court in Sampsell v. Straub, 194 F.2d 228 (9th Cir. 1951), held:

"Whether its impact in a particular case is upon secret liens or upon some other impediment to the distribution of the property of the debtor . . . Section 70 sub. C embodies a comprehensive conception of according the trustee such status as a diligent general creditor might have achieved but for the intervention of bankruptcy." 194 F.2d at 231.

The stature of the trustee as a judicial lien creditor has been expanded consistently over the 80 years of the existence of the Code sections. Today, under § 544(a), the trustee may act not only to avoid transfers of the property of the debtor, but he is granted all other rights and powers that a creditor holding a judicial lien would have had after prevailing in a simple contract action, whether or not such creditor exists in fact.

Id. at 399.

3. Prejudice to the Debtor and the United States

In determining whether to apply the marshaling doctrine, the rights of all who have an interest in the property, including the debtor, must be considered. United Retail, 33 B.R. at 153. Marshaling will only be applied if it can be "equitably fashioned as to all the parties". Id. (citing In re Leonardo, 11 B.R. 453 (Bankr. W.D. N.Y. 1981) (emphasis added)).

With respect to the United States, application of the marshaling doctrine in this case is unlikely to have a prejudicial effect. The Residence has more than enough equity to satisfy the tax liens, including any accruing interest.

In fact, ironically, denying the Trustee's request to compel the IRS to look first to the equity in the Residence might produce less net revenue for the government than by allowing it. Were the United States to apply the remaining sale proceeds of the Maple Avenue Property to is lien claims, those claims would be reduced dollar for dollar by the amount of its receipts. If, as a result, the unsecured creditors received nothing on their unsecured claims, some or all of those creditors would likely be entitled to corresponding income tax deductions on account of their bad debts from the Debtor. See I.R.C. § 166 (2008).

The IRS attempts to make a larger case for prejudice by raising the rights of the Debtor. But those pleas are premature, and, in any event, likely to fail. First, while, federal courts have ruled that they should consider state homestead exemption statutes when determining whether to apply the marshaling doctrine, Meyer, 375 U.S. at 237-38, here, state law provides no such exemption in the face of tax claims. The Massachusetts legislature apparently concluded that, as between its concern for the debtor's homestead and the public need to raise revenue, the latter would prevail. Second, while the Debtor has half-heartedly noted its agreement with the United States, he has not moved to dismiss the case. And, third, without deciding the issue in advance, but based on the undisputed record, this Court can not ignore who the Debtor is and the nature of the government's tax claims.

M.G.L. ch. 188 § 1 states, in part:
Said estate shall be exempt from the laws of conveyance, descent, devise, attachment, levy on execution and sale for payment of debts or legacies except in the following cases:

(1) sale for taxes;

M.G.L. ch. 188 § 1A para. 5 states, in part:
The following shall be exempt from the provisions of this section: federal, state and local taxes, assessments, claims and liens; first and second mortgages held by financial institutions or others; any and all debts, encumbrances or contracts existing prior to the filing of the declaration; an execution issued from the probate court to enforce its judgment that a spouse pay a certain amount weekly or otherwise for the support of a spouse or minor children; where buildings on land not owned by the ownerof a homestead estate are attached, levied upon or sold for the ground rent of the lot whereon they stand.

The Debtor is a certified public accountant. His debt to the United States arises, at least in large part, from his conversion of funds that he was obligated to withhold from his employees and safeguard for the benefit of the United States, but did not. The tax does not arise from a levy on his income but from his assertion of control over and his dissipation of funds of the United States. That the United States, a victim of that dissipation, would urge this Court either to show compassion for the Debtor or force other creditors to subsidize the Debtor's obligation and thereby lose any hope for recovery of even the pittance which the law has provided for their benefit is curious indeed.

In the words of the Bame bankruptcy court decision from the Eighth Circuit, describing the reasoning of another decision, but well-suited to the case now before the Court:

. . . where refusal to marshal allows the parties who have caused the loss to the junior creditors to escape with substantial assets or to tip toe from the scene of the economic debacle hand in hand with the senior lienholder, bankruptcy courts are permitted to exercise their equitable power to reduce the loss to the general creditors.

In re Bame, 271 B.R. 354, 362-63 (Bankr. D. Minn. 2001).

4. Judicial Estoppel

Finally, the IRS contends that the Trustee is judicially estopped from seeking the equitable remedy of marshaling because the Trustee allegedly relied on § 724 to justify his award of interim compensation earlier in the case.

Judicial estoppel will apply when a party has previously succeeded under a position that is directly inconsistent with the position that it currently espouses. SEC v. Happ, 392 F.3d 12, 20 (1st Cir. 2004) (citations omitted). The doctrine will be applied to prevent "a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase." Thore v. Howe, 466 F.3d 173 (1st Cir. 2006) (quoting New Hampshire v. Maine, 532 U.S. 742, 749 (2001)). Whether the doctrine applies is largely a matter of intent.

This court has stated that "[j]udicial estoppel should be employed when a litigant is `playing fast and loose with the courts,' and when `intentional self-contradiction is being used as a means of obtaining unfair advantage in a forum provided for suitors seeking justice.'"

Happ, 392 F.3d at 20 (citing Patriot Cinemas. Inc. v. Gen. Cinema Corp., 834 F.2d 208, 212 (1st Cir. 1987) (quoting Scarano v. Central R. Co. of N.J., 203 F.2d 510, 513 (3d Cir. 1953))).

The IRS contends that the Trustee's current position is inconsistent with that at the time of the filing of the interim application for compensation. That contention is without merit.

The United States refers to Docket entry number 137 when making the assertion that the Trustee relied upon § 724 in order to compensate himself for attorney's fees. However, the Court notes that Docket entry 137 is actually the Debtor's assent to the interim award of trustee compensation. Docket entry 134 is the First Interim Application of Compensation.

Generally, a Chapter 7 trustee applies for compensation at the conclusion of the bankruptcy case. However, given the amount of litigation which had taken place prior to the filing of the fee application and the likelihood of ongoing litigation, the Trustee requested allowance of interim fees. That § 724 might ultimately apply was certainly a possibility then and now. Further, the Trustee does not deny that the United States has a valid lien claim on the Maple Avenue Property or the Residence nor is he seeking to deny payment in full to the United States. He is simply requesting that the IRS be compelled to pursue payment of its lien claims, in their entirely, through a fund which it will inevitably have to reach and which would do no harm to less favored creditors of the estate. This request is not contradictory to a position which the Trustee has previously taken nor is it the type of behavior which would trigger the doctrine of judicial estoppel.

The Trustee's interim application for compensation disclosed over 113 total hours expended in the case and requested $28,400 in fees and $911.71 for expenses. At the March 9, 2007 hearing on the Trustee's interim fee application, the United States Trustee stated that it had no objection to the amount requested given the amount of litigation in the case and the "unusual circumstances" involved. The application for fees was granted in the amount requested.

IV. CONCLUSION

For all of the foregoing reasons, the "United States' Motion to Dismiss" will be DENIED. A separate Order in conformity with this Memorandum of Decision shall issue forthwith. United States Bankruptcy Court District of Massachusetts Western Division In re: ) ) ) Chapter 7 WAYNE G. THOMPSON, ) Case No. 06-41294-HJB a/k/a WAYNE'S EXCAVATING AND ) CONCRETE, ) a/k/a AFFORDABLE EXCAVATION, ) ) Debtor )

MEMORANDUM OF DECISION

Before this Court are two motions brought by Chapter 7 debtor Wayne G. Thompson (the "Debtor") pursuant to 11 U.S.C. § 522(f) (the "Motions to Avoid" or "Motions to Avoid Liens"). In each, the Debtor seeks to avoid judicial liens which attach to his interest in real property (the "Property") claimed as exempt under the Massachusetts Homestead Statute, Mass. Gen. Laws ("M.G.L.") ch. 188, §§ 1, et seq. (the "Massachusetts Homestead Statute" or "Homestead Statute"). The objecting parties request this Court to find and rule that the protection of the Homestead Statute was terminated by the Debtor's purported "abandonment" of his homesteaded property. The Motions to Avoid will each be granted, but for reasons other than a resolution of the abandonment question.

References to statutory provisions throughout this memorandum will be hereinafter be to the United States Bankruptcy Code (the "Bankruptcy Code" or the "Code"), 11 U.S.C. §§ 101, et seq., unless otherwise noted.

I. FACTS AND TRAVEL OF THE CASE

Although the parties have identified a number of factual disputes, the facts relevant to the disposition of this contested matter are straightforward and essentially undisputed. In the event of any material dispute, the following constitute the Court's findings of fact under Federal Rule of Bankruptcy Procedure (the "Rules") 7052.

The Debtor and his then — wife (the "Former Spouse") acquired the Property in 1988, at a time when they were married and occupied the Property as their primary residence with their two children. Such was the situation in October of 1998, when the Debtor claimed a homestead exemption on the Property under § 1 of the Homestead Statute by recording a declaration of homestead pursuant to § 2 of the Homestead Statute (the "Homestead Declaration"). See M.G.L. ch. 188, §§ 1, 2. In May of 2004, however, the Former Spouse filed a complaint for divorce, and a Judgment of Divorce issued on January 4, 2006. In the Judgment of Divorce, the Debtor was ordered to assign all of his rights and interest in the Property to the Former Spouse. By the petition date, April 11, 2007, he no longer lived at the Property, although the Former Spouse and the Debtor's daughter (the "Daughter"), a college student, still resided there.

At trial, the Debtor testified that he plans to someday return to the Property and occupy it as his primary residence, notwithstanding the entry of the Judgment of Divorce and its mandate requiring the transfer of the Property. The Debtor hopes for a reconciliation with his Former Spouse, and says he has lived in and visited the Property subsequent to the divorce. The Debtor further testified that many of his personal effects remain on the Property and that he continued to contribute to real estate taxes, mortgage payments, utilities and other expenses related to the Property through at least the fall of 2006.

Testimony of the Former Spouse was not offered by any party.

Irrespective of the Debtor's intentions, it is clear that at the time the petition was filed, he no longer resided at the Property. Although the Debtor listed the Property as his address on the bankruptcy petition, he acknowledged that he had been renting an apartment for some time, which apartment address also appeared on his driver's license.

On April 11, 2007, the Debtor commenced the present bankruptcy case by filing a petition for relief under Chapter 7 of the Bankruptcy Code. On his Schedule A filed in connection with the case, the Debtor alleged a joint ownership interest in the Property and valued his half interest in the property at $125,000. On Schedule D, the Debtor listed three secured interests in the Property: (1) a mortgage, obtained jointly with the Former Spouse prior to the divorce, in favor of MSC Mortgage Service, Inc., with a balance of approximately $52,000; (2) an execution on a judgment in favor of Karl's Excavating, Inc. in the amount of $11,811.59; and (3) an execution on a judgment in favor of the Bank of Western Massachusetts in the amount of $34,038.39. On Schedule C, the Debtor claimed all unencumbered equity in the Property exempt under the Massachusetts Homestead Statute.

At the meeting of creditors held pursuant to § 341 of the Code, the Debtor apparently testified to having signed a deed transferring his interest in the Property to the Former Spouse. Subsequently, however, he recanted that testimony, explaining that he had been distracted and confused during the § 341 meeting because he had been in a great deal of pain as a result of an injury for which he was undergoing continuing medical treatment. No such deed has been recorded and none has been produced.

The objections to the Motions to Avoid Liens, filed by Karl's Excavating, Inc. and the Bank of Western Massachusetts (the "Lienholders"), were initially premised on the contention that the Debtor's transfer of the deed terminated his Homestead Exemption. See In re Hildebrandt, 313 B.R. 535 (Bankr. D. Mass. 2004). The Lienholders appear to have since abandoned that argument. However, to the extent the Lienholders continue to rely upon that contention, the Court finds it unavailing. There is no tangible evidence that the deed exists.

On May 8, 2007, the day following the § 341 meeting, the Debtor filed the Motions to Avoid Liens. The Bank of Western Massachusetts and Karl's Excavating, Inc. (the "Lienholders") objected to the Motions to Avoid within the time allowed for objecting to the Debtor's exemptions (the "Objections").

Absent a motion for an extension of time filed prior to the expiration of the deadline, the deadline for parties in interest to file an objection to a debtor's claimed exemptions is thirty days from the conclusion of § 341 meeting of creditors or thirty days after an amendment or supplemental schedule is filed. Fed.R.Bankr.P. 4003(b). Although the Debtor claimed that the objections to the exemptions were untimely, the Objections to the Motions to Avoid Liens were filed prior to the 30-day deadline established by Rule 4003(b). As the Objections clearly questioned the validity of the Debtor's claimed Homestead Exemption, they constitute timely-filed objections to that exemption. See, In re Betz, 273 B.R. 313, 320 (Bankr. D. Mass. 2002) (". . . in the instance where some form of written objection was manifested within the 30 day deadline, Rule 4003(b) is satisfied even though no formal objection was filed.").

II. POSITIONS OF THE PARTIES

The Lienholders contend that the Debtor's claimed exemption in the Property under the Homestead Statute (the "Homestead Exemption"), although validly obtained, has lapsed, because he subsequently "abandoned" the Property. Relying on In re Marrama, 307 B.R. 332 (Bankr. D. Mass. 2004), the Lienholders urge this Court to recognize abandonment as a viable method by which an estate of homestead may be terminated under Massachusetts law. The charge of abandonment is premised on the Debtor's failure to occupy the Property on the petition date and the Lienholders' contention that the Debtor has failed to present evidence to support a reasonable expectation that he will someday return to the Property. In response to a query from the Court regarding the impact of the Daughter's continued residence at the property, the Lienholders were noticeably vague, claiming that there is no evidence to suggest she is not emancipated and that "it would be a different case" if the Daughter were a minor.

The Debtor, in contrast, argues that termination of an estate of homestead under Massachusetts law can only be effected in writing and not by abandonment. Moreover, even if abandonment of a homesteaded property could terminate an otherwise valid Homestead Exemption, the Debtor maintains that he has not abandoned the Property, as he has always intended to reconcile with his wife, return to the Property and live there as his primary residence. Finally, according to the Debtor, the Daughter's continued residence at the Property maintains the protection afforded by the Debtor's Homestead Exemption, since she is a member of his "family" within the meaning of the Homestead Statute.

III. DISCUSSION

A. The Statutory Framework

Upon the filing of a bankruptcy case, "all legal or equitable interests of the debtor in property," with certain limited exceptions, become property of the bankruptcy estate, 11 U.S.C. § 541(a)(1), potentially available for distribution to creditors,see, e.g., 11 U.S.C. §§ 704(a)(1); 727. Section 522(b), however, allows a debtor to exempt certain property from the estate. 11 U.S.C. § 541(b), (c). In Massachusetts, a debtor may elect exemptions provided for under the Bankruptcy Code or may choose to claim exemptions provided for under nonbankruptcy federal, state and local law. 11 U.S.C. § 522(b), (d); In re Leigh, 307 B.R. 324, 325 n. 1 (Bankr. D. Mass. 2004). In the present case, the Debtor has elected to claim the exemptions afforded by the state under nonbankruptcy law, including, inter alia, his claimed exemption in the Property pursuant to the Massachusetts Homestead Statute.

In the absence of a timely objection to a debtor's claimed exemptions, the claimed property is exempt pursuant to § 522(1). If, as here, a timely objection is made to an exemption arising under state law, the Court must look to the law of that state to determine the exemption's validity. In re Garran (Garran v. SMS Fin. V. LLC), 338 F.3d 1, 6 (1st Cir. 2003); In re Miller, 113 B.R. 98, 101 (Bankr. D. Mass. 1990). The party objecting to the claimed exemption "bears the burden of proving that the exemptions are not properly claimed," Fed.R.Bankr.P. 4003(c), whether the objection is raised in opposition to a lien avoidance motion or is brought independently. See Fed.R.Bankr.P. 4003(d) (governing motions to avoid liens); Fed.R.Bankr.P. 4003(c) (objecting party bears burden of proof regarding validity of exemptions in any hearing under Rule 4003).

Secured claims, including claims secured by judicial liens, are "not routinely discharged at the conclusion of the bankruptcy case. However, . . . such liens may be avoidable under a separate provision of the Bankruptcy Code, § 522(f)." Garran, 338 F.3d at 5. Pursuant to § 522(f), a judicial lien may be avoided to the "extent that such lien impairs an exemption to which the debtor would have been entitled under [§ 522(b)]." A judicial lien is said to impair an exemption when, after deducting the amount of other secured claims on the property, see, e.g., In re Ballirano, 233 B.R. 11, 14 (Bankr. D. Mass. 1999), and the amount of exemption claimed by the debtor, there is no equity left to satisfy the judicial lien.

The "formula" used to determine whether a judicial lien impairs an exemption is set forth in § 522(f)(2)(A):

a lien shall be considered to impair an exemption to the extent that the sum of —

(i) the lien;

(ii) all other liens on the property; and

(iii) the amount of the exemption that the debtor could claim if there were no liens on the property;

exceeds the value that the debtor's interest in the property would have in the absence of any liens.

11 U.S.C. § 522(f)(2)(A). Put another way, a "debtor can avoid a particular judicial lien if, in order to satisfy it, he would have to use assets he is otherwise entitled to set aside from the bankruptcy estate as exemptions." Garran, 338 F.3d at 5. And, if the value of the property is such that non-exempt equity exists to satisfy a portion of the judicial lien, "a debtor is permitted to avoid only that portion of the judicial lien that infringes upon the exemption to which he is entitled." Id. (citing E. Cambridge Savs. Bank v. Silveira (In re Silveira), 141 F.3d 34, 35-36 (1st Cir. 1998)).

Here, the Property is valued at $250,000. After deducting the amount of the mortgage, approximately $198,000 in equity remains in the Property. If the Debtor has a valid claim to a Homestead Exemption of $500,000, see M.G.L. ch. 188, § 1, then there is no remaining equity to which the judicial lien may attach, and the liens are therefore avoidable in their entirety. If, however, the Homestead Exemption on the Property has lost its vitality, the Debtor's share of the equity — approximately $99,000 — will inure to the benefit of the Lienholders, and the liens are not avoidable. The outcome of the Motions to Avoid, therefore, is entirely dependent upon the validity of the Debtor's claimed Homestead Exemption, to which the Court will now turn.

B. The Homestead Exemption

Section 1 of the Massachusetts Homestead Statute provides that

an estate of homestead to the extent of $500,000 in the land and buildings may be acquired . . . by an owner or owners of a home. . . . Said estate shall be exempt from the laws of conveyance, descent, devise, attachment, levy on execution and sale for payment of debts or legacies except [in certain enumerated cases]. . . . [P]rovided, that only one owner may acquire an estate of homestead in any such home for the benefit of his family; and provided further, that an estate of homestead may be acquired on only one principal residence for the benefit of a family. . . ."

M.G.L. ch. 188, § 1.

In order to acquire an estate of homestead under Massachusetts law, an owner of a home must: (1) occupy or intend to occupy the home as a primary residence, M.G.L. ch. 188, § 1, and (2) evidence the intent to hold the property as a homestead by a writing — either a designation in the deed at conveyance to the owner or by recording a Homestead Declaration in the appropriate registry of deeds, M.G.L. ch. 188, § 2. Here, there is no question that the Debtor validly acquired an estate of homestead in the Property under Massachusetts law. As co-owner of the property, he filed an appropriate Homestead Declaration with the registry of deeds at a time when he occupied the property.

Section 2 of the Homestead Statute provides, in relevant part:

To acquire an estate of homestead in real property, the fact that it is designed to be held as such shall be set forth in the deed of conveyance by which the property is acquired; or, after the title has been acquired, such design may be declared by a writing duly signed, sealed and acknowledged and recorded in the registry of deeds for the county or district in which the property is situated. . . .

Once acquired, the Homestead Exemption protects not only the declarant, but also the declarant's family. This protection is a central purpose of the Massachusetts Homestead Statute, and "one may view the homestead estate as protecting not the declarant's legal interest in the home or the home itself but rather the economic interest in the home of the declarant and his family."In re Vasques, 337 B.R. 255, 257 (Bankr. D. Mass. 2006) (citing White v. Rice, 87 Mass. (5 Allen) 73 (1862);Richards v. Chace, 68 Mass (2 Gray) 383 (1854)); see also In re Fiffy, 281 B.R. 451, 454 (Bankr. D. Mass. 2002); Dwyer v. Campellin, 673 N.E.2d 863, 866 (Mass. 1996). "Because homestead laws are `designed to benefit the homestead declarant and his or her family by protecting the family residence from the claims of creditors,' Massachusetts courts have `construed the State homestead exemptions liberally in favor of debtors.'" Garran v. SMS Fin. V. LLC (In re Garran), 338 F.3d 1, 7 (1st Cir. 2003) (quoting Shamban v. Masidlover, 705 N.E.2d 1136, 1138 (Mass. 1999)); see also Dwyer v. Cempellin, 673 N.E.2d at 866.

Pursuant to § 1 of the Homestead Statute, "family' shall include either a parent and child or children, a husband and wife and their children, if any, or a sole owner." M.G.L. ch. 188, § 1. Thus, to the extent the Debtor has a valid exemption under the Homestead Statute, that exemption is intended to benefit not only the Debtor, but also the Debtor's Daughter.

Once acquired, the Massachusetts Homestead Statute provides for termination of a Homestead Exemption in any of three ways: (1) by recording a new Homestead Declaration, see M.G.L. ch. 188, § 2; In re Leigh, 307 B.R. 324, 330 (Bankr. D. Mass. 2004); (2) by execution of a deed conveying the property, which deed does not specifically reserve the homestead, M.G.L. ch. 188, § 7; or (3) by a signed release of homestead recorded in the appropriate registry of deeds, M.G.L. ch. 188, § 7. See generally Garran, 338 F.3d at 7-8; In re Edwards, 281 B.R. 439, 449 (Bankr. D. Mass. 2002). It is undisputed that none of these events occurred in the present case; the Debtor has not filed a subsequent Homestead Declaration, he has not conveyed the property, see,infra, Note 2, and he has not signed a release of homestead.

The last sentence of § 2 provides that the "acquisition of a new estate or claim of homestead shall defeat and discharge any such previous estate." M.G.L. ch. 188, § 2.

Section 7 provides, in full:

An estate of homestead created under section two may be terminated during the lifetime of the owner by either of the following methods: — (1) a deed conveying the property in which an estate of homestead exists, signed by the owner and the owner's spouse, if any, which does not specifically reserve said estate of homestead; or by (2) a release of the estate of homestead, duly signed, sealed and acknowledged by the owner and the owner's spouse, if any, and recorded in the registry of deeds for the county or district in which the property is located.

M.G.L. ch. 188, § 7. If the Homestead declarant is married, the general view in this District is that both spouses must sign the deed conveying the property or the release of homestead, regardless of whether both hold title to the property. See M.G.L. ch. 188, § 7; In re Melber, 315 B.R. 181, 188 (Bankr. D. Mass. 2004); Richards v. Chace, 68 Mass. at 385-86.

The question, then, the Lienholders argue, is whether the Debtor's Homestead Exemption has lapsed as a result of his "abandonment" of the Property. The issue of whether a Homestead Exemption, having been validly-acquired under the current Homestead Statute, is susceptible to later termination by abandonment has not been reached by the Massachusetts Supreme Judicial Court (the "SJC"). And predicting how the SJC would rule on the issue is complicated by an undercurrent of disagreement filtering through the cases in this district.

See Garron, 338 F.3d at 6 (citing Caron v. Farmington Nat'l Bank (In re Caron), 82 F.3d 7, 9 (1st Cir. 1996)) (where SJC has not addressed an issue implicating the interpretation of the Massachusetts Homestead Statute, a federal court must predict how the SJC would rule).

In In re Marrama, that court answered the question definitively after reviewing SJC rulings decided primarily under earlier statutes which provided homestead protections to a declarant's wife and children. 307 B.R. 332 (Bankr. D. Mass. 2004). Noting that "several Massachusetts cases recognize[d] abandonment as a method of terminating a homestead," the Marrama court "conclude[d] that the Supreme Judicial Court would rule that a homestead estate could be terminated by abandonment." 307 B.R. at 337-38.

It is interesting to note that the homestead statutes at issue in these earlier cases were quite different from the current Homestead Statute. Earlier statutes provided protection for a [male] declarant/owner of property and extended the homestead protection "for the additional term of the continuous subsequent occupation of his widow or any of his minor children."Silloway v. Brown, 94 Mass. (12 Allen) 30, 32 (1866); see also Foster v. Leland, 6 N.E. 859 (Mass. 1866) ("The homestead exemption, created by the acts of 1851, is continued after the householder's death, for the benefit of his widow and family only in the case of `some one of them continuing to occupy such homestead.' St. 1851, c. 340, § 2."). Thus, those statutes explicitly contemplated continued occupation as a condition required for maintaining the homestead protection; consequently, many of the cases involved deciding whether or not the property had been "abandoned." See, e.g., Pratt v. Pratt, 37 N.E. 435 (Mass. 1894) (homestead protection not lost where widow left involuntarily and intended to return); Paul v. Paul, 136 Mass. 286 (1884) (widow built another house and moved there; homestead estate in former residence deemed abandoned); Foster v. Leland, 6 N.E. 859 (widow had no claim to homestead in former residence after husband's death where she and husband had previously left the property with no intent to return).

Other courts in this district, however, have expressed doubt as to whether a Homestead Exemption can be terminated by abandonment. As the court in In re Webber noted,

The [current Homestead Statute] specifies three methods for terminating an estate of homestead, all three requiring a writing. . . . Therefore, by specifying three methods of termination, . . . the Massachusetts Legislature likely meant to preclude termination by simple abandonment.

278 B.R. 294, 297-98 (Bankr. D. Mass. 2002). See also In re Melito, 357 B.R. 684, 688 (Bankr. D. Mass. 2007); In re Taylor, 280 B.R. 294, 296-98 (Bankr. D. Mass. 2002) (citing, inter alia,Webber, 278 B.R. at 297-98; Woodbury v. Luddy, 96 Mass (14 Allen) 1, 5 (1867)); Dulanty v. Pynchon, 88 Mass. (6 Allen) 510, 512 (1863) ("an estate of homestead when once lawfully acquired cannot be released or lost except by deed duly acknowledged and recorded. . . .").

Today, this Court need not weigh in with its opinion on these differing views. Absent an act of termination explicit under the statute, the continued residence of the Debtor's Daughter in the Property satisfies any occupancy requirement and precludes any argument that the Homestead Exemption has terminated by abandonment, even if such method were otherwise efficacious under Massachusetts law. The protection afforded the Debtor under the Homestead Statute extends to his family. And, because it is the family, and not the declarant alone, that Homestead Statute is meant to protect, the Court agrees with the conclusion reached by the Webber court that:

even if the continued validity of an estate of homestead were contingent on the continuing satisfaction of the occupancy requirement, the requirement would be more faithfully construed as applying to the family, not just to the owner that holds the homestead.

278 B.R. at 298.

The age of the Debtor's Daughter is of no import. The Daughter falls within the definition of "family" pursuant to § 1 of the Homestead Statute. Unlike the more limited protection provided under § 4, the homestead protection afforded to a declarant's children under § 1 is not lost upon reaching the age of majority; "[§ 1] contains no limitation whatsoever on `children.'" In re Vasques, 337 B.R. at 258. Reading such a limitation into § 1 "is barred by the plain and explicit text" of the Homestead Statute.Id. at 258-59; see In re Garran, 338 F.3d at 6 (interpretation of Homestead Statute should not contradict "plain and unambiguous" statutory language). Thus, "even if the Debtor himself failed to satisfy the alleged occupancy requirement, his [Daughter] did not; and if there is any such requirement, [her] occupancy is enough to satisfy it." In re Webber, 278 B.R. at 299.

Section 4 of the Homestead Statute was intended to continue an estate of homestead upon the death of the declarant. That section limits the continuation of the homestead "until the youngest unmarried child is eighteen and until the marriage or death of the [surviving] spouse." M.G.L. ch. 188, § 4.

IV. CONCLUSION

For all the foregoing reasons, the Court finds that the Debtor's claimed exemption in the Property is valid. Having found that the remaining elements necessary under § 522(f) have been met, the Court will GRANT the Motions to Avoid Liens, thereby overruling the Objections interposed by the Lienholders. An order in conformity with this Memorandum shall issue forthwith.