IN RE: SANDRA TILLMAN V. LAWRENCE WARFIELD

FILED

FOR PUBLICATION

NOV 18 2022

UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK

U.S. COURT OF APPEALS

FOR THE NINTH CIRCUIT

No. 21-16034

_In re: SANDRA J. TILLMAN,

Debtor, D.C. No.

3:20-cv-08204-DWL

_____________________

UNITED STATES OF AMERICA,

OPINION

Appellant,

v.

LAWRENCE J. WARFIELD,

Trustee; SANDRA J. TILLMAN,

Appellees.

Appeal from the United States District Court

for the District of Arizona

Dominic Lanza, District Judge, Presiding

Argued and Submitted July 5, 2022

Seattle, Washington

Before: CLIFTON and BUMATAY, Circuit Judges, and

CHEN, * District Judge.

Opinion by Judge Chen;

Dissent by Judge Bumatay

__________________

*

The Honorable Edward M. Chen, United States District Judge for the

Northern District of California, sitting by designation.

SUMMARY **

Bankruptcy

The panel reversed the district court’s decision affirming

the bankruptcy court’s summary judgment in favor of a

Chapter 7 trustee who brought an adversary proceeding

seeking to avoid an Internal Revenue Service tax lien on

property subject to a homestead exemption and to preserve

the value of the lien for the benefit of the bankruptcy estate.

The IRS held a secured claim on the debtor’s real

property arising from a tax penalty lien. The debtor claimed

a $150,000 homestead exemption in the property under

Arizona law. The trustee sought to avoid the tax penalty lien

on the debtor’s exempt property and preserve it for the

benefit of the estate pursuant to 11 U.S.C. §§ 724(a) and 551.

The panel held that § 724(a) concerns the trustee’s

avoidance of qualifying liens attached to the property of the

estate at the time of distribution. When a debtor exempts a

property interest under 11 U.S.C. § 522, the exemption

withdraws that property interest from the bankruptcy estate

and, thus, from the reach of the trustee for distribution to

creditors. Accordingly, because exempt property is not

“property of the estate” which may be “distributed,” a trustee

may not avoid a lien under § 724(a) attached to exempt

property which is no longer part of the estate. The panel held

that because a trustee may not avoid a tax lien attached to

exempt property through § 724(a), it follows that a trustee is

not permitted to preserve the tax lien for the benefit of the

**

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

estate under § 551, which provides for automatic

preservation of certain avoided liens, including liens avoided

under § 724(a). The panel concluded that its holding was

consistent with Hutchinson v. IRS (In re Hutchinson), 15

F.4th 1229 (9th Cir. 2021), in which the court was not called

upon to resolve any dispute as to the applicability of § 724(a)

to the property at issue. The panel reversed and remanded

to the district court with instructions for further proceedings.

Dissenting, Judge Bumatay wrote that the panel should

have affirmed the trustee’s avoidance of the IRS tax penalty

lien because the Bankruptcy Code creates no exception to

the trustee’s avoidance power for liens on exempt

property. Judge Bumatay wrote that under the plain text of

§§ 724(a) and 726(a)(4), a trustee has the authority to avoid

a federal tax penalty lien, and estate property does not evolve

over the course of a bankruptcy proceeding. Rather, exempt

property is protected from prepetition debts, but it is not

wholly removed from the bankruptcy estate.

COUNSEL

Matthew S. Johnshoy (argued), Francesca Ugolini, and Ellen

Page DelSole, Attorneys; David A. Hubbert, Deputy

Assistant Attorney General; United States Department of

Justice, Tax Division; Washington, D.C.; for Appellant.

Terry A. Dake (argued), Terry A, Dake Ltd, Phoenix,

Arizona, for Appellee Lawrence J. Warfield.

Thomas H. Allen, Allen Barnes & Jones PLC, Phoenix,

Arizona, for Appellee Sandra J. Tillman.

UNITED STATES V. WARFIELD 1

OPINION

CHEN, District Judge:

Sandra J. Tillman (the “Debtor”) purchased a house in

Prescott, Arizona (the “Prescott Property”). The Internal

Revenue Service (“IRS” or “the government”) held a

secured claim on the Prescott Property arising from a tax

penalty lien. Thereafter, Debtor filed a petition for Chapter

7 bankruptcy and claimed a $150,000 homestead exemption

in the house under Arizona law. Appellee Trustee Lawrence

J. Warfield (the “Trustee”) instituted an adversary

proceeding to avoid the IRS’s tax lien on the exempt

property and to preserve the value of the lien for the benefit

of the bankruptcy estate. The Bankruptcy Court granted

summary judgment to the Trustee and the District Court

affirmed. The government appealed.

We are presented with a matter of first impression: may

a trustee use 11 U.S.C. §§ 724(a) and 551 to avoid and

preserve a tax penalty lien on a debtor’s exempt property for

the benefit of the bankruptcy estate? We hold that a trustee

may not. Therefore, we reverse the decision of the District

Court affirming the Bankruptcy Court.

I. BACKGROUND

A. LEGAL BACKGROUND

At the outset, we briefly summarize the terminology and

statutory provisions of the Bankruptcy Code relevant to this

dispute.

First, after a bankruptcy petition is filed, a bankruptcy

estate is formed consisting of specified property interests of

the debtor. 11 U.S.C. § 541(a).

2 UNITED STATES V. WARFIELD

Second, in some circumstances, a debtor may exempt

property from the bankruptcy estate, thereby removing it

from the bankruptcy estate. Mwangi v. Wells Fargo Bank,

N.A. (In re Mwangi), 764 F.3d 1168, 1175–76 & n.4 (9th Cir.

2014). In such circumstances, the debtor generally retains

the exempt property, and the exempt property cannot be used

by the bankruptcy estate to satisfy the claims of unsecured

creditors. Owen v. Owen, 500 U.S. 305, 308 (1991). Section

522 of the Bankruptcy Code enumerates exemptions

available to an individual debtor in bankruptcy, but

§ 522(b)(1) also authorizes state legislatures to “opt out” of

the § 522 exemption scheme and provide their own

exemption schemes. “If a State opts out, then its debtors are

limited to the exemptions provided by state law.” Owen, 500

U.S. at 308.

As relevant here, Arizona has opted out of the § 522

exemptions and provides its own set of exemptions to

Arizona residents. Arizona Revised Statutes (“A.R.S.”) §

33-1133(B). Among other things, Arizona provides a

homestead exemption that permits a resident to exempt her

“interest in real property . . . in which [she] resides,” up to

$150,000 “in value.” Id. § 33-1101(A)(1) (2004 version,

effective prior to Jan. 1, 2022). Arizona, however, provides

that consensual loans, such as mortgages, are not “subject to

or affected by” the homestead exemption. A.R.S. § 33-

1104(D). Thus, depending on the value of the property, a

mortgage can diminish the amount of the homestead

exemption available to the homeowners. Notably, the

Arizona homestead exemption does not provide for any

reduction in the exemption amount for tax liens.

Third, the Bankruptcy Code limits a debtor’s ability to

shield exempted property from liability for certain pre-

petition debts. Section § 522(c) provides:

UNITED STATES V. WARFIELD 3

(c) Unless the case is dismissed, property

exempted under this section is not liable

during or after the case for any debt of the

debtor that arose . . . before the

commencement of the case, except—

...

(2) a debt secured by a lien that is—

(A)(i) not avoided under subsection

(f) or (g) of this section or under

section 544, 545, 547, 548, 549, or

724(a) of this title; and

(ii) not void under section 506(d)

of this title; or

(B) a tax lien, notice of which is

properly filed . . . .

11 U.S.C. § 522(c) (emphasis added). In short, § 522(c)

provides that a debtor remains liable for certain debts

secured by liens, such as tax liens, even if the debtor has

otherwise exempted property from the reach of unsecured

creditors. Of note, an IRS tax lien lies “upon all property

and rights to property, whether real or personal, belonging to

such person.” 26 U.S.C. § 6321.

Fourth, under § 724(a) of the Bankruptcy Code, a trustee

may “avoid” a “lien that secures a claim of a kind specified

in section 726(a)(4)” for the estate. Section 726 deals

generally with distribution of property of the estate, and

§ 726(a)(4), as relevant here, addresses claims for non-

compensatory penalties. 11 U.S.C. § 726(a)(4) (addressing

“payment of any allowed claim, whether secured or

unsecured, for any fine, penalty, or forfeiture, or for

multiple, exemplary, or punitive damages, arising before the

4 UNITED STATES V. WARFIELD

earlier of the order for relief or the appointment of a trustee,

to the extent that such fine, penalty, forfeiture, or damages

are not compensation for actual pecuniary loss suffered by

the holder of such claim”).

Fifth, if a trustee avoids a lien using § 724(a), the lien’s

priority position is automatically “preserved for the benefit

of the estate but only with respect to property of the estate.”

11 U.S.C. § 551. Thus, generally, once the trustee avoids a

lien against property of the estate, he steps into the shoes of

the lienholder and can recover that property interest for the

estate, thereby increasing the property of the estate available

to satisfy claims of unsecured creditors. Retail Clerks

Welfare Trust v. McCarty (In re Van de Kamp’s Dutch

Bakeries), 908 F.2d 517, 519 (9th Cir. 1990).

B. FACTUAL BACKGROUND

Having described the relevant statutory provisions, we

now turn to the facts of this case.

In 2015, Debtor purchased a residence in Prescott,

Arizona and granted a mortgage to Bank of America. The

Prescott Property became the Debtor’s homestead under

Arizona law. See A.R.S. § 33-1101 (2004 version, effective

prior to Jan. 1, 2022). The Debtor owed income tax for 2015

but failed to timely file a return or pay her 2015 taxes. The

IRS assessed Debtor’s 2015 income tax liability and related

penalties and interest. Debtor eventually fully paid the

original tax liability but did not fully pay the penalties and

interest, which initially totaled over $18,000. On December

24, 2018, the IRS recorded a notice of a federal tax lien (the

“IRS Tax Lien”) securing the penalties against the Prescott

Property.

UNITED STATES V. WARFIELD 5

On January 30, 2019, Debtor filed a Chapter 7

bankruptcy petition in the U.S. Bankruptcy Court for the

District of Arizona. The IRS filed a claim for Debtor’s 2015

tax liabilities and indicated its claim was secured by the IRS

Tax Lien it had filed. Debtor claimed a homestead

exemption of up to $150,000 on the Prescott Property under

A.R.S. § 33-101, which the Bankruptcy Court permitted.

that time, the Debtor’s mortgage was for $364,381 and the

IRS’s secured tax lien was for $24,686.26.

C. PROCEDURAL BACKGROUND

Thereafter, the Trustee filed the adversary proceeding

currently at issue and sought a summary judgment order: (1)

avoiding the federal tax lien on the Prescott Property

pursuant to 11 U.S.C. § 724(a), and (2) preserving the value

of the avoided federal tax lien on the Prescott Property for

the benefit of the bankruptcy estate pursuant to 11 U.S.C.

§ 551. The government responded that lien avoidance under

§ 724(a) and preservation under § 551 did not apply to liens

encumbering exempt property, such as the Prescott Property,

which was subject to Arizona’s homestead exemption. The

Debtor also intervened and asserted her right to an increased

exemption under § 522(g).

The Bankruptcy Court granted the Trustee’s summary

judgment motion, holding that the Trustee could avoid the

portion of the federal tax lien securing the tax penalties and

interest under § 724(a) and that the value of the lien was

preserved for the estate’s benefit under § 551.

The Bankruptcy Court rejected the government’s

argument that lien avoidance under § 724(a) and

preservation under § 551 for the benefit of the bankruptcy

estate did not apply to the Debtor’s exempted homestead

property. Specifically, the Bankruptcy Court found that the

6 UNITED STATES V. WARFIELD

IRS held a secured claim for a tax penalty, which is of the

kind specified in § 726(a)(4), and was, thus, subject to

avoidance by the Trustee under § 724(a). It observed that

the IRS Tax Lien was held against the Prescott Property,

which the Debtor claimed exempt under Arizona’s

homestead exemption—and which the Bankruptcy Court

had previously granted—but that the grant of this exemption

did not preclude the Trustee from avoiding the lien and

preserving it for the benefit of the estate.

The Bankruptcy Court quoted Heintz v. Carey (In re

Heintz) for the proposition that Ҥ 551 does not exclude

exempt property from preservation” and that “[a]n avoided

interest or lien encumbering exempt property is

automatically preserved for the benefit of the estate under

§ 551.” 198 B.R. 581, 586 (B.A.P. 9th Cir. 1996). Relying

on Heintz, the Bankruptcy Court concluded that the Debtor’s

homestead was property of the bankruptcy estate at the

commencement of the case and remained property of the

estate for purposes of § 551 even after the Debtor’s

homestead exemption was allowed.

The Bankruptcy Court further reasoned that, under

Arizona law, the Debtor’s exemption was limited to an

“interest” in her homestead, up to $150,000, equal to the

property’s value after subtracting both the value of the

mortgage lien and the value of the federal tax lien. The court

explained that Arizona’s exemption laws explicitly excluded

the value of consensual liens, such as her mortgage, from the

amount of the Debtor’s homestead exemption. And, as to

the federal tax lien, the court observed that Arizona’s

exemption laws were “ineffective” against the federal tax

lien. The Bankruptcy Court held this ineffectiveness meant

the Debtor’s homestead exemption did not include “the

value of the lien positions occupied by [Bank of America] or

the IRS,” and it was only the Debtor’s equity beyond the

UNITED STATES V. WARFIELD 7

mortgage and tax lien that the Debtor was entitled to exempt.

Thus, the Bankruptcy Court concluded that “[a]t all relevant

times, the IRS’s Tax Lien encumbered property of the

estate.”

Accordingly, the court explained that “[t]he trustee may

avoid the IRS’s Tax Lien under § 724(a),” and “[u]pon

avoidance of the IRS’s Tax Lien, the IRS’s Tax Lien is

preserved for the benefit of [the] bankruptcy estate under

§ 551.” 1

In so concluding, the Bankruptcy Court also rejected the

government’s argument that the court’s holding would cause

inequitable results for the Debtor, because the Debtor’s

exemption could be reduced twice as a result of the same

lien—first, as a deduction from the amount that Debtor could

exempt, and then, again, when the Debtor is required to

satisfy the value of the lien to the IRS. The Bankruptcy

Court reasoned that the Debtor would not have to unfairly

pay twice on the same lien because the IRS Tax Lien “never

attached to the Debtor’s homestead exemption.” “[T]he

value of the Debtor’s exemption was always subordinate to

the Tax Lien” and “[w]hen the Tax Lien is avoided, the

Trustee steps into that avoided position.” Therefore, the

court explained, “[i]f it so happens that the IRS’s now

unsecured claim is also nondischargeable, it is no different

than any other nondischargeable claim which will need to be

paid by the Debtor.”

The government appealed the Bankruptcy Court’s grant

of summary judgment to Trustee, and the District Court

__________________

1

The Bankruptcy Court also rejected the IRS and Debtor’s argument that

the avoided lien is preserved for the benefit of the debtor under § 522(g)

instead of for the benefit of the estate under § 551. This argument is not

re-asserted on appeal.

8 UNITED STATES V. WARFIELD

affirmed in full. The District Court, also relying on Heintz,

concluded that § 551’s “property of the estate” limitation did

not prevent the Trustee’s avoidance and preservation of the

IRS lien, and found that the Debtor was only entitled to use

Arizona’s homestead exemption to exempt unencumbered

property – i.e., the exemption excluded the mortgage and the

IRS lien. The District Court agreed with the Bankruptcy

Court that the IRS’s tax lien never attached to Debtor’s

exemption. This appeal followed.

D. INTERVENING DEVELOPMENTS

During the pendency of the appeal from the adversary

proceeding, on July 9, 2020, Debtor found a buyer for the

Prescott Property and moved for approval to sell. The

Bankruptcy Court permitted the sale of the Prescott Property

for $475,000, of which Debtor was ordered to pay

$378,062.78 to Bank of America to cover the cost of the

mortgage. The Bankruptcy Court ordered the Trustee, after

paying costs and the mortgage, to set aside a portion of the

proceeds equal to the total value of the IRS’s tax lien,

$26,771, pending the outcome of the litigation now before

this Court. The remaining proceeds of the sale after costs,

approximately $30,000, were provided to Debtor as the

value of her homestead exemption.

II. JURISDICTION AND STANDARD OF REVIEW

The government timely appealed the District Court’s

affirmance of the Bankruptcy Court’s grant of summary

judgment to the Trustee. We have jurisdiction over this

appeal pursuant to 28 U.S.C. §§ 158(d), 1291. See SS

Farms, L.P. v. Sharp (In re SK Foods, L.P.), 676 F.3d 798,

802 (9th Cir. 2012).

UNITED STATES V. WARFIELD 9

We review de novo the district court’s decision on appeal

from a bankruptcy court. Decker v. Tramiel (In re JTS

Corp.), 617 F.3d 1102, 1109 (9th Cir. 2010). “We apply the

same standard of review applied by the district court” and

“review [the] bankruptcy court decision independently and

without deference to the district court’s decision.” Id.; see

Galam v. Carmel (In re Larry’s Apt., L.L.C.), 249 F.3d 832,

836 (9th Cir. 2001) (citing Robertson v. Peters (In re

Weisman), 5 F.3d 417, 419 (9th Cir. 1993)). As such, “[t]he

bankruptcy court’s findings of fact are reviewed for clear

error, while its conclusions of law are reviewed de novo.” In

re JTS Corp., 617 F.3d at 1109 (quoting Leichty v. Neary (In

re Strand), 375 F.3d 854, 857 (9th Cir. 2004)).

III. DISCUSSION

A. AVOIDANCE AND PRESERVATION UNDER

§§ 724(a), 551

The government argues that the Bankruptcy Court erred

in holding that the Trustee could avoid a tax lien for penalties

on the Debtor’s exempt homestead property under 11 U.S.C.

§ 724(a) and then use 11 U.S.C. § 551 to take the value of

the lien from the Debtor’s exemption and preserve it for the

benefit of the bankruptcy estate. In the government’s view,

the Bankruptcy Court erred because the Debtor’s homestead

exemption withdrew her exempt property from the property

of the estate. Therefore, the government contends, the

Trustee cannot use § 724(a) and § 551 to avoid and preserve

a lien on exempted property, because such property is not

property of the estate.

1. Parameters of § 724(a)

The parties do not dispute that the tax penalty lien at

issue here is the type of lien contemplated for avoidance by

10 UNITED STATES V. WARFIELD

a trustee under § 724(a). Under § 724(a), “[t]he trustee may

avoid a lien that secures a claim of a kind specified in section

726(a)(4) of this title.” 11 U.S.C. § 724(a). Section

726(a)(4), in turn, specifies “property of the estate shall be

distributed . . . in payment of any allowed claim, whether

secured or unsecured, for any fine or forfeiture or for

multiple, exemplary, or punitive damages, arising before the

earlier of the order for relief or the appointment of a trustee

. . .” 11 U.S.C. § 726(a)(4). Under 11 U.S.C. § 551, “[a]ny

transfer avoided under section . . . 724(a) of this title . . . is

preserved for the benefit of the estate but only with respect

to property of the estate.” 11 U.S.C. § 551. The trustee’s

power under § 551 is thus predicated on its power first to

avoid the tax lien under § 724(a). The key question here is

whether the Debtor’s exempted property—her homestead

exemption under Arizona law—is subject to the Trustee’s

avoidance of the tax lien under § 724(a) and the ensuing

preservation of the tax lien under § 551. It is not.

Property interests held by the estate evolve over the

course of bankruptcy proceedings. Section 541(a)(1) of the

Bankruptcy Code explains that the filing of a bankruptcy

case “creates an estate . . . comprised of” the debtor’s

specified property interests “as of the commencement of the

case.” 11 U.S.C. § 541(a). However, the holdings of the

estate do not remain static after the commencement of the

bankruptcy case. The term “estate” refers to the property at

a particular point in time—such as at the commencement of

the case as referred to in § 541(a)(1)—rather than the estate

in perpetuity. See Owen, 500 U.S. at 308 (“An estate in

bankruptcy consists of all the interests in property, legal and

equitable, possessed by the debtor at the time of filing, as

well as those interests recovered or recoverable through

transfer and lien avoidance provisions.”).

UNITED STATES V. WARFIELD 11

Section 541(a) provides that a trustee may increase the

property of the estate if the trustee can recover non-debtor

interests in property through the various transfer and lien

avoidance provisions in the Bankruptcy Code. See 11 U.S.C

§ 541(a)(3)–(7).

Conversely, the property interests of the estate may be

reduced during the course of bankruptcy proceedings, such

as through a judicially authorized sale of assets, payment of

expenses related to the administration of the estate, or

payment of a debtor’s unexpired lease obligations. See 11

U.S.C. § 363(b) (sale of property of the estate); Tamm v.

U.S.T. (In re Hokulani Square, Inc.), 776 F.3d 1083, 1085

(9th Cir. 2015) (describing a secured creditor’s purchase of

estate property via credit bid, such that “the creditors get the

property, and the estate’s debt is reduced by the amount of

the bid”); 11 U.S.C. § 503 (allowance of administrative

expenses); 11 U.S.C. § 365 (payment on unexpired leases).

Additionally, the property interests of the estate may be

reduced by a judicially authorized exemption. See 11 U.S.C.

§ 522. Although initially “[a]n estate in bankruptcy consists

of all the interests in property legal and equitable, possessed

by the debtor at the time of filing,” “[a]n exemption is an

interest withdrawn from the estate (and hence from the

creditors) for the benefit of the debtor.” Owen, 500 U.S. at

308 (emphasis added). Likewise, § 522 of the Bankruptcy

Code “authorizes a debtor to exempt certain property from

the bankruptcy estate so that it may not be reached by the

trustee in bankruptcy.” DeMarah v. United States (In re

DeMarah), 62 F.3d 1248, 1250 (9th Cir. 1995). Indeed,

§ 522(b)(1) expressly states that “[n]otwithstanding section

541 of this title”—the statutory provision describing the

property interests that comprise the estate at the

commencement of proceedings—“an individual debtor may

exempt from property of the estate the property” listed in the

12 UNITED STATES V. WARFIELD

relevant subsections of § 522. 11 U.S.C. § 522(b)(1)

(emphasis added).

We have consistently recognized that authorized

exemptions modify the property interests of the estate. After

the commencement of bankruptcy proceedings, property

interests which are exempted by a debtor are “withdrawn

from the estate,” Gebhart v. Gaughan (In re Gebhart), 621

F.3d 1206, 1210 (9th Cir. 2010), (quoting Owen, 500 U.S. at

308) and are no longer property of the estate. See In re

Kahan, 28 F.3d 79, 81 (9th Cir. 1994) (“The bankruptcy

estate includes all of the debtor’s interests in property at the

commencement of the case, except property that the debtor

elects to exempt based on applicable federal or state law.”)

(citing 11 U.S.C. §§ 541(a), 522(b)(2)). “The general rule is

that exempt property immediately revests in the debtor.” In

re Mwangi, 764 F.3d at 1175. 2 See In re Gebhart, 621 F.3d

at 1210 (“This principle is consistent with the text of the

Bankruptcy Code, which defines exempt property as

property that, unlike all the debtor’s other property, does not

belong to the bankruptcy estate.”) (citing 11 U.S.C.

§ 522(b)(1)); S. Rep. No. 95-989, at 52 (1978), as reprinted

in 1978 U.S.C.C.A.N. 5787, 5838 (recognizing that exempt

property “ceases to be property of the estate”)); see also

Owen, 500 U.S. at 308 (recognizing that the relationship

between a debtor’s exempt property and property of the

estate may change, such that “[n]o property can be exempted

__________________

2

Where an asset itself is exempt, the asset immediately revests in the

debtor upon the end of the objection period. In re Mwangi, 764 F.3d

at1175–76. When the exemption consists of an interest in an asset, the

asset remains in the estate while “only an ‘interest’ in the property equal

to the value of the exemption claimed at filing is removed from the

estate.” Id. at 1174–75 (citation omitted).

UNITED STATES V. WARFIELD 13

(and thereby immunized) . . . unless it first falls within the

bankruptcy estate”) (emphasis added).

Recognizing the dynamic nature of the bankruptcy estate

through the pendency of bankruptcy proceedings, we must

analyze the text of the avoidance provision at issue here, 11

U.S.C. § 724(a), and interpret it in context to determine

whether the Trustee may avoid a tax lien on the Debtor’s

exempt property. In re Consol. Freightways Corp. of

Delaware, 564 F.3d 1161, 1165 (9th Cir. 2009) (“[O]ur

examination must begin with the words of the provision

itself. Of course, that does not mean that we limit ourselves

to the provision in perfect isolation. We must, instead,

construe that [Bankruptcy Code] provision with the statutory

scheme in which it is embedded.” (internal citations

omitted)).

Examining the statutory text in this context, under

§ 724(a), “[t]he trustee may avoid a lien that secures a claim

of a kind specified in section 726(a)(4) of this title.” 11

U.S.C. § 724(a). Section 726(a)(4), in turn, specifies that

“property of the estate shall be distributed . . . in payment of

any allowed claim, whether secured or unsecured, for any

fine or forfeiture or for multiple, exemplary, or punitive

damages, arising before the earlier of the order for relief or

the appointment of a trustee . . . .” 11 U.S.C. § 726(a)(4)

(emphasis added); see also id. § 726 (statutory section is

titled “Distribution of property of the estate”). Thus,

§ 724(a) applies to property that is part of the estate at the

time of distribution based on its express reference to

§ 726(a)(4). See Einstein/Noah Bagel Corp. v. Smith (In re

BCE W., L.P.), 319 F.3d 1166, 1171 (9th Cir. 2003)

(“Statutory construction of the Bankruptcy Code is ‘a

holistic endeavor’ requiring consideration of the entire

statutory scheme.”) (quoting United Sav. Ass’n of Texas v.

14 UNITED STATES V. WARFIELD

Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371

(1988)).

The statutory context makes this clear. First, § 724 deals

with the “treatment of certain liens” at the point in time that

property of the estate is to be distributed to creditors. See,

e.g., § 724(b) (“Property in which the estate has an interest

and is subject to a lien that is not avoidable . . . and secures

an allowed claim for a tax, or proceeds of such property,

shall be distributed . . . .”); § 724(c) (“If more than one

holder of a claim is entitled to distribution . . . distribution to

such holders under such paragraph shall be in the same order

as distribution to such holders would have been other than

under this section.”) (emphases added). Hence, § 724(a)

operates on the bankruptcy estate not at the commencement

of the proceedings but at a later stage—distribution.

Second, § 724(a) only permits lien avoidance of a lien

that secures an “allowed claim.” 11 U.S.C. § 726(a)(4). By

definition, the Bankruptcy Code provides that an allowed

claim is one in which sufficient proof has been provided to

the bankruptcy court after the commencement of

proceedings and any objections to the proof of claim have

been resolved. See 11 U.S.C. § 502(a).

Thus, it is clear from the express language of § 724(a)

and its cross-reference to § 726(a)(4), as well as the statutory

context provided by §§ 724 and 726, that § 724(a) concerns

the trustee’s avoidance of qualifying liens attached to the

property of the estate at the time of distribution.

When a debtor properly exempts a property interest

under § 522, the exemption withdraws that property interest

from the estate and, thus, from the reach of the trustee for

distribution to creditors. See Owen, 500 U.S. at 308; In re

DeMarah, 62 F.3d at 1250. Such an exempted property

UNITED STATES V. WARFIELD 15

interest revests with the debtor and no longer belongs to the

estate. In re Gebhart, 621 F.3d at 1210. Accordingly,

because exempt property is not “property of estate” which

may be “distributed,” we conclude that a trustee may not

avoid a lien under § 724(a) (that secures the kind of claim

specified in § 726(a)(4)) attached to exempt property which

is no longer part of the estate.

2. Prior Rulings

This holding is consistent with our prior rulings. We

have not previously had the occasion to expressly address

whether a trustee may use § 724(a) to avoid a lien which is

not secured by property of the estate, such as a lien secured

only by a debtor’s exempt property. The district court in

DeMarah v. United States, 188 B.R. 426, 431 (E.D. Cal.

1993), aff’d, 62 F.3d 1248 (9th Cir. 1995), concluded (as we

do here) that § 724(a) lien avoidance actions are limited to

property of the estate, explaining

The trustee’s avoiding powers under Section 724(a)

are limited to the types of liens secured by claims

specified in Section 726(a)(4). Section 726(a)(4)

concerns non-compensatory tax penalty claims.

However, § 726(a)(4) does not stand in isolation, it

is a part of Section 726 which is concerned only with

“property of the estate.” 11 U.S.C. § 726(a)(4)

allows the trustee to avoid claims for penalties

against the property of the estate. The avoiding

powers of Debtor, like those of the trustee, are

limited to penalty claims against property of the

estate.

Id. In affirming the district court’s holding in DeMarah, we

neither reached nor cast doubt on the district court’s analysis

that lien avoidance actions under § 724(a) are limited to liens

16 UNITED STATES V. WARFIELD

on property of the estate. See In re DeMarah, 62 F.3d at

1252.

In DeMarah, we addressed whether a debtor could assert

a trustee’s avoidance and preservation authority against a tax

lien on the debtor’s exempt property for the debtor’s own

benefit. We affirmed the district court’s decision that a

debtor could not do so by acknowledging that, even if

avoidance of a tax lien on exempt property under § 724 in

the first instance were permissible, the debtor could not

ultimately escape liability for the tax lien on his exempt

property because § 522(c)(2)(B) “brings back the whole of

any tax lien” on the exempt property. In re DeMarah, 62

F.3d at 1252. In so noting, we observed that the outcome—

that a debtor may not avoid and preserve a tax lien on exempt

property for his own benefit—is the same whether the

analysis is based on a finding that the policies behind §§ 724

and 726 prevent avoidance of liens on tax penalties attached

to exempt property, or whether the analysis is based on the

statutory language of § 522(c) preventing a debtor from

avoiding a tax lien penalty. Id. We recognized two district

court decisions that interpreted § 724(a) differently, but we

did not need to decide which interpretation was correct

because both confirmed the relevant holding that a debtor

could not escape liability for a tax penalty lien. Id. (citing In

re Carlton, 19 B.R. 73, 75 (D.N.M. 1982); In re Gerulis, 56

B.R. 283, 287 (Bankr. D. Minn. 1985)).

Because a trustee may not avoid a tax lien attached to

exempt property through § 724(a), it follows that a trustee is

not permitted to preserve the tax lien for the benefit of the

estate under § 551. Section 551 provides for automatic

preservation of certain avoided liens, including liens avoided

under § 724(a). See In re Van de Kamp’s Dutch Bakeries,

908 F.2d at 519; 11 U.S.C. § 551. But where there is no

UNITED STATES V. WARFIELD 17

avoidance under § 724(a), there is no avoided lien for the

trustee to preserve. 3

In summary, we conclude that § 724(a) does not permit

a trustee to avoid a tax lien secured by exempt property

because such securing property is not property of the estate.

__________________

3

Having assumed that the Trustee could use § 724(a) to avoid the tax

lien on the Debtor’s exempt property, the Bankruptcy Court focused on

whether the Trustee could then preserve the value of the avoided lien for

the benefit of the estate under § 551. The Bankruptcy Court relied on

the Bankruptcy Appellate Panel’s decision in In re Heintz, 198 B.R. 581,

583 (B.A.P. 9th Cir. 1996) addressing “[w]hether an avoided lien is

preserved for the benefit of the estate pursuant to § 551 when the avoided

lien encumbers exempt property.” The BAP construed § 551’s language

that an avoided lien “is preserved for the benefit of the estate but only

with respect to property of the estate” to apply to property of the estate

as defined as what was held by the estate at the commencement of

proceedings. Id. at 585–86. The BAP explained that “the fact that

property was removed from the estate after a case is commenced,

through exemption or some other means, does not change the fact that it

was property of the estate as of the commencement of the case.” Id. at

585. Therefore, the BAP concluded, “[g]iven that all exempt property is

property of the estate as of the commencement of the case, we conclude

that § 551 does not exclude exempt property from preservation. An

avoided interest or lien encumbering exempt property is automatically

preserved for the benefit of the estate under § 551.” Id. at 586.

The government urges us to declare Heintz wrongly decided. The

government requests a categorical rule that § 551 never applies to exempt

property. It is unnecessary for us to decide this issue. As we have

already explained, the Bankruptcy Court erred in overlooking the

predicate question of whether § 724(a) permits avoidance of tax liens

attached to exempt property. Because we hold that § 724(a) does not

allow the Trustee to avoid a lien on exempt property, there is no avoided

lien to which § 551’s preservation power could apply. Thus, § 551 does

not apply here and we need not construe the provision.

The dissent errs in stating that the majority relies on § 551 and its

reference to “with respect to property of the estate” in determining that

the tax penalty lien on exempt property is immune from avoidance.

Dissent at 30. Our holding only addresses the predicate question of the

application of § 724(a), not the scope of § 551.

18 UNITED STATES V. WARFIELD

Accordingly, because a trustee may not use § 724(a) to avoid

the lien, the trustee does not trigger operation of § 551’s

automatic preservation authority.

In reaching our holding, we conclude that the

Bankruptcy Court erred by overlooking the key question of

first impression before us: whether a trustee may use

§ 724(a) to avoid a lien secured by a debtor’s exempt

property. The Bankruptcy Court did not analyze this

question. Instead, the Bankruptcy Court appears to have

assumed that the Trustee could use § 724(a) to avoid a lien

on the Debtor’s exempt property. 4

Specifically, the Bankruptcy Court noted that in In re

Bolden, 327 B.R. 657, 665 (Bankr. C. D. Cal. 2005), the

“bankruptcy court refused to order the abandonment of

debtor’s exempt homestead where IRS penalty tax liens

could be avoided for the benefit of the bankruptcy estate.”

But in Bolden the government did not dispute that the trustee

could avoid a tax penalty lien on exempt property under

§ 724(a). Indeed, Bolden noted that “[i]n this case, the

__________________

4

The Bankruptcy Court suggested that the IRS tax lien never attached to

Debtor’s exempt property because the IRS tax lien was simply deducted

from the value that Debtor could exempt under Arizona law. This

analysis was incorrect for two reasons. First, it fails to properly apply

binding federal law making clear that an IRS tax lien attaches to all of a

debtor’s property interests, with no carve-out for exempt property, and

that an exemption authorized under the Bankruptcy Code remains liable

for tax penalty liens. See 26 U.S.C. § 6321; 11 U.S.C. § 522(c)(2)(B);

In re DeMarah, 62 F.3d at 1251. Second, the Bankruptcy Court

misapplied state law, as Arizona’s homestead exemption statute does not

deduct the value of tax liens from the amount that a debtor may exempt.

See A.R.S. § 33-1101(A)(1). Indeed, the Arizona statute does state that

a “consensual lien, including a mortgage,” “shall not be subject to” the

homestead exemption, but makes no such statement as to tax liens. Id. §

33-1104(D). Thus, the Bankruptcy Court’s suggestion that the IRS tax

lien never attached to the Debtor’s exempt property is incorrect.

UNITED STATES V. WARFIELD 19

trustee . . . is seeking, with the cooperation of the IRS, to

avoid the penalty portion of the IRS tax liens in order to

benefit unsecured creditors of the estate.” 327 B.R. 663 n.5

(emphasis added). There is no indication in the Bolden

decision that any party challenged the propriety of the

trustee’s avoidance of tax penalties on exempt property; the

bankruptcy court in Bolden was not presented with and,

therefore, did not address this question.

Similarly, the Bankruptcy Court cited approvingly to In

re Gill, 574 B.R. 709 (9th Cir. BAP 2017) for the BAP’s

rejection of a debtor’s request for an order requiring the

estate to abandon the debtor’s homestead exemption and

determination that the trustee could avoid an IRS tax lien

under § 724(a) and create value for the estate by preserving

the value of the tax lien through § 551 for the benefit of the

estate. But, again, in Gill there was no dispute as to the

propriety of the trustee’s authority to avoid a lien under

§ 724(a) on exempt property, as there was evidence that the

IRS consented to the avoidance, and there is no indication

that the debtor challenged the avoidance. See 574 B.R. at

717. Thus, because the courts in Bolden and Gill were not

presented with and did not decide the question of whether

§ 724(a) applies to a debtor’s exempt property, the

Bankruptcy Court’s reliance on those decisions was

misplaced.

Our analysis and holding here are consistent with our

recent decision in Hutchinson v. IRS (In re Hutchinson), 15

F.4th 1229 (9th Cir. 2021). In Hutchinson, the government

and the trustee of the estate entered into a stipulated

judgment in which the trustee “and the Government agreed

that the ‘penalty portions’ of certain of ‘the IRS’s liens’

against Plaintiffs’ [] residence ‘are avoided pursuant to 11

U.S.C. § 724(a).’” Id. at 1232. The debtors asserted an

entitlement to a homestead exemption of up to $100,000 in

20 UNITED STATES V. WARFIELD

the residence under California law. Id. The debtors did not

contest the agreement between the government and the

trustee to avoid the IRS’s tax penalty lien against the

debtor’s property, including the exempt property under

§ 724(a). Rather than contest the legality of the agreement

as applied to the exempt property, the debtors sought to take

advantage of the § 724(a) avoidance agreement between the

government and trustee by seeking to preserve the avoided

lien for the benefit of the debtors. Id. (“Plaintiffs alleged

that, to the extent the liens were avoided, they should be

preserved ‘for the benefit of the Plaintiffs.’”). The debtors

argued that they should be able to parlay the government and

trustee’s § 724(a) avoidance agreement into assets for

themselves by using § 522(i)(2), which allows a debtor to

preserve a lien avoided by a trustee under § 724(a) “for the

benefit of the debtor to the extent that the debtor may exempt

such property” under the relevant subsection. See id. at 1234

(citing 11 U.S.C. § 522(i)(2)) (emphasis added). The

debtors contended that because the government and trustee’s

§ 724(a) avoidance agreement concerned debtors’ exempt

homestead property interest, the debtors had satisfied the

requirements of § 522(i)(2) and were entitled to preserve the

avoided lien for the benefit of the debtors. Id.

We rejected the debtors’ attempt to preserve the value of

the tax lien for their own benefit, applying our holding in

DeMarah that § 522(c)(2)(B) “makes quite clear . . . that

debtors cannot use exemption authority to escape tax liens.”

Id. at 1235. We further observed that Ҥ 522(c)(2)(B) would

operate, vis-à-vis a debtor, to preserve ‘tax lien[s]’ against

otherwise exempt property regardless of whether the trustee

had avoided them.” Id. (emphasis and alteration in the

original). Considering the clear and unambiguous language

of § 522(c)(2)(B), we explained that “it would be completely

contradictory to then construe § 522(i)(2) (or § 522(g), for

that matter) as allowing a debtor, after a trustee has avoided

UNITED STATES V. WARFIELD 21

the tax lien, to then preserve the avoided lien ‘for the benefit

of the debtor’ by claiming an exemption under § 522(g). Id.

(emphases in original). “Such a result—having the trustee

avoid the lien only to turn over the benefits to the debtor,

whose exempt property would then be free of the lien—

would create precisely the kind of end-run

around § 522(c)(2)(B) that we rejected in DeMarah.” Id. at

1236. We, therefore, rejected the debtors’ theory that

§§ 522(i)(2) or 522(g) could be used by the debtors to

transform a tax lien for which they were responsible into an

asset which they could protect for their own benefit. Id.

(“The only way to read these provisions sensibly together is

to conclude that, with respect to a tax lien covered by

§ 522(c)(2)(B), a debtor may not invoke § 522(i)(2) in order

to override § 551’s otherwise applicable rule that, after the

trustee avoids a lien under § 724(a), the lien ‘is preserved for

the benefit of the estate.’”) (citation omitted).

We do not disturb Hutchinson’s careful reasoning and

construction of § 522(i)(2). In Hutchinson, we accepted the

government and the trustee’s stipulated agreement that the

trustee could avoid the tax lien on debtor’s property under

§ 724(a), including the portion of the property which was

exempted under California law. No party objected to the

stipulated agreement and no argument was presented to us

as to whether the trustee could avoid a lien on debtor’s

exempt property under § 724(a). Indeed, the debtors

accepted the premise that § 724(a) could be used by the

trustee to avoid a lien on debtors’ exempt property and

attempted to transform that premise into an argument that the

debtors could preserve the avoided lien for the debtors’

benefit. The parties did not present us with the question of

whether § 724(a) could be used to avoid a lien on exempt

property.

22 UNITED STATES V. WARFIELD

Thus, in Hutchinson we were not called upon to resolve

any dispute as to the applicability of § 724(a) to the property

at issue, and, abiding by the party presentation principle, we

had no occasion nor any need to address the question. See

United States v. Sineneng-Smith, 140 S. Ct. 1575, 1579

(2020) (“As a general rule, our system is designed around

the premise that parties represented by competent counsel

know what is best for them, and are responsible for

advancing the facts and argument entitling them to relief.”)

(cleaned up). Accordingly, nothing in our decision here

conflicts with our analysis or holding in Hutchinson. 5

Indeed, Hutchinson’s holding that “a debtor may not invoke

§ 522(i)(2) in order to override § 551’s otherwise applicable

rule that, after the trustee avoids a lien under § 724(a), the

lien ‘is preserved for the benefit of the estate,’” 15 F.4th at

1236, applies with full force.

B. APPLICATION

We conclude that the Trustee may not use § 724(a) to

avoid the $26,771 IRS tax penalty lien on the Debtor’s

exempt interest in the Prescott Property and, accordingly,

cannot preserve the value of the tax penalty lien for the

benefit of the estate through § 551. Once the Bankruptcy

Court allowed the Debtor’s homestead exemption under

Arizona law, the Debtor withdrew her exempted property

interest from the property of the estate. Therefore, the

Debtor’s exempt homestead interest in the Prescott Property

__________________

5

In Hutchinson, having accepted the undisputed fact that the trustee and

government entered an uncontested stipulated judgment through which

the trustee avoided the tax penalty liens on the property at issue under

§ 724(a), we referenced Heintz for the notion that § 551 operated to

preserve those liens avoided by stipulation for the benefit of the estate.

15 F.4th at 1234. As noted previously, we do not address Heintz’s

interpretation of § 551 here.

UNITED STATES V. WARFIELD 23

is no longer property of the estate and, therefore, is not

property to which § 724(a) applies.

Accordingly, the Debtor is entitled to exempt up to the

full $150,000 value of the homestead exemption interest

permitted under the applicable version of Arizona’s

exemption law, A.R.S. § 33-1101(A)(1) (2004 version,

effective prior to Jan. 1, 2022), after accounting for the

Debtor’s responsibility for her consensual loan, the Bank of

America mortgage, id. § 33-1104(D). The value of the

Debtor’s homestead exemption is not subject to a deduction

of the IRS tax penalty lien. However, as compelled by our

holding in DeMarah, the Debtor takes her exempt interest in

the Prescott Property subject to the IRS tax penalty lien. See

62 F.3d at 1252 (“We hold that Congress has denied debtors

the right to remove tax liens from their otherwise exempt

property. See 11 U.S.C. § 522(c)(2)(B). Moreover, we hold

that even the penalty portion of the tax lien remains fixed on

that property. We see nothing capricious or absurd about

that. It simply adds to the taxpayer’s incentive to render unto

the government that which is its due.”).

Moreover, the Bankruptcy Court’s holding that permits

the Trustee to avoid the IRS’s tax lien on the exempt

property and to apply the value of the lien for the benefit of

the bankruptcy estate, while the exempt homestead of the

Debtor remains encumbered by the tax lien, creates a

troubling result: the Debtor is burdened twice by the same

debt, resulting in a double penalty. The first penalty flows

from the Bankruptcy Court’s holding that the Trustee’s

avoidance and preservation of the tax lien on the Debtor’s

exempt property reduced the value of the exemption by the

amount of the tax lien. The second penalty flows from the

operation of 11 U.S.C. § 522(c)(2)(B) and our binding

precedent that a tax lien remains attached to property which

is exempted. See In re DeMarah, 62 F.3d at 1251 (“[I]t is

24 UNITED STATES V. WARFIELD

pellucid that property exempted from the estate remains

subject to tax liens.”). In effect, the Debtor is required to pay

twice on the same tax lien: first, in the reduction of value in

her homestead exemption by the value of the lien (here

amounting to $26,771), and then, a second time, when she is

required to pay off the lien that survives and remains

attached to her already reduced exempt property (for another

$26,771). 6 That makes her worse off, with regard to the tax

lien debt, than she was before she filed the bankruptcy

petition.

This result cannot be what is intended by the Bankruptcy

Code, which is aimed at giving the debtor a “fresh start,”

subject to the decision of Congress to maintain a debtor’s

responsibility for a tax lien. See In re DeMarah, 62 F.3d at

1252 (“11 U.S.C. § 522 allows debtors to exempt stated

property from the bankrupt estate so that they may have a

fresh start. It also provides for the survival of tax liens on

that property. 11 U.S.C. § 522(c)(2)(B). In defining fresh

start, Congress took cognizance of the fact that tax liens

would survive.”) (quoting In re Isom, 901 F.2d 744, 746 (9th

Cir. 1990))).

That fresh start would hardly be served by doubling the

burden of the previously existing tax lien on the debtor. We

are not aware of any policy rationale articulated by

__________________

6

The Bankruptcy Court purported to resolve this double penalty by

concluding the “tax lien position against the [Prescott] Property never

attached to the Debtor’s homestead exemption,” such that “[w]hen the

lien is avoided, the Trustee steps into that avoided position.” The

Bankruptcy Court held that the Trustee’s avoidance and preservation of

the tax lien extinguished the tax lien. This conclusion, however,

conflicts with § 522(c)(2)(B) and our binding authority holding that a tax

lien remains attached to exempt property. See In re DeMarah, 62 F.3d

at 1251. Therefore, the Bankruptcy Court did not resolve the double

penalty. See infra § III(A)(2).

UNITED STATES V. WARFIELD 25

Congress, nor endorsed in any of our previous decisions, that

supports the view that a debtor should pay twice on a tax

penalty lien. Our holding provides that the Debtor will be

subject to the IRS tax lien once—as a surviving lien on her

homestead exemption. It thus vindicates the debtor’s

homestead exemption under Arizona law, which reduces the

value available to exempt by the value of a mortgage, but not

by the value of an IRS tax lien. See A.R.S. §§ 33-

1101(A)(1), 33-1104(D).

It seems highly unlikely to us that our dissenting

colleague’s bankruptcy professor would countenance an

interpretation of bankruptcy law that imposed a double

penalty on the debtor. See Dissent at 27. That the dissent’s

interpretation of the statute produces such a perverse result

provides powerful reason to reject that interpretation.

At the same time, our holding does not disturb the

application of § 724(a) to non-exempt property of the estate

and is consistent with our recognition that “‘Congress could

logically have wanted to allow tax penalties to be avoided if

that would benefit unsecured creditors,’ while ‘eschew[ing]

benefiting debtors who incurred those penalties by failing to

pay their taxes.’” In re Hutchinson, 15 F.4th at 1233

(quoting In re DeMarah, 62 F.3d at 1252). Indeed, we do

not quibble with the dissent’s assertion that “the asset

remains estate property” when a statute “does not allow the

debtor to exempt the entire property interest, but instead

permits exemption of an interest in the property up to a

particular dollar amount.” Dissent at 33 (citing In re

Mwangi, 764 F.3d at 1172–73). But while the trustee may

certainly avoid the tax lien on non-exempt property that

remains in the estate, the circumstances of this case—

specifically, the fact that the mortgage on the Prescott

Property renders any lien on the estate’s portion of the

26 UNITED STATES V. WARFIELD

property valueless—demarcate our holding to only the

application of § 724(a) to exempt property.

IV. CONCLUSION

The Trustee may not use 11 U.S.C. § 724(a) to avoid the

$26,771 IRS tax penalty lien on the Debtor’s exempt interest

in the Prescott Property and, therefore, cannot preserve the

value of the tax penalty lien for the benefit of the estate

through § 551. Accordingly, the Debtor is entitled to exempt

up to the full value of the homestead exemption interest

permitted under the applicable version of Arizona’s

exemption law, after accounting for the Debtor’s

responsibility for her mortgage. A.R.S. §§ 33-1101(A)(1),

33-1104(D). The value of the Debtor’s homestead

exemption is not subject to a deduction of the IRS tax

penalty lien. However, the Debtor takes her exempt interest

in the Prescott Property subject to the IRS tax penalty lien.

REVERSED and REMANDED to the District Court

with instructions for further proceedings consistent with this

order.

UNITED STATES V. WARFIELD 27

BUMATAY, Circuit Judge, dissenting:

As my bankruptcy professor once said, a bankruptcy

case is like dividing a pie. See Elizabeth Warren,

Bankruptcy Policy, 54 U. Chi. L. Rev. 775, 785 (1987). The

pie owner promises different slices of the pie to others—

sometimes in exchange for other items, sometimes as a

payment for other debts. And sometimes, the pie owner

overpromises—leaving not enough pie to go around. All

those promised pie must then get in line and try to claim their

piece. In bankruptcy, a trustee steps in and distributes the

slices in the order of priority set by law and approved by a

bankruptcy judge.

The Bankruptcy Code also grants a trustee a special

authority. It allows the trustee to “avoid” a federal tax

penalty lien and “preserve” the lien for the benefit of the

bankruptcy estate. See 11 U.S.C. §§ 724(a), 726, 551. That

means, in divvying up the pie, the trustee may save the piece

belonging to the IRS for a debtor’s failure to pay taxes and

hold it for others in line. This increases the amount of pie

for distribution to others.

In this case, the IRS challenges the trustee’s express

avoidance authority. The IRS contends that a trustee can’t

avoid a federal tax lien on “exempt” property. Exempt

property is generally the piece of the pie that a debtor gets to

keep throughout the bankruptcy. But the Bankruptcy Code

creates no exception to the trustee’s avoidance power for

liens on exempt property. So we should have affirmed the

trustee’s avoidance of the IRS tax penalty lien here.

In invalidating the trustee’s avoidance authority, the

majority is more concerned with the Bankruptcy Code’s

“troubling result” than its text. Maj. Op. at 24. It lets

concerns over the consequences of avoidance override the

28 UNITED STATES V. WARFIELD

statutory text and it nullifies the trustee’s avoidance power

to prevent these consequences. But because our duty is to

follow the text of the Bankruptcy Code no matter how the

pie gets sliced, I respectfully dissent.

I.

“The plain text of the Bankruptcy Code begins and ends

our analysis.” Puerto Rico v. Franklin Cal. Tax-Free Tr.,

579 U.S. 115, 125 (2016). The Bankruptcy Code is

straightforward; by its ordinary meaning, a trustee may

avoid an IRS tax penalty lien and preserve it for the benefit

of the bankruptcy estate. See 11 U.S.C. §§ 724(a), 726, 551.

Our precedent confirms that. See Hutchinson v. United

States (In re Hutchinson), 15 F.4th 1229, 1234 (9th Cir.

2021). And nothing in the Code sets aside the trustee’s

avoidance authority just because the tax penalty lien attaches

to exempt property.

A.

Under the Bankruptcy Code, a trustee may avoid a

federal tax penalty lien in distributing the property of the

estate. Section 724 of the Code provides that “[t]he trustee

may avoid a lien that secures a claim of a kind specified in

section 726(a)(4) of this title.” 11 U.S.C. § 724. In this

context, “avoid[ance]” means that the trustee may take the

slice of pie reserved for a specific lienholder and distribute

it to others in line. See Retail Clerks Welfare Tr. v. McCarty

(In re Van de Kamp’s Dutch Bakeries), 908 F.2d 517, 519

(9th Cir. 1990) (explaining the “well-established principle

that a trustee who avoids an interest succeeds to the priority

that interest enjoyed over competing interests”). Avoidance

increases the property of the estate available to satisfy claims

of unsecured creditors. See id. In other words, instead of a

lienholder being at the front of the line, the holder must wait

UNITED STATES V. WARFIELD 29

for a share like everyone else, which increases the amount of

pie for others.

The Code then specifies the types of claims a trustee may

avoid. The trustee’s avoidance power applies to:

[A]ny allowed claim, whether secured or unsecured,

for any fine, penalty, or forfeiture, or for multiple,

exemplary, or punitive damages, arising before the

earlier of the order for relief or the appointment of a

trustee, to the extent that such fine, penalty,

forfeiture, or damages are not compensation for

actual pecuniary loss suffered by the holder of such

claim[.]

11 U.S.C. § 726(a)(4). In short, a trustee has the authority to

avoid any claim for non-compensatory penalties, including

a federal tax penalty lien. See Hutchinson, 15 F.4th at 1232

(By stipulation, “the Government agreed that the ‘penalty

portions’ of certain of ‘the IRS’s liens’ against . . . [the]

residence ‘are avoided pursuant to 11 U.S.C. § 724(a).’”);

Gill v. Kirresh (In re Gill), 574 B.R. 709, 716 (9th Cir. BAP

2017) (“Taken together, §§ 724(a) and 726(a)(4) allow a

chapter 7 trustee . . . to avoid a lien to the extent the lien

secures the claim for a penalty, including a tax penalty.”).

Next, when a trustee avoids a transfer, the transfer is

automatically preserved for the benefit of the estate. That’s

because under § 551 of the Code “[a]ny transfer avoided

under section . . . 724(a) . . . is preserved for the benefit of

the estate but only with respect to property of the estate.” 11

U.S.C. § 551. So when a trustee avoids the penalty portions

of the tax liens under § 724(a), “it follows that, under the

plain language of § 551, those liens are preserved for the

benefit of the estate.” Hutchinson, 15 F.4th at 1234. Doing

so expands the pie available for unsecured creditors. As

30 UNITED STATES V. WARFIELD

we’ve said, “Congress created avoidances of

noncompensatory penalties to protect unsecured creditors

from the debtor’s wrongdoing.” DeMarah v. United States

(In re DeMarah), 62 F.3d 1248, 1252 (9th Cir. 1995)

(simplified). Avoiding the tax penalty and preserving it for

the estate “benefit[s] unsecured creditors” by allowing the

amount on the penalty to go to them instead of the IRS. Id.

So as a straightforward matter of text and precedent, the

answer here is simple: a trustee may avoid a federal tax lien

and preserve it for the benefit of the estate. We’ve already

endorsed this view in Hutchinson, where we clearly stated:

“a trustee is ‘expressly authorized . . . to avoid, subordinate

and preserve the penalty portion of the IRS’s tax lien for the

benefit of the estate’s unsecured creditors.’” Id. at 1233

(quoting Gill, 574 B.R. at 716).

Here, the bankruptcy court and the district court both

concluded that the trustee was permitted to avoid the IRS

penalty lien on Sandra Tillman’s house and preserve its

value for Tillman’s bankruptcy estate. Based on the above

authorities, we should have easily affirmed here. And as

discussed below, it makes no difference that a portion of the

value of Tillman’s house was exempt property.

B.

Contrary to the IRS and majority’s view, the trustee’s

authority to avoid a federal tax penalty lien isn’t nullified

because it encumbers exempt property. The majority

incorporates § 726’s reference to the distribution of the

“property of the estate” to bar a trustee’s avoidance

authority. The IRS instead relies on § 551’s limitation of

preservation of liens “only with respect to property of the

estate.” In both cases, they insist that “exempt property”

isn’t “property of the estate” and so a trustee can’t avoid a

UNITED STATES V. WARFIELD 31

lien on exempt property. In the majority’s view, estate

property “evolve[s] over the course of bankruptcy

proceedings” and a lien on exempt property somehow

disappears from such property. Maj. Op. 10. No matter the

supposed statutory basis for curbing a trustee’s avoidance

power, because a tax penalty lien on exempt property is

undoubtedly “property of the estate,” the IRS and majority’s

view is incorrect.

To understand why the majority’s “evolution” idea is

mistaken, some background in bankruptcy is necessary. The

Supreme Court has helpfully summarized where exempt

property falls into the bankruptcy scheme:

Chapter 7 of the Bankruptcy Code gives an insolvent

debtor the opportunity to discharge his debts by

liquidating his assets to pay his creditors. 11 U.S.C.

§§ 704(a)(1), 726, 727. The filing of a bankruptcy

petition under Chapter 7 creates a bankruptcy

“estate” generally comprising all of the debtor’s

property. § 541(a)(1). The estate is placed under the

control of a trustee, who is responsible for managing

liquidation of the estate’s assets and distribution of

the proceeds. § 704(a)(1). The Code authorizes the

debtor to “exempt,” however, certain kinds of

property from the estate, enabling him to retain those

assets post-bankruptcy. § 522(b)(1). Except in

particular situations specified in the Code, exempt

property “is not liable” for the payment of “any

[prepetition] debt” or “any administrative expense.”

§ 522(c), (k).

Law v. Siegel, 571 U.S. 415, 417–18 (2014). In other words,

with some statutory exceptions, exempt property is

“immunized against liability for prebankruptcy debts.”

Owen v. Owen, 500 U.S. 305, 308 (1991). Thus, the Court

32 UNITED STATES V. WARFIELD

only describes exempt property as protected from prepetition

debts, but not wholly removed from the bankruptcy estate.

The Code specifies what property is exempted and even

allows States to set their own criteria for exemptions. 11

U.S.C. § 522(b)(3)(A), (d). Many States have set a

“homestead exemption” that is more generous than under

federal law. Law, 571 U.S. at 418. At the time of this case,

Arizona permitted a person to keep “interest in real property

. . . in which the person resides,” up to $150,000 in value,

subject to any “recorded consensual lien,” such as a

mortgage. Ariz. Rev. Stat. §§ 33-1101(A)(1), 33-1105(D)

(2004). Thus, up to $150,000 in equity from an Arizona

home is generally immune from prepetition debts.

The question then is whether a tax penalty lien on exempt

property constitutes “property of the estate.” The answer is

easily yes. The Code defines “property of the estate,” in

relevant part, as consisting of “all legal or equitable interests

of the debtor in property as of the commencement of the

case.” 11 U.S.C. § 541(a)(1) (emphasis added). Defining

the property of the estate in this way creates a “sharp

cleavage between the prepetition and postpetition worlds

with regard to estate property.” Charles Jordan Tabb, Law

of Bankruptcy 404 (5th ed. 2020). The Code “takes a

snapshot of the debtor’s assets at the moment of filing,

bringing all of those assets into the estate,” and then “settles

the debtor’s financipal affairs, assets and liabilities alike, as

of th[at] time.” Id.

Under the straightforward language of § 541(a)(1),

“property of the estate” includes all property at the filing of

the bankruptcy petition, including what’s later claimed

exempt. As the Court has clearly stated, “[a]n estate in

bankruptcy consists of all the interest in property, legal and

equitable, possessed by the debtor at the time of filing, as

UNITED STATES V. WARFIELD 33

well as those interests recovered or recoverable through

transfer and lien avoidance provisions.” Owen, 500 U.S. at

308 (emphasis added). So exempt property and its

encumbrances must be “property of the estate”; after all,

“[n]o property can be exempted (and thereby

immunized) . . . unless it first falls within the bankruptcy

estate.” Id. at 308 (simplified). Thus, it is well-settled that

“[a]ll of the debtor’s property[] as . . . defined in section 541

of the Bankruptcy Code, as of the commencement of a case

. . . , including property which may be claimed as exempt,

becomes property of the estate.” 4 Collier Bankruptcy

Practice Guide ¶ 74.02[1] (1st ed. 2022).

It is a misconception to think that a lien on exempt

homestead property is immediately removed from the

bankruptcy estate. Rather,

[I]f the statute permitting the debtor to claim a

particular exemption does not allow the debtor to

exempt the entire property interest, but instead

permits exemption of an interest in the property up to

a particular dollar amount, . . . . [then] the asset

remains estate property, and the estate does not

relinquish the property until it is administered in the

bankruptcy, the trustee abandons the property, or the

bankruptcy case is closed.

Mwangi v. Wells Fargo, N.A. (In re Mwangi), 764 F.3d

1168, 1172–73 (9th Cir. 2014) (simplified). This case

provides a good example of why this so. The IRS tax penalty

lien is on all of Tillman’s house. In contrast, Arizona law

only allows Tillman to exempt a portion of the value of the

house. Thus, in no way does the homestead exemption

remove the entirety of Tillman’s house or its lien from the

bankruptcy estate. The lien on the house always remains

part of the bankruptcy estate even if a specific dollar amount

34 UNITED STATES V. WARFIELD

of the house’s value is protected from pre-petition debts. So

there’s no reason to treat the lien on the exempt property as

removed from the bankruptcy estate for § 551 purposes.

This too makes intuitive sense with the pie analogy.

Exempt property generally means that a debtor gets to keep

a small piece of the pie even after the pie is divvied up among

the creditors—no matter what. The pie is “set” at the time

of the bankruptcy filing. And when a slice of the pie is saved

for the debtor, that piece remains within the pie until

distribution. Contrary to the majority’s view then, the size

of the pie does not “evolve” during the bankruptcy

proceedings based on exempt property. See Maj. Op. 10.

Rather, exempt property only tells us what assets a debtor

may “retain . . . post-bankruptcy,” Law, 571 U.S. at 417, or

which slice of pie is left for the debtor at the end of

bankruptcy proceedings.

Moreover, even under the majority’s “evolving”

bankruptcy estate thesis, the majority doesn’t explain why a

lien on both exempt and non-exempt property, like the tax

lien on Tillman’s residence, falls out of the bankruptcy

estate. If any part of Tillman’s house remains non-exempt

estate property, then any lien on the house necessarily

remains estate property. So, under any theory of bankruptcy

law, the IRS tax lien here is property of the estate.

Thus, a trustee retains authority to avoid and preserve a

tax penalty lien, even when it attaches to exempt property.

As we’ve recently acknowledged, “regardless of whether the

debtor claims an exemption, any interest of the debtor in

property at the commencement of the bankruptcy case is

‘property of the estate’ as that phrase is used in § 551.”

Hutchinson, 15 F.4th at 1234 (referencing the holding of

Heintz v. Carey (In re Heintz), 198 B.R. 581, 585–86 (9th

Cir. BAP 1996)).

UNITED STATES V. WARFIELD 35

Indeed, it is hard to square the majority’s holding with

Hutchinson. Hutchinson assumed—over and over—the

trustee’s authority to avoid and preserve a tax penalty lien on

exempt property. While explaining why a debtor could not

avoid a properly filed tax penalty lien, Hutchinson

repeatedly contrasted the case with the trustee’s ability to

avoid the lien under § 724(a). See, e.g., Hutchinson, 15 F.4th

at 1233 (“We acknowledged in DeMarah that this reading of

the code could lead to a disparity in which trustees might be

able to avoid such liens under § 724(a), while debtors

cannot.”) (simplified); id. at 1234 (“Under our binding

decision in DeMarah, Plaintiffs cannot invoke § 522(h) to

avoid a properly filed tax lien, even if that lien would be

avoidable by the trustee under § 724(a).”) (emphasis added).

Even though the trustee’s avoidance power wasn’t the

precise issue in Hutchinson, “[w]ell-reasoned dicta is the law

of the circuit.” Li v. Holder, 738 F.3d 1160, 1164 n.2 (9th

Cir. 2013) (simplified).

The majority justifies the departure from precedent and

statutory text based on the fear of a so-called “double

penalty.” See Maj. Op. 23–26. The majority contends that

allowing the trustee to avoid the penalty lien here would lead

to the “troubling result” of penalizing Tillman twice. Id. at

24. That’s because the bankruptcy judge reduced her

homestead exemption by the amount of the lien even though

the IRS may still seek the value of the lien from her after

bankruptcy. 7 But even if the trustee’s tax penalty avoidance

__________________

7

The Code appears to permit a tax lien on a debtor’s exempt property to

remain post-bankruptcy, which means that IRS may still collect on the

penalty. See 11 U.S.C. § 522(c)(2)(B). But I take no position on whether

the bankruptcy court was correct to deduct the amount of the tax penalty

lien from Tillman’s homestead exemption. That question is immaterial

to the question before us, which is whether the trustee is permitted to

avoid the tax lien in the first place.

36 UNITED STATES V. WARFIELD

here creates a “double penalty,” we cannot circumvent the

plain text of the Bankruptcy Code or our precedent to avoid

those concerns. This is an issue for Congress—not for us—

to resolve.

II.

Because the Code and our caselaw require affirming

here, I respectfully dissent.