11 U.S.C. § 724 — Treatment of certain liens

Page 201 TITLE 11—BANKRUPTCY § 724 the general partners. The determination will be based on factors such as the relative liability of each of the general partners under the partnership agreement and the relative rights of each of the general partners in the profits of the enterprise under the partnership agreement. Editorial Notes AMENDMENTS 2010—Subsec. (c). Pub. L. 111–327 substituted ‘‘The trustee has’’ for ‘‘Notwithstanding section 728(c) of this title, the trustee has’’. 1994—Subsec. (a). Pub. L. 103–394 substituted ‘‘to the extent that under applicable nonbankruptcy law such general partner is personally liable for such deficiency’’ for ‘‘for the full amount of the deficiency’’. 1984—Subsec. (a). Pub. L. 98–353, § 476, substituted pro- visions that the trustee shall have a claim for the full amount of the deficiency against a general partner who is personally liable with respect to claims concerning partnerships which are allowed in a case under this chapter, for provisions that each general partner in the partnership would be liable to the trustee for the full amount of such deficiency. Subsec. (c). Pub. L. 98–353, § 476(b), substituted ‘‘such partner’s case’’ for ‘‘such case’’ in two places, ‘‘by prop- erty of such partnership’’ for ‘‘be property of such part- nership’’, and ‘‘a kind specified in such section’’ for ‘‘the kind specified in such section’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1994 AMENDMENT Amendment by Pub. L. 103–394 effective Oct. 22, 1994, and not applicable with respect to cases commenced under this title before Oct. 22, 1994, see section 702 of Pub. L. 103–394, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–353 effective with respect to cases filed 90 days after July 10, 1984, see section 552(a) of Pub. L. 98–353, set out as a note under section 101 of this title. § 724. Treatment of certain liens (a) The trustee may avoid a lien that secures a claim of a kind specified in section 726(a)(4) of this title. (b) Property in which the estate has an inter- est and that is subject to a lien that is not avoidable under this title (other than to the ex- tent that there is a properly perfected unavoid- able tax lien arising in connection with an ad valorem tax on real or personal property of the estate) and that secures an allowed claim for a tax, or proceeds of such property, shall be dis- tributed— (1) first, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is senior to such tax lien; (2) second, to any holder of a claim of a kind specified in section 507(a)(1)(C) or 507(a)(2) (ex- cept that such expenses under each such sec- tion, other than claims for wages, salaries, or commissions that arise after the date of the filing of the petition, shall be limited to ex- penses incurred under this chapter and shall not include expenses incurred under chapter 11 of this title), 507(a)(1)(A), 507(a)(1)(B), 507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6), or 507(a)(7) of this title, to the extent of the amount of such al- lowed tax claim that is secured by such tax lien; (3) third, to the holder of such tax lien, to any extent that such holder’s allowed tax claim that is secured by such tax lien exceeds any amount distributed under paragraph (2) of this subsection; (4) fourth, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is junior to such tax lien; (5) fifth, to the holder of such tax lien, to the extent that such holder’s allowed claim se- cured by such tax lien is not paid under para- graph (3) of this subsection; and (6) sixth, to the estate. (c) If more than one holder of a claim is enti- tled to distribution under a particular para- graph of subsection (b) of this section, distribu- tion 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. (d) A statutory lien the priority of which is de- termined in the same manner as the priority of a tax lien under section 6323 of the Internal Rev- enue Code of 1986 shall be treated under sub- section (b) of this section the same as if such lien were a tax lien. (e) Before subordinating a tax lien on real or personal property of the estate, the trustee shall— (1) exhaust the unencumbered assets of the estate; and (2) in a manner consistent with section 506(c), recover from property securing an al- lowed secured claim the reasonable, necessary costs and expenses of preserving or disposing of such property. (f) Notwithstanding the exclusion of ad valo- rem tax liens under this section and subject to the requirements of subsection (e), the following may be paid from property of the estate which secures a tax lien, or the proceeds of such prop- erty: (1) Claims for wages, salaries, and commis- sions that are entitled to priority under sec- tion 507(a)(4). (2) Claims for contributions to an employee benefit plan entitled to priority under section 507(a)(5). (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2607; Pub. L. 98–353, title III, § 477, July 10, 1984, 98 Stat. 381; Pub. L. 99–554, title II, § 283(r), Oct. 27, 1986, 100 Stat. 3118; Pub. L. 103–394, title III, § 304(h)(4), title V, § 501(d)(23), Oct. 22, 1994, 108 Stat. 4134, 4146; Pub. L. 109–8, title VII, § 701(a), Apr. 20, 2005, 119 Stat. 124; Pub. L. 111–327, § 2(a)(27), Dec. 22, 2010, 124 Stat. 3560.) HISTORICAL AND REVISION NOTES LEGISLATIVE STATEMENTS Section 724 of the House amendment adopts the pro- vision taken in the House bill and rejects the provision taken in the Senate amendment. In effect, a tax claim secured by a lien is treated as a claim between the fifth and sixth priority in a case under chapter 7 rather than as a secured claim. Treatment of certain liens: The House amendment modifies present law by requiring the subordination of tax liens on both real and personal property to the pay- ment of claims having a priority. This means that as- Page 202 TITLE 11—BANKRUPTCY § 725 sets are to be distributed from the debtor’s estate to pay higher priority claims before the tax claims are paid, even though the tax claims are properly secured. Under present law and the Senate amendment only tax liens on personal property, but not on real property, are subordinated to the payment of claims having a pri- ority above the priority for tax claims. SENATE REPORT NO. 95–989 Subsection (a) of section 724 permits the trustee to avoid a lien that secures a fine, penalty, forfeiture, or multiple, punitive, or exemplary damages claim to the extent that the claim is not compensation for actual pecuniary loss. The subsection follows the policy found in section 57j of the Bankruptcy Act [section 93(j) of former title 11] of protecting unsecured creditors from the debtor’s wrongdoing, but expands the protection af- forded. The lien is made voidable rather than void in chapter 7, in order to permit the lien to be revived if the case is converted to chapter 11 under which penalty liens are not voidable. To make the lien void would be to permit the filing of a chapter 7, the voiding of the lien, and the conversion to a chapter 11, simply to avoid a penalty lien, which should be valid in a reorga- nization case. Subsection (b) governs tax liens. This provision re- tains the rule of present bankruptcy law (§ 67(C)(3) of the Bankruptcy Act [section 107(c)(3) of former title 11]) that a tax lien on personal property, if not avoid- able by the trustee, is subordinated in payment to un- secured claims having a higher priority than unsecured tax claims. Those other claims may be satisfied from the amount that would otherwise have been applied to the tax lien, and any excess of the amount of the lien is then applied to the tax. Any personal property (or sale proceeds) remaining is to be used to satisfy claims secured by liens which are junior to the tax lien. Any proceeds remaining are next applied to pay any unpaid balance of the tax lien. Subsection (d) specifies that any statutory lien whose priority is determined in the same manner as a tax lien is to be treated as a tax lien under this section, even if the lien does not secure a claim for taxes. An example is the ERISA [29 U.S.C. 1001 et seq.] lien. HOUSE REPORT NO. 95–595 Subsection (b) governs tax liens. It is derived from section 67c(3) of the Bankruptcy Act [section 107(c)(3) of former title 11], without substantial modification in re- sult. It subordinates tax liens to administrative ex- pense and wage claims, and solves certain circuity of liens problems that arise in connection with the subor- dination. The order of distribution of property subject to a tax lien is as follows: First, to holders of liens sen- ior to the tax lien; second, to administrative expenses, wage claims, and consumer creditors that are granted priority, but only to the extent of the amount of the al- lowed tax claim secured by the lien. In other words, the priority claimants step into the shoes of the tax col- lector. Third, to the tax claimant, to the extent that priority claimants did not use up his entire claim. Fourth, to junior lien holders. Fifth, to the tax col- lector to the extent that he was not paid under para- graph (3). Finally, any remaining property goes to the estate. The result of these provisions are to leave sen- ior and junior lienors and holders of unsecured claims undisturbed. If there are any liens that are equal in status to the tax lien, they share pari passu with the tax lien under the distribution provisions of this sub- section. Editorial Notes REFERENCES IN TEXT Section 6323 of the Internal Revenue Code of 1986, re- ferred to in subsec. (d), is classified to section 6323 of Title 26, Internal Revenue Code. AMENDMENTS 2010—Subsec. (b)(2). Pub. L. 111–327 substituted ‘‘507(a)(1)(C) or 507(a)(2)’’ for ‘‘507(a)(1)’’, ‘‘this chapter’’ for ‘‘chapter 7 of this title’’, and ‘‘507(a)(1)(A), 507(a)(1)(B),’’ for ‘‘507(a)(2),’’ and inserted ‘‘under each such section’’ after ‘‘such expenses’’. 2005—Subsec. (b). Pub. L. 109–8, § 701(a)(1), inserted ‘‘(other than to the extent that there is a properly per- fected unavoidable tax lien arising in connection with an ad valorem tax on real or personal property of the estate)’’ after ‘‘under this title’’ in introductory provi- sions. Subsec. (b)(2). Pub. L. 109–8, § 701(a)(2), inserted ‘‘(ex- cept that such expenses, other than claims for wages, salaries, or commissions that arise after the date of the filing of the petition, shall be limited to expenses in- curred under chapter 7 of this title and shall not in- clude expenses incurred under chapter 11 of this title)’’ after ‘‘section 507(a)(1)’’. Subsecs. (e), (f). Pub. L. 109–8, § 701(a)(3), added sub- secs. (e) and (f). 1994—Subsec. (b)(2). Pub. L. 103–394, § 304(h)(4), sub- stituted ‘‘507(a)(6), or 507(a)(7)’’ for ‘‘or 507(a)(6)’’. Subsec. (d). Pub. L. 103–394, § 501(d)(23), substituted ‘‘Internal Revenue Code of 1986’’ for ‘‘Internal Revenue Code of 1954 (26 U.S.C. 6323)’’. 1986—Subsec. (b)(2). Pub. L. 99–554 inserted reference to section 507(a)(6) of this title. 1984—Subsec. (b). Pub. L. 98–353, § 477(a)(1), sub- stituted ‘‘a tax’’ for ‘‘taxes’’ in provisions preceding par. (1). Subsec. (b)(2). Pub. L. 98–353, § 477(a)(2), substituted ‘‘any holder of a claim of a kind specified’’ for ‘‘claims specified’’, ‘‘section 507(a)(1)’’ for ‘‘sections 507(a)(1)’’, and ‘‘or 507(a)(5) of this title’’ for ‘‘and 507(a)(5) of this title’’. Subsec. (b)(3). Pub. L. 98–353, § 477(a)(3), substituted ‘‘allowed tax claim’’ for ‘‘allowed claim’’. Subsec. (c). Pub. L. 98–353, § 477(b), substituted ‘‘hold- er of a claim is entitled’’ for ‘‘creditor is entitled’’ and ‘‘holders’’ for ‘‘creditors’’ in two places. Subsec. (d). Pub. L. 98–353, § 477(c), substituted ‘‘the priority of which’’ for ‘‘whose priority’’ and ‘‘the same as if such lien were a tax lien’’ for ‘‘the same as a tax lien’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–8 effective 180 days after Apr. 20, 2005, and not applicable with respect to cases commenced under this title before such effective date, except as otherwise provided, see section 1501 of Pub. L. 109–8, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1994 AMENDMENT Amendment by Pub. L. 103–394 effective Oct. 22, 1994, and not applicable with respect to cases commenced under this title before Oct. 22, 1994, see section 702 of Pub. L. 103–394, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–554 effective 30 days after Oct. 27, 1986, see section 302(a) of Pub. L. 99–554, set out as a note under section 581 of Title 28, Judiciary and Judicial Procedure. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–353 effective with respect to cases filed 90 days after July 10, 1984, see section 552(a) of Pub. L. 98–353, set out as a note under section 101 of this title. § 725. Disposition of certain property After the commencement of a case under this chapter, but before final distribution of property of the estate under section 726 of this title, the trustee, after notice and a hearing, shall dispose of any property in which an entity other than