Jeffrey Klobucar, Bassford Remele, P.A.
Contributing Editor: Phillip J. Ashfield, Stinson Leonard Street, LLP
BAP___United_States_v__Austin.pdf
In United States v. Austin, No. 17-6024, 2018 WL 1702742 (B.A.P. 8th Cir. Apr. 9, 2018), the Bankruptcy Appellate Panel reversed the bankruptcy court’s finding that the debtors had presented “substantial evidence” sufficient to overcome the prima facie validity of the IRS’s proof of claim.
The debtors listed two worker’s compensation claims in their bankruptcy schedules, assigning $0.00 or “unknown value” to the claims. The IRS filed a proof of claim asserting a tax lien in the worker’s compensation claims. Approximately seven months after the petition date, the debtors negotiated a settlement resulting in a net recovery of $15,661.60. The IRS then filed an amended proof of claim, asserting a tax lien in the amount of the net recovery. The debtors objected to the valuation of the IRS’s secured claim pursuant to § 506(a)(1).
In support of the objection, the debtors filed an affidavit of their worker’s compensation attorney, who opined that the claims held a “nuisance” value of $3,000.00 as of the bankruptcy filing, and that his post-petition work increased the value. The bankruptcy court took the matter under submission without taking evidence or hearing testimony, and without providing the IRS the opportunity to cross-examine the affiant.
The bankruptcy court sustained the debtors’ objection and valued the worker’s compensation claims at $3,000.00. The bankruptcy court determined that the affidavit constituted “substantial evidence” of the value of the worker’s compensation claims, thereby rebutting the prima facie validity of the IRS’s amended proof of claim.
In its de novo review, the BAP held that the debtors failed to meet their burden of producing substantial evidence “that has a reasonable, objective basis for the valuation” of the worker’s compensation claims, including financial information and factual information necessary to overcome the IRS’s presumptively valid claim.
First, the BAP noted that the affiant could have presented, among other things, evidence of past awards for similar claims or worker’s compensation schedules. The affiant’s personal opinion was not sufficient, especially when the claims settled for significantly more than his $3,000.00 valuation. Second, the BAP held that the affiant uncovered facts and helped recover benefits, but his work did not impact the value of the claims. Finally, the IRS should have had an opportunity to cross examine the affiant.
According to the BAP, holding otherwise would encourage abuse as debtors could avoid a security interest in a tort claim simply by failing to obtain facts necessary to support the tort claim.