When the time comes to collect a debt, few organizations are as accomplished as the Internal Revenue Service. The IRS showed just such guile in the case of In re Williams, a recent Chapter 7 proceeding in the Middle District of Georgia, in which the creditor raised an interesting, and more importantly, successful defense to a McNeal motion.

As in McNeal, the debtor was upside down on its mortgages, and it moved to strip off a second priority tax lien which was wholly unsecured by the debtor’s residence. In doing so, the debtor made a standard McNeal argument.

Not to be dissuaded by the McNeal motion, the IRS argued that although the tax lien was indeed unsecured with regard to the residence, a tax lien, by statute, attached “to all property and rights to property, whether real or personal, belonging to such [debtor].” Thus, the court held that because the debtor’s personal property retained unencumbered value, a component of the IRS’s lien is partially secured by the debtor’s personal property – even if another component of the lien is wholly unsecured.  Because the lien remained partially secured, Dewsnup applied, not McNeal.

Although the IRS had not filed a separate proof of claim, the debtor in Williams had scheduled IRS as the holder of a single priority claim. The court noted that there was no basis within the Bankruptcy Code to divide the claim into separate claims for each type of collateral – real or personal property – just as Dewsnup did not permit separating claims into secured and unsecured portions for purposes of a strip-down in Chapter 7.

The court held that the IRS’s claim attached to the value of the personal property, even if it did not attach to any value of the debtor’s real property. Because the claim was allowed and secured under § 506(d), the Williams’ court was bound by Dewsnup – not McNeal. Thus, the court denied the debtor’s McNeal motion.

Williams is a simple, yet sophisticated strategy to defend against a McNeal motion under specific factual circumstances. Creditors with claims involving personal property, such as tax liens or those arising out of mortgages secured by UCC-1 financing agreements, et al., may also be able to successfully defend against a strip-off. Williams is the first case to raise the proposition under McNeal, and creditors and their counsel should examine any claims in pending Chapter 7 cases in which a McNeal motion is likely to be brought.