In Re Diaz
459 B.R. 86
Bankr. C.D. Cal.2011Background
- Debtors filed Chapter 13 on March 26, 2010 with a Chapter 13 Trustee appointed.
- Debtors filed 2009 tax returns on April 30, 2010 and received a refund around June 2, 2010.
- Debtors listed a 2009 expected tax refund of $4,000 on Schedule B and claimed it as exempt on Schedule C (wild card exemption).
- Plan was filed March 3, 2011 on the District’s mandatory form and was confirmed May 27, 2010 without objection.
- Confirmation Order stated that “all tax refunds are pledged into the plan,” while the Plan was silent on refunds, creating a discrepancy in Riverside Division documents.
- Trustee moved to dismiss on July 7, 2011 for failure to turn over the 2009 refund; hearings and briefs followed through September 2011.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Plan Confirmation Order is void for due process due to ambiguity | Debtors contend 'all' is fatally ambiguous | Trustee argues 'all' is not ambiguous and provides adequate notice | Order not void for due process; ambiguity does not render it void |
| Whether the Plan Confirmation Order excludes prepetition tax refunds | Debtors argue refunds on prepetition earnings fall outside the order’s scope | Trustee argues order requires turnover of all refunds | Postpetition refunds only; prepetition refunds excluded from turnover |
| Whether prepetition tax refunds are income or property for disposable income | Prepetition refunds are income under Trustee’s view | Refunds are property, rooted in prebankruptcy past | Tax refunds accrued on prepetition earnings are property, not income; not disposable income |
| Whether the Trustee is entitled to tax refunds under 1322(a)(1) and 1325(b)(1)(B) | Trustee can capture all refunds earned during the commitment period | Only future/postpetition income should be included; projected disposable income includes refunds only if projected | Treater not entitled to all refunds; only future/postpetition income is included; prepetition refunds not captured |
| Whether the plan should include a mechanism to handle refunds or delay discharge | N/A | N/A | Court recommends an election mechanism allowing either contribution of prepetition refund or delay of discharge |
Key Cases Cited
- United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010) (plan confirmation finality and due process considerations in chapter 11/13 context)
- Kokoszka v. Belford, 417 U.S. 642 (1974) (prepetition tax refunds treated as property, not income)
- In re Feiler, 218 F.3d 948 (9th Cir. 2000) (tax refunds treated as property in Ninth Circuit)
- In re Freeman, 86 F.3d 478 (6th Cir. 1996) (tax refunds as disposable income under broad Sixth Circuit view)
- In re Schiffman, 338 B.R. 422 (Bankr. D. Or. 2006) (prepetition refunds may be included to prevent overwithholding; policy rationale)
- In re Anderson, 21 F.3d 355 (9th Cir. 1994) (limits on broad interpretation of disposable income; must avoid surplusage)