IN RE: EARL DOUGLAS ADDISON, Debtor. EARL DOUGLAS ADDISON, Plaintiff, v. UNITED STATES DEPARTMENT OF AGRICULTURE, and UNITED STATES DEPARTMENT OF TREASURY, Defendants.
CASE NO. 14-71321
ADVERSARY PROCEEDING NO. 15-07002
IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF VIRGINIA ROANOKE DIVISION
July 13, 2015
Paul M. Black, United States Bankruptcy Judge
CHAPTER 7
The matters presently before this Court are ones which have divided other courts. Succinctly put, does the automatic stay of
The facts in this case are not in dispute.1 Earl Douglas Addison (the “Debtor” or “Plaintiff“) filed a voluntary petition under Chapter 7 of the Bankruptcy Code,
After the Debtor filed his bankruptcy petition, he filed his 2011 and 2012 federal income tax returns. Id. On November 17, 2014, without obtaining relief from the stay of
On January 13, 2015, the Debtor initiated this adversary proceeding against the government by filing a Complaint, which was amended on January 14, 2015, seeking remittance of his 2011 and 2012 tax refunds and asking the Court to find that the Defendants willfully violated the automatic stay by withholding the Debtor‘s 2011 and 2012 tax refunds to offset prepetition, non-tax debt, and in continuing to withhold the Debtor‘s tax refunds, in contravention of
In its Answer, the government contends that the Treasury is not a proper defendant and that notice to the government was insufficient because the Debtor did not serve the United States Attorney. Answer at 4-5. In addition, the government denied that it violated the automatic stay, asserting that the Debtor was not entitled to a refund of his tax overpayment until after the Treasury complied with the mandate of
The Court held two pre-trial conferences by telephone on March 12, 2015 and April 16, 2015,3 following which the Court issued deadlines for the filing of the Plaintiff‘s Response to the Defendants’ Motion for Summary Judgment and the Defendants’ Reply, and scheduled oral arguments in this matter for June 17, 2015. The Plaintiff filed a Response on May 14, 2015, which, among other things, acknowledged that the Treasury is not a proper party defendant. The Defendants filed a Reply on June 2, 2015. The Court held a hearing on June 17, 2015 and took this matter under advisement.
CONCLUSIONS OF LAW
This Court has jurisdiction of this matter by virtue of the provisions of
Pursuant to
Once a debtor files a bankruptcy petition, the automatic stay of
The applicable nonbankruptcy law relevant in this case is the T.O.P., which “authorizes the Secretary of the Treasury to intercept an individual‘s tax overpayment and apply it to preexisting debts.” Sexton, 508 B.R. at 658 (footnote omitted) (citing
The courts holding that Section 6402(d) trumps the stay of Section 362(a) find it important to explain the legal distinction between a tax “overpayment” and a tax “refund.” See, e.g., U.S. Dep‘t of Agric. Rural Hous. Serv. v. Riley, 485 B.R. 361, 365-67 (W.D. Ky. 2012). “A tax overpayment is the amount a taxpayer pays to the government in excess of [his] tax liability, whereas a tax refund represents the actual amount the government returns to the taxpayer when
In Sorenson, the Supreme Court held that excess earned-income credits were “overpayments” that could be intercepted pursuant to Section 6402(c). Sorenson, 475 U.S. at 865. The Internal Revenue Code and the Social Security Act authorize the Secretary of the Treasury to intercept tax refunds payable to taxpayers who are delinquent in child support obligations. Id. at 852-53; see also
As further discussed below, Sorenson is not a bankruptcy case and was decided prior to Congress‘s enactment of Section 362(b)(26). Congress is presumed to have known of existing case law from the highest court in the land in enacting legislation on point. See, e.g., United States v. Langley, 62 F.3d 602, 605 (4th Cir. 1995) (“It is firmly entrenched that Congress is presumed to enact legislation with knowledge of the law; that is with the knowledge of the interpretation that courts have given to an existing statute.” (citations omitted)); First Union Nat‘l Bank of Fla. v. Harmon, 234 B.R. 667, 670 (D. Md. 1998) (“Congress, in passing legislation, does not operate in a vacuum and is presumed to know the existing law when it acts.” (citation omitted)).
It is undisputed that, prior to the Debtor‘s bankruptcy filing, the USDA had a legal right under Section 6402 to set off the Debtor‘s income tax overpayment against any debts owing to the government prior to issuing a refund to the taxpayer. See
The Debtor asserts that since Section 362(a)(7) specifically prohibits setoff actions and because Section 362(b)(26) only excepts from the automatic stay the setoff of an “income tax refund” by a “governmental unit,” against “an income tax liability,” the government‘s action in offsetting the Debtor‘s refund against a non-tax liability violates the automatic stay. Am. Compl. at 3; Pl.‘s Resp. at 5. In arriving at this conclusion, the Debtor argues that his tax refund became property of the bankruptcy estate upon the filing of a bankruptcy petition. See Pl.‘s Resp. at 5-6 (citing Sexton, 508 B.R. at 661-63; Moore v. Dep‘t of Hous. & Urban Dev. (In re Moore), 350 B.R. 650, 656 (Bankr W.D. Va. 2006)). Further, the Debtor also argues that the continued withholding of the Debtor‘s tax refunds constitutes a willful and deliberate violation of the automatic stay. Am. Compl. at 4. At the hearing on June 17, 2015, counsel for the Debtor conceded that the Debtor lacks standing to recover $5,766.27—the amount withheld that he did not exempt—for the benefit of the Chapter 7 trustee, who has not intervened in this action, and clarified that the Debtor is seeking only to recover $2,319.00—the amount he did claim as exempt—from the USDA.
Although another judge of this Court has reached a decision on this issue in Sexton, the Court is fully aware that there is a split in the case law. Both schools of thought are persuasive. Compare Sexton, 508 B.R. at 662-64 (ruling that the government‘s postpetition setoff of the debtor‘s tax overpayment to non-tax federal debt was a violation of the automatic stay because the debtor‘s interest in her tax overpayment was property of the bankruptcy estate and was properly exempted by the debtor), with Riley, 485 B.R. at 365-67 (ruling that the debtors were never entitled to a tax refund because their governmental debts exceeded their tax overpayment,
In Luongo, the debtor filed for relief under Chapter 7 of the Bankruptcy Code; at the time of the bankruptcy filing, the debtor owed an unpaid tax liability to the I.R.S. Id. at 327. After the debtor received a discharge, the I.R.S. set off the debtor‘s income tax overpayment against the unpaid tax liability pursuant to Section 6402(a). Id. The debtor then moved to reopen her bankruptcy case and filed amended schedules to exempt her income tax overpayment. Id. The bankruptcy court ruled that the I.R.S. was not entitled to offset the debtor‘s properly exempted tax overpayment against prepetition governmental debt. Id. On appeal, the district court reversed, holding that the unambiguous language of Section 553(a) makes clear that the I.R.S.‘s “right of setoff was unaffected by [the debtor‘s] claims that the tax overpayment is exempt property and the tax liability was discharged in the bankruptcy proceeding.” Id. The debtor appealed, and the Fifth Circuit held that the debtor is generally only entitled to a tax refund to the extent that the tax overpayment exceeds the unpaid tax liability. Id. at 335-36. Accordingly, the court concluded that the debtor was not entitled to a tax refund, the refund never became property of the estate, and thus, the debtor had no interest in the refund that could be properly exempted. Id. This argument has substantial appeal. However, as the Court in Sexton noted, Luongo “did not have Bankruptcy Code [S]ection 362(b)(26) to consider when it issued its ruling.” Sexton, 508 B.R. at 662.
In deciding to follow Sexton, this Court finds that the Debtor‘s right to recover his tax overpayment for the 2011 tax year arose at midnight on December 31, 2011. See id. at 662-63 (finding that “a debtor‘s interest in her tax overpayment becomes fixed at the close of the
[O]nce all of the facts necessary to ascertain the amount of the overpayment exist—at midnight of December 31 of the relevant tax year—the taxpayer has a right to recover that amount. The intercept statute authorizes the government to intervene and capture those funds; however, if the taxpayer files for bankruptcy prior to the Secretary acting, the debtor‘s interest in the property at that time vests in the bankruptcy estate. If, thereafter, the government wants to use the overpayment for a setoff under section 6402, it must first get relief from the stay or act under an applicable exception enumerated in section 362(b).
Accordingly, once the Debtor filed his bankruptcy petition on September 23, 2014, all of his eligible property became property of the bankruptcy estate pursuant to
This Court further concludes that the language of Section 362(b)(26) supports this finding. Section 362(b)(26) “contrain[s] the reach of the automatic stay” by excepting from violating the automatic stay “the setoff under applicable nonbankruptcy law of an income tax refund . . . against an income tax liability.” Id. at 662; see also
Further, the Court finds that Sorenson is not applicable in this case because it was decided prior to Congress‘s enactment of Section 362(b)(26), which is controlling here. For the same reason, this Court declines to follow the Fifth Circuit‘s reasoning in Luongo. Sexton, 508 B.R. at 663. “Congress‘s enactment of [S]ection 362(b)(26) presupposes that such property interests become part of the estate subject to the stay, except for this express carve out.” Id. at
Having found that the Debtor‘s interest in his tax overpayment vested in the bankruptcy estate upon filing his petition, and therefore acquired the protections of the automatic stay, the Court must then determine whether the USDA‘s right to offset pursuant to Section 553 can defeat the Debtor‘s exemption rights under Section 522(c). Section 522(c) provides that except in certain circumstances that are not applicable here, “[u]nless 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, or that is determined under section 502 of this title as if such debt had arisen, before the commencement of the case.”
Courts are also divided over whether Section 522(c) trumps a creditor‘s right to setoff preserved under Section 553. See Miller v. United States, 422 B.R. 168, 172-73 (W.D. Wis. 2010). Though the Miller court ultimately sided with the minority reasoning, it acknowledged
Last, the Court turns to the issue of whether to grant attorney‘s fees to counsel for the Plaintiff in accordance with the Equal Access to Justice Act. In general, the American Rule does not allow a prevailing litigant to recover any attorney‘s fees from the losing litigant. See Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2164 (2015); however, this rule is not absolute. The Equal Access to Justice Act is a statutory exception to the American Rule, and provides that attorney‘s fees may be granted against the United States in certain circumstances. See
[A] court shall award to a prevailing party other than the United States fees and other expenses . . . incurred by that party in any civil action (other than cases sounding in tort) . . . brought by or against the United States in any court . . . unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.
Although the government was fully aware that its position was previously rejected by the Chief Bankruptcy Judge of this district in the Sexton case, this Court finds that it does not necessarily follow that the government was not substantially justified in taking the same position in this case. Of particular relevance to this finding is that there is a split in the case law regarding this issue and that this Court is not bound by the doctrine of stare decisis to adhere to the ruling in Sexton. Therefore, on the basis of the record in this case, this Court finds that the government‘s position was “substantially justified.” See
CONCLUSION
The Court concludes that the Debtor‘s interest in his tax overpayment is property of the bankruptcy estate, and is therefore protected by the automatic stay, and that the Debtor has properly claimed an exemption in the amount of $2,319.00 in his tax overpayment. Therefore, this Court will deny the Motion for Summary Judgment filed by the Defendants; the Plaintiff, however, has not cross-moved for summary judgment.
Decided this 13th day of July, 2015.
UNITED STATES BANKRUPTCY JUDGE