Faasoa v. Army & Air Force Exchange Service (In re Faasoa)Faasoa v. Army & Air Force Exchange Service (In re Faasoa)
MEMORANDUM DECISION AND ORDER DISMISSING COMPLAINT
Before the court is defendant Army & Air Force Exchange Service’s motion to dismiss under Rule 12(b)(6). Prepetition, plaintiff Jubilee Faasoa incurred credit card debt to Defendant. He then filed his 2016 federal income tax return, expecting a refund. But the U.S. Department of the Treasury intercepted the tax overpayment and applied it to the debt he owed Defendant. No funds remained once the setoff was complete. Plaintiff consequently did not receive a tax refund. And despite repeated demands, Defendant declined to issue one.
In response, Plaintiff brought this adversary proceeding seeking: (1) immediate turnover of the tax refund under §§ 522, 541, 542 and 647; and (2) § 362(k)(Z) damages, including punitive damages, for Defendant’s alleged ongoing stay violation. This motion followed.
The court finds that Defendant holds nonbankruptcy law setoff rights that are recognized and enforceable in bankruptcy under § 553. Plaintiff does not identify compelling circumstances to justify disallowing setoff. And his other arguments fail as a matter of law. Accordingly, the court grants Defendant’s motion and dismisses the complaint without leave to amend.
I. JURISDICTION AND VENUE
The court has jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b) and 157(b)(2)(A), (E), (F), and (0). Venue is proper under 28 U.S.C. § 1409(a).
II. FACTUAL BACKGROUND AND HISTORY
A. Overview
Defendant is a component of the U.S. Department of Defense that offers goods and services for sale to active duty service members, retirees, and their families. It operates more than 2,700 facilities worldwide, including retail, specialty, and convenience stores, theaters, quick-serve restaurants, and concession operations. It also manages and funds Military Star, which “is an in-house credit plan that provides the military and authorized family members affordable credit at AAFES facilities worldwide.” In re Buttrill,
At some point prepetition, Plaintiff incurred credit card debt to Defendant. He later claimed an overpayment on his 2016 federal income taxes. On February 8, 2017, the Treasuiy Department intercepted the tax overpayment and forwarded it to Defendant to offset Plaintiffs delinquent consumer debt. After the IRS exercised the United States’ setoff rights on Defendant’s behalf, no funds remained. Plaintiff consequently did not receive a tax refund for 2016.
Plaintiff ñled a voluntary Chapter 7 petition in April 2017 (Bankr. ECF No. 1), He originally scheduled $5,815 in assets and $17,284 in liabilities. Id. at p. 30. Amended Schedule B listed a $3,000 interest in a “2016 Federal Income Tax Refund offset by unsecured creditor AAFES” (Bankr. ECF No. 14-1, p. 1). Plaintiff fully exempted that interest under California Code of Civil Procedure § 703.140(b)(5). Id. at p. 3. Schedule F disclosed a $2,872 obligation to Military Star, described as a 2012 “revolving account” debt (Bankr. ECF No. 1, p. 20). And. Paragraph 11 of the Statement of Financial Affairs revealed that AAFES/NEXCARD offset $2,865 from Plaintiffs 2016 federal income tax refund on February 8, 2017 (Bankr. ECF No. 14-1, P- 6).
Plaintiffs bankruptcy case proceeded in the normal course, and he received his discharge on August 1, 2017 (Bankr. ECF No. 16). The day before that, he filed this adversary proceeding (ECF No. 1) (the “Complaint”).
C. The Complaint
The Complaint alleges that the Treasury Department withheld $2,865 from Plaintiff and his wife’s 2016 federal income tax refund to satisfy an outstanding obligation to Defendant (ECF No. 1, p. 10). In July 2017, Plaintiffs counsel demanded that Defendant return the funds. Defendant refused. Id. at pp. 18-19. Because the funds were fully exempted yet intercepted within 90 days prepetition, Plaintiff believes they are recoverable as an avoidable preferential transfer. The Complaint thus seeks an order: (1) requiring Defendant to immediately turn over to Plaintiff the $2,865 plus interest under §§ 522, 541, 542, and 547; and (2) awarding Plaintiff reasonable attorney’s fees, expenses, and punitive damages for Defendant’s alleged ongoing stay violation under § 362(k)(¿).
D.Defendant’s Motion to Dismiss
Defendant now moves to dismiss the Complaint. It argues that the United States properly exercised its § 553 setoff rights in transferring Plaintiffs tax overpayment to Defendant because: (1) Plaintiff and Defendant owed each other prepetition obligations; and (2) § 563’s mutuality requirement is met since both Defendant and the IRS are federal governmental entities.
Defendant further contends Plaintiffs right to a tax refund did not arise until after Defendant exercised its setoff rights. Once that happened, there were no remaining funds to come into the estate. Plaintiffs claimed exemption in the tax refund is thus invalid.
Defendant next asserts that, even if Plaintiffs claimed exemption were viable, plain Ninth Circuit authority has held that § 553 controls over any § 522 exemption rights Plaintiff may have held.
Finally, Defendant cites myriad authorities standing for the proposition that § 553 exclusively governs setoff issues—§ 547 is inapplicable.
Plaintiff does .not dispute Defendant’s rendition of the facts or the law. And he concedes that: (1) Defendant and the IRS are “united” parts of the United States; (2) § 553 mutuality exists; and (3) the United States properly exercised its § 553 setoff rights by intercepting his tax overpayment. But he urges the court to disallow setoff owing to the case’s “compelling equities.” In particular, although he and his wife are gainfully employed, he filed bankruptcy and was adjudicated insolvent. His wife is also considering bankruptcy. This, he contends, strongly suggests that
III. LEGAL STANDARDS
A. Rule 12(b)(6) Motion to Dismiss
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), incorporated into the Federal Rules of Bankruptcy Procedure in Rule 7012, tests a complaint’s legal sufficiency and requires the reviewing court to accept all factual allegations as true. Ashcroft v. Iqbal,
“A Rule 12(b)(6) dismissal may be based on either a ‘lack of a cognizable legal theory* or ‘the absence of sufficient facts alleged under a cognizable legal theory.’ ” Johnson v. Riverside Healthcare Sys., LP,
Rule 12(b)(6) motions are generally viewed with disfavor. Gilligan v. Jamco Dev. Corp.,
B. Section 553 Setoff
The concept of setoff dates to early Roman and French law. In re HAL, Inc.,
Section 553 governs setoff rights in bankruptcy. It provides:
Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debt- or that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case[.] ...
In re Gould,
Section 553 does not provide “an independent source of law governing setoff; it is generally understood as a legislative attempt to preserve the common-law right of setoff arising out of nonbankruptcy law.” United States of America v. Arkison (In re Cascade Roads, Inc.),
Applicable nonbankruptcy law thus confers a right of setoff; but it does not “supplant[] § 553 in determining whether this right is recognized and preserved in bankruptcy.” In re Wade Cook Fin. Corp.,
Three conditions must be met for setoff in bankruptcy: “(1) the debtor owes the creditor a prepetition debt; (2) the creditor owes the debtor a prepetition debt; and (3) the debts are mutual.” In re Wade Cook Fin. Corp.,
As to the timing component, “each debt or claim sought to be offset must
The mutuality mandate is strictly construed. Newbery Corp.,
“The mutual debts must arise prepetition in order to be in the ‘same right.”’ In re Luz Int’l Ltd.,
“ ‘[CJapacity refers to the nature of the relationship between the parties. Thus, where a debt arises from a fiduciary duty or is in the nature of a trust, courts have held that there is no mutuality for setoff purposes.” In re Luz Int’l, Ltd.,
Finally, the trial court has discretion to allow or disallow setoff. In re Silver Eagle Co.,
With the above framework established, the court turns to the merits.
IV. LEGAL ANALYSIS AND CONCLUSIONS
Plaintiff in opposition concedes most of Defendant’s arguments. He instead asks that setoff be disallowed on equitable grounds. The court could simply analyze the case’s equities and rule accordingly. But for the sake of analytical completeness—and to clarify the state of the law in the Ninth Circuit—it will nevertheless address each argument.
The court therefore employs the following formula: First, does Defendant have setoff rights under nonbankruptcy law? If so, should those rights be recognized and enforced in bankruptcy? This turns on whether Defendant has satisfied § 553’s requirements. Finally, if Defendant establishes nonbankruptcy law setoff rights that are enforceable under § 553, are there compelling equities justifying those rights’ disallowance?
A. Defendant’s Nonbankruptcy Law Setoff Rights
It is well established that government agencies have setoff rights outside of bankruptcy. In re HAL, Inc.,
The federal government ... has enacted various statutory setoff provisions in title 31 of the United States Code. One section authorized government agencies to setoff [sic] “past-due legally enforceable debt [s]” with the unpaid federal tax refunds of the debtor. 31 U.S.C. § 3720A (1994). However, in order to use this section, the government agency has to formally enter into an agreement with the IRS, notify the IRS of any deficiency, and conform to the procedural due process requirements contained in the statute.
In re HAL, Inc.,
The United States also has statutory administrative offset powers. Astrue
In addition, the Treasury Department’s Bureau of the Fiscal Service administers centralized offset of federal payments to collect delinquent, nontax debts owed to federal agencies in accordance with 31 U.S.C. §§ 3716 and 3720A, and 26 U.S.C. § 6402. See 31 C.F.R. § 285.5(a)(1).
Finally, the IRS’s setoff rights arise under 26 U.S.C. § 6402(a), which provides that:
In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall ... refund any balance to such person.
In re Gould,
(A) reduce the amount of any overpayment payable to such person by the amount of such debt;
(B) pay the amount by which such overpayment is reduced under subpara-graph (A) to such agency; and
(C) notify the person making such overpayment that such overpayment has been reduced by an amount necessary to satisfy such debt.
See 26 U.S.C. § 6402(d)(Z )(A)-(C). See also In re Sexton,
The Bankruptcy Court for the Northern District of Texas has explained that “[section 6402(d) authorizes the Secretary of the Treasury to set off a tax refund against the taxpayer’s debt to another Federal agency. Section 3720A provides the procedural framework for that setoff.” In re Shortt,
There was thus clear statutory authority allowing the IRS to intercept Plaintiffs tax overpayment and apply it to the debt he owed Defendant. Plaintiff no longer asserts otherwise. Nor does he contend that Defendant failed to follow 31 U.S.C. §§ 3716 and 3720A, and 26 U.S.C. § 6402’s applicable notice, regulatory, and procedural requirements.
Accordingly, the court holds that the IRS possessed and properly exercised Defendant’s nonbankruptcy law setoff rights in intercepting Plaintiffs tax overpayment and using it to offset the debt he owed.
B. Defendant Satisfies § 553’s Requirements
As stated above, Defendant must establish^ 553’s timing and mutuality requirements for its nonbankruptcy law setoff rights to be preserved and enforced in bankruptcy. For the following reasons, the court concludes that it has.
Section 553’s. timing requirement is plainly met. The evidence shows that the respective debts arose prepetition: the Treasury Department intercepted Plaintiffs tax overpayment on February 8, 2017, yet he did not file for bankruptcy until April 28, 2017.
Mutuality is also satisfied. Plaintiffs sole assertion against it is that Defendant and the IRS are separate governmental agencies. This argument is not well taken: the United States, together with its various departments and components, is considered a unitary creditor in bankruptcy cases. The Ninth Circuit has expressly held that for § 553’s purposes, “the agencies of the United States constitute a single ‘governmental unit,’ as defined in § 101(27)....” In re Hal, Inc.,
The two debts are in the same right since both arose prepetition. The same individuals are involved—Plaintiff owed Defendant (a federal governmental entity) a credit card debt, and the IRS (another governmental agency) owed Plaintiff a tax refund based on overpayment. Finally, the parties were standing in the same capacity—the debt did not arise from a fiduciary relationship and was not in the nature of a trust. Instead, they owed mutual debts (again, the governmental components are treated as a single unit for § 553’s purposes).
Accordingly, the court holds that Defendant has established nonbankruptcy law setoff rights that should be recognized and enforced under § 553.
C. No Compelling Equities Justify Disallowance of Setoff
Alternatively, Plaintiff urges the court to disallow Defendant’s setoff rights on equitable grounds. He cites Gould in support of five equitable factors the court may consider in disallowing setoff. And he argues that those factors favor disallowance since: (1) he was adjudicated an “insolvent”; (2) his wife is considering filing her own bankruptcy petition; and (3) he believes he needs the refund. The court disagrees.
But his reliance on Gould is misplaced. That case involved an appeal of the bankruptcy court’s order denying the IRS stay relief to exercise its setoff rights against tax refunds in which a Chapter 13 debtor had claimed a wildcard exemption. In re Gould,
The debtor in Gould was a divorced father of two who worked as a mechanic with only $75 in monthly net income. His main assets were a 1987 Jeep Cherokee, a $3,217 state income tax refund, and a $6,852 federal income tax refund. And his only significant prepetition obligations were tax debts to the Franchise Tax Board and IRS for $28,000 and $10,000, respectively. The debtor filed a voluntary Chapter 13 petition in January 2005. Shortly thereafter, he amended his schedules to disclose and fully exempt his interest in his 2002 through 2004 federal income tax refunds. In October 2005, the IRS sought stay relief “to allow the IRS to ‘offset the tax refunds totaling $8,733 owed by the IRS to the debtor against the IRS’ claim of $9,972.44 against the debtor.’” In re Gould,
The bankruptcy court exhaustively analyzed the cases interpreting whether § 553 or § 522 takes precedence. It noted that, absent the debtor’s unopposed exemption in the refunds, the IRS should be allowed to exercise its setoff rights under § 553 and 26 U.S.C. § 6402(a). But since it failed to object, the debtor’s claim of exemptions in the tax refunds was valid and unassailable. The exempt tax refunds were no longer estate property liable to setoff against debts owed by the estate. They were thus not subject to the IRS’s subsequent efforts to assert setoff because the debtor’s allowed exemption was superior to the IRS’s § 553 setoff rights.
The bankruptcy court also denied the motion on the merits. In doing so, it balanced the case’s equities and noted several factors weighing in the debtor’s favor. Specifically:
• The IRS failed to object, or request an extension of timé to object, to the debtor’s claim of exemptions in the tax refunds;
• 26 U.S.C. § 6402(a) did not confer ■upon the IRS any extraordinary status or rights—it merely allowed the discretionary setoff of debts owed to the IRS;
• The IRS did not timely exercise its discretionary setoff rights, ie., it did not seek stay relief until several months after the debtor claimed his exemption; and
• The ■ debtor’s financial position ' weighed heavily in his favor. Specifically: (1) he was not attempting “to take unfair advantage” of the IRS by using his exemptions to defeat a set-off; (2) he owned no assets otherthan the tax refunds, which provided him with “the basic necessities of life”; (3) had two dependent. children; and (4) allowing the IRS to set off the tax refunds would take his wildcard exemption—the most important exemption available to him as a nonhomeowner—and run contrary to bankruptcy and California state exemption policy.
Id. at 127-30, See also In re Gould,
Plaintiff contends that the Gould bankruptcy court’s analysis applies equally here. After considering the BAP’s reasoning, however, the court must disagree.
The BAP reversed the bankruptcy court’s decision on two grounds. First, it held that § 553 controls over § 522(c). In re Gould,
More important, the BAP did not expressly adopt the bankruptcy court’s “compelling equities” factors; rather, it simply disagreed that any weighed in the debtor’s favor. Id. at 429-31,
Because the BAP did not embrace the factors in Gould, the court does not consider them a definitive—or even persuasive— explication of the Ninth’s Circuit’s “compelling circumstances” or “equitable consideration” requirements. Moreover, based on the totality of the facts and circumstances, the court finds no compelling equities warrant disallowance of setoff.
Plaintiffs central argument is. that he needs the tax refund for basic life necessities. This is unpersuasive. According to Schedule I, Plaintiff and his wife were gainfully employed on the petition date, with $3,938.32 in combined adjusted monthly income (Bankr. EOF No. 1, pp. 25-26). Schedule J listed $3,940 in monthly expenses, leaving only a $1.68 deficit monthly. Id, at pp. 27-28. But as Defendant observes, Plaintiff discharged significant debt through his bankruptcy case. Without those obligations, Plaintiff ostensibly now has additional income to devote to basic living expenses post-discharge. And if his wife files for bankruptcy and receives a discharge, the family will presumably have even less debt to service. The court also doubts this could ever be a convincing argument—the vast majority of individual debtors need more money.
In addition, Gould is readily distinguishable on its facts. The debtor there did not file his tax returns until well after the petition date. The IRS was seeking stay relief to invoke its setoff rights. Here, the parties’ obligations were established pre-petition. The IRS exercised its nonbank-ruptcy law setoff rights prepetition, and those are now cognizable under § 553. In addition, the IRS in Gould failed to object to the debtor’s claimed exemptions within the allowed time. Here, Plaintiff amended Schedule C to claim the tax refund as exempt on July 28, 2017. He received his
Nor does the court find that setoff is contrary to public policy or the Code’s objectives. It shares the BAP’s concern over “whether California exemption policy holds any weight under these circumstances when a federal statute such as IRC § 6402 controls the IRS’s setoff rights. ... Arguably, the Supremacy Clause of the United States Constitution prevents state exemption laws from defeating federal setoff rights provided under IRC § 6402.” In re Gould,
Finally, the court fails to see how allowing setoff will jeopardize Plaintiffs ability to reorganize—he filed for Chapter 7 relief and has already obtained his discharge.
Accordingly, the court finds that no compelling circumstances justify disallowing setoff on equitable grounds.
D. Plaintiffs Remaining Arguments Are Unavailing
The court addresses Plaintiffs remaining arguments in turn.
1. Plaintiff Has Standing to Demand Turnover and Seek § 362(k)(í) Damages
Plaintiff contends that the tax refund is recoverable under §§ 522 and 542. And he seeks attorney’s fees and costs under § 362(k)(¿) for Defendant’s ongoing stay violation in refusing to restore the refund upon demand. But § 542 “enables the bankruptcy trustee, or the debtor-in-possession in a reorganization case to seek turnover of the debtors’ assets, for the benefit of the estate.” In re Hernandez,
The procedural irregularity was remedied however by debtor’s response to Collect’s opposition. The ultimate relief that debtor sought was to preserve his exemption in the levied funds by invoking § 522(g) and/or by exercising the trustee’s avoiding powers under § 522(h). Moreover, as of the commencement of the case, the automatic stay under' § 362(a) arises, which enjoins any and all collection efforts against the debtor. As an enforcement mechanism, a debtor is afforded a private right of action to seek redress under § 362(k)(Z). “Section 522’s right to claim exemptions in property of the estate bestows standing on debtors for purposes of § 362(k)(Z).” In re Mwangi,432 B.R. 812 , 822 (9th Cir. BAP 2010). Therefore, debtor’s statutory standing to seek the return of the funds levied upon was conferred by statutes other than § 542(a).
In re Hernandez,
2. The Tax Refund Never Became Estate Property and Thus Cannot Be Exempted Under § 522
It is well established that unliqui-dated claims for tax refunds for prepetition
Note the distinction between an overpayment and a refund. The refund is the balance of the overpayment after it has been applied to past tax liabilities. In re Pigott,330 B.R. 797 , 800 (Bankr. S.D. Ala. 2006). Thus, this provision “grants the IRS discretion whether to offset against a debtor’s unpaid tax liability or to refund the overpayment to the taxpayer.” Beaucage v. U.S.,342 B.R. 408 , 411 (D. Mass. 2006). As a result, the debtor is not entitled to a refund to the extent of the unpaid liability. Id.; In re Baucom,339 B.R. 504 , 507 (Bankr. W.D. Mo. 2006); IRS v. Luongo (In re Luongo),259 F.3d 323 , 335 (5th Cir. 2001); Lyle v. Santa Clara Cty. Dept. of Child Servs. (In re Lyle),324 B.R. 128 , 131 (Bankr. N.D. Cal. 2005). In fact, “over-payments are not assets of the taxpayer until the IRS credits any overpayment to unpaid taxes.” Pigott,330 B.R. at 800 (citing Estate of Bender v. Comm’r of Int. Rev.,827 F.2d 884 (3d Cir. 1987)). Consequently, the anticipated refund does not become property of the estate. Beaucage,342 B.R. at 411 ; In re Shortt,277 B.R. 683 , 692 (Bankr. N.D. Tex. 2002).
In re Jones,
The Jones court went on to hold that a debtor has a right to a tax refund only to the extent his overpayment exceeds any preexisting tax liability. The refund does not become estate property subject to exemption until after the IRS has conducted any offset. Id. Myriad authorities are in accord. See, e.g., In re Shortt,
It is undisputed that Plaintiff and Defendant owed mutual prepetition debts. The government properly intercepted Plaintiffs tax overpayment and used it to offset his consumer obligation to Defendant. Once that occurred, there were no funds remaining, and so Plaintiff was not entitled to a tax refund. Since no funds were owed to him on the petition date, the tax refund did not become estate property.
This renders Plaintiffs reliance on § 522 futile. Section 522(b) permits a debtor to “exempt (1) property under the federal exemptions contained in Section 522(d), unless State law does not so authorize, or (2) property exempt under State or local
This conclusion limits Plaintiffs ability to employ other subsections of § 522. For example, § 522(c) provides, subject to various exceptions, that “[ujnless 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.” 11 U.S.C. § 522(c), There is significant case law discussing the conflict between §§ 522(c) and 553, with the BAP recently holding that the latter controls. In re Gould,
Further, §§ 522(g) and (h) both allow Plaintiff to exempt recoverable or avoidable property that “could have been exempted.” Again, the tax refund was not exemptible because it did not become estate property on the petition date. And as set forth below, Plaintiff cannot avail himself of §§ 642 or 547’s protections.
3. Plaintiffs § 542 Turnover Request Is Inapt
Sections 542(a) and (b) are facially inapplicable.
Section 542(b) likewise appears inappo-site. “That section applies only to debts which are property of the estate, and directs turnover of such property to the Trustee, except where the debt is the proper subject of a set-off. Section 542(b) does not, however, determine the validity of a set-off. Rather, § 542(b)’s exception pertaining to set-offs only comes into play where the entity involved has a valid and property right of set-off,” In re Alexander,
Finally, even if all this were not true, the court would still find that this is not a proper turnover action since Plaintiff disputes the funds’ ownership and whether a rightful setoff took place. See, e.g,, In re Gurga,
4. Section 547 Does Not Govern this Case
Plaintiff alleges that Defendant’s prepetition setoff was an avoidable preference recoverable under § 547. Section 542’s unavailability aside, courts have rejected this argument repeatedly. See, e.g., Campos v. Wells Fargo Bank, N.A.,
A creditor may exercise its setoff remedy prior to the commencement of the case without court approval. Subject to the limitations set forth in section 653(b), the Code does not restrict a creditor from exercising its rights of setoff under applicable non-bankruptcy law prior to the commencement of the case. Setoff prior to bankruptcy, if within the terms of the Code, does not constitute a preference.
In re Remillong,
Indeed, “[sjection 553(b), the insufficiency test, contains the ‘special rules’ and is, in essence a miniature preference provisions akin to § 547(c)(5).” In re Remillong,
5. Plaintiff Is Not Entitled to § 362(k)(I) Damages
Finally, Plaintiff seeks attorney’s fees and costs for bringing this adversary proceeding, and punitive damages for Defendant’s alleged ongoing stay violation in not remanding the tax refund when asked. The court denies this request as well.
As stated above, the IRS properly exercised its nonbankruptcy law setoff rights on Defendant’s behalf. The setoff was accomplished prepetition (and consequently at a time when no stay was in effect). That meant there were no funds available for a tax refund. Plaintiff no longer had an interest in the tax refund on the petition date, and no right to it ever came into the estate. The tax refund thus did not become estate property, and consequently did not fall under § .362’s protections. Plaintiff cannot now manufacture a stay violation post hoc by demanding the disputed funds’
Y. CONCLUSION
Defendant properly exercised its non-bankruptcy law setoff rights prepetition when the IRS intercepted Plaintiffs tax overpayment and applied it to the debt' he owed Defendant. Defendant has also proven all of § 553’s elements. And Plaintiff fails to establish compelling circumstances justifying disallowance of setoff. Consequently, Defendant’s nonbankruptcy law setoff rights are recognized and enforceable in bankruptcy.
Plaintiff had standing to bring this adversary proceeding. But since nothing remained of his tax overpayment once setoff was complete, he was not entitled to a tax refund. He had no interest in the tax refund on the petition date, and thus it never became exemptible estate property. And because the tax refund was: (1) a disputed debt; and (2) not estate property subject to exemption, § 542 turnover is not an available remedy. In addition, the law is clear that where, as here, there is a valid setoff, § 553’s requirements govern over § 547’s. Finally, Plaintiffs request for § 362(k)(i) damages is denied since the setoff occurred prepetition and no right to the tax refund existed on the petition date. Plaintiff conceded at the hearing, and the court agrees, that the Complaint cannot be saved by amendment. Accordingly, the court grants Defendant’s motion and dismisses the Complaint with prejudice.
IT IS SO ORDERED.
Attachment
Notice Recipients
District/Off: 0974-3
Case: 17-90153-CL
User: Admin.
Form ID: pdfOl
Date Created: 10/10/2017
Total: 4
Recipients of Notice of Electronic Filing:
aty Beth A. Clukey beth.clukey@usdoj.gov
aty Daniel Wiedecker dandrlc@debtclinic. com
TOTAL: 2
Recipients submitted to the BNC (Bankruptcy Noticing Center):
pla Jubilee Faasoa 800 E Bobier Dr # K6 Vista, CA 92084-3851
dft Army & Air Force Exchange Service ATTN: FA-F/R P. O. Box 65038 Dallas, TX 75265
TOTAL: 2
Notes
. Routinely referred to as the "Treasury Offset Program.” See, e.g., Briggs v. U.S., No. C-07-05760-WHA,
, Subject to certain exceptions, § 542(a) provides that "an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, ’ sell, or lease under section 363 of this title, or that the debtor may exempt under 522 of this ' title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.” 11 U.S.C, § 542(a). And § 542(b), again subject to various exceptions, states that "an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee, except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor. 11 U.S.C. § 542(b).
. Section 362(a)(7) is inapposite since that applies to post-petition setoff of prepetition debts. See, e.g., In re Sexton,