MEMORANDUM
This сase presents the primary question of whether the Internal Revenue Service (“IRS”) may assert a right of offset in the debtor’s tax refund which the debtor has claimed exempt. For the reasons discussed below, the court answers the question in the affirmative, disagreeing with the majority of courts which have concluded otherwise. Also considered herein is whether a right of setoff survives discharge, whether the IRS’s inadvertent violation of the automatic stay precludes setoff, and whether the IRS should be granted retroactive relief from the stay. The answers to these questions as posed are yes, no, and yes. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A), (B), (G) and (0).
I.
According to the stipulations filed by the parties, on May 10, 1990, the debtor and her adult daughter secured a loan in the amount of $65,331 for the purchase of a manufactured house for the daughter. Repayment of the loan was guaranteed by the Department of Housing and Urban Development (“HUD”). When the debtor and her daughter defaulted on the loan in 1992, the loan was repaid by HUD, who succeeded to the lender’s interest. Although no voluntary payments have been made to HUD since that time, a total of $5,398 “in involuntary payments effectuated by the Internal Revenue Service under the tax refund offset program” has been credited against the indebtedness.
Prior to the April 17, 2000 deadline, the debtor filed her 1999 federal income tax return, which indicated that she was entitled to a refund of overpaid taxes in the amount of $2,534. On June 30, 2000, “[p]ursuant to 26 U.S.C. § 6402(d) and 26 C.F.R. § 301.6402-6, the Internal Revenue Service applied the $2,534 overpayment of the debtor’s 1999 federal income tax refund to the debtor’s $33,079 debt to HUD.”
On July 10, 2000, the debtor amended her Schedule F and creditor matrix in order to add HUD as a creditor. A discharge order was entered on August 4, 2000, and on September 28, 2000, the United States of America, on behalf of HUD and the IRS, moved for post facto relief from the automatic stay in order to validate the previous offset. The debtor objected and requested that the court order the return of the tax refund and award the debtor her attorney’s fees because of the IRS’s violation of the automatic stay.
The parties have agreed that this matter is appropriate for resolution based on stipulations of fact and memoranda of law. In their joint stipulation filed on January 5, 2001, the parties fashioned the following issues for resolution by this court:
A.Whether the United States has the right to setoff the debtor’s 1999 federal income tax refund against her debt to HUD?
B. Whether the court should modify the stay post facto to allow the United States to offset the debtor’s 1999 federal income tax refund against her debt to HUD?
C. Whether the United States’ inadvertent violation of the automatic stay precludes the United States’ right of setoff?
D. Whether the debtor’s discharge bars relief from the automatic stay?
E. Whether the exemptions claimed by the debtor limit the United States’ right to offset the debts?
Although not necеssarily in the format presented, the court will address each of these issues raised by the parties, beginning with whether the United States has a right of offset.
II.
A. General Right of Offset
Section 553 of the Bankruptcy Code addresses setoff in the bankruptcy context. It provides in part the following:
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 ....
The United States Supreme Court has noted that § 553 does not create a federal right of offset; it only preserves in bankruptcy whatever right otherwise exists.
Citizens Bank of Maryland v. Strumpf,
There has been no allegation by the debtor in the present case that either her obligation to HUD or the IRS’s obligation to her did not arise prepetition. The debt- or’s obligation to HUD at a minimum arose in 1992 when HUD acceded to the lender’s position. The IRS’s obligation to the debtor to refund her overpayment of income taxes in 1999 arose at the end of 1999 prior to her bankruptcy filing in May 2000.
See In re Conti,
The debtor does argue, however, that the obligations are not mutual. She notes that she owes HUD, not the IRS, and maintains that separate agencies of the federal government do not constitute the same creditor for offset purposes. This issue was resolved by this court in its unreported decision in
In re Bowling,
No. 98-20054 (July 2, 1998), wherein the majority view that the United States and its various agencies and departments comprise a unitary creditor was adopted.
Id.
(citing
Lopes v. United States Dep’t of Housing and Urban. Dev. (In re Lopes),
Because mutual, prepetition obligations between the debtor and the United States have been established, it must be determined whether a right to setoff exists outside of bankruptcy, under either state or other federal law. According to the stipulations, the setoff exercised by the United States was effectuated pursuant to 26 U.S.C. § 6402(d), which provides the following:
Collection of debts owed to Federal agencies.—
(1) In general. — Upon receiving notice from any Federal agency that a named person owes a past-due legally enforceable debt (other than past-due support subject to the provisions of subsection (c)) to such agency, the Secretary [of the Treasury] shall—
(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.
This federal intercept statute, which was enacted as part of the Deficit Reduction Act of 1984, allows the IRS to offset a tax refund against any debt which the taxpayer may owe a federal agency.
Bosarge v. United States Dep’t of Educ.,
The Bosarge court noted that 26 U.S.C. § 6402(d), the federal intercept statute, and its companion statute, 31 U.S.C. § 3720A, which sets forth the procedure for the intercept, “make[ ] no allowance for state law personal property exemptions.” Id. at 1418. The court contrasted these provisions with the Federal Debt Collection Procedures Act of 1990 (“FDCPA”), 28 U.S.C. §§ 3001-3308, which expressly recognizes exemption rights. Id. The court concluded that the intercept statutes rather than the FDCPA applied because the “FDCPA expressly disclaims any intent to ‘supersede or modify the operation of statutory rights to setoff.’ ” Id. at 1419 (citing 28 U.S.C. § 3003(c)(6)). Since the intercept statutes make no exceptions for exemptions, the court held that state law exemption rights may not defeat the federal government’s setoff rights pursuant to the doctrine of preemption under the Supremacy Clause of the United States Constitution. Id.
As applied to the present case, it is cleаr that but for the debtor’s bankruptcy filing, the federal government would have a statutory right under 26 U.S.C. § 6402(d) to offset the debtor’s tax refund against her liability to HUD, notwithstanding her state law exemption claim. And since § 553 of the Bankruptcy Code is designed to preserve in bankruptcy any right of offset to the extent the obligations are mutual and arose prepetition, it would appear that the United States’ offset right should not be affected by the debtor’s bankruptcy case. Whether it is will be discussed in the next section.
B. Effect of Debtor ’s Exemption Claim in Bankruptcy
11 U.S.C. § 522 governs the exemptions available to a debtor in a bankruptcy case and provides that the debtor may elect certain specified federal exemptions set forth in § 522(d) or the exemptions available to a debtor under applicable state and nonbankruptcy federal law, unless the state has opted out of the federal bаnkruptcy exemptions.
See In re Sumerell,
Regardless of whether exemptions are claimed pursuant to state law because the state has opted out or the federal bankruptcy scheme, property exempted from the bankruptcy estate as a general rule is not liable for prepetition debts unless the debts fall within certain specified exceptions. Section 522(c) of the Bankruptcy Code provides:
Unless 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 sectiоn 502 of this title as if such debt had arisen, before the commencement of the case, except—
(1) a debt of a kind specified in section 523(a)(1) or 523(a)(5) of this title;
(2) a debt secured by a lien that is—
(A)(i) not avoided under subsection (f) or (g) of this section or under section544, 545, 547, 548, 549, or 724(a) of this title; and
(ii) not void under section 506(d) of this title; or
(B) a tax lien, notice of which is properly filed; or
(3) a debt of a kind specified in section 523(a)(4) or 523(a)(6) of this title owed by an institution-affiliated party of an insured depository institution to a Federal depository institutions regulatory agency acting in its capacity as conservator, receiver, or liquidating agent for such institution.
Unless the offset right held by the United States in the present case falls within one of the exceptions set forth in section 522(c), there would appear to be a conflict between section 553, which preserves the United States’ right of offset even against a claim of exemption, and section 522(c) which provides that property claimed exempt is not liable for prepetition debts. The exceptions in paragraphs (1) and (3) of § 522(c) pertain to certain nondischargeable debts and the exception in paragraph (2) applies to debts secured by a hen.
United States v. Jones (In re Jones),
This court can find no guidance in the legislative history to either sections 506(a) or 522(c)(2) and httle in the two cases which have directly addressed whether section 506(a)’s treatment of a setoff right as a secured claim constitutes a hen for purposes of section 522(c).
See In re Pieri
It would appear that if Congress had intended the phrase “debt secured by a lien” as utilized in § 522(c) to mean secured claim within the meaning of § 506(a), it could have readily used the terminology “secured claim” as it did in other provisions of the Bаnkruptcy Code.
See, e.g.,
11 U.S.C. § 326(a) (“parties in interest ... including holders of secured claims”); § 1111(b)(2) (“such claim is a secured claim”); § 1129(b)(2)(A) (“class of secured claims”); and § 1222(b)(2),(4),(5) and (9) (“secured claim” or “secured claims”). Congress’ use of the word “lien” in section 522(c)(2) rather than “secured claim” suggests the terms are not synonymous and should not be treated as such.
See United States v. Stauffer Chemical Co.,
Because a right of offset does not fall within any of the exceptions to § 522(c), many courts have concluded that there is a conflict between § 522(c) and § 553.
See, e.g., In re Jones,
The majority courts’ position has been based primarily on three considerations. The first basis is that allowing the exemption right under § 522 to prevail over § 553 offset privileges gives effect to both § 553 and § 522(c) and prevents a nullification of § 522(c).
See In re Jones,
The courts which have permitted offset despite a debtor’s claim for exemption have done so based primarily on the language of section 542(b). This provision requires payment to the trustee of a debt which is property of the estate unless the debt is subject to offset.
See
11 U.S.C. § 542(b).
3
As noted by the court in
Eg-gemeyer,
“[t]his section enables a creditor who has a valid right of setoff to retain the property, regardless of its exempt status.”
In re Eggemeyer,
The majority reject the assertion that § 542(b) is controlling.
See In re Jones,
With all due respect to the majority courts, this court disagrees with their conclusions in all respects and agrees with the minority courts. As noted above, the majority maintain that subsection (a) of § 542 rather than subsection (b) is the determinative turnover provision; that subsection (a) pertains to turnover of exempt property for which there is no stated exception for offset rights; and that subsection (b) applies to turnover of property of the estate for which there is an offset exception.
In re Jones,
The relevant distinction between subsections (a) and (b) of section 542 is not that one applies to turnover of exempt property and the other applies to turnover of property of the estate as the
Jones
and
Alexander
courts held; it is that subsection (a) speaks in terms of turnover of property whether exempt or of the estate, while subsection (b) pertains to payment of a debt.
Cf.
11 U.S.C. § 542(a)
with
§ 542(b).
See also In re Lanes,
This distinction is important for offset purposes because mutual obligations must exist, i.e., a debt owed to the debtor and a claim against the debtor, in order for an offset to take place. Since § 542(a) only addresses property of the debtor or of the estate held by a third person, rather than a debt owed to either, offset does not even come into play.
See Brendern Enter., Inc. v. Micro-Acoustics Corp. (In re Brendern Enter., Inc.),
As stated by one court:
A setoff is applicable only where the debtor and creditor “owe” one another. It is inapplicable where the debtor’s property is in the possession of the creditor as bailee or trustee. In such an instance, the property is “owned” by the bankruptcy estate, and the creditor’s obligation as bailee or trustee cannot form the basis for a debt which the creditor may set off against his claim against the debtor.
Marshall v. Shipman Elevator Co. (In re Marshall),
In the present case, the tax refund which the debtor is seeking to recover from the IRS is an obligation owed to her, rather than funds belonging to her.
See In re Fishbein,
Section 542(b)’s offset exception to the requirement that a debt owed to the estate must be paid to the trustee is consistent with the offset preservation provision of § 553. Furthermore, notwithstanding their apparent conflict, both of these provisions can be reconciled with § 522(c)’s exemption protection language. Once a right of offset preserved by § 553 has been established in a debt owed to the estate, a debtor may claim an exemption only in the balance of the debt turned over to the estate after the offset has been exercised. Thereafter, the exempted property is protected from all other pre-petition debts pursuant to § 522(c).
“It is a well-established principle of statutоry construction that, whenever possible, statutes are to be construed so that no clause, sentence or word is rendered void or contradictory.”
Illinois v. Consolidated Rail Corp.,
This court disagrees with the majority’s conclusion that allowing exemption rights under § 522(c) to supersede a creditor’s setoff rights under § 553 gives effect to both provisions and prevents the nullification of § 522(c). To the contrary, by giving primary effect to the exemption rights of a debtor, the offset right of a creditor is often completely nullified, as would be the result in the instant case. It is just as logical to give effect to both provisions by holding that a debtor may claim an exemption which is valid as to all creditors except one having a right of offset. As stated by the district court in Wiegand:
Allowing setoff against exempt property would not undermine the general policy behind the Bankruptcy Code because a debtor will not be denied the ability to hold property exempt from liability for pre-petition debts. Only creditors who possess a valid setoff right can offset their obligation with a dеbt- or’s exempt property. Under 11 U.S.C. § 522, debtor can still exempt propertyfrom the reach of all other creditors possessing pre-petition claims.
In re Wiegand,
The second rationale offered by the majority courts in denying offsets in exempt property is that this construction is consistent with the fresh start policy of the Bankruptcy Code. However, as shown by the eighteen categories of debts that are excepted from discharge under § 523(a), this policy is not always paramount and is often subordinated to other social and economic concerns and objectives.
See Grogan v. Garner,
Furthermore, as noted by the bankruptcy appellate panel in
Pieri
when considering this issue, “recognition of the preeminence of the right of setoff [is] in accord with the special status granted set-off under the Code.”
In re Pieri,
With regard to the majority courts’ assertiоn that their conclusion is supported by the legislative history to § 522(c), it must be noted that the legislative history to this provision does not mention setoff rights in any respect whatsoever or whether they may be defeated by an exemption. The history simply reveals that in connection with the enactment of the Bankruptcy Act of 1978, Congress debated whether exempt property should remain liable for all taxes or just nondischargeable taxes, ultimately limiting liability to taxes excepted from discharge under § 523(a)(1). However, the conclusion that exempt property is not liable for discharged taxes does not necessarily preclude offset against property claimed exempt. As the
Wie-gand
court recognized, there is a distinction between collecting on a unilateral debt and offsetting a mutual obligation.
In re Wiegand,
Based on the foregoing analysis, this court concludes that the debtor herein has no greater exemption rights with respect to her tax refund than she would have had if this bankruptcy case had not been filed. It has been recognized that “[i]f rights of setoff were not preserved in bankruptcy, creditors might be more inclined to exercise a right of setoff under applicable nonbankruptcy law at an earlier
C. Effect of Discharge on the Offset Right
This issue was recently resolved by this court in its unpublished opinion in
In re Ketelsen,
No. 99-20545 (January 16, 2001). In that decision, it was noted that there was an apparent conflict between section 553, preserving the right of setoff, and section 524(a)(2), which provides that a bankruptcy discharge “operates as an injunction against ... an act, to collect, recover or offset any such debt as a personal liability of the debtor.” This court observed that this conflict was reconciled in
Conti,
wherein the court concluded that § 524(a)(2)’s offset injunction was limited to attempts by a creditor to offset discharged debt against a postpetition obligation to the debtor, and did not affect the offset of mutual prepetition obligations permitted by § 553.
In re Conti,
Nothing in the Code or in the case law would indicate that discharge would bar a creditor from exercising a right to setoff which existed at the time of filing the petition. [Citation omitted.] To hold otherwise would mean that if a creditor failed to file for relief from stay or failed to have its relief from stay granted prior to discharge, its right to setoff would be lost. In addition, to follow this line of reasoning would mean precluding a third party who stands as both debtor and creditor of the bankrupt from effecting a setoff uрon demand by the trustee in bankruptcy for the balance of the debt due to the debtor, which demand may be made after the debtor has received his discharge.
... [T]here would appear to be no reason why a setoff should not be allowed [postdischarge] ... as neither the Code nor the Rules of Bankruptcy Procedure provide a timetable by which set-off must be accomplished.
Id. Based on this analysis, the Conti court concluded that the IRS did not violate the discharge injunction when it offset the debtor’s tax refund, the right to which had arisen prepetition, against the debtor’s discharged obligations to the IRS. Id.
This court further noted in the
Ketelsen
memorandum opinion that most courts construing this issue have agreed with the
Conti
result.
See Davidovich v. Welton (In re Davidovich),
This court agreed with the majority’s conclusion because it gave effect tо both § 553 and § 524(b) and because it was consistent with the rights of a secured creditor granted to a setoff creditor under § 506(a). “Just as a secured creditor is free, notwithstanding discharge of the debtor’s personal liability, to enforce its lien rights in the property once the stay has been lifted, a creditor with a right of offset may exercise this right postdis-charge.”
In re Ketelsen,
No. 99-20545 at p. 13.
See also In re Thompson,
In the present case, this court sees no reason to disagree with the conclusion previously reached by it in Ketelsen. Accordingly, the debtor’s argument that the United States’ offset request should be denied because a discharge order has been entered in this case is without merit.
D. Effect of Stay Violation
Under 11 U.S.C. § 362(a)(7), the filing of a bankruptcy petition operates to stay “the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor.” The IRS’s effectuation of the offset violatеd the automatic stay despite its lack of knowledge of the debtor’s bankruptcy case at that time.
See In re Skeen,
The courts which have considered the issue have disagreed as to whether the right of setoff should be denied to a creditor who has violated the automatic stay.
Compare United States v. Ruff (In re Rush-Hampton Indus., Inc.),
In the present case, there are no “other third-party creditors” which would be prejudiced by the allowance of the setoff. And, the equities do not lie in favor of denying setoff. The IRS’s stay violation was inadvertent, attributable to the debt- or’s own failure to schedule HUD as a creditor for notice purposes. In light of the court’s ruling regarding the debtor’s exemption claim, there is no indication that the United States would not have been grаnted relief from the stay if it had been requested prior to the setoff.
See In re Gribben,
E. Post Facto Stay Relief
In light of the foregoing conclusions, the only remaining issue before this court is whether the United States’ request for post facto relief from the stay should be granted. In other words, should the automatic stay be annulled in order to validate the offset already effectuated by the IRS on behalf of HUD? The definitive case on this issue in the Sixth Circuit is
Easley v. Pettibone Michigan Corp.,
[Ajctions taken in violation of the stay are invalid and voidable and shall be voided absent limited equitable circumstances. We suggest that only where the debtor unreasonably withholds notice of the stay and the creditor would be prejudiced if the debtor is able to raise the stay as a defеnse, or where the debtor is attempting to use the stay unfairly as a shield to avoid an unfavorable result, will the protections of section 362(a) be unavailable to the debtor.
Id. at 911.
This court concludes that the “limited equitable circumstances” referenced in
Easley
are present in the instant case.
III.
In light of the foregoing, an order will be entered contemporaneously with the filing of this memorandum opinion granting the United States’ motion for relief from stay and denying the debtor’s request for affirmative relief.
Notes
. 11 U.S.C. § 506(a) states as follows:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.
. A few of the courts which considered the issue of whether a right of offset may be exercised against exempt property have not found it necessary to resolve a conflict since they have found no offset right preserved by § 553. As noted previously, § 553 simply preserves in bankruptcy, subject to certain limitations, an offset right under state or other federal law. These courts have concluded that under state law, there is no right to offset in exempt property. Thus, there is no right of offset under nonbankruptcy law preserved by
Similarly, the present case would be more readily resolved if the right of offset were based on state law rather than federal statutory law. It is the common law in Tennessee that a creditor may not offset its claim against exempt properly.
See In re Haffner,
. 11 U.S.C. § 542(b) provides:
Except as provided in subsection (c) or (d) of this section, 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(a) specifically provides:
Except as provided in subsection (c) or (d) of this section, 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 section 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.