In Re Ealy
MEMORANDUM OPINION
Before the court is the Motion to Modify Stay to Permit Setoff of Tax Overpayment [the Motion] filed by the Internal Revenue Service [IRS] on May 21, 2008. A hearing was held on June 18, 2008. The parties appeared through their attorneys; the
I. Jurisdiction
This court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157. This is a core proceeding under 28 U.S.C. § 157(b)(2)(G). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052, made applicable to the proceeding under Federal Rule of Bankruptcy Procedure 9014.
II. Background
On January 6, 2005, the debtor filed his pre-BAPCPA Chapter 13 voluntary petition and Chapter 13 plan. The plan provided for an IRS priority claim of $1,928. On January 31, 2005, the IRS filed a proof of claim, reflecting a priority claim for the debtor’s tax liabilities for 2002-2004 in the amount of $3,510.82 and a general unsecured claim of $34.47. On February 24, 2005, this court entered an order confirming the debtor’s Chapter 13 plan. The order states that “[t]he total amount of an allowed claim shall be the amount stated on a proof of claim filed by or on behalf of such creditor, unless the Court determines a different amount following the filing of an objection to claim.” This court entered an order on July 7, 2005 that, inter alia, deemed as “allowed” the IRS’s claims.
The debtor modified his Chapter 13 plan on January 23, 2006, to provide for the IRS’s priority claim in the amount of $3,511.00 to be paid in full, pro rata. This modification of the debtor’s plan was never confirmed. Thereafter, the debtor made several other modifications to his plan, but these modifications made no reference to the IRS. 2 On October 25, 2006, this court issued an order confirming the last modification of the debtor’s plan.
The debtor did not pay his postpetition federal income tax for 2005 and 2006. On June 6, 2007, the IRS filed a proof of claim reflecting a priority claim of $7,298.00 and a general unsecured claim of $476.41. The priority claim included the debtor’s tax liability for prepetition years 2002-2004 and his postpetition tax liability of $3,375.00 for 2005 and $1,499.00 for 2006. On June 20, 2007, the Chapter 13 trustee filed a “Summary Notice of Amended Claim Filed” [Notice]. The Notice stated, in relevant part:
Pursuant to 11 U.S.C. Sections 501 and 502 and Federal Rule of Bankruptcy Procedure 3007, a claim or interest for which a proof of claim is filed is deemed allowed unless the Debtor or a party ininterest objects to the claim and obtains an order modifying or disallowing the claim as filed. If no order is entered which modifies or disallows a claim, each of the claims noted below will be paid as filed, subject to the terms of the confirmed plan and the United States Bankruptcy Code.
The Notice listed the IRS’s original claim amount as $3,510.82 and its amended claim amount as $7,298.08. The debtor did not modify his plan after the trustee filed the Notice. The trustee’s records show that: (1) the IRS’s priority claim is $7,298.08; (2) $3,209.96 of that claim has been paid; and (3) $4,088.12 is still owed on the claim. The debtor is current on his plan payments.
In 2008, the debtor filed his income tax return for 2007, reflecting an overpayment of $936.00. On May 21, 2008, the IRS filed its Motion. Five days later, the IRS credited the debtor’s 2007 account for $600 in accordance with the Economic Stimulus Act of 2008. 3
III. Discussion
In support of its Motion, 4 the IRS argues that it has a right to set off mutual postpetition obligations, thereby permitting it to offset the debtor’s tax overpayment for tax year 2007 in the amount of $936 and his economic stimulus payment of $600 against his 2005 tax liability in the amount of $3,375. The IRS also contends that the debtor’s confirmed plan does not prevent it from offsetting the debtor’s postpetition tax overpayment because: (1) it had no way of knowing when it filed its claim that the debtor would have a postpe-tition overpayment and (2) at the time the debtor’s plan was confirmed, there was no tax overpayment. In response, the debtor asserts that the IRS does not have the right of setoff against his postpetition earnings, as the Bankruptcy Code’s [the Code] provision on setoff, 11 U.S.C. § 553, only covers the setoff of mutual prepetition obligations. Additionally, the debtor maintains that relief from the automatic stay is precluded by the debtor fully funding his confirmed plan that provides for full payment to the IRS.
A. Right of Postpetition Setoff
Although no federal right of setoff is created under the Code, “any right of setoff that a creditor possessed prior to the debtor’s filing for bankruptcy is not affected by the Bankruptcy Code.”
Citizens Bank of Md. v. Strumpf,
Except as otherwise provided in this section and sections 362 and 363 of thistitle, this title does not affect any right of a creditor to offset a mutual debt by such creditor to the debtor 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....
Notably absent from the Code is an express provision providing for postpetition setoff. “Although this silence has created some confusion, the general rule is that, subject to the restriction imposed by section 362, a postpetition claim may be offset against a postpetition debt so long as the claim and debt constitute valid, mutual obligations.” 5 Collier on Bankruptcy § 553.03[6], at 553-56 (15th ed. rev.2004) (citing
In re Alfar Dairy, Inc.,
In the present case, the IRS has a statutory right of setoff under § 6402(a). This court agrees with the majority view that the Code does not abrogate a creditor’s common law right of setoff for mutual postpetition obligations. 5 But this court’s recognition of the IRS’s right to set off mutual postpetition obligations does not end the inquiry, as this court issued an order confirming the debtor’s plan on February 24, 2005, which specifically states that “[t]he total amount of an allowed claim shall be the amount stated on a proof of claim filed by or on behalf of such creditor, unless the Court determines a different amount following the filing of an objection to claim.” The confirmed plan proposes to pay the IRS in full, and the debtor is current in his plan payments. 6 Therefore, the issue is whether the debt- or’s confirmed plan prevents the IRS from exercising its right of setoff.
B. Effect of Plan Confirmation on Right of Setoff
Courts frequently discuss the effect of confirmation on a creditor’s right of setoff pursuant to § 553. Courts are divided as to whether confirmation of a plan under §§ 1141 or 1327 prevents the creditor from offsetting its claim under § 553.
In re Ronnie Dowdy, Inc.,
In contrast, other courts have concluded “that the plan confirmation provisions take precedence and have denied setoff post-confirmation.”
Id.
(citing
In re Cont’l Airlines,
Prior decisions in the United States Bankruptcy Court for the Eastern and Western Districts of Arkansas have uniformly adopted the former view that confirmation of a plan does not affect a creditor’s
prepetition
setoff rights.
See, e.g., Dowdy,
“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 debtor 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.... ”
Womack,
C. Lifting of the Automatic Stay
Courts generally recognize that, by establishing a right of setoff, the creditor has established a prima facie showing of “cause” for relief from the automatic stay under § 362(d)(1).
In re Nuclear Imaging Sys., Inc.,
In this instance, this court does not find sufficient justification under 11 U.S.C. § 362(d) to modify the automatic stay to permit setoff of the tax overpayment. The debtor has clearly met his burden of rebutting the prima facie showing of “cause” for relief from the automatic stay. The IRS is treated as a fully secured creditor under the debtor’s confirmed plan. The debtor is making his payments timely; in fact, he is slightly ahead in his payments to the trustee’s office. There is no evidence that the payment stream might be discontinued, altered, or adversely impacted in the near future, or that the IRS is inadequately protected under the confirmed plan. Additionally, the debtor has adequately demonstrated his need for the refund and the economic stimulus payment, both of which will help him in providing for his family and in fully complying with the terms of his confirmed plan.
D. Equitable Considerations
The IRS cites authority suggesting that this court may use equity to allow the IRS to exercise its right of postpetition setoff after confirmation of the plan.
See In re Murry,
Not only is the Government’s right of [prepetition] setoff supported by statute, but it is also the equitable solution in this situation. Any refund made to the plaintiff at this point would be a windfall to her. The plan proposed by the debt- or-plaintiff in this proceeding is based upon the net income which she has ather disposal during the course of the year. Amounts which are deducted from her gross income are not taken account of because it is assumed they are being used to cover current expenses. If, as in this case, the debtor’s current tax liabilities are less than the amounts withheld from her wages, then the excess should be available to her creditors under the plan. If the 1980 overpayment is simply refunded to the debtor-plaintiff herein, she will receive a cash windfall with no additional obligation to her creditors other than to continue with her payments under the plan. It is clearly a fairer solution to allow the United States to retain the overpayment against its claim in the bankruptcy proceeding.
Id.
at 326;
see also Womack,
In essence, the IRS’s position is that if equity permits setoff of prepetition debts postconfirmation, then equity should also permit postconfirmation setoff of postpetition debts. But this court: (1) is persuaded that the discussion of equitable considerations in Murry was unnecessary, given that § 558 adequately at law addresses setoffs of prepetition indebtedness; (2) has ruled above that the plan governs as to setoffs regarding postpetition debts; and (3) is equally persuaded that equitable considerations do not automatically favor allowing setoff in any circumstance, but particularly under the facts of this case.
Assuming arguendo that the refund amount is property of the estate — an issue not reached by this court — the analysis in
Murry
ignores the fundamental conditions and assumptions underlying the formulation of a plan leading to its confirmation. Specifically, a plan payment is not “based upon the net income which [the debtor] has at [his or her] disposal
during
the course of a year.”
Murry,
While unofficial procedures may have arisen in the context of Chapter 13 trustees administering postpetition tax refunds, this record does not indicate that either the trustee or a creditor attempted to claim the refund for the estate or filed an objection to confirmation of the plan, seeking to: (1) preserve any future setoff right to the IRS for postpetition mutual obligations; (2) contractually include, either partially or fully, any subsequent tax refund as an amount that would be distributed to creditors under the plan; or (3) convert the refund — arguably personal property of the estate received postconfir-mation — into an amount that should be distributed to creditors as part of a belated pre-confirmation best-interests-of-creditors-test analysis. While the IRS argues that proactive steps either at confirmation or in the context of filing its claim were unavailing because, at each pertinent time, no refund was due and owing, this court can discern no reason to equitably compel what could have' easily been anticipated, negotiated, resolved, and contractually addressed by the parties either at confirmation of the original three to five year plan or upon modification. The IRS chose to raise the setoff issue in the context of a
Further, the “windfall” analysis in Mur-ry is shortsighted and one-sided. It presupposes that, during the course of a three to five year plan, the debtor’s expenses will remain level and that he or she will not be subjected to any increased living expenses or unforeseen adverse financial circumstances. The plan at confirmation is subject to negotiation based upon code sections that expressly contemplate a threshold best-interests-of-creditors test concerning personal property and a projected disposable income calculation based on current figures, which do not always anticipate or contemplate future adverse changes. Allowing the debtor to keep a subsequent tax refund is no less equitable than ignoring that, as the evidence in this case reflects, the debtor has, postconfirmation, struggled with increased transportation, living, and educational responsibilities and costs, while continuing to honor his plan payment commitment.
In this instance, the plan as confirmed does not address any subsequent refund issues, nor has a modification been proposed. The IRS is adequately protected and insufficient grounds exist for terminating or lifting the automatic stay, and, if equity applies, the equities in this instance lie with the debtor.
IV. Conclusion
For the reasons stated above, the IRS’s Motion is denied. The IRS is directed to return’ the refund and economic stimulus payment to the debtor.
IT IS SO ORDERED.
Notes
. The $600 amount was not available at the time the IRS filed its Motion.
. On February 4, 2006, the debtor modified his plan, and this court entered an order confirming the modified plan on March 2, 2006. On August 1, 2006, the debtor modified his plan, and this court entered an order confirming the modified plan on August 28, 2006. On September 19, 2006, the debtor modified his plan, and this court entered an order confirming the modified plan on October 25, 2006.
. In "Debtor’s Brief Opposing Set Off of Post-petition Earnings and Economic Stimulus Payment,” the debtor argues that the IRS violated the automatic stay by freezing the debtor's 2007 tax refund and economic stimulus payment without notice to the debtor and without seeking approval of this court. There is no motion pending before this court for contempt or for violation of the automatic stay. Accordingly, this court will not address the allegations.
. Because the IRS chose to assert its right to setoff by filing a motion for relief from the automatic stay, this court will not address whether the debtor's tax overpayment is property of the bankruptcy estate.
. The debtor has not asserted that, presuming a right of setoff exists, the government has failed to prove the elements necessary to establish a right of setoff.
. The IRS elected to file an amended proof of claim. Under the terms of the confirmation order, as effectuated by a procedure employed by the Chapter 13 trustee, the plan contemplates paying the amended IRS claim in full. Accordingly, this court will not speculate as to what the outcome of this case would be had the IRS elected not to file an amended claim for postpetition taxes.