In Re Whitaker
ORDER GRANTING MOTION TO LIFT STAY
The United States of America on behalf of the Internal Revenue Service (“IRS”) requests relief from the automatic stay pursuant to 11 U.S.C. § 362(d) to set off a prepetition income tax refund due to the Debtors against the IRS claim filed in this case. The Debtors filed a petition for relief under chapter 13 of the Bankruptcy Code on March 22, 1994. Debtors’ chapter 13 plan sets forth, in addition to full repayment of secured claims and unsecured priority claims, repayment of unsecured debt at ten percent (10)%.
The IRS filed an Objection to Confirmation of the Debtors’ plan. The IRS alleged the Debtors had not filed income tax returns for the taxable years 1988 through and including 1993, and argued the Dеbtors should not be afforded relief under title 11 of the United States Code while ignoring their duties under title 26. Upon submission of copies of the timely filed returns by the Debtors, apparently misplaced by the IRS, the IRS withdrew its Objection to Confirmation. Thе IRS Objection did not address the content of the Debtors’ plan, nor include a request for a provision permitting setoff. The Debtors’ plan of reorganization was confirmed by Order of this Court on June 9, 1994.
The Debtors’ original Schedule B — “Personal Property” did not indicate a prepetition tax refund as part of the estate. On August 12, 1994, Debtors amended Schedule B to include an income tax refund for the tax year 1993 in the amount of $1,337.00.
On June 7, 1994, the IRS filed its Amendment No. 2 to Proof of Claim for an unsecured priority claim in the total amount of $19,033.75 and an unsecured general claim in the total amount of $4,818.48. The Debtors have not objected to the IRS’ Proof of Claim.
11 U.S.C.' § 553 provides:
(a) 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 bysuch creditor to the debtor that arose before the commencement of the case....
Sectiоn 553(a) does not create a right of setoff, but preserves the right where it exists under applicable nonbankruptcy law.
United States v. Orlinski (In re Orlinski),
A creditor must first establish its right to setoff under 11 U.S.C. § 553(a). The creditor must show that a right to setoff exists by establishing:
1) A debt owed by the creditor to the debtor which arose prior to the commencement of the bankruptcy case;
2) A claim of the creditor against the debt- or which arose prior to the commencement of the bankruptcy ease;
3) The debt and claim are mutual obligations; and
4) A right to setoff the debts under non-bankruptcy law.
DuVoisin v. Foster (In re Southern Industrial Banking Corp.),
Having filed their petition for relief on March 22,1994, the Debtors’ 1993 income tax refund is a prepetition debt owed to the Debtors by the IRS. Debtors do not dispute that the obligations are mutual, the obligations arose from separate transactions, and both obligations accrued prepetition. Because the Internal Rеvenue Code, 26 U.S.C. § 6402(a), provides that the IRS has the right to set off a taxpayer’s overpayment of tax against a tax liability for prior years, the IRS meets the fourth requirement of showing its right to setoff exists in nonbankruptcy law. Finally, none of the three exceptions to setoff listed in 11 U.S.C. § 553(a) applies to the case at bar. The Court finds that the IRS satisfies the requirements of 11 U.S.C. § 553(a) and therefore retains its prepetition right of setoff.
Section 553(a) by its own terms is limited by § 362. Seсtion 362(a)(7) provides a stay of any action by a creditor to set off any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor. The imposition of the automatic stay against a creditor’s right of setoff “... does not defeat the right of setoff, rather, setoff is merely stayed pending an ‘orderly examination of the debtor’s and creditor’s rights....’”
In re Orlinski,
In its Motion, the IRS argues that it should be granted relief from stay to set off a prepetition refund of $1,377.00 due to the Debtors for the tax year 1993 against the prepetition claim owed to the IRS by the Debtors. The practical effect would be to reduce the amount of debt the Debtors will repay to the IRS through the confirmed plan. The Debtors’ Memorandum in Opposition argues that the IRS Mоtion does not state any grounds upon which relief from stay can be granted. Debtors argue the IRS Motion fails to plead lack of adequate protection, and no material default has occurred under the cоnfirmed plan. The Court does not find the Debtors’ argument persuasive.
The application of setoff pursuant to 11 U.S.C. § 553(a) is permissive, and lies within the equitable powers of the bankruptcy court.
In re Southern Industrial Banking Corp.,
As aforementioned, the IRS in this case has established its right to setoff. Responding to thе Motion for Relief from Stay, the Debtors in this case have not refuted the IRS’s right to setoff. Further, Debtors have not rebutted the IRS’s showing of cause for relief from stay nor shown that granting relief from stay would herein impede their fresh start, jeоpardize their plan of reorganization, prejudice other creditors or cause other harm. Upon an examination of the Debtors’ and IRS’s rights, this Court holds the IRS’s establishment of its right to setoff pursuant to 11 U.S.C. § 553(a) is cause for reliеf from the automatic stay.
Debtors’ Memorandum in Opposition to Motion for Relief from Stay: Discussion of Cases Alleged in Support of the IRS, cites to the ease of
In re Alexander,
This Court does not agree with the holding of
In re Alexander
and its brethren. The plаin language of § 553(a) states, “[e]xcept as otherwise provided in this section and in sections 362 and 368 of this title [11],
this title does not affect any right of a creditor to offset
...” mutual prepetition debts. 11 U.S.C. § 553(a) (emphasis added). As stated in
In re Orlinski,
“ ‘this title,’ title 11, includes § 1327(a). Section 553(a) is clear that the right of setoff is not made subject to the provisions of § 1327(a). Under § 553(a), a valid prepetition right of set-off continues to exist notwithstanding § 1327(a), subject only to the provisions of §§ 362, 363, and the rеst of § 553.”
In re Orlinski,
The Debtors argue that the IRS is bound by the terms of the confirmation order because the IRS failed to object to the provisions of the proposed plan. Under 11 U.S.C. § 1327(a), a confirmation order is res judica-ta as to all questions pertaining to a plan of reorganization which were or could have been raised.
In re Orlinski,
Cases under chapter 11 of the Bankruptcy Code have similarly allowed post-confirmation setoff under § 553(a). The case of
Carolco Television, Inc. v. National Broadcasting Co. (In re De Laurentiis Entertainment Group, Inc.),
The
De Laurentiis
Court specifically notes that the chapter 13 cases it reviewed were decided in favor of barring setoff post-confirmation. The Court criticizes the result in these cases, stating: “... in all of these eases the Internal Revenue Service was the creditor. The IRS attempted to retain tax overpayments and set them off against other debts. The factual settings of these cases may have had some influence on their results.”
In re De Laurentiis,
This Court does not see a difference betwеen chapter 11 and chapter 13 for the purpose of applying § 553 and allowing post-confirmation setoff to occur. By its own terms, § 553 predominates and is limited only by the exceptions and Code sections therein enumerated. Accordingly, this Court holds that § 553 takes precedence over § 1327, and an order confirming a chapter 13 plan does not bar a creditor from seeking setoff pursuant to § 553. The IRS, having shown its right to setoff under 11 U.S.C. § 553(a), and cause for relief from stay pursuant to 11 U.S.C. § 362(d), is therefore permitted to exercise its prepetition right of setoff.
Accordingly, the IRS’s Motion for Relief from Stay shall be, and the same hereby is, GRANTED.
IT IS SO ORDERED.
Notes
.
See In re Willardo,
. In
Applied Logic,
Judge Friendly of the Second Circuit ruled the plaintiff bank was entitled under the Bankruptcy Act to exercise its right of setoff of unsecured debt owed to it against bank deposits and certificates of deposit (not designated for special use) of the debtor defendant which were held by the bank.