OPINION AND ORDER
Dеbtor-appellant Kendra Miller appeals an order of the United States Bankruptcy Court for the Western District of Wisconsin denying her motion for summary judgment and awarding judgment in favor of appellee United States of America on her claim that appellee violated the automatic stay in her bankruptcy proceedings by wrongfully seizing her federal income tax refund and applying the funds to the debt she owed appellee. At issue in this appeal is 1) the extent of the government’s setoff rights under federal bankruptcy law, 11 U.S.C. § 553, and the United States Department of the Treasury offset program, 26 U.S.C. § 6402(d) and 31 U.S.C. § 3720A; and 2) whether in exercising thе setoff, the government willfully violated the automatic stay, entitling Miller to damages, fees and costs under 11 U.S.C. § 362(k). (Although both Miller and the bankruptcy court cite the damages provision as § 362(h), that section was redesig-nated as § 362(k) in 2005). Because I agree with the bankruptcy court that Miller properly exercised valid setoff rights аnd did not willfully violate the automatic stay, I will affirm its denial of her motion for summary judgment and entry of judgment for the government.
The following summary of relevant undisputed facts and proceedings is drawn from the record of the proceedings before the bankruptcy court.
FACTS
On March 31, 2005, appellant Kendra Miller contracted with a bank for the pur
Miller filed a petition in a Chapter 7 bankruptcy in the Western District of Wisconsin on March 11, 2008. In re Miller, No. 08-11097 (Bankr.W.D.Wis.). Under 11 U.S.C. § 362, an automatic stay issued, enjoining creditors from collecting Miller’s delinquent accounts. The government was scheduled as a creditor in Miller’s petition and received notice of the case and the imposition of the аutomatic stay.
The Debt Management Servicing Center Financial Management Service is a bureau of the United States Department of Treasury that manages debt collection for the federal government. On April 4, 2008, the servicing center seized $1,393.00 of Miller’s 2007 federal income tax refund on the government’s behalf without first seeking relief from the automatic stay as required under § 362. The Department of Treasury’s computer automatically transferred Miller’s tax overpayment to the government. Initially, the electronic transfer was credited to Miller’s loan account but the credit was manually reversed later and the funds were transferred to an “unap-plied funds” account. On its own initiative, the government has continued to hold Miller’s overpayment in the unapplied funds account, pending resolution of this appeal.
Ordinarily, the government’s computer program would have placed an automatic halt on the setoff when Miller filed bankruptcy. However, her debt arose as a result of the government’s payment of a guaranty claim. The government’s computer is not programmed to prevent a setoff under such circumstances. On April 14, May 12 and May 14, 2008, Miller’s attorney wrote the servicing center, alleging that the tax overpayment was intercеpted wrongfully and demanding its return. The automatic stay was terminated on July 3, 2008, when the bankruptcy court issued a general discharge order. On July 11, 2008, Miller filed an adversary proceeding in the bankruptcy court, claiming that she was entitled to damages for the government’s willful violation of the automatic stay.
Miller v. United States of America,
On April 1, 2009, Miller moved for summary judgment, arguing that because she claimed her 2007 tax refund as exempt under § 522(c) in her bankruptcy filing, the government did not have the right to exercise a setoff against the tax refund and willfully violated the automatic stay, justifying an award of fees and costs under § 362(k). The government opposed the motion and requested entry of summary judgment in its favor. On July 8, 2009, United States Bankruptcy Judge Thomas Utschig entered an order denying Miller’s motion for summary judgment and granting judgment in favor of the government.
In re Miller,
In its decision, the bankruptcy court noted that although 11 U.S.C. § 553 does
OPINION
Under Rule 8013 of the Federal Rules of Bankruptcy Procedure, a district court on appeal may affirm, modify or reverse a bankruptcy judge’s judgment, order or decree or remand with instructions for further proceedings. A bankruptcy court’s factual findings are reviewed fоr clear error; its conclusions of law are reviewed de novo.
Mungo v, Taylor,
A. Extent of the Government’s Setoff Rights
Under the bankruptcy code, 11 U.S.C. § 553(a), mutual debts arising before the commencement of a bankruptcy proceeding may be offset, subject to certain exceptions.
In re United Air Lines, Inc.,
In this case, the government claims a valid right of setoff with respect to Miller’s 2007 federal income tax overpayment under the Treasury offset program, 26 U.S.C. § 6402(d) and 31 U.S.C. § 3720A. That program allows a government agency with a legally enforceable debt to notify the Secretary of Treasury of thе debt, and if there later comes a time when the Secretary is indebted to the debtor for a tax overpayment, the Secretary must pay the overpayment to the agency for application toward the debtor’s debt to the agency. As the bankruptcy court recognized, courts generally consider the federal government to be a single-entity that is entitled to set off one agency’s debt to a party against that party’s debt to another agency.
Maxwell,
The government asserts correctly that both Miller’s mortgage-related debt to the government and its tax overpayment debt to Miller preceded Miller’s filing of her bankruptcy petition.
In re Kadrmas,
No. 00-31138,
The crux of Miller’s argument is that the government lacked the authority to exercise its setoff right because she had claimed her 2007 tax overpayment as exempt property under 11 U.S.C. § 522(c). Section 522(c) provides that except in certain circumstances not applicable in this case
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 section 502 of this title as if such debt had arisen, before the commencement of the case ...
Courts are split over whether § 522(c) trumps setoff rights preserved by § 553.
Kadrmas,
As the bankruptcy court and the parties recognize, more courts have held that exempt property is not subject to setoff, than have reached the opposite conclusion.
E.g., In re Pace,
Following the holding in
Kadrmas,
the bankruptcy court rejected the majority view in this case and looked to the plain language of § 553, which provides that “this title does not affect any right of a creditor to offset a mutual debt.” The court observed that allowing § 522(c) to limit a creditor’s setoff rights would contradict the court of appeals’ finding that the bankruptcy code neither expands nor constricts the common law right of setoff.
I agree with the bankruptcy court’s conclusion. Although §§ 522 and 553 are in apparent conflict and should be interpreted tо give effect to the whole act,
Jove Engineering, Inc. v. Internal Revenue Service,
The bankruptcy court’s other primary rationale for rejecting the majority view is equally convincing. A separate but related section of the bankruptcy code, 11 U.S.C. § 542(b), allows a creditor with a valid setoff right to retain exempt property
during
the bankruptcy proceeding rather than turning the property over to the trustee. Courts holding the minority view reason that “if a creditor’s setoff right is not defeated by exemption pursuant tо § 542(b) while a bankruptcy proceeding is in progress, then a creditor’s setoff right is not defeated by exemption pursuant to § 553(a) after a bankruptcy proceeding is over.”
In re Wiegand,
In sum, although courts disagree whether a creditor can exercise a setoff right against property that a debtor claimed as exеmpt, I find that the opinions of the courts addressing this issue in more recent decisions, including the bankruptcy courts in the Western District of Wisconsin, are more persuasive. Therefore, I will affirm the bankruptcy court’s decision that the government could exercise its setoff right in Miller’s 2007 tax overpayment even though she had clаimed it as exempt.
B. Automatic Stay
Filing a petition for bankruptcy triggers the automatic stay provisions of 11 U.S.C. § 362.
In re Radcliffe,
“A willful violation does not require specific intent to violate the stay; it is sufficient that the creditor takes questionable action despite the awareness of a pending bankruptcy proceeding.”
Radcliffe,
In this case, although the government was sent a notice of Miller’s bankruptcy filing, a glitch in its computer program failed to place an automatic halt on the setoff. Miller points оut that her attorney later contacted the government on three different occasions to demand the return of Miller’s overpayment. The government dismisses these notifications as meaningless because the seizures had occurred before they were made. It argues also that because it had a valid setoff right and no obligation to turn over the funds to Miller, she was not injured by its failure to request relief from the stay. Although another court may have reached a different decision in this case with respect to the government’s willfulness,
e.g., Price,
ORDER
IT IS ORDERED that the decision of the United States Bankruptcy Court for the Western District of Wisconsin denying appellant Kendra Miller’s motion for summary judgment and awarding summary judgment to appellee United States of America is AFFIRMED.