MEMORANDUM OPINION
The question this court must answer is whether the government’s post-petition setoff of the debtor’s tax refund to satisfy a non-tax debt is a violation of the automatic stay. Before the Court are the debtor’s complaint and the government’s two motions to dismiss the debtor’s complaint. The debtor’s complaint seeks to enforce the automatic stay against the government. The government seeks to dismiss the complaint under Rule 12(b)(6) for failure to state a claim. Additionally, the government moves to dismiss under Rule 12(b)(1) for this Court’s alleged lack of subject matter jurisdiction. The government also moves the Court for entry of a nunc pro tunc order retroactively annulling the automatic stay and validating its setoff action. For the reasons set forth below, the Court denies the government’s motions to dismiss and its nunc pro tunc motion and finds that the government’s actions of intercepting and withholding the debtor’s tax overpayment violated the automatic stay.
JURISDICTIONAL STATEMENT
This Court has subject matter jurisdiction over the matters presented in this case pursuant to 28 U.S.C. § 1334.
BACKGROUND
The underlying facts of this case are not in dispute. Adina Naomi Sexton filed her voluntary petition for Chapter 7 liquidation on February 13, 2013. Chapter 7 Voluntary Petition, In re Sexton, 13-70230 (Bankr.W.D.Va. Feb. 13, 2013) ECF Doc. No. 1. In her petition, Ms. Sexton listed her anticipated 2012 federal tax refund as an asset of her estate,
It was during this time, however, that the issues leading to the present dispute arose. On March 6, 2013, approximately three weeks after Ms. Sexton filed her petition, the Department of the Treasury (“the Treasury” and, collectively, with the DOA, “the government”) sent a letter to
After the government failed to release the funds, on June 25, 2013, Ms. Sexton filed a motion to reopen the bankruptcy case and challenged the government’s application of her tax refund to her prepetition debt owed to the DOA. Motion to Reopen Case, In re Sexton, 13-70230 (Bankr.W.D.Va. June 25, 2013) ECF Doc. No. 11. The Court granted the motion to reopen on July 25, 2013. Id. After reopening the case, Ms. Sexton’s attorney instituted this adversary proceeding against the government for allegedly violating the automatic stay by confiscating and continuing to withhold her anticipated 2012 refund, which she asserts she had exempted from her estate. Complaint at 3-4. Further, the complaint requested that this Court order the government to reimburse either the trustee or debtor the amount of the refund as well as pay attorney’s fees and actual damages incurred as a result of the actions. Id. at 4. As set forth more fully below, in its response, the government denied any wrongdoing in intercepting the tax overpayment. Answer at 5. It argued the tax refund did not become a part of Ms. Sexton’s estate and procure the stay’s protections until after the Secretary of the Treasury complied with the mandatory requirements of the Treasury Offset Program. Id. Furthermore, the government challenged the complaint’s procedural soundness under Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Civil Procedure 12(b)(1) — both applicable in the bankruptcy context pursuant to Federal Rule of Bankruptcy Procedure 7012(b). See id. at 4-5. Finally, the government sought entry of a nunc pro tunc order retroactively validating its set-off action against Ms. Sexton. Motion for Nunc Pro Tunc Order Validating Setoff, Sexton v. Dep’t of Treasury, IRS (In re Sexton), 13-07037 (Bankr.W.D.Va. Sept. 24, 2013) ECF Doc. No. 13 [hereinafter Nunc Pro Tunc Motion ].
The Court held a pretrial conference on November 5, 2013, at which it requested the parties brief the interaction between the Bankruptcy Code and the Treasury Offset Program. Each party submitted authorities in support of their respective positions. The Court will outline these arguments below.
ANALYSIS
Ms. Sexton’s complaint included two claims. First, she argued the government’s interception of her refund and application of the TOP provisions violated the
In response to Ms. Sexton’s complaint, the government defended its actions by asserting Ms. Sexton only possessed a contingent interest in the overpayment until after the Secretary of the Treasury complied with TOP. The government moved to dismiss through two separate motions under Rule 12. First, the government asserted that the complaint failed to state a claim upon which relief could be granted under Rule 12(b)(6). See Motion to Dismiss Adversary Proceeding, Sexton v. Dep’t of Treasury, IRS (In re Sexton), 13-07037 (Bankr.W.D.Va. Sept. 23, 2013) ECF Doc. No. 10. Second, it moved to dismiss Ms. Sexton’s action under Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction. See Motion to Dismiss Adversary Proceeding Federal Rule of Civil Procedure 12(b)(1), Sexton v. Dep’t of Treasury, IRS (In re Sexton), 13-07037 (Bankr.W.D.Va. Sept. 24, 2013) ECF Doc. No. 16. As these motions are threshold issues, the Court will begin its analysis by addressing them.
(a) Rule 12(b)(1) Motion to Dismiss for Lack of Subject Matter Jurisdiction
Rule 12(b)(1) of the Federal Rules of Civil Procedure authorizes any defendant to raise, by motion, a defense of “lack of subject-matter jurisdiction.” FED. R. CIV. P. 12(b)(1). In this case, the government’s two arguments for why there is a lack of subject matter jurisdiction challenge Ms. Sexton’s standing to bring this suit. “Standing is a threshold jurisdictional question which ensures that a suit is a case or controversy appropriate for the exercise of the courts’ judicial powers under the Constitution of the United States.” Pye v. United States,
By lodging a Rule 12(b)(1) challenge, the defendant asserts that the complaint does not sufficiently plead a jurisdictional basis for the court to hear the matters before it. These challenges can take two forms— “facial” or “factual.” See Kerns v. United States, 585 F.3d 187, 192 (4th Cir.2009). In asserting a facial challenge, the movant argues, even assuming that everything in the complaint is true, there is no jurisdictional “hook” pled. Id. Conversely, when the challenge is factual, the movant asserts that, although there are facts pled sufficient to establish jurisdiction, those facts simply are not true. Id.
The government contends its challenge to the complaint’s jurisdictional basis is factual, because Ms. Sexton actually suffered no injury. Having no injury deprives her of standing to bring her case. Memorandum in Support of Rule 12(b)(1) Motion to Dismiss at 3, Sexton v. Dep’t of Treasury, IRS (In re Sexton), 13-07037 (Bankr.W.D.Va. Sept. 24, 2013) ECF Doc. No. 17 [hereinafter Rule 12(b)(1) Memo ]. Alternatively, an underlying theme of many of the government’s arguments for
i Lack of Injury
The government’s main argument is that Ms. Sexton cannot prove that she has an “injury-in-fact which is constitutionally required in order ... to have Article III standing.” Id. at 2. Further, it asserts that this motion to dismiss presents a “factual,” as opposed to a “facial,” challenge, because “the jurisdictional allegations of the complaint [are] not true.” Id. at 3 (quoting Kerns,
After a careful review of the pleadings, the only factual issue the government seems to dispute is the existence of an injury-in-fact. Id. at 6. In bankruptcy, “an injury-in-fact means a pecuniary loss.” Id. In the Chapter 7 context, to have a pecuniary loss, the debtor must show either that she had properly exempted the property or that there was a likelihood that some remainder amount of property would revert back to the debtor after the administration of the estate. Id. According to the government, Ms. Sexton retained only a conditional interest in the refund of her tax overpayment, subject to the Secretary of the Treasury’s compliance with the provisions of 26 U.S.C. § 6402. Id. at 6. After the Secretary of the Treasury complies with the provisions of 26 U.S.C. § 6402(d) and applies the tax overpayment to satisfy Ms. Sexton’s preexisting debt to the DOA, the government must return any remainder to the taxpayer as a tax refund. See id. The government argues that, because the offset absorbed the entire amount of the overpayment, no remainder ever existed for the Secretary to refund and become a part of the debtor’s bankruptcy estate. Id. As such, the debtor: (1) could not exempt the refund from the estate and (2) did not lose any pecuniary interest, since there was no remainder to revert back to her. Id. Thus, Ms. Sexton suffered no injury by the government’s actions.
Despite the above arguments, the Court rejects the government’s characterization of the challenge as “factual.” Although framed as such, the government does not contest any of the facts alleged, but summarily asserts that the plaintiff suffered no injury.
[T]he ... court has jurisdiction if the right of the petitioners to recover under their complaint will be sustained if theConstitution and laws of the United States are given one construction and will be defeated if they are given another ... unless the claim clearly appears to be immaterial and made solely for the purpose of obtaining jurisdiction or where such a claim is wholly insubstantial and frivolous.
Id. (internal quotation marks omitted) (citation omitted).
In this case, whether Ms. Sexton has an injury-in-fact depends entirely upon the construction of the relevant statutes and case law, which remain unsettled within the Fourth Circuit. The government’s argument assumes the debtor’s interest in her overpayment did not become a part of her estate until after the Secretary of the Treasury complied with the offset procedures; however, that question is central to the merits of the debtor’s cause of action and the government’s defense and remains unresolved. Thus, the Court concludes that it is improper to dismiss the action for want of jurisdiction at this stage of the proceeding.
ii. Improper Party
Alternatively, the government suggests that Ms. Sexton is not the proper party to bring the action, so she lacks standing. Rule 12(b)(1) Memo at 5. In its Memorandum in Support, the government cites multiple sources suggesting that in the Chapter 7 context only the trustee has standing to prosecute causes of action on behalf of the estate. See id. at 5-6 (citing In re Gronczewski
The government’s argument does not stop there, however, as it further asserts that even the trustee lacked standing to pursue this claim. Id. at 6-7. Here, as with its injury-in-fact argument, the government asserts that because the refund never became an asset of the estate, the estate suffered no injury, depriving the trustee of standing as well. Id. at 7-9. Ultimately, the government’s argument is that this case presents no cause of action, because its actions violated no right of either the debtor or the debtor’s estate. Accordingly, the government’s attack of the complaint seems to be under Rule 12(b)(6) rather than Rule 12(b)(1).
(b) Rule 12(b)(6) Motion to Dismiss for Failure to State a Claim
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a defendant can move to dismiss a case when, assuming the facts as pled are true and construing all inferences in favor of the plaintiff, the complaint does not state a claim upon which the court can grant relief. FED. R. CIV. P. 12(b)(6); Vitol, S.A. v. Primerose Shipping Co. Ltd.,
Each of the parties’ briefs delves into the merits of the claim as a whole; however, the Court must not consider the merits at this stage in the proceeding. Tahir Erk v. Glenn L. Martin Co.,
According to the government’s motion, Ms. Sexton’s complaint fails to state a claim upon which relief can be granted, not because of insufficient pleadings and factual allegations, but actually because her action, as a matter of law, does not exist. See Memorandum of Law in Support of Their Motion to Dismiss 3-6, Sexton v. Dep’t of Treasury, IRS (In re Sexton), 13-07037 (Bankr.W.D.Va. Sept. 23, 2013) ECF Doc. No. 11 [hereinafter Rule 12(b)(6) Memo]. In support of this position, the government cites a litany of cases holding that only the debtor’s contingent interest in her tax refund became a part of the estate. Id. at 4-6.
Conversely, Ms. Sexton argues that the Fourth Circuit has not yet settled the law in this area. Response to Rule 12(b)(6) Motion to Dismiss at 7, Sexton v. Dep’t of Treasury, IRS (In re Sexton), 13-07037 (Bankr.W.D.Va. Jan. 21, 2014) ECF Doc. No. 27 [hereinafter Rule 12(b)(6) Response]. According to the debtor, the government bases its position primarily
According to the information before it, the Court finds that Ms. Sexton has carried her burden in pleading and denies the government’s motion to dismiss. Important to the Court’s decision is the fact that neither the Supreme Court nor the Fourth Circuit has addressed what type of property interest a debtor has in a tax overpayment when the intercept provisions apply. Cognizant of the conflicting authority within the Circuit and the relatively low standard under Rule 12(b)(6), the Court does not believe “to a certainty that the plaintiff would not be entitled to relief under any legal theory which might plausibly be suggested by the facts alleged.” Edwards,
(c) Adversary Proceeding to Enforce the Automatic Stay
Having concluded the complaint withstands all of the government’s motions to dismiss, the Court now moves to the merits of Ms. Sexton’s action. As mentioned above, Ms. Sexton claims that the government violated the automatic stay by offsetting, post-petition, her prepetition obligation to the DOA with her 2012 tax overpayment. See generally Complaint. Conversely, the government contends that Ms. Sexton only had a contingent right to receive a tax refund, in the event that funds remained after the Secretary of the Treasury complied with the TOP provisions. See generally Answer. The question posed by the parties’ positions, therefore, is what kind of interest a debtor has in a tax overpayment and to what extent is that interest a part of a debtor’s bankruptcy estate. Courts are split on this question, and, in recent years, the divide has grown. As such, the Court finds it necessary to review the relevant statutory provisions of the Bankruptcy Code and Internal Revenue Code along with the split of authority among the courts.
i. Statutes
a. Property of the Estate
Pursuant to section 541 of the Bankruptcy Code, the filing of a petition for bankruptcy automatically creates a bankruptcy estate, which is subject to administration by the trustee. 11 U.S.C. § 541(a). The Code defines “estate” liberally to include all property interests of the debtor at the time she files her petition, irrespective of whether the property interests are legal or equitable, tangible or intangible, or vested or contingent. Id.; United States v. Whit
b. Automatic Stay
Simultaneous with the creation of the bankruptcy estate, an automatic stay engages to protect the property included therein. 11 U.S.C. § 362(a). The stay is the most powerful protection the Bankruptcy Code affords debtors. See Bunch v. NCNB South Carolina (In re Bunch),
Although the automatic stay seems impregnable, subpart (b) of section 362 delineates an extensive — and exhaustive — list of actions that are not subject to the stay’s protection. See 11 U.S.C. § 362(b); Shaw v. Ehrlich,
c. Tax Offset Program
In this case, the “applicable nonbank-ruptey law” authorizing setoff is the Treasury Offset Program, which authorizes the Secretary of the Treasury to intercept an individuáis tax overpayment
Under the provisions of 26 U.S.C. § 6402(d)(1), when the Secretary receives notice that a taxpayer owes a “past-due legally enforceable debt” to another federal agency, “the Secretary shall ... reduce the amount of any overpayment payable to such person by the amount of such debt....” Id. at § 6402(d)(1)(A) (emphasis added). The provisions further instruct the Secretary to forward the withheld amount to the appropriate federal agency and notify the taxpayer of the offset. Id. at § 6402(d)(1)(B) & (C). After compliance with the provisions of the intercept statute, the Secretary must refund any remaining balance to the taxpayer. Id. at 6402(a).
The relevant provisions of both the Bankruptcy Code and the Internal Revenue Code’s Treasury Offset Program are unambiguous — the automatic stay protects the property included in the bankruptcy estate except for the enumerated exceptions, and the Secretary of the Treasury must comply with the offset procedures
ii. Case Law
Historically, a majority of courts considered TOP to be subordinate to the Bankruptcy Code. See Pigott,
In Luongo, the debtor filed for Chapter 7 relief under the Bankruptcy Code on May 19, 1998. Luongo,
After granting the debtor’s motion to reopen the case with leave to amend her schedules,
On review, the Fifth Circuit analyzed its framework for establishing a right of setoff and whether the IRS adhered thereto.
The Fifth Circuit’s decision in Luongo, evoked a split in the case law. A number of courts across the country followed Luongo and held that the refund did not vest in the estate until after the Secretary of the Treasury complied with the provisions of section 6402(a), leaving only the remainder as a part of the estate. See Pigott,
Conversely, other courts declined to adopt Luongo’s reasoning. See In re Vargas,
Although settled in some other Circuits, within the Fourth Circuit, in particular, this question of law is unsettled. Since Luongo, only two courts in the Fourth Circuit have even considered the interaction between the government’s right to offset a tax overpayment and the protections of the automatic stay — the aforementioned In re Abbott, adopting Luongo’s reasoning, and In re Moore, declining to do so.
In Abbott, the court adopted the Luongo interpretation of the statutes without much discussion or analysis of the statutes or ease law. The court, however, focused on the fact that the provisions of section 6402(d) are mandatory. See In re Abbott,
The Secretary was required to reduce the overpayment to zero because the debtor owed [the government] in excess of his tax refund. Nothing remained to become property of the estate after the Secretary’s mandatory reduction of the debtor’s tax refund. Since the debtor’s tax refund never became property of the estate, the U.S. Treasury is under no obligation to turn over the funds.
Id. (internal citations omitted). Notably, in Abbott, the setoff occurred pre-petition, and the debtor was attempting to retroactively invalidate the pre-petition set off. Id. at *1.
Conversely, the court in Moore held that the government’s seizure of the tax refund violated the stay. First, it acknowledged that the government “executed the administrative setoff ... one day following the filing of the debtor’s petition.”
Hi. Ruling
Cognizant of the recent trend of courts following Luongo, we decline to adopt the Fifth Circuit’s reasoning. Instead, the Court finds that the government’s post-petition withholding of the tax overpayment and post-petition offset of Ms. Sexton’s debt to the DOA against her overpayment violated the automatic stay. In this case, the Court finds that Ms. Sexton’s right to recover her tax overpayment arose for the 2012 tax year at the midnight on December 31, 2012. By filing her bankruptcy petition on February 13, 2013, which was prior to the Secretary of the Treasury redirecting her overpayment to the Department of Agriculture, all of Ms. Sexton’s eligible property, including her interest in the overpayment, vested in her bankruptcy estate and instantly acquired the protections of the automatic stay. See Complaint at 2; 11 U.S.C. §§ 541 & 362. Accordingly, the government’s application of Ms. Sexton’s overpaid funds to the prepetition debt she owed to the DOA without first obtaining relief from the automatic stay was a direct violation section 362(a). Furthermore, contrary to the government’s assertions in its answer, it is settled law within the Fourth Circuit that a properly-claimed exemption trumps a creditor’s right to offset mutual prepetition debts and liabilities. See Moore,
a. Statutory Framework: Sections 5M(a) and 362(b)(26)
In section 541, Congress expressly delineated what property interests become part of a debtor’s bankruptcy estate. See 11 U.S.C. § 541. Section 541(a) defines property of the estate liberally to include all of the debtor’s property interests, no matter who controls or possesses the property or where it is located. See id. at § 541(a).
Congress then expressly excluded specific property interests from the bankruptcy estate. 11 U.S.C. § 541(b). Nowhere in section 541(b), however, does Congress exclude a debtor’s interest in her tax overpayment or right to a refund.
By not excluding such property from within the broad definition of “property of the estate,” these interests vest in the bankruptcy estate upon the filing of a petition. As such, they are subject to the protections of the automatic stay, including subsection (a)(7) that specifically stays set-off actions. 11 U.S.C. § 362(a)(7). To constrain the reach of the automatic stay, Congress enacted section 362(b). Subpart 26 of that section specifically excepts from violating the automatic stay, “the setoff under applicable nonbankruptcy law of an income tax refund, by a governmental unit, with respect to a taxable period that ended before the date of the order for relief against an income tax liability.... ” 11 U.S.C. § 362(b)(26) (emphasis added). Based on this statutory framework, the Court today finds that applying the Luon-go court’s ruling is problematic.
The Luongo court did not have Bankruptcy Code section 362(b)(26) to consider when it issued its ruling. To now apply its holding that any governmental right to set off under TOP is outside the protections of the Bankruptcy Code because the property did not become a part of the bankruptcy
Congress’s enactment of section 362(b)(26) presupposes that such property interests become part of the estate subject to the stay, except for this express carve out. If the Court were to hold that the property interest in question is not subject to the stay, it would render section 362(b)(26) unnecessary surplusage. We decline to adopt an understanding of these provisions that renders an enacted part of the Bankruptcy Code a nullity. See Connecticut Nat’l Bank v. Germain,
Furthermore, section 362(b)(26) only excepts the offset of a tax overpayment to satisfy pre-petition tax liability. If the Court were to rule that section 362(b)(26) excepts the offset to satisfy non-tax liability, the Court would have to append extra terms onto the specific language of the enacted provision. As passed by Congress, the exception in section 362(b)(26) excludes from the protections of the stay only the setoff of an “income tax liability” — not the liability on other nontax debts. 11 U.S.C. § 362(a)(7) & (b)(26). Under the statutory canon of construction expressio unius est exclusio alterius, Congress’s specific inclusion of the phrase “income tax liability” excludes the application of the provision to non-tax liabilities. Pauley v. BethEnergy Mines, Inc.,
Also instructive to the Court’s decision today is the fact that Congress enacted section 362(b)(26) following the Fifth Circuit’s ruling in Luongo and decades after enacting section 6402 of the Tax Code, yet it constrained the exception only to setoffs of income tax liability. Congress easily could have excepted all governmental debts by omitting the modifier “income tax” before the word “liability.” It did not do so, and the Court declines to ignore the express language of the statute. Therefore, the Court concludes the language of 362(b)(26) does not except other, non-tax, governmental debts from the protections of the automatic stay.
Accordingly, the Court finds that a debt- or’s interest in her tax overpayment becomes fixed at the close of the relevant tax year for the purposes of bankruptcy law. At that point, the amount of overpayment is discernible, and the debtor is entitled to recover that amount from the government. Generally, outside of bankruptcy, the tax intercept provisions of section 6402 authorize the government to intervene and defer the taxpayer’s right to the overpayment until after the Secretary of the Treasury complies with the offset provisions. If the taxpayer files for bankruptcy prior to the offset occurring, however, the taxpayer’s interest in the overpayment vests in her estate, and the automatic stay bars the government from pursuing the funds un
b. Tax Refund versus Tax Overpayment
As discussed above, courts have noted a distinction between a tax overpayment and a tax refund.
A tax overpayment is the amount a taxpayer pays to the government in excess of her tax liability, whereas a tax refund represents the actual amount the government returns to the taxpayer when the taxes collected exceed her liability. Pigott,
Because of this process, and in particular the language in 26 U.S.C. § 6402(a) that the refund is “subject to” the Secretary’s authority under TOP, courts that have followed Luongo characterize a right to a refund as “limited” and the property interest as “contingent.” See, e.g., Luon-go,
Although the Court generally agrees with the aforementioned analysis outside of the context of a bankruptcy proceeding, after a taxpayer files a petition for relief, the government’s right to collection must comply with the requirements of the Bankruptcy Code. Under bankruptcy law, any property interest not expressly excluded becomes property of the bankruptcy estate — including a debtor’s tax overpayment. As with any other right to collect outside of bankruptcy, once the debtor files her petition, the creditor’s right to collect becomes subject to the automatic stay. Thus, by treating the government’s right to set off under section 6402 the same whether the taxpayer is in bankruptcy or not, courts are essentially finding that TOP either (1) creates a statutory lien on the amount of the overpayment or (2) creates a statutory exclusion to the property interest’s inclusion in the bankruptcy estate or (3) a statutory exception from the protections of the automatic stay. This Court disagrees.
By concluding that a federal collection statute eliminates a property interest, these courts fail to recognize: (1) the interest of the debtor in that overpayment enables the government to credit it on behalf of the debtor; (2) the right of the debtor to challenge the liability against which the government applies the overpay
The Court, further, believes that this ruling does not entirely remove the teeth from section 6402. The government can still exercise its right of setoff under section 6402 when the taxpayer is in bankruptcy in certain situations that do not violate the automatic stay. If, for instance, the prepetition debt owed to the government was for an unpaid tax liability, the government may set off the amounts without petitioning for relief from the stay, under section 362(b)(26)’s exception. Similarly, if the government sets off the amounts prior to the taxpayer filing for bankruptcy, the action would not violate the stay, because section 362 would not yet apply.
(d) The Government’s Nunc Pro Tunc Motion
Finally, having determined that the government’s setoff of Ms. Sexton’s overpayment violated the automatic stay, the Court will now consider the government’s nunc pro tunc motion. In the event the Court ruled in favor of Ms. Sexton on the merits of her action, the government also sought entry of a nunc pro tunc order retroactively annulling the stay and validating its setoff action against Ms. Sexton. See Nunc Pro Tunc Motion at 1-2. In support of its motion, the government relies on our decision in the Moore case as an explanation of the relevant law, and how the court should “balance the equities” of the case in making its decision. Id. at 6. The government asserts, however, that the decision is “not controlling,” because the court “did not decide nor even discuss the [government’s] present argument that the tax refund was never property of the bankruptcy estate, never property of the debtor, and that the estate or debtor had only a contingency interest in the tax refund....” Id. Nevertheless, the Court finds that retroactive annulment of the automatic stay is improper in this case.
The decision of whether to lift the automatic stay is within the discretion of the bankruptcy judge. Ehrlich,
In considering Ms. Sexton’s case, the Court finds the decision in Moore instructive.
We agree with the reasoning in Moore, and, in fact, we find the equities of Ms. Sexton’s case are more favorable than those in the Moore case. In the current case, the government knew of Ms. Sexton’s bankruptcy but intercepted and withheld the overpayment anyway. Moreover, in Moore, the debtor had to reopen her case to exempt her refund, which occurred after the government’s setoff procedures. Id. Ms. Sexton, on the other hand, exempted her interest in her refund before the government intercepted the funds.
Having ruled in favor of the debtor, the Court now must consider the appropriate remedy. In her complaint, Ms. Sexton sought (1) release of the $4,201 tax refund the government withheld, (2) reimbursement of actual damages and costs expended in response to the violation, (3) reimbursement of attorney’s fees, (4) sanctions for the “willful violation” of the automatic stay, and (5) any other relief the Court deems just and equitable. Complaint at 4. The Court orders the government to release the sequestered funds and reimburse the debtor for her actual damages. We decline, however, to impose sanctions or any other relief requested.
Section 362(k)(l) grants any individual injured by a “willful violation” of the automatic stay the right to recover actual damages, including costs and attorneys’ fees, as well as punitive damages in “appropriate circumstances.” 11 U.S.C. § 362(k)(l). Within the Fourth Circuit, “to constitute a willful act, the creditor need not act with specific intent but must only commit an intentional act with knowledge of the automatic stay.” Citizens Bank of Maryland v. Strumpf (In re Strumpf),
In this case, the Court finds that the government’s actions were willful; however, the conduct is not sufficient to warrant the imposition of punitive damages. The government intentionally intercepted the debtor’s tax overpayment a month after she petitioned for bankruptcy relief and continued to withhold the refund, even after Ms. Sexton’s attorney notified the government of the bankruptcy proceeding. The government intended its actions with knowledge of the automatic stay and, accordingly, must reimburse Ms. Sexton for her actual damages, attorney’s fees, and costs. Nevertheless, although willful, the government’s conduct was not “egregious” or “vindictive.” The government’s reading of section 6402 in this case, although ultimately rejected by the Court, was legitimate and not motivated by any nefarious or retaliatory purpose. Simply arguing for another understanding of a law, without more and when not done to harass the debtor or waste the Court’s time, does not warrant the imposition of punitive damages. The Court is satisfied that the government respects the automatic stay and protections of the Bankruptcy Code, and these actions were isolated incidents based on the advocacy for an alternative construction of the law.
CONCLUSION
In conclusion, the Court DENIES the government’s respective motions to dismiss under Rules 12(b)(1) and 12(b)(6), as well as its motion for entry of an nunc pro tunc order retroactively annulling the automatic stay, and GRANTS the relief requested by the debtor in her action to enforce the automatic stay. In so ruling, the Court finds that the debtor had a
The government is, therefore, ordered to release the debtor’s withheld overpayment.
Additionally, the debtor may submit any further evidence for other costs and fees incurred due to the government’s actions, and the Court will consider those fees at a future hearing, if she so requests. The Court declines, however, to impose any punitive damages or other sanctions on the government for these actions.
The Court will contemporaneously issue a separate order consistent with this opinion.
Notes
. In its motion to dismiss, the government framed its Rule 12(b)(1) motion as an objection to subject matter jurisdiction; however, it admitted the Court has jurisdiction in its answer. Answer at 1, Sexton v. Dep’t of Treasury, IRS (In re Sexton), 13-07037 (Bankr.W.D.Va. Sept. 23, 2013) ECF Doc. No. 12 [hereinafter Answer], Furthermore, the government never made any argument relating specifically to the statutory grant of jurisdiction of the Court to hear this case. Id. Instead, the crux of the argument was that the debtor lacked standing to bring her case, which the Court will consider below.
. In Stern v. Marshall, the Supreme Court found that a bankruptcy court may have statutory authority to hear a "core proceeding” under 28 U.S.C. § 157 yet not Constitutional authority to issue a final judgment in that proceeding. - U.S. -,
. As further discussed below, there is a legal difference between a tax "refund” and a tax "overpayment;” however, at this point, the Court will use the terms as the parties used them in the pleadings. In her complaint, Ms. Sexton disputes the withholding of her “tax refund." For further discussion, see infra note 14.
. In a sworn statement filed with the court, Ms. Janice M. Dietz, assistant to the Director of Business Operations for the DOA's Centralized Servicing Center, testified that the DOA officially received the offset funds from the Treasury on March 21, 2013. Exhibit A at 3, Sexton v. Dep’t of Treasury, IRS (In re Sexton), 13-07037 (Bankr.W.D.Va. Sept. 23, 2013) attachment to ECF Doc. No. 11.
. The government’s first responsive pleading was to the Rule 12(b)(6) motion; however, if the Court lacks subject matter jurisdiction under Rule 12(b)(1), we should not even address the Rule 12(b)(6) motion. Accordingly, the Court will address the jurisdictional challenge first.
. Such an argument could be sufficient as a legal challenge to the sufficiency of the pleadings if the relevant law is settled; however, here, neither the Fourth Circuit nor any other court within the Western District of Virginia has adopted the government’s construction of the law. Ultimately, the government does not argue that there is no standing or subject matter jurisdiction but, actually, that the actions did not violate any recognized legal right. As such, the proper strategy by which to lodge this attack is under Rule 12(b)(6), which the Court addresses below.
. For judicial economy and clarity, courts must ascertain a filing’s true nature. See, e.g., Hailey v. Yellow Freight System, Inc.,
. These cases appear to hold that because the debtor has a contingent interest in a tax refund, the tax refund does not become property of the bankruptcy estate; that is, the contingency effects an exclusion from property of the estate. No basis is provided for this conclusion; rather, the contingency alone is cited as the basis to exclude the interest from property of the bankruptcy estate.
.
. No. 12-01166-8-SWH,
.
. The government argued in Whiting Pools that property seized pre-petition pursuant to a tax lien was not property of the estate and, therefore, not subject to a turnover action. The Supreme Court disagreed, noting “[n]oth-ing in the Bankruptcy Code or its legislative history indicates that Congress intended a special exception for the tax collector in the form of an exclusion from the estate of property seized to satisfy a tax lien.”
. Congress added section 362(b)(26) as a part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Pub L. No. 109-8, Stat. 23-217 (2005). At this time,
. Many cases, in debating whether to follow Luongo, also recognize the distinction between a tax "overpayment” and a tax “refund.” See In re Pigott,
Briefly, once all of the facts necessary to ascertain the amount of the overpayment exist — at midnight of December 31 of the relevant tax year — the taxpayer has a right to recover that amount. The intercept statute authorizes the government to intervene and capture those funds; however, if the taxpayer files for bankruptcy prior to the Secretary acting, the debtor's interest in the property at that time vests in the bankruptcy estate. If, thereafter, the government wants to use the overpayment for a setoff under section 6402, it must first get relief from the stay or act under an applicable exception enumerated in section 362(b).
Accordingly, the Court, although aware of the legal difference between an overpayment and a refund, does not find it determinative of the issue before us. In this opinion, we will adhere to the aforementioned nomenclature, but, ultimately, the Court believes that what we call the debtor’s interest in the property is unimportant. Even if she only had an interest in her "overpayment,” that interest would vest in her estate at the time of filing her petition, and the government would have to seek relief from the automatic stay to proceed against it.
. Under the language of Bankruptcy Code section 362(b)(26), the automatic stay does not apply to stay an intercept and offset under section 6402(a) to the extent the offset is applied to satisfy pre-petition tax liability; however, section 362(b)(26) does not affect the stay’s protection against the offset under other provisions of the intercept statute.
. Prior to the Luongo decision, courts were split over whether an exemption under “§ 522(c) trampled] setoff rights preserved by § 553,” and they rarely discussed whether the tax refund became property of the estate. See Miller v. United States (In re Miller),
. As in this case, the IRS argued in Luongo that the Bankruptcy Court lacked jurisdiction over the case; however, the Fifth Circuit held that the court had jurisdiction and had not abused its discretion by hearing and deciding the case. See id. at 328-32.
. In analyzing if the IRS established a valid right of setoff, the court said it must provide: "(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 debtor which arose prior to the commencement of the bankruptcy case; and (3) the debt and claim must be mutual obligations.” Id. (citing Braniff Airways, Inc. v. Exxon Co.,
. Not all of these cases expressly reject Luongo; however, by holding that either the government first had to get relief from the automatic stay or else would be in violation of the automatic stay, these courts implicitly reject the Luongo court's reasoning that the TOP provisions apply prior to the property entering the bankruptcy estate. In order for the automatic stay to apply, the property interest had to vest in the estate first.
. See supra note 14.
. The Court agrees that if the setoff occurred prior to the filing of the petition, the overpayment would not become properly of the estate; however, the Court declines to conclude that a post-petition setoff erases the property interest from the estate.
. The Court believes that this understanding of the relevant Tax Code provisions is consistent with the statutory framework Congress implemented in the Bankruptcy Code. Our reading affords the relevant provisions of both Codes their full effect without rendering any other provisions redundant or unnecessary. See Kohler,
. Although the government contends that Moore does not control the matters before the court today, the analysis in Moore regarding annulment of the automatic stay is valid.
. Ms. Sexton timely claimed an exemption and no one objected to the exemption. The government argues at this juncture that the debtor cannot exempt the interest, because she had no interest to exempt, but otherwise raises no objection to the claim of exemption. As mentioned above, this Court finds that the debtor does have a property interest in her right to a refund of her overpayment to the extent it exceeded tax liability. In this case, the debtor timely claimed and perfected her exemption in the full amount of the overpayment. The government did not timely raise any objection to the claim of exemption, so it appears that the exemption was effective. See generally Taylor v. Freeland & Kronz,