In re Ballard

In re: ADAM J. BALLARD, Debtor

Case No. 12-33165

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF OHIO WESTERN DIVISION AT DAYTON

June 23, 2015

Judge Humphrey

Chapter 7

Decision Denying the United States' Motion for Summary Judgment

I. Introduction

This decision addresses whether the United States¹ should be granted summary judgment concerning the debtor's motion seeking damages for a willful stay violation.

II. Jurisdiction

This court has jurisdiction pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).

III. Summary Judgment Standard

The standard to address the IRS' motion is contained in Federal Rule of Civil Procedure 56 and is applicable to contested matters through Bankruptcy Rules 7056 and 9014 and states, in part, that a court must grant summary judgment to the moving party "if the movant shows there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). In order to prevail, the moving party, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). If the burden is on the non-moving party at trial, the movant must: 1) submit affirmative evidence that negates an essential element of the nonmoving party's claim or 2) demonstrate to the court that the nonmoving party's evidence is insufficient to establish an essential element of the nonmoving party's claim. Id. at 331-32. Thereafter, the opposing party "must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations and emphasis omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-51 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 586-88.

IV. Findings of Fact

On May 26, 2012 the IRS issued a continuous pre-petition wage levy on Adam Ballard's employer (Mary L. Clinton Declaration, ¶ 2, IRS exhibit 1).² The IRS received threepayments, which were credited by the IRS against Ballard's 2006 federal income tax liability. doc. 15, p. 6 - 8; IRS exhibit 2 (Ballard 2006 Income Tax Transcript). The employer paid $377 on June 21, 2012, which the IRS received on June 29, 2012. The employer also paid $439 on June 28, 2012, which the IRS received on July 2, 2012. Ballard filed a petition under Chapter 7 of the Bankruptcy Code on July 3, 2012 (doc. 1). On July 5, 2012 the employer paid $365.60, which the IRS received on July 12, 2012. July 5, 2012 was also the date that the Clerk sent electronic notice to the IRS of Ballard's bankruptcy petition (doc. 10) and Ballard's counsel sent a fax to the IRS advising of the bankruptcy filing. Ballard exhibit B.

In order to track taxpayers which file bankruptcy, the IRS uses a computer system it refers to as the Automated Insolvency System (AIS). See IRS exhibit 4. The IRS recorded Ballard's bankruptcy information into AIS on July 6, 2012. IRS exhibit 3. On July 10, 2012 the AIS notes that the IRS released the wage levy and noted it had not received any post-petition funds. However, the single post-petition payment of $365.60 was received two days later, on July 12, 2012.

Ballard asserts that his counsel sent the IRS a letter on September 13, 2012, but the IRS only concedes Ballard's counsel intended to send the letter.³ Besides the July 5, 2012fax, when the stay violation issue was not yet clear, this letter, copied to the local United States Attorney, was the only extrajudicial contact the debtor had with the IRS to resolve the issue now before the court. The letter (Ballard exhibit C) states as f0llows:

September 13, 2012

Internal Revenue Service

Centralized Insolvency Operations

PO Box 7346

Philadelphia, PA 19101-7346⁴

RE: Adam J. Ballard, Chapter 7 Case Number 12-33165

Social Security Number: [number redacted]

To Whom It May Concern:

Please be advised that my client, Adam J. Ballard, filed the above referenced bankruptcy case in the United States Bankruptcy Court for the Southern District of Ohio, Western Division at Dayton, on July 3, 2012. The Internal Revenue Service levied Mr. Ballard's wages as follows:

Date

Amount

June 21, 2012

$376.99

June 28, 2012

$439.26

July 5, 2012

$365.60

Mr. Ballard demands these funds levied on June 21, 2012 and June 28, 2012 be returned to him pursuant 11 U.S.C. §522(h) and 11 U.S.C. §547 as these funds are exempt wages pursuant to O.R.C. 2329.66. Additionally, Mr. Ballard demands return of the funds levied on July 5, 2012 because the automatic stay imposed pursuant to 11 U.S.C. §362 was in effect. Therefore, please immediately return these funds to Mr. Ballard or he will consider filing a Motion for Contempt in the Bankruptcy Court. You may mail these funds directly to my office at the address listed above.

If you have any additional questions or concerns, please feel free to contact the office.

Best regards,

[signature of Andrew J. Ziegler]

Andrew J. Zeigler

Copy to: United States Attorney, 602 Federal Building, 200 W. Second Street, Dayton, Ohio 45402

Enclosures: June 21, 2012, June 28, 2012 and July 5, 2012 Paystubs

On November 6, 2012 Ballard was granted his Chapter 7 discharge (doc. 13) and the IRS was sent electronic notice of the discharge by the Clerk on November 7, 2012 (doc. 14). This case had no assets available for creditors and the court's review of the claim registryshows that the IRS did not file a proof of claim or otherwise participate in the case. See Chapter 7 Trustee's Report of No Distribution docket entry (Sept. 13, 2012).⁵

The AIS shows that on November 13, 2012 an IRS employee noticed the post-petition levy payment in processing Ballard's discharge. IRS exhibit 3. The refund was approved by the IRS on November 14, 2012 and the refund was subsequently issued by the IRS. Id. However, on November 15, 2012, the Debtor filed a "Motion for an Order of Contempt and Damages for Violation of the Discharge Injunction." (doc. 15).⁶ The IRS' records do not indicate any evidence of receiving this motion either. Clinton Declaration, ¶ 3.⁷ The IRS asserts that it "eventually became aware of the motion due to its being served on the United States Attorney's Office." Clinton Declaration, ¶ 5. The IRS issued the refund of the $365.60 in November 2012 and there is no dispute that Ballard received the refund. See Clinton Declaration, ¶ 4; doc. 20, ¶ 12. The IRS' position is that the refund of the $365.60 was not made in response to the Debtor's motion, but rather, occurred solely due to the IRS' own discovery that it was holding those funds when it reviewed the AIS information after receiving notice of Ballard's discharge. Ballard's counsel requested $817 in attorney fees from the IRS in December 2012, but no settlement was reached. Ballard exhibit D.

V. Analysis

A. Did the IRS Not Violate § 362(a)(6) As a Matter of Law?

The IRS first requests that this court determine as a matter of law that it did not violate § 362(a)(6) of the Bankruptcy Code. The court cannot make such a determination based upon the record in this case.

Upon the filing of a bankruptcy petition, the automatic stay enjoins creditors from taking most actions to collect a pre-petition debt against the debtor and property of the bankruptcy estate. In re Cousins, 404 B.R. 281, 286 (Bankr. S.D. Ohio 2009); 11 U.S.C. § 362(a). The automatic stay provides a "breathing spell" to the debtor from collection actions by his creditors. Id. One of the purposes of the automatic stay "is to alleviate the financial strains on the debtor." State of California Emp't Dev. Dept. v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1151 (9th Cir. 1996). Actions taken in violation of the automatic stay are "invalid and voidable and shall be voided absent limited equitable circumstances." Easley v. Pettibone Mich. Corp., 990 F.2d 905, 911 (6th Cir. 1993).

Specifically, Ballard argues that the IRS' post-petition levy and the four month hold of those funds constituted a willful violation of § 362(a)(6), which prohibits "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title[.]"⁸ "[A] course of conduct violates § 362(a)(6) if it (1) could reasonably be expected to have a significant impact on the debtor's determination as to whether torepay, and (2) is contrary to what a reasonable person would consider to be fair under the circumstances." Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 423 (6th Cir. 2000) (cited in Harchar v. United States (In re Harchar), 694 F.3d 639, 648 (6th Cir. 2012).

The IRS argues that the temporary retention of the $365.60 was not an intentional act. Essentially, the IRS argues that its bankruptcy review of its data regarding Ballard inadvertently missed the third capture of Ballard's wages because when an IRS employee first reviewed the data and released the continuous levy on Ballard's wages on July 10, 2012, the funds had not yet been received by the IRS and entered into the AIS system. The funds were then received and entered into the AIS system on July 12, 2012 and no further review was conducted until Ballard's discharge was issued, with the levied funds being discovered on November 13th through the routine procedures employed by the IRS following receipt of knowledge of a taxpayer's bankruptcy discharge. The IRS appears to be saying that rather than a matter of an intentional violation, the four plus month hold of the funds was just a function of the AIS computer process and the IRS' internal bankruptcy review procedures.

The IRS concedes creditors sometimes have an affirmative obligation to terminate pre-petition acts under § 362(a)(6), but states it did so when it, through its "quick action," released the continuous levy. However, there is no dispute that the continuation of the post-petition levy and the subsequent...