In re Diaz, RS 10–18846 MJ.

459 B.R. 86

In re Marcos Vasquez DIAZ, Alma Lawreen Diaz, Debtor(s).

No. RS 10–18846 MJ.

United States Bankruptcy Court, C.D. California.

Oct. 3, 2011.

Gregory J. Doan, Laguna Hills, CA, for Debtors.

OPINION RE TAX REFUNDS IN CHAPTER 13 PLANS

MEREDITH A. JURY, Bankruptcy Judge.

FACTS

The debtors, Marcos Vasquez Diaz and Alma Lawreen Diaz (“Debtors”), filed their Chapter 13 petition on March 26, 2010, at which time Rod Danielson (“Trustee”) was appointed chapter 13 trustee. Debtors filed their 2009 tax returns on April 30, 2010 and received their refund on or about June 2, 2010. Debtors listed in schedule B their 2009 expected tax refund of $4,000. Debtors also claimed the tax refund as exempt in Schedule C under C.C.P. § 703.140(b)(5), the wild card exemption. On March 3, 2011, Debtors filed a proposed chapter 13 plan (“the Plan”) using the Central District of California mandatory plan form; the Plan was confirmed without objection. The Trustee submitted the Confirmation Order, as is the common practice in the Riverside Division, and the Confirmation Order was entered on May 27, 2010.

The present dispute arises out of disparate treatment of tax refunds in the Plan and Confirmation Order. The Plan is silent regarding tax refunds while the Confirmation Order states, “in addition to regular monthly payments, all tax refunds are pledged into the plan.” As a consequence of contradictory form documents, the aforementioned difference exists in all chapter 13 plans and confirmation orders in the Riverside Division.¹

On July 7, 2011, the Trustee moved to dismiss Debtors' case for failure to turn over Debtors' 2009 tax refund. Debtors filed an opposition and a hearing was held on July 28, 2011. At the initial hearing Debtors' counsel and the Trustee presented arguments regarding the Code's treatment of tax refunds accrued on prepetition earnings. The Court asked Debtors' counsel and the Trustee to submit briefs on the issue. On September 8, 2011, the Court heard argument from both sides and took the matter under submission.²

DISCUSSION

I. Effect of the Plan Confirmation Order.

A Plan Confirmation Order is a final order that is preclusive as to all issues that were justiciable at the time of plan confirmation. United Student Aid Funds, Inc. v. Espinosa, ––– U.S. ––––, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010).

A. The Order Is Not Void Because It Did Not Violate Debtor's Due Process Rights.

A limited exception to the finality of an order arises under Rule 60(b), made applicable by Bankruptcy Rule 9024, which allows a party to seek relief from a final judgment under a limited set of circumstances. Gonzalez v. Crosby, 545 U.S. 524, 529, 125 S.Ct. 2641, 162 L.Ed.2d 480 (2005). Rule 60(b)(4) authorizes the court to relieve a party from a final judgment if the judgment is void. Espinosa, 130 S.Ct. at 1376. A judgment is void only where it is premised on jurisdictional error or on a violation of due process that deprives a party of notice and an opportunity to be heard. Id.

The Debtors argue that the Plan Confirmation Order was so ambiguous that it deprived them of adequate notice. Debtors argue that the word “all” in the phrase “all tax refunds are pledged to the plan” is fatally ambiguous. Debtors point out that, taken literally, “all” would require Debtors to turn over every tax refund ever received by Debtors. The Trustee embraces this broad application of “all” and disagrees only with the assertion that it is fatally ambiguous. The Court agrees with the Trustee. The word “all,” while broad, is not so ambiguous as to deprive the Debtors of adequate notice. Here, Debtors received actual notice of the entry of the Confirmation Order and its contents. If Debtors believed the inclusion of the tax provision was incorrect, then a motion for reconsideration for mistake would have been proper. See Rule 60(b)(1). Not surprisingly, however, the Court cannot find any case law to support a proposition that an order is void if it is overly broad. If that were the case, the court's power to create comprehensive orders would be significantly diminished.

B. The Plan Confirmation Order Excludes PrePetition Tax Refunds.

A bankruptcy judge has the power to interpret its own orders. In re Optical Technologies, Inc., 425 F.3d 1294, 1300 (11th Cir.2005); See In re Conejo Enterprises, Inc., 96 F.3d 346 (9th Cir.1996). The Court is persuaded that the term “all” in the Plan Confirmation Order refers to all tax refunds on income earned postpetition. The Court's interpretation is consistent with the Debtors' understanding at confirmation, as evinced by Debtors' exemption of their prepetition tax refund on Schedule C. ³ The Court also notes that the language included in the Plan Confirmation Order regarding turnover of taxes was not included in the Debtors' Proposed Plan, presented on the District's mandatory plan form, and that the Trustee drafted and submitted the Plan Confirmation Order. More importantly, the Court's interpretation is consistent with the law regarding projected disposable income and future earnings in sections 1322(a) and 1325(b), as discussed more thoroughly below. Any decision to the contrary would be anomalous; it would vest the Chapter 13 Trustee with unfettered discretion to seek contribution of all tax refunds, regardless of when those refunds were earned.

II. Treatment of Prepetition Tax Refunds under the Bankruptcy Code.

As a preliminary matter, the Court's decision is not based on Debtors' argument that prepetition tax refunds are excluded from disposable income because they are exempted under state law.⁴

The Trustee asserts that the prepetition tax refund is captured by the Plan under sections 1322(a)(1) and 1325(b)(1)(B). The Trustee's argument hinges on the classification of the tax refund as income.⁵ However, the Supreme Court has held prepetition tax refunds are property and not income. Kokoszka v. Belford, 417 U.S. 642, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974). The Court stated, “the income tax refund at issue in the present case does not relate conceptually to future wages and is not the equivalent of future wages for the purpose of giving the bankrupt a ‘fresh start.’ The payments refunded here were income tax payment withheld from petitioner prior to his filing for bankruptcy.” Id. at 648, 94 S.Ct. 2431. The Supreme Court premised this holding on its prior case Segal v. Rochelle, 382 U.S. 375, 380, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966), where that “Court concluded that the refund was ‘sufficiently rooted in the pre-bankruptcy past [...] that it should be regarded as property [...].’ ” The Ninth Circuit has similarly held that tax refunds are property. In re Feiler, 218 F.3d 948 (9th Cir.2000). Even Congress adopted the Supreme Court's view when enacting the present Bankruptcy Code: “The result of Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966), is followed, and the right to a refund is property of the estate.” S.Rep. No. 989, 95th Cong., 2d Sess. 82. Under established precedent, therefore, tax refunds accrued on prepetition earnings but received postpetition are property, not income. They are “rooted in the pre-bankruptcy past,” disqualifying them from classification as income. To dispel any doubt, the Court will address the Trustee's arguments.

Because the Code does not define “income,” the Trustee asks the Court to adopt the Code's definition for “current monthly income” and apply it to sections 1322(a). The cardinal rule of statutory interpretation is to begin with the statutory language. Conn. Nat'l Bank v. Germain, 503 U.S. 249, 253, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). The Court must presume that Congress says what it means in a statute and means what it says. Id. “Where the statutory language is plain, the ‘sole function of the courts, at least where the disposition required by the text is not absurd, is to enforce it according to its terms.’ ” Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (citing United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)).

Section 1322(a)(1) states that the plan shall:

Provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan. (emphasis added).

Section 1322(a)(1) uses the phrase “future income,” not current monthly income. The Court must interpret the statute with deference to each word, including the word “future.” Accordingly, the Court interprets section 1322(a)(1) to only include income earned postpetition, not tax refunds on prepetition earnings.

Even if the Court believed the tax refunds fell within the Code's definition of current monthly income, the Trustee would not be entitled to the entire tax refund. The Code defines “current monthly income” as:

(10A)The term ‘current monthly income’—

(A) means the average monthly income from all sources that the debtor receives ... without regard to whether such income is taxable income, derived during the 6–month period ending on—

(I) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income ...

Under this definition, the Trustee is only entitled to the portion of tax refund accrued on earnings from the six months prior to the commencement of the case, not the entire refund. But see In re Forbish 414 B.R. 400, 402 (Bankr.N.D.Ill.2009) (“Because a debtor's income consists of CMI, it is not technically correct to say [...] that a debtor's tax refund constitutes ‘income’ that must be devoted to the plan. The reason is that CMI is calculated before withholding for taxes—indeed, before any kind of expense.”). The Court's reluctance to ignore the word “future” in section 1322(a)(1) eliminates this awkward calculation.

The Trustee also asserts that the prepetition tax...