In re Oakey

In Re: Robert L. Oakey

Case No.: 14-32685-ABA

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY

July 22, 2015

NOT FOR PUBLICATION

Chapter: 13

Judge: Andrew B. Altenburg, Jr.

MEMORANDUM DECISION

The United States of America, on behalf of its agency, the Social Security Administration (the "SSA"), filed a Motion to lift the automatic stay to permit the SSA to offset certain prepetition federal tax overpayments owed by the United States of America to Robert L. Oakey (the "Debtor") in the amount of $10,064 against the prepetition debts owed by the Debtor to the SSA, Doc. No. 34 on the court's docket (the "Motion"). The Debtor opposes the Motion and filed a cross-motion for attorney's fees, presumably pursuant to 11 U.S.C. § 362(k), because SSA garnished wages and a state tax refund postpetition, offset the federal tax overpayments without first obtaining relief from the automatic stay, and brought the Motion after significant delay (the "Cross-Motion"). Doc. No. 35 on the court's docket. The Debtor also contends that even if setoff is allowable it is not mandatory, and the Court has discretion to decide whether the stay should be lifted in each case.¹ The parties argued their positions before the court on May 26, 2015, at which time the court requested further submissions. The parties made their submissions and the court has considered same. The electronic record from the hearing on the Motion and Cross-Motion is incorporated herein.

JURISDICTION

This court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated September 18, 2012, referring all bankruptcy cases to the bankruptcy court. Further, this matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (G) and (O) and venue is proper in this court pursuant to 28 U.S.C. § 1408. Accordingly, the court issues the following findings of fact and conclusions of law as required by Fed. R. Bankr. P. 7052.

FINDINGS OF FACTS

Prior to the filing of his bankruptcy petition, the Debtor was indebted to the SSA for overpaid prepetition benefits totaling $76,046.70 (the "Debt"). The Debtor did not file a request for reconsideration of the Debt nor did he appeal the Debt. See Doc. No. 36 at 2 on the court's docket. Indeed, the Debtor admits that the Debt is a prepetition debt that he owes to the SSA and he has listed the Debt on Schedule F to his Petition as not being disputed, contingent or unliquidated. See Doc. 1 at 27 on the court's docket. Prior to the filing of the Petition, the SSA was collecting the Debt through wage garnishment.

The Debtor filed his Petition for Relief under Chapter 13 of the Bankruptcy Code (the "Petition") on November 7, 2014 (the "Petition Date"). The SSA itself, and its counsel, received direct notice of the Debtor's bankruptcy filing from the bankruptcy court on November 12, 2014. See Doc. No. 9 on the court's docket. The SSA was also advised through a letter from Debtor's counsel that the Petition was filed and the automatic stay was in place. See Doc. No. 35-1 on the court's docket. Despite this direct notice, the SSA did not input the Petition into its system until February 15, 2015 and, even then, the SSA's representative incorrectly noted the account. See Doc. No. 37-1 ¶ 8 on the court's docket. Finally, on March 17, 2015, the SSA correctly noted the Petition in its system. Id. ¶ 10.

As of the Petition Date, the Debtor was delinquent in filing federal and state tax returns for the years 2010, 2011, 2012 and 2013. The Debtor subsequently filed all the delinquent returns in or about December 2014. The Debtor also filed his 2014 return early in 2015. As a result of the filing of the delinquent tax returns, it was determined that the Debtor made tax overpayments in the amounts of $3,738, $4,221, and $2,105, totaling $10,064 (collectively, the "Overpayments"). That is why, on January 5, 2015, the Department of the Treasury Bureau of the Fiscal Service applied the Overpayments to the Debt thereby reducing the amount of the Debt. See Doc. No. 34-1 at 2 and Exhibit B thereto (Doc. No. 34-3) on the court's docket.

It is also undisputed that as a result of the Debt, the Debtor's wages and a state tax refund were garnished/attached postpetition. Through the Certification of Bryant Wilder, Doc. No. 37-1 on the court's docket, the SSA certified that the continued wage garnishment was a result of its clerical error and all postpetition wage garnishments have been returned to the Debtor. There was also a postpetition state tax refund in the amount of $337 refunded to the Debtor. While the Debtor claims that no postpetition garnishments or attachments have been returned to him, see,Doc. No. 35 ¶ 7 on the court's docket, he has submitted no evidence to refute the statements made by the SSA in its supporting Certification. In contrast, the SSA has provided evidence that prior to the filing of the Motion, it returned via direct deposit into the Debtor's Wells Fargo bank account the $337 state tax refund (via two payments: $142.20 and $194.80) and the $1,048.23 in wages. See Doc. Nos. 44 and 44-1 on the court's docket. This exhibit has not been disputed by the Debtor.

On April 30, 2015, the SSA filed its Motion. The SSA claims that once it learned of its ability to effectuate a setoff, it attempted to obtain the Debtor's consent to the Motion, and, after receiving no response, it filed the Motion and its proof of claim. See Doc. No. 37 at 3 on the court's docket. The SSA also contends that at no point had it intended permanently to settle accounts and instead demonstrated its intention to obtain the court's approval of the setoff. Id. at 4. Also, on April 30, 2015, the SSA filed its proof of claim, Claim No. 6-1 on the Court's Claims Register (the "Proof of Claim"). The Proof of Claim reflects an unsecured claim owed to the SSA in the amount of $65,869.41. The Proof of Claim does not reflect any designation of the SSA's entitlement to effectuate a set off in Part 4 thereof or any other part.

The court notes other relevant facts that it has considered in connection with its decision. The Debtor's Plan was confirmed on an interim basis on January 15, 2015. The plan payments under the confirmed plan did not rely upon receipt of the Overpayments. The Debtor did not list the Overpayments on Schedule B to his bankruptcy petition or claim an exemption of the Overpayments. Indeed, a review of the Debtor's Petition and Schedules reveals that the Debtor has exhausted his exemptions available under 11 U.S.C. § 522(d)(5) and therefore appears unable to exempt the Overpayments. See Doc. No. 1 at 23 on the court's docket. Also, the confirmed plan does not specifically provide for any direct payments to the SSA or for that matter, adequate protection to the SSA. Instead, the SSA is simply listed as a general unsecured creditor on Schedule F to the Debtor's Petition and general unsecured creditors are to receive a de minimis pro rata distribution under the confirmed plan.

CONCLUSIONS OF LAW

A. The SSA Has Established The Right Of Set Off

Section 553(a) provides:

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 by such creditor to the debtor that arose before commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case[.]

11 U.S.C. § 553(a). Section 553 does not create a setoff right but rather preserves that right if it existed outside a bankruptcy case. Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 18 (1995). With that in mind:

in order to maintain a right of setoff under section 553, the party asserting the right must show:

1. A debt exists from the creditor to the debtor and that debt arose prior to the commencement of the bankruptcy case.

2. The creditor has a claim against the debtor which arose prior to the commencement of the bankruptcy case.

3. The debt and the claim are mutual obligations.

Folger Adam Sec., Inc. v. DeMatteis/MacGregor JV, 209 F.3d 252, 262-63 (3d Cir. 2000). See Strumpf, 516 U.S. at 18 (stating requiring mutuality "thereby avoid[s] the absurdity of making A pay B when B owes A") (internal marks omitted). In re Stienes, 285 B.R. 360, 362 (Bankr. D.N.J. 2002).

The Debtor argues that the SSA cannot establish the necessary elements for setoff to apply. He argues that the Overpayments were paid and payable postpetition and were actually paid postpetition. However, a tax refund accrues at the end of the corresponding taxable year, not when it is paid or when the tax return is filed or due. In re Midkiff, 271 B.R. 383, 386 (B.A.P. 10th Cir. 2002) ("The date on which all events necessary to establish the tax liability have occurred is the date in which the taxpayer's refund claim arises."); In re Glenn, 207 B.R. 418, 421 (E.D. Pa. 1997); In re Stienes, 285 B.R. at 362. Thus, the Overpayments, which arose from the years 2010 through 2013, arc a debt owed to the Debtor which arose prior to the commencement of the bankruptcy case.

Notwithstanding the foregoing, the Debtor argues the right to setoff is the right of the creditor to offset a mutual debt owed by such creditor to the debtor. Here we have a debt owing to the Debtor from the Internal Revenue Service for overpayment of income taxes and a debt owing from the Debtor to the SSA for overpayment of benefits. Accordingly, the Debtor argues, there cannot be mutual obligations because the SSA is not the Internal Revenue Service. However, the Debtor is mistaken. All agencies of the United States are considered one creditor for purposes of setoff. In re Turner, 84 F.3d 1294, 1298 (10th Cir. 1996). See In re SemCrude, L.P., 399 B.R. 388, 399 (Bankr. D. Del. 2009), aff'd, 428 B.R. 590 (D. Del. 2010). See also In re Shortt, 277 B.R. 683 (Bankr. N.D. Tex. 2002) where the court noted:

[T]he general rule is that all agencies of the federal

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