DOR Collection Violates Confirmation Order

Posted by NCBRC - August 17, 2016

The Florida Department of Revenue violated the bankruptcy court’s confirmation order when it intercepted the debtor’s travel reimbursement funds for payment toward a domestic relations order. Florida Dept. of Rev.v. Gonzalez, No. 15-14804 (11th Cir. Aug. 11, 2016).

Irain Gonzalez’s confirmed chapter 13 plan provided for payment of his domestic support arrearages and for direct ongoing payments on that support obligation. Nonetheless, the Florida DOR intercepted his work-related travel reimbursement money and applied it to the support obligation. Mr. Gonzalez filed a motion for contempt due to the DOR’s contravention of the terms of the confirmed plan. During the contempt hearing the DOR agreed to release the funds and cease collection efforts. The bankruptcy court granted the motion for contempt and awarded attorney’s fees. In re Gonzalez, No. 11-23183-BKC-LMI, 2012 WL 2974813 (Bankr. S.D. Fla. July 20, 2012). The district court affirmed. In re Irain Gonzalez, No. 1:15-CV-20023-KAM, 2015 WL 5692561 (S.D. Fla. Sept. 29, 2015).

On appeal, the circuit court examined the interaction of sections 362(b)(2)(C) and 1327(a). Section 362(b)(2)(C) permits “the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute.” Section 1327(a) provides that “[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.”

The DOR argued that section 362(b)(2)(C)’s exception to the automatic stay applies even after a plan is confirmed and permits its action. The DOR argued that, in adding section 362(b)(2)(C) to the BAPCPA amendments, Congress sought to solve the problem of domestic support (DSO) creditors losing access to the debtor’s funds once they become part of a bankruptcy estate. The court agreed that the legislative record supported the DOR’s contention that section 362(b)(2)(C) was enacted to further the goal of insuring “continued payment of on-going support and support arrearages with minimal need for participation in the process by support creditors.”

The court disagreed, however, with the DOR’s position that the exception to the automatic stay abrogates the binding effect of the confirmation order. Once a plan is confirmed, DSO creditors benefit from other Bankruptcy Code protections. Specifically, sections 507(a)(1) and 1322(a)(2) mandate that DSO creditors be paid in full through the plan, and sections 523(a)(5), (15), and 1328(a)(2) render DSO obligations nondischargeable. Therefore, section 362(b)(2)(C) acts as a stop-gap measure between the filing of the bankruptcy petition and the time that a plan is confirmed. The court held that section 1327 is not affected by section 362(b)(2)(C) and applies to all creditors.

The court rejected the DOR’s reliance on In re McGrahan, 459 B.R. 869 (B.A.P. 1st Cir. 2011), for the proposition that confirmation of a plan binds parties to its terms only to the extent those terms were actually litigated in the plan confirmation process. McGrahan incorrectly limited the res judicata effect of confirmation only to those terms actually litigated, when the proper application of res judicata is to all the issues that were or could have been litigated.

The court concluded that while section 362(b)(2)(C) expanded the rights of DSO creditors, it did not abrogate the binding effect of section 1327(a). Thus, the DOR’s interception of Mr. Gonzalez’s funds, while not subject to the automatic stay, did violate the terms of the confirmation order. Therefore, the bankruptcy court’s finding of contempt and its award of attorney’s fees was proper.

Gonzalez 11th Cir. opinion Aug 2016

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