Turnover

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Tenth Circuit to Decide Dispute Over Child Tax Credit Exemption in Bankruptcy

Facts

The Tenth Circuit is reviewing a case that centers on Colorado’s bankruptcy exemption statute, which allows debtors to exempt the “full amount” of tax refunds attributed to the Child Tax Credit (CTC). The debtor, Jose L. Garcia-Morales, filed for Chapter 7 bankruptcy in 2021 and claimed an exemption for his $1,800 CTC, which resulted in a $1,455 tax refund.

The Chapter 7 trustee, Robertson Cohen, objected, arguing that the refund was only partially exempt and sought to retain $914.40 for the bankruptcy estate using a pro-rata allocation method. The bankruptcy court, and later the district court, sided with Garcia-Morales, finding that the entire refund was exempt under the plain meaning of the statute. The trustee has appealed to the Tenth Circuit.

[Read more…] about Tenth Circuit to Decide Dispute Over Child Tax Credit Exemption in Bankruptcy

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The Ninth Circuit Considers Whether the Social Security Administration Can Recoup Overpayments Without Violating the Discharge Injunction

In In re Cooper, Case No. 24-1084 (9th Cir. 2024) the Ninth Circuit is determining whether the Ninth Circuit B.A.P. erred when it held that the Social Security Administration (SSA) could recoup an overpayment of Social Security Disability Insurance (SSDI) benefits from Darrin Cooper’s ongoing SSDI payments, without violating the discharge injunction in bankruptcy.

Darrin Cooper was overpaid SSDI benefits due to an administrative error, receiving $73,112.90 more than he was entitled to because the SSA did not account for his concurrent workers’ compensation benefits. After filing for Chapter 7 bankruptcy and receiving a discharge, Cooper discovered the overpayment and the SSA began deducting the overpaid amount from his ongoing SSDI payments.

The B.A.P.’s legal analysis focused on the equitable doctrine of recoupment, which allows a creditor to offset a debtor’s claim with a counterclaim arising from the same transaction. The court applied the “logical relationship test” to determine whether the overpayment and ongoing SSDI payments arose from the same transaction. The court found that both the overpayment and the ongoing payments stemmed from Cooper’s entitlement to SSDI benefits, establishing a strong logical relationship. Therefore, the SSA’s actions did not violate the discharge injunction. The court distinguished this case from others where recoupment was denied, such as in In re Madigan, by emphasizing that Cooper’s SSDI payments did not involve separate disability periods or different reimbursement agreements. Instead, Cooper’s ongoing SSDI entitlement and the overpayment were part of a continuous disability claim, thereby satisfying the same transaction requirement. The court also noted that Cooper did not seek available remedies under the Social Security Act, such as requesting a waiver or appealing the overpayment decision, which could have addressed his financial concerns.

Both NCBRC and NACBA submitted an amicus brief in support of the Debtor.

In re Cooper – Appellants Brief

In re Cooper – NCBRC-NACBA Amicus Brief

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Chapter 7 Trustee Bound by Pre-Conversion Agreement

The Chapter 7 trustee was bound by the Chapter 13 trustee’s pre-conversion concession that the creditor’s liens were valid. Therefore the Chapter 7 trustee could not prevent the creditor from receiving the proceeds from the sale of the property securing the liens. In re Hillis, No. 20-70372 (Bankr. M.D. Ga. Jan. 11, 2023).

When the debtors filed for Chapter 13 bankruptcy they listed Southern Pine Credit Union as a creditor with security interests in a lawn mower, two John Deere loaders, and a Nissan Armada. During the pendency of the bankruptcy, the debtors sought and received an order approving the sale of the lawn mower and the two loaders with the proceeds going to Southern Pine in satisfaction of the loans secured by all the vehicles including the Nissan Armada. The Trustee consented to the sale, and Southern Pine offered no opposition. The court approved the sale and ordered the creditor to release the lien on the Nissan Armada upon receipt of the proceeds.

The debtors completed the sale but converted to Chapter 7 before they had received the proceeds. Southern Pine moved for relief from stay because it had not yet received the proceeds from the sale. Soon after it filed the motion, the debtors transferred the proceeds to Southern Pine. The chapter 7 trustee, believing the underlying liens might be avoidable, objected to the motion for relief from stay and made a verbal demand at the meeting of creditors for turnover of the funds. Southern Pine responded that the trustee was barred by res judicata from reneging on the pre-conversion agreement. The debtors filed a turnover motion seeking an order requiring the creditor to release the lien on the Nissan as required by the court’s order approving the sale.

The court began by finding that the Chapter 7 trustee had standing in the case because, under section 348(f)(1)(A), the proceeds from the sale of the vehicles became part of the converted estate. Under that provision property in an estate converted from chapter 13 to chapter 7 consists of property the debtors held at the time of their chapter 13 petition which they continue to hold at the time of conversion. The court found that the sale agreement gave the debtor a contractual right to the proceeds which became property of the new estate.

The court agreed with Southern Pine, however, that the Chapter 7 trustee was barred by res judicata from challenging the pre-conversion agreement to transfer the proceeds to the creditor in satisfaction of its liens. The only issue in that regard was whether the Chapter 7 trustee was in privity with the Chapter 13 trustee such that the Chapter 7 trustee should be bound by an agreement entered into by his predecessor. The court found the elements for res judicata as outlined in Griswold v. County of Hillsborough, 598 F.3d 1289, 1292 (11th Cir. 2010), were satisfied. Specifically, where section 704(a)(5) empowers the Chapter 7 trustee to oppose the allowance of an improper claim, section 1302(b)(1) empowers the Chapter 13 trustee to exercise the powers granted in section 704(a)(5). The court observed that when the two trustees have corresponding duties, the performance of those duties by the first binds the second.

Here, the Chapter 13 trustee did not object to the debtor’s motion to sell the property, including the understanding in the motion that Southern Pine had valid liens. Nor was the motion contingent upon the debtors’ staying in chapter 13. The court also rejected the trustee’s argument that because section 348(f) permits him to reevaluate the property of the estate, he is entitled to challenge the validity of the liens. The court found the trustee’s reading of the statute to be too broad. Valuation of property does not include lien validity.

The court concluded that Southern Pine’s motion was moot by reason of its having received the proceeds from the sale. It ordered Southern Pine to release the lien as requested by the debtors and overruled the trustee’s objections.

Hillis Bankr MD Ga Jan 2023

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Debtor Stated Claim for Turnover of Repossessed Vehicle

The debtor stated a claim for turnover of the fair market value of a vehicle where the creditor repossessed the vehicle post-petition but prior to the expiration of section 108(b)’s extension of time to redeem or cure a default. Milledge v. Carolina Acceptance, No.21-2968, Adv. Proc. No. 22-80001 (Bankr. D. S.C. April 7, 2022).

The debtor bought a car under a retail installment contract obligating her to pay a $5,050.00 down payment and secure financing from the creditor, Carolina Acceptance, for the principal amount of $20,139.00 at an annual interest rate of 19.88% with 51 monthly payments of $592.87. The debtor paid all but $500.00 of the down payment and arranged with the creditor to pay that amount by November 4, 2021. She failed to make the payment and filed for chapter 13 bankruptcy on November 17, 2021, proposing a plan committing her to pay the car loan in full at 5.25% interest. Because of two prior dismissed bankruptcies the automatic stay did not take effect. [Read more…] about Debtor Stated Claim for Turnover of Repossessed Vehicle

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Transfer of Funds Divided between Creditor and Creditor’s Agent Fully Avoidable

Garnished wages divided between the creditor and his agent in accordance with their fee agreement were an avoidable transfer in their entirety even though the creditor never received the portion withheld by the agent. Hooker v. Wanigas Credit Union, No. 20-2252 (6th Cir. Jan. 26, 2021) (unpublished).

During the ninety-day preference period,Wanigas Credit Union, through its agent, Shek Law Offices, garnished $884.13 from the debtor’s wages in satisfaction of a judgment Wanigas had against the debtor. Shek retained $452.60 of the garnished wages and sent the remaining $431.53 to Wanigas. After filing for bankruptcy the debtor sought turnover of the funds under section 547(b)(1) as a preferential transfer. Wanigas turned over only the funds it received. It argued that the portion retained by Shek was not subject to turnover because Wanigas never received the funds, and in the alternative, because the funds were subject to an attorney-charging lien. The bankruptcy court denied Wanigas’s motion for summary judgment and ordered the turnover of the funds. The district court granted leave to appeal and affirmed. [Read more…] about Transfer of Funds Divided between Creditor and Creditor’s Agent Fully Avoidable

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Diaz v. Viegelahn, No. 19-50982 (5th Cir.)

Type: Amicus
Date: January 21, 2020
Description: Whether the district’s form Chapter 13 plan violated the Bankruptcy Code by requiring the debtor to turn over any tax refund to the extent the debtor’s total annual tax refunds exceeded $2,000, if the plan did not provide for full payment of unsecured claims.
Result: Vacated and Remanded, August 26, 2020.

Diaz (5th 082620)

Diaz NACBA Amicus Jan 2020

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Sovereign Immunity in Tax Refund Turnover Claim

Application of section 505(a)(2)(B), which carves out an exception to the government’s abrogation of sovereign immunity in tax refund claims, involved issues of both fact and law, and therefore, the district court remanded this appeal to the bankruptcy court for determination of whether it had subject matter jurisdiction over the debtors’ claim for turnover of their tax refund. United States v. Copley, No. 3:16-cv-207 (E.D. Va. March 31, 2017).

Chapter 7 debtors, Matthew and Jolinda Copley, listed the United States as a creditor for a tax debt of over $13,000 from 2008, 2009, and 2010. They also listed a 2013 tax refund in the amount of over $3,000 which they sought to exempt under Virginia’s homestead exemption statute. Post-petition, the IRS notified the Copleys that it had withheld their 2013 tax refund as set off against the tax debt. The Copleys sought turnover of the refund and both parties moved for summary judgment. The bankruptcy court granted judgment in favor of the Copleys, relying on sections 522 and 542(a) and case law establishing that, unless the IRS acts to offset the tax debt prior to bankruptcy, the refund becomes part of the bankruptcy estate.

On appeal, the United States raised for the first time the jurisdictional question of whether sovereign immunity barred the Copleys’ claim. Absent specific waiver, a bankruptcy court lacks jurisdiction over a suit against the United States and its agencies, so the district court began with a look at the abrogation of immunity in sections 106 and 505. Specifically, the court looked to the exception to waiver carved out by section 505(a)(2)(B) which prohibits a court from determining “any right of the estate to a tax refund, before the earlier of.- (i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or (ii) a determination by such governmental unit of such request.” The United States argued that the waiver of sovereign immunity did not apply in this case because the debtors rather than the trustee requested the refund, and because the debtors did not seek the refund for the benefit of the estate.

In finding that there were unanswered questions of law and fact that were relevant to resolution of this issue, the court seemed to rely on the decision in United States v. Bond, 762 F.3d 255, 260 (2d Cir. 2014), where the Second Circuit, in a chapter 11 case, found that a liquidating trustee does not qualify as “trustee” as contemplated by section 505, but that the debtor, if acting on behalf of the bankruptcy estate, may so qualify. Based on this reasoning, the district court found that the bankruptcy court needed to determine: “(1) whether the Debtors constitute ‘trustees’ as contemplated under§ 505; and, (2) whether the Debtors, who purportedly exempted the tax refund from bankruptcy, sought the refund for ‘the right of the estate.’” The court remanded to the bankruptcy court to address these issues.

Copley ED Va opinion March 2017

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Charitable Contribution in Excess of 15% Avoidable in its Entirety

In a sharply circumscribed opinion, the Tenth Circuit found that the trustee could avoid in their entirety charitable contributions over 15% of the debtors’ gross annual income. Wadsworth v. The Word of Life Christian Center (In re McGough), No. 12-1142 (Dec. 16, 2013). [Read more…] about Charitable Contribution in Excess of 15% Avoidable in its Entirety