co-debtor stay bankruptcy

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