Faasoa v. Army & Air Force Exch. Serv. (In re Faasoa)

• Decision Date: 10 October 2017
• Docket Number: Bankruptcy Case No. 17–02558–CL7,Adversary Proceeding No. 17–90153–CL
• Citation: 576 B.R. 631
• Court: U.S. Bankruptcy Court — Southern District of California
• Parties: IN RE: Jubilee FAASOA, Debtor, Jubilee Faasoa, Plaintiff, v. Army & Air Force Exchange Service, Defendant.

576 B.R. 631

IN RE: Jubilee FAASOA, Debtor,Jubilee Faasoa, Plaintiff,

v.Army & Air Force Exchange Service, Defendant.

Bankruptcy Case No. 17–02558–CL7

Adversary Proceeding No. 17–90153–CL

United States Bankruptcy Court, S.D. California.

Signed October 10, 2017

Daniel Wiedecker, Debt Relief Legal Clinic, San Diego, CA, for Plaintiffs.

Beth A. Clukey, United States Attorney, San Diego, CA, for Defendant

CHRISTOPHER B. LATHAM, JUDGE United States Bankruptcy Court

MEMORANDUM DECISION AND ORDER DISMISSING COMPLAINT

Before the court is defendant Army & Air Force Exchange Service's motion to dismiss under Rule 12(b)(6). Prepetition, plaintiff Jubilee Faasoa incurred credit card debt to Defendant. He then filed his 2016 federal income tax return, expecting a refund. But the U.S. Department of the Treasury intercepted the tax overpayment and applied it to the debt he owed Defendant. No funds remained once the setoff was complete. Plaintiff consequently did not receive a tax refund. And despite repeated demands, Defendant declined to issue one.

In response, Plaintiff brought this adversary proceeding seeking: (1) immediate turnover of the tax refund under §§ 522, 541, 542 and 547; and (2) § 362(k)(l) damages, including punitive damages, for Defendant's alleged ongoing stay violation. This motion followed.

The court finds that Defendant holds nonbankruptcy law setoff rights that are recognized and enforceable in bankruptcy under § 553. Plaintiff does not identify compelling circumstances to justify disallowing setoff. And his other arguments fail as a matter of law. Accordingly, the court grants Defendant's motion and dismisses the complaint without leave to amend.

I. JURISDICTION AND VENUE

The court has jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b) and 157(b)(2)(A), (E), (F), and (O). Venue is proper under 28 U.S.C. § 1409(a).

II. FACTUAL BACKGROUND AND HISTORY

A. Overview

Defendant is a component of the U.S. Department of Defense that offers goods and services for sale to active duty service members, retirees, and their families. It operates more than 2,700 facilities worldwide, including retail, specialty, and convenience stores, theaters, quick-serve restaurants, and concession operations. It also manages and funds Military Star, which "is an in-house credit plan that provides the military and authorized family members affordable credit at AAFES facilities worldwide." In re Buttrill, 549 B.R. 197, 200 (Bankr. E.D. Tenn. 2016) (citing 10 U.S.C. § 2481 ; 32 C.F.R. § 842.127 )). About two million service members from all military branches currently hold Military Star accounts.

At some point prepetition, Plaintiff incurred credit card debt to Defendant. He later claimed an overpayment on his 2016 federal income taxes. On February 8, 2017, the Treasury Department intercepted the tax overpayment and forwarded it to Defendant to offset Plaintiff's delinquent consumer debt. After the IRS exercised the United States' setoff rights on Defendant's behalf, no funds remained. Plaintiff consequently did not receive a tax refund for 2016.

B. Plaintiff's Bankruptcy Case

Plaintiff filed a voluntary Chapter 7 petition in April 2017 (Bankr. ECF No. 1). He originally scheduled $5,815 in assets and $17,284 in liabilities. Id. at p. 30. Amended Schedule B listed a $3,000 interest in a "2016 Federal Income Tax Refund offset by unsecured creditor AAFES" (Bankr. ECF No. 14–1, p. 1). Plaintiff fully exempted that interest under California Code of Civil Procedure § 703.140(b)(5). Id. at p. 3. Schedule F disclosed a $2,872 obligation to Military Star, described as a 2012 "revolving account" debt (Bankr. ECF No. 1, p. 20). And Paragraph 11 of the Statement of Financial Affairs revealed that AAFES/NEXCARD offset $2,865 from Plaintiff's 2016 federal income tax refund on February 8, 2017 (Bankr. ECF No. 14–1, p. 6).

Plaintiff's bankruptcy case proceeded in the normal course, and he received his discharge on August 1, 2017 (Bankr. ECF No. 16). The day before that, he filed this adversary proceeding (ECF No. 1) (the "Complaint").

C. The Complaint

The Complaint alleges that the Treasury Department withheld $2,865 from Plaintiff and his wife's 2016 federal income tax refund to satisfy an outstanding obligation to Defendant (ECF No. 1, p. 10). In July 2017, Plaintiff's counsel demanded that Defendant return the funds. Defendant refused. Id. at pp. 18–19. Because the funds were fully exempted yet intercepted within 90 days prepetition, Plaintiff believes they are recoverable as an avoidable preferential transfer. The Complaint thus seeks an order: (1) requiring Defendant to immediately turn over to Plaintiff the $2,865 plus interest under §§ 522, 541, 542, and 547; and (2) awarding Plaintiff reasonable attorney's fees, expenses, and punitive damages for Defendant's alleged ongoing stay violation under § 362(k)(l).

D. Defendant's Motion to Dismiss

Defendant now moves to dismiss the Complaint. It argues that the United States properly exercised its § 553 setoff rights in transferring Plaintiff's tax overpayment to Defendant because: (1) Plaintiff and Defendant owed each other prepetition obligations; and (2) § 553's mutuality requirement is met since both Defendant and the IRS are federal governmental entities.

Defendant further contends Plaintiff's right to a tax refund did not arise until after Defendant exercised its setoff rights. Once that happened, there were no remaining funds to come into the estate. Plaintiff's claimed exemption in the tax refund is thus invalid.

Defendant next asserts that, even if Plaintiff's claimed exemption were viable, plain Ninth Circuit authority has held that § 553 controls over any § 522 exemption rights Plaintiff may have held.

Finally, Defendant cites myriad authorities standing for the proposition that § 553 exclusively governs setoff issues—§ 547 is inapplicable.

Plaintiff does not dispute Defendant's rendition of the facts or the law. And he concedes that: (1) Defendant and the IRS are "united" parts of the United States; (2) § 553 mutuality exists; and (3) the United States properly exercised its § 553 setoff rights by intercepting his tax overpayment. But he urges the court to disallow setoff owing to the case's "compelling equities." In particular, although he and his wife are gainfully employed, he filed bankruptcy and was adjudicated insolvent. His wife is also considering bankruptcy. This, he contends, strongly suggests that he needs the tax refund to pay daily living expenses.

III. LEGAL STANDARDS

A. Rule 12(b)(6) Motion to Dismiss

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), incorporated into the Federal Rules of Bankruptcy Procedure in Rule 7012, tests a complaint's legal sufficiency and requires the reviewing court to accept all factual allegations as true. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; Lacey v. Maricopa County, 693 F.3d 896, 907 (9th Cir. 2012). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). When ruling on a Rule 12(b)(6) request, the Complaint must be construed in the light most favorable to Plaintiff. Parks Sch. of Bus. Inc. v. Symington, 51 F.3d 1480 (9th Cir. 1995). The court must accept as true all material allegations in the complaint, as well as any reasonable inferences to be drawn from them. Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998).

"A Rule 12(b)(6) dismissal may be based on either a ‘lack of a cognizable legal theory’ or ‘the absence of sufficient facts alleged under a cognizable legal theory.’ " Johnson v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1121 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990) ). In the end, the determinative question is whether there is any set of "facts that could be proved consistent with the allegations of the complaint" that would entitle the plaintiff to some relief. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002).

Rule 12(b)(6) motions are generally viewed with disfavor. Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 249 (9th Cir. 1997). And dismissal without leave to amend is proper only in "extraordinary" cases. United States v. City of Redwood, 640 F.2d 963, 966 (9th Cir. 1981). Thus, "[d]ismissal without leave to amend is improper unless it is clear, upon de novo review, that the complaint could not be saved by any amendment." Moss v. U.S. Secret Serv., 572 F.3d 962, 972 (9th Cir. 2009) (quoting Gompper v. VISX, Inc., 298 F.3d 893, 898 (9th Cir. 2002) ).

B. Section 553 Setoff

The concept of setoff dates to early Roman and French law. In re HAL, Inc., 196 B.R. 159, 161 (9th Cir. BAP 1996) (citing Camelback Hosp., Inc. v. Buckenmaier (In re Buckenmaier), 127 B.R. 233, 237 (9th Cir. BAP 1991) ; In re Hancock, 137 B.R. 835, 840 (Bankr. N.D. Okla. 1992) ). Although it was not recognized as a legal right under English common law, "it was first used by the courts of equity as a discretionary procedural device in order to prevent multiplicity of actions." In re HAL, Inc., 196 B.R. at 162 (citing 4 COLLIER ON BANKRUPTCY ¶ 553.01 at 553–3 (15th ed. 1991); In re Hancock, 137 B.R. at 840 ). Put differently, "the use of setoff prevented a court from having to entertain two separate lawsuits, enter two separate judgments, and require the parties to try and collect on their individual judgments. Instead, the court merely netted out the amounts owing and entered one judgment...." In re HAL, Inc., 196 B.R. at 162. Today, however, setoff has come to be recognized as both a statutory right and a "latter-day common-law doctrine derived from the equitable doctrine." Id. (quoting In re Hancock, 137 B.R. at 840 ).

Section 553 governs setoff rights in bankruptcy. It...