Hurt v. U.S. Dep't of Hous. & Urban Dev. (In re Hurt)

• Decision Date: 27 December 2017
• Docket Number: Adv. Proc. No. 17–07020,Case No. 17–70281
• Citation: 579 B.R. 765
• Parties: IN RE: Adam Andrew HURT and Jessica Nichole Hurt, Debtors. Adam Andrew Hurt and Jessica Nichole Hurt, Plaintiffs, v. U.S. Department of Housing and Urban Development, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Virginia

579 B.R. 765

IN RE: Adam Andrew HURT and Jessica Nichole Hurt, Debtors.

Adam Andrew Hurt and Jessica Nichole Hurt, Plaintiffs,

v.U.S. Department of Housing and Urban Development, Defendant.

Case No. 17–70281

Adv. Proc. No. 17–07020

United States Bankruptcy Court, W.D. Virginia, Roanoke Division.

Signed December 27, 2017

James P. Carmody, Richlands, VA, for Plaintiff.

Anthony P. Giorno, Ashley Neese, U.S. Attorney's Office, Roanoke, VA, for Defendant.

MEMORANDUM OPINION

PAUL M. BLACK, UNITED STATES BANKRUPTCY JUDGE

This matter comes before the Court on cross-motions for summary judgment filed by the Debtors, Adam and Jessica Hurt ("Debtors"), and the United States Department of Housing and Urban Development ("HUD"). The Debtors filed an adversary proceeding pursuant to 11 U.S.C. §§ 542(a) and 547(b) seeking to recover a federal tax refund the United States Department of the Treasury ("Treasury") setoff prepetition within ninety (90) days of their petition date in partial satisfaction of a foreclosure deficiency that the Debtors owed to HUD. HUD contends that the setoff is not recoverable under either section, nor is it recoverable under 11 U.S.C. § 553, the provision of the Bankruptcy Code governing setoffs. The parties have stipulated the relevant facts, filed briefs in support of their positions, and this matter is ripe for resolution.

FACTUAL BACKGROUND

On or about March 1, 2011 the male debtor, Adam Andrew Hurt, obtained a Title I loan ("the Loan") from HUD, an agency of the United States, to purchase a manufactured home. The debt was in the original principal amount of $38,463.00. Stipulation of Fact , ¶ 1. In connection with the Loan, the male debtor also executed a "Notice to the Borrower of HUD's role in Title I Loans." Among other things, the Notice advised the male debtor that "Failure to pay this debt to HUD may result in offsets of Federal payments due to you, including Federal income tax refunds ...." Id. at ¶ 2. The Loan fell into arrears as a result of the Debtors' failure to make payments. As of July 20, 2016, the outstanding balance due on the Loan was $18,301.93. Id. at ¶ 3. On or about August 22, 2016, HUD sent a "Notice of Intent to Collect by Treasury Offset" to the male debtor. No response or objection to the Notice was received by HUD or Treasury in response to the Notice, and HUD referred the matter to the Treasury, an agency of the United States, in October 2016. Id. at ¶¶ 4, 5.

Prior to February 23, 2017, the Debtors filed their 2016 income tax return with the Internal Revenue Service, a component agency of the Treasury Department. Because the Debtors had overpaid taxes due to the United States, it was determined that Treasury owed a debt, namely, a tax refund to the Debtors in the amount of $5,267.00. Id. at ¶ 6. As of January 30, 2017, the Debtors owed HUD $19,653.38 by virtue of their obligations under the Loan. Id. at ¶ 7. On February 23, 2017, Treasury processed the request from HUD and offset the tax refund amount due to the Debtors and, instead, paid it to HUD to satisfy a portion of the indebtedness due on the Loan. Id. at ¶ 8. The Debtors filed a Chapter 7 bankruptcy petition on March 3, 2017, listing the tax refund as exempt under Schedule C pursuant to Virginia Code Sections 34–4 and 34–14 for $1,098.00 and also under Section 34–26(9) for $4,169.00. Id. at ¶ 9. The Debtors identified the "Dpt Treasury" on Schedule F, paragraph 4.11 as a creditor of both Debtors. HUD was also listed as a party to be notified about the debt owed to "Dpt Treasury." Id.

On April 10, 2017, the male debtor filed a Homestead Deed dated March 3, 2017 in the Clerk's office of the Circuit Court of Tazewell County, Virginia. The Homestead Deed claimed the following as exempt property: (a) Wages garnished by U.S. Dept. of Treasury in the amount of $269.79; (b) funds on deposit in the amount of $600 and, (c) 2016 tax year income tax refunds in the amount of $549. Id. at ¶ 10.¹ On April 10, 2017, the female debtor filed a Homestead Deed dated March 3, 2017 in the Clerk's office of the Circuit Court of Tazewell County, Virginia. The Homestead Deed claimed the following as exempt property: (a) funds on deposit in the amount of $600 and, (b) 2016 tax year income tax refunds in the amount of $549. Id. at ¶ 11. The amount of the indebtedness listed by the Debtors as owing to HUD was $26,600.00, arising from "foreclosure deficiency on a home." HUD records reflect a balance due of $14,417.44 as of the filing date, March 3, 2017. Id. at ¶ 12.

CONCLUSIONS OF LAW

This Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the delegation made to this Court by Order from the District Court on December 6, 1994 and Rule 3 of the Local Rules of the United States District Court for the Western District of Virginia. This Court further concludes that this matter is a "core" bankruptcy proceeding within the meaning of 28 U.S.C. § 157(b)(2)(B) and (F). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1408.

I. Applicable Legal Standard

Federal Rule of Civil Procedure 56, incorporated into adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, states that "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "When faced with cross-motions for summary judgment, the court must review each motion separately on its own merits ‘to determine whether either of the parties deserves judgment as a matter of law.’ " Rossignol v. Voorhaar , 316 F.3d 516, 523 (4th Cir. 2003) (quoting Philip Morris Inc. v. Harshbarger , 122 F.3d 58, 62 n.4 (1st Cir. 1997) ). "When considering each individual motion, the court must take care to ‘resolve all factual disputes and any competing, rational inferences in the light most favorable’ to the party opposing that motion." Rossignol , 316 F.3d at 523 (citing Wightman v. Springfield Terminal Ry. Co. , 100 F.3d 228, 230 (1st Cir. 1996) ). See also Benson v. United States (In re Benson) , 566 B.R. 800, 806–07 (Bankr. W.D. Va. 2017). The parties agree, and the Court concurs, that there are no material facts in dispute.

II. Analysis

The Debtors ask the Court to enter summary judgment in their favor, contending that they are eligible to recover their 2016 federal income tax refund pursuant to 11 U.S.C. §§ 522 and 542² . Conversely, HUD requests that the Court enter summary judgment in its favor, dismiss the Complaint, and allow it to retain the Debtors' 2016 tax refund. HUD argues that Section 547 preference claims are inappropriate in this case, that the Debtors could not exempt their tax overpayment under Section 522, and that the Debtors cannot invoke Section 553(b) of the Bankruptcy Code in order to set aside an improvement in HUD's position pre-petition.

A. 11 U.S.C. §§ 547 and 542 are not applicable.

The Debtors assert that under Section 547 of the Bankruptcy Code, the intercepted funds constitute a preference and the Debtors (in the Trustee's absence of exercise of that right) are entitled to avoid the seizure of tax refund, given they have claimed an exemption in the funds. As stated in Comer v. United States Social Security Admin. (In re Comer) , 386 B.R. 607, 608 n.2 (Bankr. W.D. Va. 2008), "[ Section] 522(g) permits a debtor to exempt property that the trustee recovers under [Section] 550 ‘to the extent that the debtor could have exempted such property ... if such property had not been transferred.’ Under [ Section] 522(h), the debtor is entitled to avoid a transfer of property of the debtor or recover a setoff if the transfer is voidable by the trustee under [ Section] 547 and the trustee does not attempt to avoid such transfer. In summary, there has to be a voidable preference under [ Section] 547 which the trustee does not pursue and the property recoverable must have been exemptable by the debtor."

Comer addressed a nearly identical argument as that made by the Debtors in this case, where the debtors attempted to use Section 547(b) to recover a pre-petition setoff against a federal tax refund. Specifically, Comer observed as follows:

At the outset, the court will dispose of the Debtors' preferential transfer position. In order for there to be a preferential transfer under 11 U.S.C. § 547(b), there is a requirement of a prepetition "transfer" of an interest of the debtor in property. See 11 U.S.C. § 547(b) (2006). Transfer is a term of art which is defined in 11 U.S.C. § 101(54). The term "setoff" is omitted from the definition of transfer in 11 U.S.C. § 101(54). The legislative history to 11 U.S.C. § 101(54) explains the omission in clear terms: "inclusion of ‘setoff’ is deleted. The effect is that a ‘setoff’ is not subject to being set aside as a preferential ‘transfer’ but will be subject to special rules." See 5 Collier on Bankruptcy ¶ 553.09[2][a] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev.). Further, Durham v. SMI Indus. Corp., 882 F.2d 881, (4th Cir.1989), stands for the proposition that only if a setoff is invalid and no right of setoff exists in bankruptcy is 11 U.S.C. § 547 applied. Seeid. at 882.

In summary, the Debtors cannot utilize 11 U.S.C. § 547 for purposes of recovery of the setoff unless the setoff was not valid. The Debtors have not put into issue the validity of the setoff by any factual allegations in their complaint.

In re Comer , 386 B.R. at 608–09. Further, as stated in Lopes v. United States Dep't of Housing & Urban Development (In re Lopes) , 211 B.R. 443, 448 (D. R. I. 1997),

Section 553(a) states, in relevant part, "Except as otherwise provided in this section ... this title does not affect any right of a creditor to offset a mutual debt." While section 553 explicitly lists exceptions to the setoff rule, Congress chose not to include section 547 in this list. Courts have interpreted this absence as an apparent indication "that questions of setoff are

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