In re Buttrill, CASE NO.: 1:15–BK–10891–SDR

• Decision Date: 31 March 2016
• Docket Number: CASE NO.: 1:15–BK–10891–SDR
• Parties: In re: Mitchill Stephen Buttrill and Martha Suzanne Buttrill, Debtors.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee

549 B.R. 197

In re: Mitchill Stephen Buttrill and Martha Suzanne Buttrill, Debtors.

CASE NO.: 1:15–BK–10891–SDR

United States Bankruptcy Court, E.D. Tennessee, Southern Division.

Signed March 31, 2016

Richard L. Banks, Richard Banks & Associates, P.C., Andrew B. Morgan, Law Office of Andrew B. Morgan, Cleveland, TN, for Debtors.

MEMORANDUM

Shelley D. Rucker

, UNITED STATES BANKRUPTCY JUDGE

The United States, acting on behalf of its agency the Army and Air Force Exchange Service ("AAFES"), has moved for retroactive modification of the automatic stay pursuant to 11 U.S.C. § 362(d)(1) and (2)

so that it may retain $4,405 received from the Department of the Treasury as an offset recognized by 11 U.S.C. § 553

. The Debtors oppose the relief requested on the grounds that AAFES has not proven it is entitled to an offset and that the Debtors' claim of exemption in the refund is superior to the right of setoff. Further, the Debtors contend that the actions taken by AAFES violated the stay and that the violation deprives AAFES of its right of offset and entitles the Debtors to damages.

The court finds that prior to the time the case was filed, the Debtors had a contingent interest in the overpayment of their income taxes and their entitlement to an earned income tax credit. Also prior to the filing date, AAFES had a right of offset and was entitled to apply any overpayment due to the Buttrills to its outstanding balance under 26 U.S.C. § 6402(d)

and 11 U.S.C. § 553 ; however, that right could not be exercised without relief from the stay. 11 U.S.C. 362(a)(7). Following the filing and without seeking relief from the bankruptcy court, the Department of the Treasury exercised AAFES's right under the Treasury Offset Program to send the overpayment to AAFES for satisfaction of non-tax liabilities. The court finds that the stay was violated; but, the court also finds that the right to setoff held by AAFES under 26 U.S.C. § 6402(d) was preserved in bankruptcy, and the Debtors' contingent property interest was subject to the offset. Because the Debtors were not ultimately entitled to any refund, it appears that there are no damages warranted for the violation of the stay under the circumstances of this case. Finally, the court does not find any other conduct on the part of AAFES that would justify the court exercising its discretion and finding that the setoff should be disallowed. The motion will be GRANTED in part and DENIED in part and the automatic stay will be modified and the offset permitted subject to any injured spouse claim which Mrs. Buttrill may have.

This court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(a)

and (b) and 157(b)(2)(G). These are the court's findings of fact and conclusions pursuant to Fed. R. Bankr.P. 7052, as made applicable to contested matters by Fed. R. Bankr.P. 9014(c).

Stipulated Facts

The parties have stipulated the following facts.

On or about February 8, 2008, Debtor-husband opened a Take It Home Today account with AAFES. This program is an in-house credit plan designed for purchasing furniture, major appliances and similar merchandise with a minimum purchase price of $299. Debtor-husband's Take It Home Today account originally became delinquent on June 5, 2013.

Additionally, on or about May 18, 2008, Debtor-husband opened a Military Star account with AAFES. This program is an in-house credit plan that provides the military and authorized family members affordable credit at AAFES facilities worldwide. See 10 U.S.C. § 2481

; 32 C.F.R. § 842.127. Debtor-husband's Military Star account originally became delinquent on August 16, 2013. On January 11, 2014, the delinquent Take It Home Today debt of $5,468.35 was placed in the Treasury Offset Program ("TOP") pursuant to 31 U.S.C. § 3720A. On January 21, 2014, the delinquent Military Star debt of $8,199.91 was also placed in TOP pursuant to 31 U.S.C. § 3720A.

Debtors filed a voluntary petition under chapter 7 on March 5, 2015. Debtors claimed an exemption in an anticipated tax overpayment¹ in the amount of $3,000 and no objection to that claim of exemption was filed. On March 10, 2015, Debtors amended Schedules B and C to cover the correct amount of the anticipated tax overpayment and fully exempt the amount. No objection to the amended claim of exemption has been filed.

On or about March 19, 2015, the Internal Revenue Service, pursuant to the TOP, withheld Debtors' federal income tax overpayment of $4,405 for the tax year of 2014. Debtors were entitled to a credit of $3,370 for the Earned Income Credit and $814 for the Additional Child Tax Credit. Debtors had withheld $221 from wages which were previously paid to the Internal Revenue Service.

Upon being informed of the bankruptcy petition, AAFES froze the account to maintain the status quo on its claim for offset while addressing the relief from stay. The Debtors were discharged on June 18, 2015, and no objections to discharge were filed.

The court makes the additional findings of fact. This motion for relief was filed on July 1, 2015. At the hearing on the motion on July 30, 2015, the parties announced that they were submitting the issues to the court on the stipulated facts. The court also asked the parties whether they could stipulate that the copies of the agreements attached to AAFES's motion were true and correct copies of the documents that created the debt between AAFES and the Debtors. The parties agreed that those were the documents.

The applications of the Take It Home Today ("TIHT") and the Military Star accounts are both signed by only Mr. Buttrill. Application for TIHT account (Doc. No. 15–2); Application for Military Star account (Doc. No. 15–4). The introduction to the summary of the Take It Home Today program terms provides that the words "you" and "your" refer to the person who signs the application. Summary of TIHT Terms, p.1 (Doc. No. 15–1). The words "we" and "our" refer to the exchange credit program of AAFES, NEXCOM and the Marine Corps Exchange, which is administered by the Army and Air Force Exchange Service. Id. Section 11, entitled "Charge-off Accounts" of the Summary of TIHT Terms, provides:

Delinquent Accounts deemed not collectable under the above terms and conditions will be closed and transferred to AAFES collections. AAFES Collections collects debt in accordance with the Debt Collection Improvement Act of 1996, 31 USC 3720

, Deficit Reduction Act 26 USC 402(d) and 31 USC 3720 A, the Federal Claims Collection act[sic] of 1996 or federal pay offset under 5 USC 5514. In addition to the interest charges specified in these terms and conditions charged-off accounts will also incur additional penalties, interest, and collection costs as allowed by law. The charge-off APR will be the greater of the APR of the TAKE IT HOME TODAY program or the 5 year U.S. Treasury note rate in effect on the first business day of the year in which the account charges off +8.94%. The accounts may be forwarded to a commercial collection agency or federal agency for collection action including Administrative Wage Garnishment of civilian wages, offset for federal employee pay, including retirement pay, or may be submitted to the Department of the

Treasury for offset against any federal payments due you, including a federal income tax refund, federal salaries or federal retirement pay.

(AAFES Mot. for Relief, p. 2–3 (Doc. No. 15–1)). The Military Star account summary of terms contains identical language in section 12. (AAFES Mot. For Relief, p.3 (Doc. 15–3)).

ISSUES

1. Did AAFES have a right to set off the overpayment prior to the commencement of the Debtors' case?

2. Did the Debtors have a property interest in the overpayment at the time the case was filed that was protected by the automatic stay?

3. Did the Department of the Treasury's act of applying the overpayment to the AAFES debt violate the automatic stay?

4. Does a right of offset constitute "cause" for relief from the stay?

5. Has the uncontested claim of exemption deprived AAFES of the ability to exercise its right of offset? Does section 522(c) defeat the preservation of the offset right provided in section 553

?

6. Did AAFES's violation of the automatic stay of 11 U.S.C. § 362(a)

deprive AAFES of the right to set off the refund?

7. Are the Debtors entitled to any damages for the violation of the stay?

ANALYSIS

I. Setoff Rights of AAFES

In a case with similar facts, Judge Parsons of this district discussed the Bankruptcy Code's treatment of the right of offset.

Section 553 of the Bankruptcy Code

addresses setoff in the bankruptcy context. It provides in part the following:

Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case....

The United States Supreme Court has noted that § 553 does not create a federal right of offset; it only preserves in bankruptcy whatever right otherwise exists. Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995). "The right of setoff (also called ‘offset’) allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding ‘the absurdity of making A pay B when B owes A.’ " Id. (quoting Studley v. Boylston Nat'l Bank of Boston, 229 U.S. 523, 528, 33 S.Ct. 806, 57 L.Ed. 1313 (1913) ). Section 553 preserves the right of setoff where there are mutual, prepetition obligations owing between the debtor and the creditor and a right to setoff the obligations exists under nonbankruptcy law. In re Holder, 182 B.R. 770, 775 (Bankr.M.D.Tenn.1995).

In re Bourne, 262 B.R. 745, 748–49 (Bankr.E.D.Tenn.2001)

.

In this case, AAFES's right to setoff is created by a federal statute. The bankruptcy court for the Western District of Virginia, in a case similar to...