In re Harbaugh
| Decision Date | 11 May 1989 |
| Docket Number | Adv. No. 88-490.,Bankruptcy No. 88-297,Motion No. 89-004M |
| Citation | 99 BR 671 |
| Parties | In re David W. HARBAUGH and Cathy J. Harbaugh, Debtors. David W. HARBAUGH and Cathy J. Harbaugh, Plaintiffs, v. UNITED STATES of America, INTERNAL REVENUE SERVICE, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Pennsylvania |
James C. Warmbrodt, Pittsburgh, Pa., for debtors.
Joseph F. Minni, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C.
K. Lawrence Kemp, Kemp & Kemp, New Kensington, Pa., Trustee.
Stephen I. Goldring, Pittsburgh, Pa., Asst. U.S. Trustee.
Before the Court are Plaintiffs/Debtors' Complaint For Specific Enforcement Of The Automatic Stay, and Defendant's Motion For Relief From The Automatic Stay Nunc Pro Tunc. Plaintiffs opine that the action of Defendant in offsetting a tax refund postpetition, without requesting and/or receiving court authorization to do so, is a clear-cut violation of the automatic stay. Accordingly, Debtors request Defendant be ordered to return the refund to the estate with interest.
In addition to answering the above-captioned Adversary Complaint, by first denying and thereafter admitting the basic facts, Defendant avers that approval of a request for relief from the automatic stay, so as to permit setoff, would have been approved if it had been timely requested, and accordingly, requests this Court grant said relief, nunc pro tunc. For the reasons hereinafter set forth, this Court determines that this tax refund must be released by the IRS. Defendant's Motion For Relief From Stay Nunc Pro Tunc will be denied.
On June 9, 1983 the United States of America, on behalf of its agency, the Internal Revenue Service ("IRS"), filed a Notice of Federal Tax Lien, in the amount of $3,910.34, relating to unpaid tax liability of the Debtors for the tax years 1980 and 1981. Thereafter, no material activity occurred between these parties, until February 5, 1988, when this bankruptcy filing occurred. The Internal Revenue Service (hereinafter "IRS") was designated a creditor in Debtors' Schedules, but was not included on the mailing matrix. As a result, the IRS did not receive immediate notice of the bankruptcy filing.
On March 21, 1988 Debtors filed their tax return for the 1987 tax year, and indicated a refund due of $1,788.74. On March 29, 1988 the IRS acknowledges that it became aware of the bankruptcy filing; however, during this same time frame, the IRS transmitted a notice to the Debtors, indicating that the refund due for the 1987 tax year was set off against the 1983 tax lien, effective March 21, 1988.
Counsel to the Debtors transmitted written notification of the bankruptcy filing to the IRS, and demanded return of the refund, first on March 29, 1988 and again on July 5, 1988. Debtors received no response from the IRS relating to these requests and/or demands; accordingly, on November 2, 1988, Debtors filed this Complaint For Specific Enforcement Of The Automatic Stay. The initial response filed by the IRS denied the material facts relating to the setoff; however, an Amended Answer was filed admitting the above facts. Concurrent with the filing of its second responsive pleading and/or on December 27, 1988, the IRS filed the instant motion for relief from stay nunc pro tunc. The parties agree that no material fact is at issue.
In creating the Bankruptcy Reform Act of 1978, the drafters embarked upon a journey to harmonize three (3) distinctly separate interests, these being: general creditors, who fear a complete loss will result from an ever-increasing tax debt; the debtor, who seeks a "fresh start", free from the manacles of debt; and the public, which relies upon the distribution of the tax burden, and the collection of same to fund public works. See United States v. Norton, 717 F.2d 767 (3rd Cir.1983).
Congress began by creating the automatic stay, which by its own terms is exceptionally broad. It prohibits many acts by creditors, including those which seek to obtain possession of property belonging to the estate, acts to collect on prepetition debts and acts to setoff prepetition debts owing to a debtor. See United States v. Reynolds, 764 F.2d 1004 (4th Cir.1985); Norton, supra.
Section 362(a)(7) specifically states:
The automatic stay therefore provides the debtor with a fundamental protection— an opportunity to catch his or her breath without the pursuit by creditors, including governmental agencies. Even creditors whose claims are secured under the Code must submit to the risk inherent in judicial suspension of the rights they normally would have to enforce their claims against property of the estate.
Section 362(d) provides the procedural steps for obtaining relief from the automatic stay to effectuate a setoff. The action must be instituted by a party in interest; all necessary parties must receive notice of the request; and a hearing on the motion must be held.
On November 18, 1988, three (3) of the four members of this Bench, executed an Order allowing the IRS to retain tax refunds without first complying with the requirements of § 362(d). Specifically, the Order permits the IRS to retain a refund for up to sixty (60) days after a debtor requests same. Within that sixty (60) day period, the IRS must either release the refund or obtain relief from the automatic stay in order to effectuate a setoff. If the IRS does not so act, sanctions may be imposed.
The IRS urged the entry of this Order upon this Court and convinced the majority of the members of the Court that such an Order was appropriate. This member of the Bench specifically declined to execute said Order, as being inappropriate and contrary to both the specific provisions of the Bankruptcy Code, granting a breathing space to a debtor, and the constitutional mandate of due process. It was clear to this member of the Court that the intent of Congress was to provide a remedy to the debtor, rather than turning the Code on its head to provide a remedy to the creditor. The due process requirements included in § 362(d) are not merely procedural niceties. Compliance with the basic prerequisites of notice and hearing is indispensable; to do otherwise is deemed improvident by this member of the Court. See In re Willardo, 67 B.R. 1014 (Bankr.W.D.Mich.1986); In re IRS Liabilities and Refunds in Chapter 13 Proceedings, 30 B.R. 811 (M.D.Tenn. 1983).1
In the instant action, however, the Standing Order was not yet in effect;2 therefore, the IRS was bound by the strictest reading of § 362(d). After some denial and posturing, the IRS now acknowledges and concedes that its retention of Debtor's overpayment is, in and of itself, a violation of the automatic stay. This Court joins in this obvious conclusion.
Having so found, we must now determine whether the IRS is in contempt for willfully violating the automatic stay. In support of its position to the contrary, the IRS contends that a party should not be held in contempt unless a Court first gives fair warning that certain acts are forbidden. If it were not clear from the Code and the early cases that relief from stay to perform a setoff must have Bankruptcy Court approval, then clearly, in 1983, when the Third Circuit spoke to the issue in the Norton case, fair warning was provided. This Court might accept the fact that the IRS did not know at the time it effectuated the setoff that a bankruptcy filing had occurred, and that the automatic stay provisions were in effect. However, the parties acknowledge that eight (8) days later, the IRS did become specifically aware of this filing, and did become specifically aware of the request for a return of the retained funds. Thereafter, a second request was made by the Debtors. Neither request was acknowledged with so much as a form letter. Only when this adversary complaint was filed did the IRS give any serious consideration to the laws of these United States, and to its potential violation of same.
The IRS contends that the offices handling main bankruptcy cases and adversary proceedings are separate and independent of one another, causing some communication problems. An innocent taxpayer should not be penalized because the tax collector neglects to tell his right hand what his left is doing. Crum v. CIR, 635 F.2d 895 (D.C.Cir.1980).
Had Debtors not filed this adversary, the IRS would still not have requested relief from the automatic stay and would have forever retained the refund in question. It is only because the Plaintiffs specifically determined not to pursue a finding of contempt that this Court will not so find.
The IRS argues that it would have been entitled to relief from the automatic stay and that a nunc pro tunc order is appropriate. 11 U.S.C. § 105(a). Nunc pro tunc orders are orders given effect as of a date in the past. The term is derived from Latin and literally translates as "now for then." Weil v. Markowitz, 829 F.2d 166 (D.C.Cir.1987); King v. Ionization International, Inc., 825 F.2d 1180 (7th Cir. 1987); Middleton v. Dan River, Inc., 617 F.Supp. 1206 (M.D.Ala.1985). Its purpose is to correct records by showing what was previously done; it is not retroactive, nor is it an alteration of substantive rights. King, supra; Crosby v. Mills, 413 F.2d 1273 (10th Cir.1969). Therefore, the nunc pro tunc order requires that the Court have made some prior indication of its ruling. See, Recile v. Ward, 496 F.2d 675 (5th Cir.1974); Middleton, supra.
In the case at bar the IRS did absolutely nothing until Debtors sought a Court-ordered recovery of their refund. No attempt was made on the part of the IRS to seek...
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