In re Nase

• Citation: 297 B.R. 12
• Decision Date: 04 August 2003
• Docket Number: Bankruptcy No. 02-23200 BM.,Adversary No. 02-2453 BM.
• Parties: In re Deanna Lynn NASE, Debtor. Deanna Lynn Nase, Plaintiff, v. GNC Community Federal Credit Union, Defendant.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Pennsylvania

297 B.R. 12

In re Deanna Lynn NASE, Debtor.

Deanna Lynn Nase, Plaintiff, v. GNC Community Federal Credit Union, Defendant.

Bankruptcy No. 02-23200 BM.

Adversary No. 02-2453 BM.

United States Bankruptcy Court, W.D. Pennsylvania.

August 4, 2003.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Paul W. Johnson, New Castle, PA, for Plaintiff.

John J. Romza, Pittsburgh, PA, for Defendant.

MEMORANDUM OPINION

BERNARD MARKOVITZ, Bankruptcy Judge.

Debtor Deanna Lynn Nase has brought this adversary action to avoid and/or recover pursuant to §§ 547(b), 553(a) and 542(a) of the Bankruptcy Code a tax refund deposited into her personal checking account at GNC Community Federal Credit Union ("GNC") which GNC applied to satisfy a past-due debt owed to it by debtor.

GNC opposes debtor's action and insists that debtor is not entitled to avoid and/or recover the funds.

We conclude that debtor cannot prevail under any of these provisions and therefore will enter judgment in favor of GNC and against debtor.

— FACTS —

Debtor, who had a personal checking account at GNC, borrowed $48,121.00 from GNC on August 7, 1998. A portion of this amount was utilized to pay a prior debt owed to GNC. The remainder was paid to debtor directly.

Contemporaneously therewith, debtor executed a document entitled "Note and Disclosure Statement" in favor of GNC. Debtor promised to repay the debt in sixty equal installments with interest accruing on the unpaid balance at the rate of 10.5% per annum. To secure payment of the obligation, debtor granted GNC a security interest in, among other things, all deposits in all her accounts with GNC now or in the future.

On February 18, 2001, debtor filed a Form 1041A income tax return for tax year 2000, wherein she claimed a refund in the amount of $3,616.00. On the return she directed Internal Revenue Service ("IRS") to deposit the refund directly into her checking account at GNC.

Debtor filed a Form 1040X amended tax return on September 24, 2001. In addition to reducing the amount of the refund claimed to $2,405.00, debtor directed on the amended return as follows: "Disregard my direct deposit — please mail refund".

That same day debtor sent a fax to a specific employee of IRS stating that she had filed an amended return. She further directed that her previous instruction to directly deposit the refund into her checking account at GNC be "disregarded" and asked that it instead be mailed to her residence. Debtor evidently had an epiphany after filing the original tax return and realized that GNC would apply the full amount of the refund to her obligation under the above note. To prevent this from happening, and keep the money for herself, debtor decided that the refund should be mailed to her instead of being deposited directly into her checking account at GNC.

For some unknown reason, IRS deposited the tax refund in the amount of $2,405.00 directly into debtor's checking account at GNC on December 14, 2001, instead of mailing it to her residence.

At the time the refund was deposited into debtor's checking account, debtor owed GNC at total of $2,470.00 in past-due debts. Of this total, $2,145.00 was due and owing on debtor's obligation under the above note, on which she previously had defaulted. The remainder was owed for an NSF check charge and for past-due payments on her VISA credit card account.

GNC posted the refund to debtor's checking account that same day — i.e., December 14, 2001, — and immediately thereafter applied it to the above past-due debt. Nothing remained of the refund for debtor's use.

Debtor filed a voluntary chapter 7 petition on March 22, 2002. The tax refund was listed on the schedules as an asset of the bankruptcy estate. Determined to keep it all for herself, debtor exempted the entire amount pursuant to § 522(d)(5), the so-called "wild card" exemption. No objection was raised to debtor's claimed exemption in the tax refund. GNC was listed as having an unsecured non-priority claim in the amount of $2,700.00 for a "personal loan".

After conducting the § 341 meeting of creditors, the chapter 7 trustee reported that no estate assets were available for distribution to creditors over and above what debtor had exempted.

Debtor commenced this adversary action against GNC on July 31, 2002, seeking pursuant to § 547(b) to avoid as a preference GNC's application of her tax refund to past-due debt she owed it. She alternatively sought to recover the tax refund pursuant to § 522(h). According to debtor, the setoff GNC exercised should not be preserved in bankruptcy in light of § 553(a)(2) of the Bankruptcy Code because it occurred within ninety days of the bankruptcy filing.

The above complaint and a summons were served on GNC on August 14, 2002. GNC answered the complaint on September 18, 2002.

On May 20, 2003, long after the time period set forth in Federal Rule of Civil Procedure 15(a) for amendment had passed and without the consent of GNC, debtor filed an amended complaint. The only change from the complaint as originally filed was a request for attorney's fees in the amount of $1,500.00. Debtor's counsel erroneously caused the amended complaint to be erroneously docketed at the main bankruptcy case instead of the adversary action. GNC brought a motion on June 12, 2003, to strike the amended complaint because debtor had neither obtained written consent from GNC nor obtained leave of court to file it. The motion was not scheduled for hearing because trial was imminent.

Trial of the adversary action took place on June 30, 2003. Upon realizing that the setoff exercised by GNC had taken place more than ninety days prior to the filing of debtor's chapter petition, debtor orally amended her complaint once again at the start of the trial to assert a turnover action pursuant to § 542(a) of the Bankruptcy Code. Although debtor and GNC were provided an opportunity to call witnesses, neither did so. They instead offered documentary evidence to which there was no objection and obviously expected the court to decide if plaintiff had proven a case on any legal theory and, if so, whether defendant had provided a valid defense.

— DISCUSSION —

I.) Preference Action.

Debtor originally sought in accordance with § 547(b) to avoid as a preference GNC's application of the directly deposited tax refund to the past-due amount she owed it.

Section 547(b) provides in pertinent part as follows:

(b) except as provided in subsection of this section, the trustee may avoid any transfer of an interest of the debtor in property —

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made —

(A) on or within 90 days before the filing of the petition ...;

(5) that enables such creditor to receive more than such creditor would receive if —

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b).

The purpose of this provision is to ensure that creditors are treated equitably, both by deterring a failing debtor from giving preferential treatment to its most persistent and demanding creditors "to stave off a hard ride into bankruptcy", and by discouraging creditors from racing to the courthouse to dismantle the debtor. Fiber Lite v. Molded Acoustical Products, Inc.(In re Molded Acoustical Products, Inc.), 18 F.3d 217, 219 (3d Cir.1994).

The burden of proving each of these requirements lies with the debtor in this case. 11 U.S.C. § 547(g). This she must do by a preponderance of the evidence. Bohm v. Golden Knitting Mills, Inc. (In re Forman Enterprises, Inc.), 293 B.R. 848, 855 (Bankr.W.D.Pa.2003).

A debtor is presumed to be insolvent for purposes of § 547(b)(3) during the ninety-day period immediately preceding the filing of the bankruptcy petition. 11 U.S.C. § 547(f).

Debtor's preference avoidance action fails for a number of reasons.

Where a pre-petition setoff lies at the heart of a preference action, it first must be determined if the setoff was valid for purposes of § 553 of the Bankruptcy Code. Section 547(b) can apply only if the setoff was not valid for bankruptcy purposes. Durham v. SMI Industries Corp., 882 F.2d 881, 882 (4th Cir.1989). As we shall see, GNC exercised a valid setoff which was preserved for bankruptcy purposes when it applied debtor's income tax refund to the past-due debt she owed it. Debtor therefore may not utilize § 547(b) to avoid this transaction.

The matter does not end there. Debtor cannot prevail under § 547(b) also because application of the tax refund occurred outside the ninety-day window prescribed at § 547(b)(4)(A). Said application occurred on December 14, 2001, ninety-eight days before debtor filed a chapter 7 petition on March 22, 2002. Debtor conceded as much at trial and for that reason sought to orally amend her complaint to state a wholly different cause of action in accordance with § 542(a) of the Bankruptcy Code.

II.) Setoff.

Debtor asserts that she may seek to recover the above transaction on her own pursuant to § 553 because the chapter 7 trustee could have avoided it in accordance with § 547(b) or recovered it under § 553 but elected not to do so. See 11 U.S.C. § 522(h).

It is far from clear which portion of § 553 debtor relies upon in seeking on her own to recover the above setoff exercised by GNC. We gather from her original (and first amended) complaint that she relies upon § 553(a), which provides in part as follows:

(a) Except as 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...