In re Rush Hampton Industries, Inc.
| Decision Date | 15 September 1993 |
| Docket Number | Bankruptcy No. 84-1169-BKC-6P7. |
| Citation | 159 BR 343 |
| Parties | In re RUSH HAMPTON INDUSTRIES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
Andrea A. Ruff, Trustee, Orlando, FL.
Richard A. Resnick, Washington, DC, for IRS.
Findings of Fact and Conclusions of Law
This case is before the Court upon the Second Report on Trustee's Objections to Claims. The Trustee objects to claims 180 and 207 filed by the Internal Revenue Service ("IRS"). Hearings were held on February 26, 1993, March 19, 1993, and April 16, 1993. Upon the evidence presented the Court enters the following findings of fact and conclusions of law.
The stipulated facts of the parties are as follows:
1. The debtor filed for relief under Chapter 11 of the Bankruptcy Code on December 31, 1984. On February 6, 1986, the case was converted to a Chapter 7 case of the Bankruptcy Code.
2. Andrea A. Ruff was appointed as the Chapter 7 trustee and still serves as trustee.
3. On May 27, 1986, the United States filed a proof of claim numbered 180 which included as an unsecured claim the debtor's 1978 federal income tax liabilities. These liabilities consisted of $43,893.02 in taxes and $48,457.49 in interest to the petition date. At this time, the United States did not assert that it had a right to set off the debtor's 1978 federal tax liability.
4. On May 27, 1986, the United States also filed a request for payment of Internal Revenue taxes document numbered 181 for the debtor's 1985 Federal Unemployment Tax Act (FUTA) tax liability, which consisted of Chapter 11 administrative expense. This claim was amended on November 28, 1988. On December 9, 1988, the Court entered an "Order Deferring Consideration of Request for Allowance of Administrative Expenses" which provided that a ruling on the request for payment of Internal Revenue Service taxes filed by the United States would be deferred pending the final closing of the case.
5. On or about June 15, 1989, the Court entered the Notice of Trustee's Final Report and Accounting, which listed administrative claims filed in the estate at the time, including the only administrative claim of the Internal Revenue Service filed at the time in the amount of $39,187.92. The Internal Revenue Service did not file an objection to this notice.
6. On December 20, 1989, the Court entered its Order Allowing Administrative Expenses which allowed the administrative claim of the United States consisting of the debtor's 1985 FUTA tax liability. On or about December 21, 1989, the trustee paid over to the United States the amount of $39,187.92 in satisfaction of the debtor's 1985 FUTA tax liability.
7. Upon the conversion from a Chapter 11 to a Chapter 7 bankruptcy case, the Court entered an Order dated February 6, 1986, which Order provided as follows:
June 11, 1986, is fixed as the last day for creditors to file a claim. In order to receive distribution from the estate, a claim must be filed. THOSE CREDITORS WHO HAVE PREVIOUSLY FILED CLAIMS NEED NOT REFILE THEIR CLAIMS. Proofs of claim must be on approved claim forms accompanied by evidence of claim.
8. The estate filed various estate tax returns after this case was converted to a Chapter 7, and after the June 11, 1986, date for filing claims as set forth in the Order dated February 6, 1986. On or about February 12, 1990, the Internal Revenue Service ("IRS") determined that the debtor had overpaid its federal income taxes for the year 1979 in the total amount of $1,491,781.21. From this amount, the amount of $1,310,149.81 was refunded to the trustee in 1990. The remaining amount of the overpayment was set off by the IRS against debtor's tax liabilities without the IRS moving to lift the automatic stay.
a. On or about February 26, 1990, the United States incorrectly applied $39,289.09 of the 1979 overpayment towards the debtor's 1985 FUTA tax liability, which had already been paid by the trustee.
b. On or about March 19, 1990, the United States incorrectly applied $100,000 of the 1979 overpayment towards a postpetition tax liability consisting of a penalty for failure to file Forms W-2 for the year 1985. The trustee received notice of the penalty assessment on March 26, 1990, and notice of the application of the $100,000 overpayment to the penalty assessment on March 23, 1990. Copies of the notices are attached hereto as Exhibits 1 and 2. The trustee also received a letter from the IRS with respect to this penalty, a copy of which is attached hereto as Exhibit 3.
9. The United States is also holding $25,408.51 of the 1979 overpayment because in 1990 the trustee sent this amount back to the IRS after it was paid to the estate as a refund. The trustee sent this money back to the IRS and requested that the IRS re-issue a check to the estate in the amount of $125,408.51. A copy of the letter from the trustee to the IRS requesting a check in the amount of $125,408.51 is attached hereto as Exhibit 41.
10. Consequently, the debtor's estate is entitled to the amount of $164,697.60, plus interest, as the remaining portion of the debtor's 1979 overpayment. Specifically, the debtor's estate is entitled to the amount of $125,408.51, plus interest from March 19, 1990, and the amount of $39,289.09, plus interest from February 26, 1990.
11. On or about October 20, 1992, the trustee filed her Second Report of Objections to Claims.
12. On February 23, 1993, the United States filed the Amended Response of United States to Trustee's Second Report on Trustee's Objections to Claims admitting that the debtor's estate is entitled to the amount of $164,697.60, plus interest.
13. The United States filed an amended proof of claim number 212, dated February 24, 1993, listing the debtor's 1978 federal income tax liability in the amount of $99,293.86 as a secured claim. The amended proof of claim states that the IRS is a secured claimant because it is holding funds due the debtor's estate in the amount of $164,697.60, plus interest.
14. On March 25, 1993, the United States filed a motion to lift the automatic stay which requested permission to set off the remaining 1979 overpayment against the debtor's 1978 federal income tax liability listed on the amended proof of claim number 212.
15. The United States filed a request for payment of Internal Revenue taxes dated February 25, 1993, listing as a civil penalty the amount of $100,00, plus interest, for debtor's failure to file Forms W-2 for the year 1985. The merits of this request are not at issue at this time.
The Court makes the following additional findings of fact:
1. The trustee did not oppose the Motion of the IRS to Lift Stay to Permit Setoff at the April 16, 1993, hearing.
2. The Court lifted the stay with the caveat that this action did not affect the trustee's right to oppose the proposed setoff on its merits.
3. By May 3, 1993, Order the Court granted relief from stay to permit setoff of debtor's remaining 1978 tax obligation against the remaining 1979 overpayment.
4. The IRS then filed a Motion to Withdraw Claims 180 and 207.
5. By May 21, 1993, Order the Court granted the Motion to Withdraw Claims.
Given the entry of orders granting relief from stay and withdrawing claims 180 and 207, the only dispute remaining is the amount, if any, that the IRS is entitled to set off. The IRS asserts, in claim 212, that it is secured to the extent of $164,697.60.2 The $167,697.60 is debtor's 1979 refund. Although the IRS has withdrawn claims 180 and 207, and the trustee has not objected to claim 212, the Court will determine the validity of the proposed setoff because it is disputed.
The Code preserves non-bankruptcy rights to setoff in § 553. That section states in pertinent part as follows:
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, except to the extent that —
Section 553 requires that the "obligation between the debtor and creditor arise before filing the bankruptcy petition and that mutuality of obligation exists." In re Patterson, 967 F.2d 505 (11th Cir.1992).
Contrary to the assertion of the IRS, lifting the stay does not cause the trustee's objections to be moot. As the Eleventh Circuit highlighted in In re Patterson, the Code contemplates a judicial determination of the validity of a setoff right prior to its exercise. 967 F.2d 505, 510 (11th Cir.1992); Cumberland Glass Manufacturing Co. v. De Witt & Co., 237 U.S. 447, 35 S.Ct. 636, 59 L.Ed. 1042 (1915) (). Thus the Court must first determine the validity of the IRS's right of setoff.
The IRS is authorized by 26 U.S.C. § 6402(a) to setoff tax refunds against outstanding tax liability. Section § 6402(a)...
To continue reading
Request your trial