Matos v. Rivera

• Decision Date: 26 September 2012
• Docket Number: BAP No. 11–074.,Bankruptcy No. 10–10289–ESL.
• Parties: Damian Garcia MATOS, a/k/a Damian Garcia, a/k/a D. Garcia, a/k/a D. Garcia Matos, Debtor. Damian Garcia Matos, Appellant, v. Alejandro Oliveras Rivera, Chapter 13 Trustee, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, First Circuit

478 B.R. 506

Damian Garcia MATOS, a/k/a Damian Garcia, a/k/a D. Garcia, a/k/a D. Garcia Matos, Debtor.Damian Garcia Matos, Appellant,

v.Alejandro Oliveras Rivera, Chapter 13 Trustee, Appellee.

BAP No. 11–074.

Bankruptcy No. 10–10289–ESL.

United States Bankruptcy Appellate Panel of the First Circuit.

Sept. 26, 2012.

Juan M. Suárez Cobo, Esq., San Juan, PR, and Manuel Casellas, Esq., on brief for Appellant.

Miriam D. Salwen Acosta, Esq., Hato Rey, PR, on brief for Appellee.

Before BOROFF, DEASY, and BAILEY, United States Bankruptcy Appellate Panel Judges.

DEASY, Bankruptcy Judge.

Damian Garcia Matos (the “Debtor”) appeals from the bankruptcy court's order sustaining the chapter 13 trustee's (the “Trustee”) objection to the exemption he claimed in an income tax refund (the “Refund”), and the order denying his motion for reconsideration. The Debtor contends that it was error to sustain an exemption objection that was based upon an unrelated statute governing plan confirmation. For the reasons set forth below, we conclude that the Trustee failed to sustain his burden in objecting to the exemption and therefore, REVERSE.

BACKGROUND

In October 2010, the Debtor filed a chapter 13 petition, along with his schedules and Statement of Financial Affairs. On his Schedule B, the Debtor listed the Refund with a value of $9,424.00. He further described it as follows:

Estimated accumulated excess tax paid to P.R. Treasury Department during 2010, that will normally be refunded to debtor. We are taking refund for 2009 as reference.

On Schedule C, he claimed an exemption in the Refund under § 522(d)(5). ¹ At the time of the bankruptcy filing, the Debtor had not yet filed his income tax return for 2010 as the calendar year had not yet concluded.

In November 2010, the Debtor filed a chapter 13 plan, which he amended two weeks later. Both versions provided the following with respect to tax refunds:

TAX REFUNDS: Income Tax refunds will be devoted each year, as periodic payments, to the plan's funding until plan completion. The tender of such payments shall deem the plan modified by such amount, increasing the base thereby without the need of further notice, hearing or Court order. In [sic] need be for the use by debtor(s) of a portion of such refund, debtor(s) shall seek Court's authorization prior to any use of funds.

The Trustee filed an objection to the Debtor's claim of exemption in the Refund (the “Objection”). As grounds, the Trustee argued that it was not property of the estate because, as of the petition date, the Debtor was not yet entitled to receive a tax refund for the 2010 tax year. The Trustee also opposed the exemption on the grounds that it was inconsistent with the Debtor's proposal to pay into the plan the tax refunds received during the life of the plan. Finally, the Trustee argued that “tax refunds received during the life of the plan, including the one for the 2010 tax period is disposable income [ ] to be devoted into the plan as per the chapter 13 case of In re Padilla, Bankruptcy No. 07–07495–ESL.” ²

In March 2011, the Debtor filed an amended Schedule B, to amend the value of the Refund to $9,269.00. The Debtor did not file an amended Schedule C. On that same day, the Debtor filed another amended plan (the “March Plan”), proposing to increase his plan payments by applying that portion of the Refund that was attributable to post-petition income.³ In addition, the March Plan provided:

TAX REFUNDS: Income Tax refunds, that have not been exempted and thus property of the estate, will be devoted each year, as periodic payments, to the plan's funding until plan completion. The tender of such payments shall deem the plan modified by such amount, increasing the base thereby without the need of further notice, hearing or Court order. In [sic] need be for the use by debtor(s) of a portion of such refund, debtor(s) shall seek Court's authorization prior to any use of funds.

The Debtor then filed an opposition to the Objection. He first argued that the Refund constituted property of his estate, and therefore was properly included on Schedule B. He also asserted that there was no inconsistency between the plan provisions and the claimed exemption, because the March Plan provided that all non-exempt tax refunds would be paid into the plan. Finally, the Debtor argued that the March Plan complied with In re Padilla, because it provided for payment of all “future” tax refunds that accumulate during the life of the plan. According to the Debtor, the Refund was properly exempted and he was not required to fund the March Plan with the exempt funds.

On March 16, 2011, the bankruptcy court issued an order sustaining the Objection (the “Exemption Order”). The bankruptcy court reasoned as follows:

In a Chapter 13 case all property and earnings acquired by the debtor after the commencement of the case but before the case is closed, dismissed or converted is property of the estate. 11 U.S.C. § 1306. Post petition tax refunds are income of the debtor and property of the estate while the debtor is in chapter 13. When the trustee or an unsecured creditor object [sic] the confirmation of the plan, the debtor must provide all of the projected disposable income during the applicable commitment period to fund the plan. 11 U.S.C. § 1325(b)(1). The income tax refunds, as projected disposable income, are subject to the deductions in sections 1325(b)(2, 3), but may not be exempt as the same are not property of the estate under 11 U.S.C. § 541(a). Exempt property may be retained by the debtor and generally is not liable for any prepetition debt. In a chapter 13 case the post petition income, less applicable expenses, may not be retained by the debtor but must be paid to fund the plan. If debtor would prevail on the claimed exemption, then the court would have to deny confirmation for failure to meet the requirements of section 1325(b)(1) as the debtor would not be providing all of its disposable income to fund the plan. Such a result is not consonant with BAPCPA's intent to have chapter 13 debtors pay as much as they can to creditors. Consequently, the trustee's objection to exemptions is hereby granted.

On March 29, 2011, the Debtor filed a motion to alter or amend the Exemption Order (the “Reconsideration Motion”), arguing that the Trustee had not provided any valid reasons to support the Objection and the bankruptcy court sustained the same simply because otherwise it would have to deny confirmation of the plan. The Debtor argued that the bankruptcy court's reasoning was problematic because the Trustee had not filed an objection to confirmation, and even if the bankruptcy court raised an objection sua sponte, the Debtor was not given an opportunity to respond. The Debtor asserted that the Trustee's arguments related not to the validity of the Debtor's exemption but rather to the Trustee's potential objection to plan confirmation and that the former did not have any impact on the latter.

In response, the Trustee filed an objection to confirmation of the March Plan, arguing that it failed the disposable income test set forth in § 1325(b). He also filed an opposition to the Reconsideration Motion, arguing that it did not meet the strict standard for relief under Fed.R.Civ.P. 59(e). In addition, the Trustee argued that an analysis of the applicable legal principles mandated a conclusion that the Refund constituted income of the Debtor and that it was improper for a chapter 13 debtor to claim an exemption in income.

On June 8, 2011, the Debtor filed another amended plan (the “June Plan”) which provided for the application of the entire amount of the Refund to his plan payments and also provided that non-exempt tax refunds would be applied to fund the plan. He also filed a response to the Trustee's objection to confirmation of the March Plan, asserting that the June Plan resolved the concerns raised by the Trustee. Thereafter, the Trustee filed a favorable recommendation for confirmation of the June Plan, based upon his understanding that the Reconsideration Motion and the Trustee's opposition thereto were now moot.

On June 22, 2011, the bankruptcy court held a hearing on confirmation of the June Plan, the Reconsideration Motion, and the Trustee's objection thereto. At the hearing, the parties noted that although the June Plan provided for the entire amount of the Refund to be devoted to the plan and the issue was essentially moot, the Debtor still desired a ruling on the Reconsideration Motion. It was for only this reason that the Trustee had amended his recommendation regarding plan confirmation to an unfavorable one.⁴

Addressing the Reconsideration Motion, the Debtor argued that his interest in the Refund existed on the petition date because at that time, there was already an “overpayment of taxes.” Moreover, the Debtor asserted that the Refund was not post-petition income because he earned the income pre-petition and the Refund was simply a refund of an overpayment of taxes. He urged the bankruptcy court not to confuse cash with income, arguing that just because property can be converted to cash does not make it income. Conversely, the Trustee argued that it is well established that tax refunds are income, pointing to In re Padilla. He also argued that because this case was filed on October 10, 2010, and the Debtor had not yet filed a tax return for 2010 due to the remaining months in the calendar year, the Debtor was not entitled to a refund as of the petition date and, therefore, could not claim it as exempt. At the conclusion of the hearing, the bankruptcy court took the Reconsideration Motion under advisement, and continued the hearing on confirmation of the June Plan.

On September 14, 2011, the bankruptcy court issued an order stating simply that “Trustee's sur-reply to Debtor's motion to supplement oral argument & objection to confirmation (docket # 78) is hereby granted” (the “Reconsideration Order”).⁵ This appeal...