Posey v. US DEPT. OF TREASURY-IRS
| Decision Date | 25 June 1993 |
| Docket Number | No. 91-CV-404S.,91-CV-404S. |
| Parties | Joseph Brunner POSEY, Plaintiff, v. UNITED STATES DEPARTMENT OF the TREASURY—INTERNAL REVENUE SERVICE, Defendant. |
| Court | U.S. District Court — Western District of New York |
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Joseph W. Rotella, UAW-GM Legal Services Plan, Cheektowaga, NY, for plaintiff.
Eugene Rossi, U.S. Dept. of Justice, Tax Div., Washington, DC, for defendant.
DECISION AND ORDER
Now before this Court is an appeal by Joseph Brunner Posey ("Posey"), plaintiff below, from an order of the Bankruptcy Court for the Western District of New York, Hon. John W. Creahan, finding that, pursuant to 11 U.S.C. § 553, the United States Department of the Treasury—Internal Revenue Service ("United States") properly set off appellant's 1988 tax overpayment against his 1984 income tax liability.
For the reasons set forth herein, the decision of the Bankruptcy Court is affirmed.
Jurisdiction is based upon 28 U.S.C. § 158(a).
In support of his appeal, appellant submits the Debtor's Chapter 7 Voluntary Petition, filed September 11, 1989 ("Petition"), the Discharge Order discharging all the debtor's dischargeable debts, filed December 14, 1989 ("Discharge Order"), the Complaint Requesting Money Judgment for Violation of 11 U.S.C. § 362, filed August 3, 1990 ("§ 362 Complaint"), a Notice and Motion for Summary Judgment, filed March 25, 1991 ("Pl. Motion"), an Affidavit in Support of Motion for Summary Judgment, filed March 25, 1991 ("Pl. Affidavit"), a Brief, filed March 25, 1991 ("Pl. Brief"), the Order granting Summary Judgment to the Appellee, filed May 8, 1991 ("Final Order"), Notice of Entry of Judgment, filed May 10, 1991 ("Final Judgment"), Plaintiff's Notice of Appeal, filed May 20, 1991 ("App. Notice"), Plaintiff's Amended Notice of Appeal, filed May 23, 1991 ("App. Amend Notice"), Appellant's Record on Appeal and Statement of Issues, filed May 26, 1991 ("App. Index"), Transcript of In Chambers Conference before the Honorable John W. Creahan, United States Bankruptcy Judge filed June 11, 1991 ("Transcript"), Appellant's Brief, filed July 3, 1991 ("App. Brief"), and Appellant's letter regarding sovereign immunity following oral argument, dated September 25, 1991 ("App. Letter").
In opposition appellee submits the United States' Answer, filed October 4, 1990, ("Answer"), Defendant's Notice of Motion for Summary Judgment, filed March 1, 1991 ("Def. Motion"), the United States' Memorandum in Support of Motion to Dismiss and/or for Summary Judgment, filed March 1, 1991 ("Def. Memo"), the United States' Designation of Additional Items for Record on Appeal and Additional Issues on Appeal, filed June 6, 1991, ( ), and the United States' Reply to Brief on Appeal, filed July 19, 1991 ("App. Reply").
Oral Argument was heard by this Court on September 16, 1991.
On September 11, 1989, Posey filed a petition under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq. The petition listed debts to 17 creditors including a priority debt of $2,428.43 to the United States and an anticipated tax refund in an unspecified amount for the years 1988 and 1989, which debtor claimed as exempt.1 On December 18, 1989, the bankruptcy court entered a Discharge Order.
In January of 1990, Posey filed his 1988 and 1989 income tax returns claiming a refund of $1,820.00 and $422.00, respectively. The United States, through its agency the IRS, retained Posey's overpayment pursuant to 11 U.S.C. § 553 as a setoff to his 1984 tax debt, but issued a refund for the 1989 income tax return.
On August 3, 1990, Posey filed a complaint claiming that the United States had violated the automatic stay provision of 11 U.S.C. § 362 and thus improperly withheld his 1988 tax overpayment. (Pl. brief at 5). The United States filed a motion to dismiss, maintaining that it was not a suable entity and it had not waived sovereign immunity to be sued. In any event, the United States contended that it properly withheld the 1988 tax overpayment as a setoff to the 1984 tax liability.
Judge Creahan determined that the United States correctly withheld Posey's 1988 tax overpayment pursuant to 11 U.S.C. § 553 and such withholding did not violate the automatic stay provision of 11 U.S.C. § 362 because once a discharge is entered in a bankruptcy proceeding, the stay is gone and there can be no violation of the stay. Having so concluded, the bankruptcy court determined that it need not discuss whether or not the United States had waived its sovereign immunity and thus was a suable entity. Summary judgment was entered in favor of the United States and Posey appealed.
Pursuant to 28 U.S.C. § 158, jurisdiction is conferred upon the district courts to hear appeals from decisions of the bankruptcy courts. 28 U.S.C. § 158(a) provides in pertinent part:
the district court of the United States shall have jurisdiction to hear appeals from final judgments, orders or decrees . . . of bankruptcy judges entered in cases and proceedings. . . .
On appeal, the district court must review the bankruptcy court's findings of fact under a clearly erroneous standard and its conclusions of law de novo. 11 U.S.C. § 8013; see also, In re Sanshoe Worldwide Corp., 139 B.R. 585, 590 (Bankr. S.D.N.Y.1992), aff'd, 993 F.2d 300 (2d Cir. 1993) (citing Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir.1987); In re O.P.M. Leasing Serv. Inc., 79 B.R. 161, 162 (Bankr. S.D.N.Y.1987)).
The parties in this case do not dispute the material facts. Moreover, a review of the record indicates that the facts as articulated by Judge Creahan are not clearly erroneous, and thus, deference must be given to his findings of fact. Id.
Further, this Court finds that Judge Creahan's final decision granting summary judgment to United States is correct and thus affirms the decision.
The relevant issues on this appeal are: (I) whether the United States has a valid right to setoff appellant's 1988 tax overpayment, claimed as exempt property, against a discharged 1984 tax liability; (II) whether the United States Department of the Treasury, or the Internal Revenue Service are suable entities; (III) whether the United States has waived its sovereign immunity under 11 U.S.C. § 106. Each of these issues will be discussed seriatim.
The right to setoff in general has not been disputed. However, this Court will discuss setoff as it necessarily relates to the analysis of setoff against debts discharged in bankruptcy court and setoff against property claimed as exempt.
Although "setoff has the effect of paying one creditor more than another, . . . setoffs are accepted and approved because they are based upon long-recognized rights of mutual debtors." Bohack Corp. v. Borden, Inc., 599 F.2d 1160, 1165 (2d Cir.1979). The right to setoff exists if the debt is owing absolutely at the time the petition is filed. In re Lawrence, 19 B.R. 627, 629 (Bankr.E.D.Ark.1981).
The elements necessary to establish the propriety of setoff under 11 U.S.C. § 553 are:
In re Fulghum Const. Corp., 23 B.R. 147, 151 (Bankr.M.D.Tenn.1982).
While jurisdictions differ on the appropriateness of setoff as an equitable remedy, they do agree that such remedy is subject to the discretionary judgment of the courts. See In re Davies, 27 B.R. 898, 901 (Bankr.E.D.N.Y.1983) (); In re Pieri, 86 B.R. 208, 210 (9th Cir. BAP 1988) ().
"Allowance or disallowance of a setoff is a decision which ultimately rests in the sound discretion of the bankruptcy court." Bohack Corp., 599 F.2d at 1165. Moreover, setoffs should be allowed unless, after due reflection, the setoff would violate the provisions and purposes of the Bankruptcy Code. Id. Therefore, although setoff is a preferred remedy in the Second Circuit, it must be used permissively rather than mandatorily.
It is undisputed that both the 1988 income tax refund and the 1984 income tax liability arose prior to the commencement of the bankruptcy case and the debts were mutual obligations. (App. Brief at 12; App. Reply at 8). Upon the fulfillment of the prerequisites of setoff, the determination to grant or deny setoff rests in the sound discretion of the court, considering, of course the purpose of the Bankruptcy Code. As discussed fully in the sections that follow, this Court concludes the bankruptcy court below was correct in determining that: (1) discharge of the 1984 tax liability did not affect the setoff right of the United States; and (2) a debtor's claim to exempt a tax refund from liability of debts did not defeat the setoff right of the United States.
Appellant argues that although 26 U.S.C. § 6402 allows the government to credit a refund or an overpayment made by a taxpayer against a tax liability owing, his tax liability from 1984 was discharged along with his other debts and therefore, there was no tax liability owing which could be setoff by appellee. (App. Brief at 16). Thus, appellee was barred from asserting a right to setoff against such discharged debt. (App. Brief at 16). Appellant cites no authority other than the Discharge Order itself to support his position. (App. Brief at 16...
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