U.S. v. Harchar, 1:06-cv-2927.

• Decision Date: 06 June 2007
• Docket Number: No. 1:06-cv-2927.,1:06-cv-2927.
• Citation: 371 B.R. 254
• Parties: UNITED STATES of America, Appellant, v. Kenneth HARCHAR, and Andrea Harchar, Appellees.
• Court: U.S. District Court — Northern District of Ohio

371 B.R. 254

UNITED STATES of America, Appellant, v. Kenneth HARCHAR, and Andrea Harchar, Appellees.

No. 1:06-cv-2927.

United States District Court, N.D. Ohio, Eastern Division.

June 6, 2007.

COPYRIGHT MATERIAL OMITTED

Anita A. Gill, Internal Revenue Service, Cleveland, OH, Peter Sklarew, U.S. Department of Justice, Washington, DC, for Appellant.

Susan M. Gray, Rocky River, OH, Thomas C. Loepp, Maistros & Loepp, Stow, OH, for Appellees.

Memorandum of Opinion and Order

GAUGHAN, District Judge.

INTRODUCTION

Currently before the Court is Appellant the United States of America's appeal of the Bankruptcy Court's decision denying in part Appellant's motion to dismiss and alternative motion for summary judgment regarding the adversary complaint of Appellees/Debtors Kenneth and Andrea Harchar (BD # 141-42).¹ At issue here are Appellees' claims that the Internal Revenue Service ("IRS") violated the automatic stay provisions of Section 362 of the Bankruptcy Code, 11 U.S.C. § 362, by placing an administrative freeze on payment of Appellees' postpetition tax overpayment and taking other actions that delayed Appellees' receipt of the overpayment amount. For the following reasons, the decision of the Bankruptcy Court is Affirmed.

BACKGROUND²

Debtors filed a petition for Chapter 13 bankruptcy in 1998. Included among the scheduled debts was a $6,200 unsecured debt to the IRS. The IRS filed a proof of claim which included a $353 priority tax claim and a general unsecured tax claim of $6,335. The plan eventually confirmed by the Bankruptcy Court provided for full payment of the priority tax claim and 5% payment of all unsecured claims, including the unsecured tax claim.

At some point after the 1998 bankruptcy filing the IRS placed an administrative freeze on all automated activity involving the Debtors.³ Thus, the Debtors did not automatically receive a refund on their 1999 return for overpayment and instead had to repeatedly ask the IRS for the overpayment.⁴ The IRS refused, and approximately seven weeks after it became aware of the overpayment, filed a motion with the Bankruptcy Court to modify the plan such that the refund would be used to increase payments to unsecured creditors such as the IPS.⁵ The Debtors responded that they were providing all of their disposable income into the plan. The IRS then withdrew its motion and refunded the 1999 overpayment in July of 2000.⁶

While the motion of the IRS was pending, but prior to the actual repayment, the Debtors filed an Adversary Complaint against the IRS alleging, inter alia, that the actions of the IRS were in violation of federal law. Thereafter, in 2001, the Debtors filed separate returns seeking refunds for the 2000 tax year. The automatic transactions were again frozen and the IRS delayed a number of months in providing the refunds.⁷ With respect to Mr. Harchar, the IRS performed an audit of the return to assess whether his dependent claims were proper. The IRS ultimately provided the full refund in November of 2001.⁸ With respect to Mrs. Harchar, the IRS delayed payment until June 2001 while it determined whether the Debtors' dependent claims were inconsistent.

Finally, the Debtors also allege that Mrs. Harchar called the IRS to inquire about the status of her delayed refund and was told that she did not deserve a refund and that the IRS was applying it to her prepetition tax liability.

The adversary proceedings continued for a number of years and the Debtors eventually filed a Third Amended Complaint on February 15, 2006 (BD# 122). The IRS responded with a "Motion to Dismiss Adversary Proceeding (or at Least Partially Dismiss) or for Summary Judgment, and to Rule on this Motion before Ruling on Discovery Disputes." (BD# 125). The Bankruptcy Court granted the motion in part and denied the motion in part. First of all, the Bankruptcy Court declined to convert the motion into a motion for summary judgment, and thus refused to consider certain matters outside of the Third Amended Complaint. With respect to the merits, the Bankruptcy Court dismissed "[t]he debtors' claims for due process, for declaratory relief, and for injunctive relief for lack of subject matter jurisdiction under civil rule 12(b)(1) and the debtors' claims for violation of bankruptcy code §§ 525(a) and 1327 ... under civil rule 12(b)(6) for failure to state a claim upon which relief can be granted." (BD# 141). The Bankruptcy Court did not grant the motion as to the Debtors' claims that the IRS freeze resulted in violations of 11 U.S.C. §§ 362(a)(3) & 362(a)(6).

The IRS filed a motion for leave to appeal the decision. (Doc. 2). The motion was unopposed and granted by the Court. Now before the Court are the following issues for appeal:

1. § 362(a)(3). Does the refusal to pay a debt control any "property" of the claimant and, if so, is that property "property of the estate" where the claimed property is a tax refund owed to a debtor whose Chapter 13 plan is confirmed, for a tax year ending after confirmation of the plan, where the plan does not provide for tax refunds to be used to fund payments to the Chapter 13 trustee for estate administration and distribution among creditors?

2. § 362(a)(6). Does the fact that one of the reasons the IRS shuts down computer-automated refunding of tax overpayments to bankruptcy debtors is to preserve the ability to file a motion (where appropriate) either to offset prepetition overpayments against prepetition tax claims or to have postpetition overpayments be paid to a trustee for distribution partly back to the IRS, mean that the computer freeze code is an "act to collect" a prepetition debt in violation of § 362(a)(6). If the answer to this is no, does it become a violation because an IRS employee mistakenly tells a debtor that the IRS is going to apply a postpetition tax overpayment to a prepetition claim where no such offset i[s] done, and the IRS instead files a motion to turn the refund over to the Chapter 13 trustee for administration?

STANDARD OF REVIEW

A district court reviewing a bankruptcy court's decision on matters of law must apply a de novo standard of review. Lutz v. Chitwood, 337 B.R. 160, 168 (S.D.Ohio 2005) (citing In re Caldwell, 851 F.2d 852, 857 (6th Cir.1988)). The sufficiency of a complaint is a matter of law. Id. (citing LRL Properties v. Portage Metro Hous. Auth., 55 F.3d 1097, 1104 (6th Cir.1995)).

When considering a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the allegations of the complaint must be taken as true and construed liberally in favor of the plaintiff. Lawrence v. Chancery Court of Tenn., 188 F.3d 687, 691 (6th Cir.1999). A claim is not to be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); see also Hammond v. Baldwin, 866 F.2d 172, 175 (6th Cir.1989). Notice pleading requires only that the defendant be given "fair notice of what the plaintiff's claim is and the grounds upon which it rests." Conley, 355 U.S. at 47, 78 S.Ct. 99. However, the complaint must set forth "more than the bare assertion of legal conclusions." Allard v. Weitzman (In Re DeLorean Motor Co.), 991 F.2d 1236, 1240 (6th Cir.1993). "[A] court is not required to accept as true unwarranted legal conclusions and/or factual allegations." Harvey v. Great Seneca Fin. Corp., 453 F.3d 324, 327 (6th Cir.2006).

DISCUSSION

Summary Judgment

The IRS first faults the Bankruptcy Court for declining to convert its 12(b)(6) motion into a motion for summary judgment. As the Bankruptcy Court noted, the IRS did not state the Rule 56 standards or argue under those standards. The Court concurs, and notes that the IRS explicitly moved under 12(b)(6) and requested that the Bankruptcy Court convert the motion to a summary judgment motion as permitted under that rule. The Bankruptcy Court declined to do so in a separate docket entry. Accordingly, the only issue is whether the Bankruptcy Court properly declined to convert the motion to a summary judgment motion under Rule 12(b).

A court's decision on whether to convert a motion to dismiss into a motion for summary judgment is reviewed for an abuse of discretion. Ball v. Union Carbide Corp., 385 F.3d 713, 719 (6th Cir.2004); Backer v. Manning Family Trust, 51 Fed. Appx. 522, 529 (6th Cir. Oct.22, 2002) (applying the same standard to a bankruptcy court). The IRS generally argues that this case has been ongoing for a long period of time and that there is little discovery left to complete. However, the IRS fails to cite any relevant authority or explain how the failure to convert the motion amounts to an abuse of discretion under these circumstances. Accordingly, the Court finds that the Bankruptcy Court's refusa to convert the motion was not an abuse of discretion.

Section 362(a)(3)

The IRS claims that the Bankruptcy Court erred in denying its motion to dismiss the Debtors' claim under Section 362(a)(3), which imposes a stay of "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3). The IRS makes two main arguments that this claim must fail as a matter of law. First, according to the IRS its failure to pay a tax refund does not control any property. Second, the IRS believes that to the extent that anyone has a property right in an unpaid tax refund it is the right of the Debtors, not the estate as required under Section 362(a)(3).

The first argument is based on the Supreme Court case of Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995). The Strumpf Court considered whether a bank was liable to its customer, in bankruptcy at the time, for a breach of the Section 362(a) stay for placing a hold on the customer's checking account. Id. at 17, 116 S.Ct. 286. The bank did...