United States v. Copley

• Decision Date: 10 September 2018
• Docket Number: Civil Action No. 3:16cv207
• Citation: 591 B.R. 263
• Court: U.S. District Court — Eastern District of Virginia
• Parties: UNITED STATES of America, Appellant, v. Matthew A. COPLEY, et al., Appellees.

591 B.R. 263

UNITED STATES of America, Appellant,

v.Matthew A. COPLEY, et al., Appellees.

Civil Action No. 3:16cv207

United States District Court, E.D. Virginia, Richmond Division.

Signed September 10, 2018

Kieran O'Neill Carter, U.S. Department of Justice - Tax Division, Washington, DC, Robert P. McIntosh, United States Attorney's Office, Richmond, VA, for Appellant.

Martin Carroll Conway, The Martin Conway Law Firm PC, Woodbridge, VA, for Appellees.

MEMORANDUM OPINION

M. Hannah Lauck, United States District Judge

This matter comes before the Court on Appellant the United States of America's appeal from the final judgment of the United States Bankruptcy Court for the Eastern District of Virginia (the "Bankruptcy Court"). The United States and Appellees Matthew A. Copley and Jolinda M. Copley (the "Appellees" or "Debtors") have filed their respective briefs. (ECF Nos. 16, 17, 19.) The Court dispenses with oral argument because the materials before it adequately present the facts and legal contentions, and argument would not aid the decisional process. The Court exercises jurisdiction pursuant to 28 U.S.C. § 158(a)(1).¹ For the reasons that follow, the Court will affirm the decision of the Bankruptcy Court and will dismiss this appeal.

I. Standard of Review

"When reviewing a decision of the bankruptcy court, a district court functions as an appellate court and applies the standards of review generally applied in federal courts of appeal." Paramount Home Entm't Inc. v. Circuit City Stores, Inc. , 445 B.R. 521, 526–27 (E.D. Va. 2010) (citing In re Webb , 954 F.2d 1102, 1103–04 (5th Cir. 1992) ). The district court reviews the bankruptcy court's legal conclusions de novo and its factual findings for clear error. In re Harford Sands Inc. , 372 F.3d 637, 639 (4th Cir. 2004). A finding of fact is clearly erroneous if a court reviewing it, considering all of the evidence, "is left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City , 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (quoting United States v. United States Gypsum Co. , 333 U.S. 364, 365, 68 S.Ct. 525, 92 L.Ed. 746 (1948) ); accord In re Mosko , 515 F.3d 319, 324 (4th Cir. 2008) (quoting United States Gypsum Co. , 333 U.S. at 365, 68 S.Ct. 525 ). In cases where the issues present mixed questions of law and fact, the Court will apply the clearly erroneous standard to the factual portion of the inquiry and de novo review to the legal conclusions derived from those facts. Gilbane Bldg. Co. v. Fed. Reserve Bank of Richmond, Charlotte Branch , 80 F.3d 895, 905 (4th Cir. 1996).

II. Factual and Procedural Background

A. Factual Background ²

This appeal arises out of the Debtors' petition for bankruptcy under Chapter 7 of the United States Bankruptcy Code.³ The petition for bankruptcy proceeded on stipulated facts. On May 29, 2014, the Debtors filed a petition for bankruptcy, along with Schedules A through J.⁴ On Schedule E,⁵ the Debtors identified the Internal Revenue Service ("IRS") as a creditor holding unsecured priority claims for "Income Taxes" for tax years 2008, 2009, and 2010 in the cumulative amount of $13,547.10. (App. 0025, ¶ 2.) On Schedule C,⁶ the Debtors listed as exempt a "refund from 2014 federal ... income taxes" in the amount of $3,208.00⁷ pursuant to Virginia Code § 34-4 (Virginia's Homestead Exemption).⁸ (App. 0026, ¶ 4 (emphasis added).) The parties agree that the Debtors intended to exempt the 2013 federal income tax overpayment.

On June 3, 2014, the Debtors each filed a Homestead Deed with the Clerk of the Circuit Court for Spotsylvania County, Virginia, claiming as exempt a "Refund from 2014 federal ... income taxes [in the amount of] $3,208.00." (App. 0026, ¶ 6 (emphasis added).) The parties agree that the Debtors intended to exempt the 2013 federal income tax overpayment.⁹

On June 6, 2014, the Debtors filed their 2013 federal tax return with the IRS. The Debtors reported that their 2013 tax liability totaled $7,054.00, but that $10,262.00 had been withheld from their earnings. Because the Debtors overpaid federal income taxes in 2013 by $3,208.00, they claimed a refund in that amount.

On or about June 30, 2014, IRS records demonstrate that the IRS mailed a Notice to the Debtors, informing them that their "2013 Form 1040 overpayment was applied to tax [they] owe[d]." (App. 0027, ¶ 9.) The Debtors deny receiving this notice.¹⁰ The summary identified the Debtors' "overpayment for 2013 in the amount of $3,208.00" and listed $3,208.00 as the "[a]mount applied to tax owed for [years] 2008 [and] 2009." (App. 0027 ¶ 9 (brackets in original).) Using the $3,208.00, the IRS paid in full the Debtors' $158.76 unpaid tax balance from 2008, and applied the remaining $3,049.24 to the Debtors' 2009 unpaid tax balance. The IRS then wrote off the remainder of the Debtors' 2009 unpaid tax balance by reason of their discharge in bankruptcy.¹¹

B. Procedural History

On February 1, 2015, the Debtors filed an Amended Complaint in the Bankruptcy Court,¹² seeking to compel the United States to turn over the $3,208.00 tax overpayment. The Debtors sought the tax refund return because they had listed it as an exempt asset pursuant to Virginia Code § 34-4 and 11 U.S.C. §§ 522¹³ (the debtor's right to exempt), 542(a)¹⁴ (requirement to turn property over to the estate), and 553(b)¹⁵ (the right to setoff). Both parties filed motions for summary judgment.

On March 22, 2016, the Bankruptcy Court issued a final order and memorandum opinion. The Bankruptcy Court granted the United States's motion for summary judgment on Count I, denying the Debtors' request for turnover of the tax overpayment under the Virginia common law principle of assumpsit. The Bankruptcy Court granted the Debtors' motion for summary judgment on Count II, granting the Debtors' request for turnover of the tax overpayment under §§ 522 and 542(a).¹⁶

On April 6, 2016, the United States filed an amended notice of appeal¹⁷ challenging whether the Bankruptcy Court had jurisdiction to hear the case and claiming, for the first time on appeal, that it did not waive sovereign immunity for the purpose of the Debtors' claims. The United States never asserted in the Bankruptcy Court that sovereign immunity barred the Debtors' claim, so the Bankruptcy Court did not reach that issue. The Court remanded the case to the Bankruptcy Court to rule on the issue of sovereign immunity. After considering the parties' briefing on the issue, the Bankruptcy Court ruled that Congress abrogated the United States's sovereign immunity under 11 U.S.C. § 106(a).¹⁸

The United States renewed its appeal, on four grounds: (1) the Bankruptcy Court lacked jurisdiction to compel the IRS to refund the tax overpayment; (2) the Debtors' 2013 federal income tax overpayment did not become part of the bankruptcy estate until after the IRS set off the overpayment against the Debtors' prepetition income tax liability pursuant to 26 U.S.C. § 6402 ;¹⁹ (3) the United States did not need to object to the Debtors' claim for a refund to preserve its setoff rights because the Debtors' refund claim lacked any value; and, (4) the United States's setoff right under § 553 supersedes the Debtors' exemption rights under § 522. The Court begins, as it must, by assessing the threshold jurisdictional challenge.

III. Analysis: Sovereign Immunity

The United States argues that the Bankruptcy Court lacked jurisdiction to hear the Debtors' refund suit because the United States has not waived its sovereign immunity from such cases under 11 U.S.C. § 106. Specifically, the United States says that none of the Bankruptcy Code sections referenced in § 106 —specifically, 505,²⁰ 522, 542, and 553—provides the Debtors with "an avenue for bringing a suit to recover a tax overpayment." (Appellant's Br. 15, ECF No. 16.)

The Bankruptcy Court held § 505 inapplicable, found §§ 522 and 553 directly implicated, and determined that the United States was "bound by the abrogation of sovereign immunity provided in § 106(a)." (App. 0074.) On appeal, the United States argues that "[§] 106(a)'s waiver allows a court to take action against the United States only in the manner and to the extent set out in the listed Code provisions." (Appellant's Br. 12.) The United States argues that the listed code sections at issue—505, 522, 542, and 553—do not abrogate the United States's sovereign immunity in this case because none of the applicable code sections create a cause of action like the one at bar. For the reasons below, the Court will affirm the Bankruptcy Court's holding.

A. Legal Standard for the United States's Sovereign Immunity in Bankruptcy Cases

Absent a waiver that permits suits against it on a particular kind of matter, sovereign immunity protects the United States and its agencies from suit. FDIC v. Meyer , 510 U.S. 471, 475, 114 S.Ct. 996, 127 L.Ed.2d 308 (1994). Any waiver of sovereign immunity by the United States must be "unequivocally expressed" and "construed strictly in favor of the sovereign." United States v. Nordic Village, Inc. , 503 U.S. 30, 33–34, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992) (internal quotation marks and citations omitted). If an action falls outside the strictly-construed terms of an unequivocal waiver, the Court lacks subject-matter jurisdiction, and the action must be dismissed. See id. ; Meyer , 510 U.S. at 475, 114 S.Ct. 996.

The Bankruptcy Code expressly abrogates sovereign immunity in 11 U.S.C. § 106 as to fifty-nine (59) provisions of the Bankruptcy Code. The list of provisions includes 11 U.S.C. §§ 505, 522, 542, and 553.

B. Sections 106, 522, and 553 Abrogate the United States's Sovereign Immunity

Section 106 expressly abrogates the United States's sovereign immunity for the purpose of this suit. First, Debtors bring their claims pursuant to §§ 522 and 553. Because the suit directly implicates §§ 522 and 553, and because resolving the case requires resolving the tension between §§ 522 and 553, ...