US By and Through Farmers Home Admin. v. Ketelsen
| Decision Date | 04 March 1988 |
| Docket Number | CIV. 87-5126. |
| Citation | 104 BR 242 |
| Parties | UNITED STATES of America Acting By and Through the FARMERS HOME ADMINISTRATION, Appellant, v. Perry Roy KETELSEN and Lola Mae Ketelsen, Appellees. |
| Court | U.S. District Court — District of South Dakota |
Robert M. Nash, Wilson, Olson & Nash, P.C., Rapid City, S.D., for Ketelsens.
Dennis C. Whetzal, Rapid City, S.D., Trustee, pro se.
Robert J. Haar, Asst. U.S. Atty., Sioux Falls, S.D., for U.S.
The Appellant Farmers Home Administration (FmHA) appeals a judgment of the bankruptcy court1 for the Western Division of South Dakota 78 B.R. 573 (1987) which awarded actual damages of $1,100, punitive damages of $13,284.96, and attorney's fees of $3,332.58 against FmHA for violation of the automatic stay provision of 11 U.S.C. § 362(a). This action originated in the bankruptcy court as a "core proceeding" pursuant to 28 U.S.C. § 157(b). This Court entertains jurisdiction pursuant to 28 U.S.C. § 158.
Appellees Perry Roy Ketelsen and Lola Mae Ketelsen, husband and wife, live in Sturgis, South Dakota, and operate a 1,100 acre farm in Meade County, South Dakota. By 1986, the Ketelsens had become indebted to the Appellant FmHA in excess of $240,000.
On December 31, 1986, Ketelsens filed a Chapter 12 petition for bankruptcy. FmHA was listed as a secured creditor on the bankruptcy schedules and received notice of the bankruptcy proceeding.
On February 28, 1987, Ketelsens filed their 1986 income tax return. Ketelsens were informed by the IRS in a notice dated April 6, 1987, that they had overpaid their 1986 tax obligation in the amount of $3,446. FmHA attempted to offset $2,166 of the $3,446 against the FmHA obligation of $240,000. IRS cooperated with FmHA in this offset. After receiving the April 6, 1987, notice, Ketelsens' attorney notified FmHA that the attempted offset was in violation of the automatic stay provision of the Bankruptcy Code (11 U.S.C. § 362(a))2. Various communications thereafter ensued between FmHA and the bankrupts' attorney concerning the propriety of the claimed offset.
The position of FmHA was that the offset was authorized by 11 U.S.C. § 553(a).3
Ketelsens claimed that their failure to obtain the refund caused them to be in need of funds to prepare for the 1987 crop year, thereby causing the damages sought. They commenced this action on May 26, 1987, seeking a return of the income tax refund, actual and punitive damages, plus attorney's fees and costs. A trial was held on August 24, 1987. The court found that FmHA's actions were willful in violation of the automatic stay provisions of 11 U.S.C. § 362(a). Accordingly, the court ordered FmHA to pay Ketelsens $1,100 in actual damages, $13,284.96 in punitive damages, and $3,332.28 in attorney's fees and costs, for a total judgment of $17,717.24. In addition, the court provided that the offset portion of the tax refund in the amount of $2,166 be refunded to the Ketelsens. The refund check of $2,106 was delivered to the Ketelsens at the conclusion of the hearing.
The bankruptcy court's oral ruling following trial was embodied in the court's findings of fact and conclusions of law which, along with the court's judgment, were entered September 25, 1987. The court's findings numbered 14 to 19 inclusive4 set forth the court's findings upon which the court's legal conclusions as to willfulness were based.
The following questions are presented for purposes of this appeal:
1. Whether the bankruptcy court erred in the application of 11 U.S.C. § 553.
2. Whether the bankruptcy court erred in failing to apply the provisions of 11 U.S.C. § 505(a)(2)(B).
3. Whether the bankruptcy court erred in proceeding with this case as there had been no exhaustion of administrative remedies.
4. Whether the evidence supported an award of actual damages.
5. Whether an award of punitive damages was proper.
11 U.S.C. Rule 8013 provides for the weight accorded a bankruptcy judge's findings of fact, to-wit:
On appeal, the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy court\'s judgment, order, or decree or remand with instructions for further proceedings. Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.
11 U.S.C. Rule 8013. See also In re Clarkson, 767 F.2d 417, 419 (8th Cir.1985). "This test obtains as to facts found, but not necessarily as to the legal conclusions to be reached or drawn from the facts so found." In re Naftalin & Co., 333 F.Supp. 136, 140 (D.Minn.1971), vacated on other grounds 469 F.2d 1166 (8th Cir.1972). "Where there is no factual dispute, however, but purely a question of law, . . . the standard is not so stringent nor so high." In re Mieux, 362 F.Supp. 1040, 1042 (D.Minn.1973). Thus it has been held that a bankruptcy court's conclusions of law are freely reviewable on appeal. United States v. Mississippi Valley Generating Co., 364 U.S. 520, 526, 81 S.Ct. 294, 297, 5 L.Ed.2d 268, 275 (1961).
WHETHER THE BANKRUPTCY COURT ERRED IN THE APPLICATION OF 11 U.S.C. § 553.
FmHA argues that the bankruptcy court erred in finding that FmHA was in violation of the automatic stay when it applied the offset against Ketelsens' indebtedness. FmHA asserts that because the offset of Ketelsens' income tax refund was commenced pursuant to 26 U.S.C. § 6402(d) by FmHA over 60 days prior to the filing of the Chapter 12 petition, that the provisions of the automatic stay are inapplicable.5 FmHA argues that such an application would in effect be retroactive and not within the automatic stay provisions of 11 U.S.C. § 362.
Section 553 of the Bankruptcy Code provides in pertinent part:
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. . . .
11 U.S.C. § 553. Section 553 allows the set off of a mutual debt; however, such action is expressly subject to the automatic stay provisions of 11 U.S.C. § 362. Section 362 of the Bankruptcy Code provides in pertinent part:
11 U.S.C. § 362(a).
The effect of section 362(a)(7) is to stay the exercise of any pre-petition setoff. In re Mealey, 16 B.R. 800 (Bankr.E.D.Pa. 1982). Relief from the automatic stay is obtained pursuant to 11 U.S.C. § 362(d) after proper request by a party in interest and after notice in hearing. 11 U.S.C. § 362(d). Thus, both sections 553 and 362 preserve a creditor's right to any setoff he possesses, but automatically stays the exercise of that right unless the creditor obtains from the bankruptcy court relief from the automatic stay. United States v. Reynolds, 764 F.2d 1004, 1006 (4th Cir. 1985). The purpose of the automatic stay provisions of section 362 is two-fold: first, to give the debtor a "breathing spell" from his creditors6; and second, to prevent one creditor from rushing to enforce its lien to the detriment of the other creditors. See In re Ahlers, 794 F.2d 388, 393-94 (8th Cir.1986).7
FmHA's position is that this matter involved a prepetition obligation owed to the government and a pre-petition tax refund claim on the debtors' 1986 earnings. FmHA first argues that a pre-petition debt owed the government can be set off by a pre-petition tax refund, even though the refund is processed after the filing of a petition in bankruptcy. Second, FmHA asserts that because the offset of the Ketelsens' refund was commenced prior to the commencement of the stay pursuant to 26 U.S.C. § 6402(d), such actions were outside the scope of the automatic stay provisions of section 362.
FmHA relies on the case of Segal v. Rochelle, 362 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966) for its proposition that such a setoff is proper even though the tax refund is processed after the petition in bankruptcy is filed. Segal involved an application by the debtors to obtain loss-carryback refunds for losses suffered by the debtors' partnership prior to the filing of their bankruptcy petitions. The question presented in Segal was whether the loss carryback refunds had passed as "property . . . which prior to the filing of the petition the bankrupt could by any means have transferred." 362 U.S. at 377, 86 S.Ct. at 513-14, quoting section 70(a)(5) of the Bankruptcy Act of 1898. If the funds were found to be "property" and able to have been "transferred" prior to the filing of the bankruptcy, title to the refund would vest by operation of law with the trustee. The court held in Segal that the funds did constitute property as that term was defined under the Bankruptcy Act of 1898 and that a transfer could have been made prior to the bankruptcy. Therefore, even though the refund claim was filed post-petition, the tax refund was nevertheless a pre-petition debt of the IRS to the taxpayer, the title to which was vested with the trustee. Id.
Segal stands for the proposition that even though a claim for a loss-carryback tax refund is made after the filing for bankruptcy, that refund is not a post-petition debt of the IRS, but is instead a pre-petition debt of the IRS. This distinction becomes important with respect to setoffs. The law is clear that with respect to mutual pre-petition debts between a debtor in bankruptcy and a creditor that setoff is allowed...
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