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Addison v. U.S. Dep't of Agric. (In re Addison) (Case No. 14-71321; A.P. No. 15-07002) 7/13/2015

The Court, noting the two different schools of thought on this issue, followed Sexton v. U.S. Dep't of Treasury (In re Sexton), 508 B.R. 646 (Bankr. W.D. Va. 2014), a recent decision from the Chief Bankruptcy Judge of this district, and held that the government cannot setoff a prepetition, non-tax debt against the debtor's federal tax refund pursuant to the Treasury Offset Program (26 U.S.C. § 6402), without first obtaining relief from the automatic stay.  In particular, the Court reasoned that the language of 11 U.S.C. § 362(b)(26) supports this finding because Section 362(b)(26) only excepts setoff of a debtor's income tax refund against income tax liability from violating the automatic stay, and did not include language excepting setoffs against non-tax liability.  Under the canon of statutory construction, Congress’s specific inclusion of the phrase "income tax liability" excludes the application of the provision to non-tax liabilities.  The Court held that the debtor's interest in his tax overpayment arose at midnight on December 31 of the relevant tax year.  Accordingly, the debtor's interest in his tax overpayment vested in the bankruptcy estate once the debtor filed his petition, and therefore acquired the protections of the automatic stay.  Further, the Court held that a properly claimed exemption under 11 U.S.C. § 522(c) trumps the government's right to offset pursuant to 11 U.S.C. § 553.  The Court also found that the Plaintiff was not entitled to an award of attorney's fees against the government in accordance with the Equal Access to Justice Act because the government's position in the litigation was "substantially justified."

Date: 
Monday, July 13, 2015
Category: 
Adversary Proceedings
Attorneys Fees
Automatic Stay
Exemptions
Property of the Estate
Relief from Stay
Statutory Construction
Tax Issues
Turnover
Chapter: 
7