Opinion
Case No. 99-11874-SSM
August 4, 1999
MEMORANDUM OPINION AND ORDER
A hearing was held in open court on July 20, 1999, on the objection filed by Gordon P. Peyton, the chapter 7 trustee, to the debtor's claim of exemptions. The debtor was present in person and represented herself. The chapter 7 trustee was present in person. Because several unusual issues were presented, the court took the matter under advisement.
Background
The debtor, LeSans Laverne Alexander, who is employed by the United States Government as an air traffic controller, filed a voluntary chapter 7 petition in this court on April 13, 1999. On her schedules, she listed and claimed exempt, among other property, $200 in "Currency/Coins used for daily expenses" and $1,350 in a "checking account in name of Debtor to be used to pay living expenses." The stated basis for the exemption was § 34-13, Code of Virginia (1950). She did not list, or claim exempt, any Federal or state income tax refunds.
Her petition — which was obviously prepared on commercial bankruptcy form preparation software — was filed pro se, with the blocks for identification of, and signature by, a non-attorney bankruptcy petition preparer marked "not applicable." Documents filed by the debtor in response to the trustee's objection reflect that in fact her petition was prepared by a business called "Affordable Bankruptcy — North America" of San Marcos, California. The failure by the petition preparer to sign the petition and to provide the preparer's social security number are clear violations of § 110(b) and (c), Bankruptcy Code, and will be dealt with separately by the court.
Gordon P. Peyton was appointed interim trustee and presided over the meeting of creditors held on May 14, 1999. On June 15, 1999, he filed the objection that is currently before the court. The objection asserts that the debtor is not entitled to exempt the cash and the funds in the checking account because she did not file a timely homestead deed. Additionally, the objection seeks turnover of Federal and state income tax refunds in the aggregate amount of $3,804. The debtor, in response, says that the funds in the checking account were not really hers, since they consisted of travel advances on Government temporary duty orders; that the state income tax refund has already been spent, so that there is nothing to turn over; and that, except for $840, the Federal income tax refund was offset by the Government to pay a prepetition claim of the Army and Air Force Exchange Service ("AAFES").
As to the tax refunds, copies of the 1998 joint Federal income tax return filed by the debtor and her husband, Anthony Alexander, reflect Federal income taxes withheld of $10,117, and a refund due of $5,131. Correspondence to the debtor from the IRS reflects that $4,274.71 of that refund was offset to pay the claim of "another agency," presumably AAFES, and that the IRS has "prepared the paperwork" to have that amount returned to the debtor (presumably based on the automatic stay having been in effect when the offset occurred). The debtor's 1998 Virginia income tax return shows a refund due to the debtor of $864, which the debtor testified that she had received after the meeting of creditors and had spent, primarily to make needed repairs to her car.
Subsequent to the hearing, the debtor advised the court by letter that AAFES had told her that they would not disgorge the funds. The issue of whether AAFES is required to do so is not before the court. In any event, the debtor will not be required to turn over any non-exempt portion of the offset amount to the trustee unless and until she receives it. That does not, of course, preclude the trustee from bringing, if he is so advised, an appropriate avoidance action to recover the offset amounts from AAFES.
With respect to bank accounts, the evidence reflects that the debtor actually has two accounts: a share draft account in her own name at Fort Belvoir Federal Credit Union, and a share draft account, joint with her husband, Anthony Alexander, in the Dover Federal Credit Union. The balance in the Fort Belvoir account on April 13, 1999, the date the chapter 7 petition was filed, was $359.27. From a review of the April 1999 statement for the account, there is nothing to suggest that the balance derived from a travel advance. Rather, the balance in the account appears to derive from a direct deposit of the debtor's salary on April 8, 1999, in the amount of $1,475.76. The debtor, in a post-hearing submission, explains that she requested an advance payment of salary to cover her anticipated expenses for the upcoming travel since she had not yet received a government credit card to which she could charge the expenses of that travel. However, she states that she received the card on May 13, 1999, which was one month after the bankruptcy filing and four days prior to the start of her travel. The debtor's travel claim reflects that her period of temporary duty (for a management conference in Kansas City, Missouri) was from May 17, 1999, to May 28, 1999, and it appears that the bulk of the expenses incurred in connection with that travel were charged to the government credit card. When she settled the travel claim, the government paid the credit card issuer directly. Based on the documents presented, the court cannot find that any portion of the $359.27 balance in the Fort Belvoir account on the filing date represented a government travel advance. The fact that the debtor requested a salary advance because she thought she would need the funds for travel does not suffice to make the funds a travel advance or to impose any restrictions on the debtor's use of the funds. Accordingly, the court need not reach the legal issue of whether — had that been the case — the funds could have been administered by the trustee for the benefit of creditors in this case.
With respect to the Dover account, the account statement reflects a balance of $594.24 on the filing date. The debtor testified, and the account statement seems to confirm, that all of the funds in the account on that date derive from a $650 deposit made by the debtor's husband from his active-duty pay for the purpose of paying a mortgage on the marital residence. Thus, although the account is a joint account, because the funds were supplied by the other account owner and were designated for a specific purpose, the court cannot find that they are subject to being administered by the trustee, or that the debtor is required to account to the trustee for them.
Discussion A.
In general, all property belonging to a debtor is available for distribution to creditors in a bankruptcy case. However, an individual debtor who files for bankruptcy relief may exempt from property of the bankruptcy estate — and thus retain, free from the claims of most creditors — either the property specified in § 522(d), Bankruptcy Code ("the Federal exemptions"), or, alternatively, the exemptions allowable under state law and general (that is, nonbankruptcy) Federal law. A state, however, is permitted to "opt out" of allowing its residents to take advantage of the Federal exemptions. § 522(b)(1), Bankruptcy Code. Virginia has done precisely that. Va. Code Ann. § 34-3.1. Accordingly, residents of Virginia filing bankruptcy petitions may claim only those exemptions allowable under state law and general Federal law. In re Smith, 45 B.R. 100 (Bankr. E.D. Va. 1984).
The state law exemptions available to Virginia residents are primarily set forth in Title 34, Va. Code Ann. The exemption at issue here is the "homestead" exemption created by Va. Code Ann. §§ 34-4 and 34-13. Under the homestead exemption, a "householder" — defined as any resident of Virginia — may hold up to $5,000 of real or personal property exempt by filing for record an instrument known as a homestead deed in the clerk's office of the circuit court for the city or county where the real property is located and, if personal property is claimed, where the debtor resides. Va. Code Ann. §§ 34-4, 34-6, 34-13, and 34-14. Additional amounts maybe claimed exempt if the householder supports dependents or is a disabled veteran. Va. Code Ann. §§ 34-4 (additional $500 for each dependent) and 34-4.1 (additional $2,000 for disabled veteran). In the case of a debtor who has filed for bankruptcy, the homestead exemption must be "set apart" no later than 5 days after the first date set for the meeting of creditors in the bankruptcy case. Va. Code Ann. § 34-17. Failure to comply with the requirements for setting apart a homestead exemption results in the loss of that exemption in bankruptcy. Zimmerman v. Morgan, 689 F.2d 471, 472 (4th Cir. 1982); In re Freedlander, 93 B.R. 446, 448-49 (Bankr. E.D. Va. 1988) (Shelley, J.).
Where a case is converted to chapter 7 from chapter 13 or chapter 11, the five days runs from the meeting of creditors in the converted case. Va. Code Ann. § 34-17.
The debtor does not dispute that she did not file a homestead deed within 5 days of the meeting of creditors. She does complain that the trustee failed to advise her of the need to file a homestead deed. She asserts that, following the meeting of creditors in her own case, she took time off from work to observe meetings of creditors being conducted by other trustees, who, she says, routinely advised pro se debtors like herself of the requirement to file a homestead deed. It would of course be desirable if there were uniformity of practice among trustees: certainly, it ill-serves the public perception of fairness if certain debtors are treated less favorably than others based simply on the happenstance of whom they happen to draw as trustee. At the same time, there is no legal duty on the part of a trustee to advise the debtor concerning exemptions; and it could well be argued that the trustee's statutory duty to "collect and reduce to money the property of the estate for which such trustee serves," 11 U.S.C. § 704(1), is incompatible with providing assistance to debtors (whether or not represented by counsel) in claiming exemptions. While the apparent inconsistency of practice among trustees in this division is troubling, a mere failure by a particular trustee to advise a pro se debtor of the procedure for perfecting a homestead exemption does not constitute a legally sufficient basis for allowing the exemption. Accordingly, the trustee's objection must be sustained and the homestead exemption disallowed.
B.
As noted, the debtor claimed a homestead exemption with respect to $200.00 in "Currency/Coins used for daily expenses" and $1,350 in a checking account. The cash is clearly not exempt and must be turned over to the trustee, as must the $359.27 that was in the Fort Belvoir account on the filing date. As discussed above, the court finds that the funds in the Dover Federal Credit Union account on the filing date belonged to the debtor's husband and are not subject to turnover.
The tax refunds raise a somewhat different issue. First, the debtor argues that since the returns were not filed until after the bankruptcy, the tax refunds are not property of the bankruptcy estate. The cases are clear, however, that where a refund relates to a period prior to the filing of the bankruptcy, any tax refund for that period is property of the bankruptcy estate even if the return is not filed (or the refund received) until after the bankruptcy is filed. Kokoszka v. Belford, 417 U.S. 642, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974); see also In re Sutphin, 24 B.R. 149 (Bankr. E.D. Va. 1982) (Bostetter, J.); In re Whitmer, 228 B.R. 841 (Bankr. W.D. Va. 1998).
With respect to the Virginia income tax refund of $864.00, the only apparent basis for exemption under Virginia law would have been the homestead exemption, and, as noted, the time for claiming that exemption has expired. Thus, the debtor must account to the trustee for the amount of that refund. The Federal income tax refund was filed jointly with the debtor's husband. The most recent ruling in this district is that a joint refund is to be allocated between the spouses in proportion to their withholdings, not their earnings. In re Lyall, 191 B.R. 78, 85-86 (E.D. Va. 1996) (Smith, J.); contra, Bass v. Hall, 79 B.R. 653 (W.D. Va. 1987) (Kiser, J.) (debtor wife entitled to exempt 50% of joint tax refund despite having earned less than 50% of the couple's joint income for the tax year in question). In the present case, the W-2 forms of the debtor and her husband reflect that $5,997.09 was withheld from her pay and that $4,120.23 was withheld from his pay. Her withholdings are therefore 59.3% of the total. Accordingly, $3,042.68 (59.3% of the joint $5,131 refund) is property of the estate and subject to administration by the trustee.
Lyall is inconsistent with two earlier holdings in this district, In the matter of Hilliou, 38 A.F.T.R.2d 76-5254, 1976 WL 1031 (E.D. Va. 1976) (Shelley, Bankr. J.) and In re Kestner, 9 B.R. 334 (Bankr. E.D. Va. 1981) (Bostetter, J.), both of which held that the tax refund was to be allocated in proportion to the respective incomes of the parties. As Lyall is the most recent opinion, the court will follow it. The actual difference, in the present case, would be relatively slight, in that the debtor's share of the refund would be 57.26%, or $2,938, if allocated on the basis of income.
C.
The final issue involves the trustee's request for turnover. Any person — which would include the debtor — who is in possession of property of the bankruptcy estate is required to turn that property over to the trustee or account to the trustee for its value. § 541(a), Bankruptcy Code. Additionally, the debtor is under an independent duty to "surrender to the trustee all property of the estate and any recorded information, including books, documents, records, and papers, relating to property of the estate." § 521(4), Bankruptcy Code. With respect to the Federal income tax refund, it appears that the bulk of it was offset to pay a debt owed to a government instrumentality, AAFES. There is an indication that the offset is being reversed, and that the refund will be mailed to the debtor. Obviously, until the debtor actually receives the refund, she cannot in a literal sense turn it over to the trustee, nor in equity can she be required to account to the trustee for its value. With respect to the Virginia income tax refund, the cash, and the funds in the Fort Belvoir Federal Credit Union account, it appears that the debtor has spent those sums and does not literally have them in her possession to turn over. She is nevertheless required to account to the trustee for them. Given that she appears to have been genuinely unaware of the need to do so and has requested a reasonable period of time to come up with the necessary funds, the court will give her four months to do so.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The trustee's objection to the debtor's claimed exemptions under § 34-13, Code of Virginia, is sustained.
2. The debtor shall turn over to the trustee, as soon as she receives it . her portion ($3,042.68) of the joint 1998 Federal income tax refund. If she receives any correspondence from the IRS or AAFES indicating that the amount offset will not be refunded, a copy of that correspondence should immediately be furnished to the trustee.
3. The debtor shall account to the trustee for the $200 in cash, the $359.27 balance in the Fort Belvoir Federal Credit Union account, and the $864.00 Virginia 1998 income tax refund by paying to the trustee the sum of $1,423.27 not later than November 1, 1999 . If not paid by that date, the trustee may have judgment against the debtor for that sum, together with interest from the date of this order at the Federal judgment rate until paid.
4. The clerk shall mail a copy of this memorandum opinion and order to the debtor, the chapter 7 trustee, and the United States Trustee.