Opinion
Case No. 6:18-bk-00939-KSJ
08-09-2018
In re ROBIN D. GILLAND, Debtor.
Chapter 7 ORDER PARTIALLY GRANTING CREDITOR'S MOTION FOR RELIEF FROM AUTOMATIC STAY NUNC PRO TUNC
The Army and Air Force Exchange Service's (the "AAFES") seeks relief from stay nunc pro tunc to setoff the Debtor's tax refunds against debts due to the Movant (the "Motion"). The Debtor opposes the Motion. The Court took the dispute under advisement on July 10, 2018. The Court will partially grant the Motion to allow AAFES to retain $303 as a setoff from the Debtor's 2017 tax income refund.
Motion for Relief form Stay Nunc Pro Tunc (Doc. No. 13).
Response to (In Opposotion) to Creditor United States of Ameriaca's Motion for Relief from Automatic Stay (Doc. No. 18).
AAFES provides services to the military and authorized family members. Debtor opened a line of credit with AAFES's Military Star Program on March 3, 2004. Debtor defaulted and AAFES placed the account in the Treasury Offset Program. The Treasury Offset Program exercises the government's right to setoff mutual obligations owed to federal agencies. With accrued interest, Debtor owed $7,608.17 to AAFES.
Doc. No. 13, p. 1.
Id.
Id. at 2.
Id.; see also 26 U.S.C. § 6402 and 31 U.S.C. § 3720A.
Id. at 2.
On February 21, 2018, Debtor filed for bankruptcy relief under Chapter 7. The Internal Revenue Service set off the Debtor's 2017 federal income tax refund against the outstanding Military Star debt. On February 28, 2018, AAFES received, as part of setoff, a $6,062.75 payment, plus a $17.25 fee. AAFES applied $6,062.75 to the Military Star account.
Doc. No. 1.
Doc. No. 13, p. 2.
Id.
Id.
AAFES seeks to lift the automatic stay under § 362(d)(1) and (2) of the Bankruptcy Code nunc pro tunc to permit AAFES to set off the Debtor's 2017 federal income tax refund against their Military Star debt. It argues its common law right to setoff, coupled with the Treasury Offset Program's statutory authority, permits the Secretary of the Treasury to offset a taxpayer's tax refund against the debt owed to another federal agency.
All references to the Bankruptcy Code refer to 11 U.S.C. §§ 101 et. seq.
Doc. No. 13, p. 4.
Id. at 3-4 (citing U.S. v. Tafoya, 803 F.2d 140, 414-142 (5th Cir. 1986); 26 U.S.C. § 6402; 31 U.S.C. § 3720A).
Debtor asserts AAFES's right to setoff under 31 U.S.C. § 3720A is limited under subsection (c) to only the amount of "federal taxes paid," which in this case was $303. The rest of Debtor's income tax refund consisted of three different types of tax credits: earned income credit, an additional child tax credit, and an American opportunity credit.
Doc. No. 18, p. 1.
Id.
The only issue before the Court is whether AAFES had the right to set off the entire tax refund including the tax credits or just the $303 attributed to federal taxes paid by the Debtor. Under § 553 of the Bankruptcy Code, a creditor may set off a mutual debt against a claim by the creditor against the debtor, provided both debts arose before the commencement of the bankruptcy case. However, § 522(b) of the Bankruptcy Code allows a debtor to exempt specified property from the bankruptcy estate. The applicable undisputed state law here is Florida law. Section 222.25(3) of the Florida Statues exempts "a debtor's interest in a refund or a credit received or to be received ...pursuant to s. 32 of the Internal Revenue Code of 1986, as amended" with the limited exception of debt owed for child support or spousal support is not exempt under § 222.25(3).
The Eleventh Circuit has decided a similar issue. In In re James, part of the debtors' refunds included earned income tax credit ("EITC") payments. Debtors claimed an interest in the payments as exempt under the Alabama Code in their schedules. Trustee objected to the exemption. Applying Alabama law, the Court looked at the Alabama Code § 38-4-8, which exempts "all amounts paid or payable as public assistance to needy persons." The Court found that "public assistance" included EITC and the tax credit was therefore exempt under the Alabama Code.
In re James, 406 F.3d 1340 (11th Cir. 2005).
Id. at 1342.
Id.
Id.
Id. at 1343.
Id. at 1344-45.
Here, the Debtor's pre-petition Military Star's debt and the IRS's tax refund are mutual obligations because the IRS and AAFES, as federal agencies, are instrumentalities of the United States. Debtor, however, only paid $303 in federal taxes and the rest of the refund were tax credits. Section 222.25(3) of Florida statutes is clear tax credits are exempt property unless the "debt [is] owed for child support and spouse support." Movant's debt does not fall within this limited exception. AAFES then may only offset the Debtor's $303 federal income tax withholdings.
See FLA. STAT. § 222.25(3). --------
Accordingly, it is
ORDERED:
1. AAFES's Motion for Relief from Automatic Stay Nunc Pro Tunc (Doc. No. 13) is PARTIALLY GRANTED.
2. The automatic stay imposed by 11 U.S.C. § 362 is lifted nunc pro tunc to allow AAFES to setoff the Debtor's federal income tax withholdings for $303.
3. AAFES is directed to remit the balance of $5,777 to the Debtor as exempt funds.
ORDERED.
Dated: August 09, 2018
/s/_________
Karen S. Jennemann
United States Bankruptcy Judge
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The Clerk is directed to serve a copy of this order on all interested parties.