In re Brian Lee SHORTT and Traci Kaye Shortt, Debtors., United States Bankruptcy Court, N.D. Texas, Fort Worth Division., 277 B.R. 683, No. 01-42418-BJH-13., May 17, 2002
In re Brian Lee SHORTT and Traci Kaye Shortt, Debtors.
United States Bankruptcy Court, N.D. Texas, Fort Worth Division.
277 B.R. 683
May 17, 2002.
Donna K. Webb, Assistant U.S. Attor╜ney, Fort Worth, TX, for United States, Army & Air Force Exchange Service.
Behrooz Vida, Venable & Vida, Bedford, TX, for debtors.
BARBARA J. HOUSER, Bankruptcy Judge.
Before the Court is the Motion of Unit╜ed States of America to Modify Stay Nunc Pro Tune to Authorize Set Off (the "Mo╜tion"). The Motion was filed by the Unit╜ed States on behalf of the Army and Air Force Exchange Service ("AAFES"). Bri╜an Lee Shortt ("Shortt") and Traci Kaye Shortt ("Mrs. Shortt") (collectively, the "Debtors") have filed a response in opposi╜tion to the Motion. After a hearing on the Motion, the Court took the matter under advisement and directed the parties to submit b riefs on the issues. The last of those briefs was filed on March 21, 2002.
To decide the Motion, the Court must consider five issues. First, whether the Debtors could compel the Internal Reve╜nue Service ("IRS") or AAFES to pay the 2000 tax refund to them pursuant to sec╜tion 542(b) of the Bankruptcy Code. Sec╜ond, whether AAFES has a right outside of bankruptcy to setoff its debt against the Debtors' 2000 tax refund. Third, whether AAFES acts in a distinct private capacity when it sells goods on credit to military personnel and charges them interest and fees for that service such that AAFES and the IRS should not be treated as a single governmental unit for purposes of setoff. Fourth, whether section 522(c) of the Bankruptcy Code, which protects exempt property from liability on prepetition debt, also protects that exempt property from setoff under section 553 of the Bankruptcy Code. Finally, if AAFES had a valid right to setoff which it exercised in violation of the automatic stay, whether the Court should grant relief from stay nunc pro tune and allow AAFES to keep the monies it set off in light of its six-month delay in filing the Motion.
For the reasons explained below, the Court concludes that (i) the Debtors could not compel the IRS or AAFES to pay the 2000 tax refund to them if AAFES has a valid non-bankruptcy right of setoff; (ii) AAFES has a valid non-bankruptcy right of setoff which section 553 of the Bank╜ruptcy Code preserves; (iii) AAFES and the IRS should be treated as a single governmental unit for purposes of setoff; (iv) while AAFES may be prohibited from exercising its right to setoff against ex╜empt property, the Debtors' interest in the 2000 tax refund (which may then be claimed as exempt) must be determined after allowing for a proper setoff in accor╜dance with section 542(b) of the Bankruptcy Code; and (v) notwithstanding its delay in seeking relief from the automatic stay, the stay will be modified nine pro tunc to validate AAFES's setoff of the Debtors' 2000 tax refund against the Debt.
I. Factual Background
In 1993, Mrs. Shortt opened a Deferred Payment Program ("DPP") account (the "Account") with AAFES. The DPP is an in-house credit plan that provides military personnel and authorized family members affordable credit at AAFES's worldwide facilities. On August 19, 1996, the Account became delinquent. On September 18, 1998, AAFES sent a Notice of Intent to Offset to Collect Delinquent Debt (the "Notice Letter") to Mrs. Shortt at a Jack╜sonville, North Carolina address. See AAFES Exhibit 2. The Notice Letter ad╜vised Mrs. Shortt that a past due debt in the amount of $4,531.59 (the "Debt") was owing to AAFES and that future income tax refunds were subject to offset. See id. Debra Hill, a paralegal in the general counsel's office of AAFES, testified with╜out contradiction that the Notice Letter was sent to the last known address AAFES had for Mrs. Shortt. On Septem╜ber 18, 1998, however, the Debtors lived in North Richland Hills, Texas. On October 2, 2000, pursuant to 31 U.S.C. ╖ 3720A, AAFES placed the Debt in the Treasury Offset Program.
On April 2, 2001, the Debtors filed for relief under Chapter 13 of the Bankruptcy Code. On April 27, 2001, the Debtors filed (i) their Schedule F listing AAFES as an unsecured creditor in the amount of $3,859.00, (ii) their amended mailing ma╜trix listing AAFES as a creditor, and (iii) their Schedule C listing the Debtors' 2000 tax refund in the amount of $1,608.00 as an asset and claiming it as exempt pursuant to 11 U.S.C. ╖ 522(d)(5). No party-in-interest, including AAFES, objected to the Debtors' exemptions.
It appears that various offices of AAFES received notice of the Debtors' bankruptcy at different times, but did little to communicate with each other. At least one office of AAFES received notice of the Debtors' bankruptcy on or about April 27, 2001 when the Debtors' schedules and amended mailing matrix were filed. While Debra Hill agreed that the address listed on the schedules and matrix was a correct one for AAFES, she testified that she thought it was just a billing address-i.e., an address where customer payments were sent. According to Ms. Hill, the Debtors' bankruptcy information should have been sent to the Dallas office of AAFES. In fact, the Notice Letter (which the Debtors claim never to have received) states that bankruptcy information must be sent to:
Army & Air Force Exchange Service
P.O. Box 650038
Dallas, TX 75265-0038
On June 1, 2001, counsel for the Debtors contacted AAFES by telephone and orally notified it that the Shortts had filed bank╜ruptcy. Ms. Hill testified that this phone call was received by AAFES's customer service department. The customer service department then called the general coun╜sel's office and notified it that a bankrupt╜cy petition had been filed. Ms. Hill testi╜fied that a representative of the general counsel's office attempted to call counsel for the Debtors back (so that AAFES could obtain the relevant bankruptcy infor╜mation), but that this phone call was never returned. In fact, AAFES contends that it did not receive the relevant bankruptcy information until September 5, 2001, when it received another call from Debtors coun╜sel's office providing the bankruptcy infor╜mation and requesting the 2000 tax refund.
Despite being telephonically notified of the pending bankruptcy, on either June 1, 2001 (according to the testimony of Debra Hill) or June 8, 2001 (according to AAFES's responses to the Debtors' inter╜rogatories # 6 and # 8), at the request of AAFES and pursuant to the Treasury Off╜set Program, the IRS withheld the Debt╜ors' 2000 tax refund in the amount of $2,108.15 and paid those monies to AAFES in partial satisfaction of the Debt. Debra Hill testified that AAFES could not have stopped the offset when they received tele╜phonic notice of the bankruptcy on June 1, 2001 because once the Debt had been cer╜tified, the offset could not be stopped. She further testified that "if we take it [a tax refund] inadvertently, or if we take it and it's wrong, we refund the money back be╜cause once we certify it, we can't reverse it.
When the IRS withheld the 2000 tax refund from the Debtors in June, 2001 and then paid those monies to AAFES, AAFES had not sought relief from the automatic stay. AAFES filed the Motion on December 13, 2001 and sought nunc pro tune authority to setoff the Debt against the 2000 tax refund.
II. Legal Analysis
A. ═ Jurisdiction
The Court has jurisdiction over the Mo╜tion pursuant to 28 U.S.C. ╖╖ 157, 1334. The Motion is a core proceeding.
B. ═ Can the Debtors compel payment
═════ of the 2000 tax refund?
While the Debtors make much of the fact that AAFES waited some six months to file the Motion, of equal interest and perhaps more legal significance is the fact that the Debtors have not sought to com╜pel the payment of the 2000 tax refund to them since their Chapter 13 case was filed over a year ago. When asked about this at the hearing, counsel for Debtors ex╜plained that he delayed initially because he was waiting for the objection period to run on the Debtors' claimed exemptions. However, it appears there is an additional explanation.
Under section 542(b) of the Bankruptcy Code, the Debtors cannot compel the pay╜ment of the debt owed to them by the IRS - i.e., the 2000 tax refund, if AAFES has a valid right of setoff against that tax refund. Section 542(b) provides that "an entity that owes a debt that is property of the estate and that is matured .. . shall pay such debt to . . . the trustee, except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor. " 11 U.S.C. ╖ 5 42(b)(emphasis added). The courts and commentators have construed this lan╜guage to mean what it says. See, e.g., Stephenson v. Salisbury (In re Corland Corp.), 967 F.2d 1069 (5th Cir.1992); 5 Collier on Bankruptcy ╤ 542.03, at 542-15 (Lawrence P. King ed., 15th ed.1992).
In general, a debtor's claim to a tax refund is property of the estate. See Internal Revenue Serv. v. Luongo (In re Luongo), 259 F.3d 323, 335 (5th Cir.2001). However, recognizing that the IRS has the right to offset unpaid tax liabilities owed to it against refunds owing to a taxpayer under 26 U.S.C. ╖ 6402(a), the Luongo court explained that unless there is a net amount owing after offset, there is no actu╜al tax refund to become property of the estate in a debtor's bankruptcy case. Spe╜cifically, the Fifth Circuit held that
[b]ecause the prior unpaid tax liability exceeded the amount of the overpay╜ment, the debtor was not entitled to a refund and the tax refund did not be╜come property of the estate. Absent an interest in the estate to the refund, it could not properly be exempted by the debtor under ╖ 522.
Luongo, 259 F.3d at 335. Thus, the Fifth Circuit makes a distinction between a claim to a tax refund and an actual refund. A claim to a tax refund is property of the estate - i. e., a contingent right to payment. However, for that contingent right to ripen into an actual right to payment, there must be monies still owing to the debtor's estate after offset has occurred. If there are no monies owing after offset, there is no actu╜al refund to be paid to the estate- i. e., "the tax refund did not become property of the estate," Luongo, 259 F.3d at 335, and there is no interest in property to be claimed as exempt.
Thus, if AAFES has a valid right of setoff under section 553 of the Bankruptcy Code, the Debtors' claint to a tax refund is property of the estate but their interest in an actual tax refund (or their right to payment) is limited to that amount in ex╜cess of the Debt. Because the Debt 1 is in excess of the amount of the 2000 tax re╜fund, if AAFES has a valid right of setoff, the Debtors have no interest in the 2000 tax refund - i.e. , there is no net refund to become property of the estate that can be exempted under section 522 of the Bank╜ruptcy Code; and the Debtors could not compel the payment of the 2000 tax refund to them under section 542(b).
1. In the Notice Letter, the amount shown to be owing to AAFES was $4,531.59 plus inter╜est, penalties and other charges. In their Statement of Financial Affairs the Debtors show a prior setoff by AAFES against their 1999 tax refund, but show an undisputed debt of 53,859.00 still owing to AAFES on Schedule C. AAFES filed a second proof of claim on September 28, 2001 in the amount of $3,579.08. Although the record is unclear with respect to the precise amount owed to AAFES, based upon the Debtors' admission in Schedule C, the amount owing to AAFES is in excess of the 2000 tax refund.
C. ═ Does AAFES possess a right to setoff?
Setoff is governed by section 553 of the Bankruptcy Code which provides:
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 debt╜or that arose before the commencement of the case under this title against a claim of such a creditor against the debt╜or that arose before the commencement of the case . . .
11 U.S.C. ╖ 553(a). Courts have con╜strued the language of section 553(a) to be "permissive in nature, rather than manda╜tory." Alexander v . Comm'n, In ternal Revenue Serv. (In re Alexander), 225 B.R. 145, 147 (Bankr.W.D.Ky.1998) (citing Cumberland Glass Mfg. Co. v. De Witt, 237 U.S. 447, 455, 35 S.Ct. 636, 59 L.Ed. 1042 (1915); Internal Revenue Serv. v. Norton, 717 F.2d 767, 772 (3rd Cir.1983)). Application of section 553(a), "when prop╜erly invoked before a court, rests in the discretion of that court, which exercises such discretion under the general princi╜ples of equity." In re Pace, 257 B.R. 918, 919 (Bankr.W.D.Mo.); Alexander, 225 B.R. at 147 (citing Norton, 717 F.2d at 772) (quoting 4 Collier on Bankruptcy ╤ 553.02, at 553-11 (Lawrence P. King ed., 15th ed.1992)).
Although the Bankruptcy Code does not create a federal right of setoff, if a party possesses a setoff right outside of bankruptcy, section 553(a) preserves that right if certain conditions are met. See Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995); Luongo, 259 F.3d at 336. Thus, the threshold question is whether AAFES has a right of setoff outside of bankruptcy. AAFES contends that it does pursuant to the so-called tax intercept program, codi╜fied as 31 U.S.C. ╖ 3720A and 26 U.S.C. ╖ 6402(d). 2
2. Section 6402(d) provides in relevant part
(d) Collection of debts owed to Federal agencies.-
(1) In general.-Upon receiving notice from any Federal agency that a named per╜son owes a past-due legally enforceable debt ... to such agency, the Secretary shall-
(A) reduce the amount of any overpay╜ment payable to such person by the amount of such debt;
(B) pay the amount by which such over╜payment is reduced under subparagraph (A) to such agency; and
(C) notify the person making such over╜payment that such overpayment has been reduced by an amount necessary to satis╜fy such debt . . .
Section 3720A provides in relevant part:
(a) Any Federal agency that is owed by a person a past-due, legally enforceable debt (including debt administered by a third par╜ty acting as an agent for the Federal Gov╜ernment) shall, and any agency subject to section 9 of the Act of May 18, 1933 (16 U.S.C. 831h), owed such a debt may, in accordance with regulations issued pursu╜ant to subsections (b) and (d), notify the Secretary of the Treasury at least once each year of the amount of such debt. (b) No Federal agency may take action pursuant to subsection (a) with respect to any debt until such agency-
(1) notifies the person incurring such debt that such agency proposes to take action pursuant to such paragraph with respect to such debt . . .
In Aetna Casualty & Surety Co. v. LTV Steel Co., Inc. (In re Chateaugay Corp.), 94 F.3d 772, 778-79 (2d Cir.1996) the Sec╜ond Circuit explained that "[s]ection 6402(d) authorizes the Secretary of the Treasury to set off a tax refund against the taxpayer's debt to another Federal agency. Section 3720A provides the pro╜cedural framework for that setoff." Id. Section 3720A requires the federal agency to notify a debtor before submitting a claim for setoff to the Secretary of the Treasury. See 31 U.S.C. ╖ 3720A (a)-(b); see also Gerrard v. United States Office of Educ., 656 F.Supp. 570, 575 (N.D.Cal. 1987).
Here, the Debtors contend that setoff is not appropriate because they did not re╜ceive such a notice from AAFES. As not╜ed previously, the Notice Letter was sent to an address in North Carolina while the Debtors were living in Texas. AAFES contends that it sent the Notice Letter to the last address it had for the Debtors and that this notice is legally sufficient, not╜withstanding the fact that the Debtors claim not to have received it. The Debtors disagree.
Section 3720A does not specify that a particular form of notice must be sent. See 31 U.S.C. ╖ 3720A(b); Gerrard, 656 F.Supp. at 575. However, due process requires "notice reasonably calculated, un╜der all the circumstances, to apprize inter╜ested parties of the pendency of the action and afford them an opportunity to present their objections." Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). "The mail is generally held to be an ade╜quate means of providing notice under this standard." See Gerrard, 656 F.Supp. at 575 (citing Greene v. Lindsey, 456 U.S. 444, 455, 102 S.Ct. 1874, 72 L.Ed.2d 249 (1982); Mullane, 339 U.S. at 319, 70 S.Ct. 652). Where the government took reason╜able steps to notify the debtor, the fact that the debtor did not actually receive the notice is immaterial. Id.; see also Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985) (while recognizing that some notices were "undeliverable," the Court found that due process was satisfied when a "fully de╜scriptive notice is sent via first-class mail to each class member"); Schroeder v. City of New York, 371 U.S. 208, 214, 83 S.Ct. 279, 9 L.Ed.2d 255 (1962) (holding that the city could have discharged its constitution╜al obligation to make a good faith effort to give personal notice by "the mailing of a single letter.").
Here, Debra Hill testified that AAFES followed its normal procedures and sent the Notice Letter to the Debtors at their last known address. AAFES had no way of knowing that the Debtors had moved to Texas. The Debtors do not con╜tend that they advised AAFES of their change of address; they only contend that they did not get the Notice Letter. The primary purpose of the notice under the tax intercept program is to give the Debt╜ors the opportunity to dispute the validity of the Debt before setoff can occur. Here, the Debtors do not dispute the Debt. In fact, they admit that they owed AAFES $3,859.00 on the petition date. See Sched╜ule F. Moreover, in response to question 13 on their Statement of Financial Affairs, the Debtors disclose a prior setoff by AAFES against their 1999 tax refund.
Under these circumstances, the Court finds that AAFES took reasonable steps to notify the Debtors of its intent to place the Debt in the Treasury Offset Program and to seek a setoff of future tax refunds. Thus, the Court concludes that AAFES complied with the notice provision of sec╜tion 3720A.
D. ═ Are AAFES and the IRS a single governmental unit for purposes of setoff?
To establish a valid right to setoff under section 553 of the Bankruptcy Code, AAFES must prove: (i) a debt owed to the debtor which arose before the commence╜ment of the bankruptcy case; (ii) a claim against the debtor which arose before the commencement of the bankruptcy case; and (iii) that the debt and claim are mutual obligations. See 11 U.S.C. ╖ 553(a); see also Luongo, 259 F.3d at 334; Braniff Airways, Inc. v. Exxon Co., 814 F.2d 1030, 1035 (5th Cir.1987); United States v. Jones (In re Jones), 230 B.R. 875, 878 (M.D.Ala.1999); Runnels v. Internal Reve╜nue Serv. (In re Runnels), 134 B.R. 562, 564 (Bankr.E.D.Tex.1991).
Here, there is no dispute over the first two elements-the 2000 tax refund and the Debt both arose before the Debtors filed their Chapter 13 case. However, there is a disagreement over whether the tax re╜fund owed to the Shortts by the IRS and the Debt owed by the Shortts to AAFES are mutual obligations. In short (no pun intended), are AAFES and the IRS the same entity for purposes of setoff under section 553 of the Bankruptcy Code?
As the Debtors concede, the gener╜al rule is that all agencies of the federal government are treated as a single entity for purposes of setoff. See, e.g., United States v. Maxwell, 157 F.3d 1099, 1102 (7th Cir.1998); HAL, Inc. v. United States (In re HAL, Inc., 122 F.3d 851, 853 (9th Cir.1997); Turner v. SBA (In re Turner), 84 F.3d 1294, 1299 (10th Cir.1996). Thus, the government may setoff funds owed by one agency to collect debts owed to other agencies of the government. See, e.g., Cherry Cotton Mills, Inc. v. United States, 327 U.S. 536, 539, 66 S.Ct. 729, 90 L.Ed. 835, 105 Ct.Cl. 824 (1946); In re Young, 144 B.R. 45, 46 (Bankr.N.D.Tex.1992); In re Sound Emporium, Inc., 70 B.R. 22, 24 (W.D.Tex.1987) (allowing a setoff between the Army's debt to the debtor and the IRS's claim against the debtor). When faced with the issue, courts of appeal "have applied the same single-entity rule in bankruptcy cases," United States v. Max╜well, 157 F.3d at 1102, and have held that "for purposes of setoff under ╖ 553, the agencies of the United States constitute a single 'governmental unit . . . ,' " HAL , Inc., 122 F.3d at 853.
A recognized exception to the gen╜eral rule arises when a federal agency acts in a "distinctive private capacity." See HAL, Inc., 122 F.3d at 853. Here, the Debtors contend, without explanation or authority, that "AAFES acts in a distinc╜tive private capacity and not as a govern╜mental agency when it sells goods on cred╜it to the military personnel and charges them interest and fees for the service. This is not a governmental function but a distinctly private function." See Debtors' Brief at p. 4. Needless to say, AAFES disagrees.
Few courts have considered whether AAFES and other federal agencies should be considered as a single entity for pur╜poses of setoff. Although not directly on point, in Honeycutt v. Long, 861 F.2d 1346, 1349 n. 3 (5th Cir.1988), the Fifth Circuit defined AAFES as a "Nonappropriated Fund Instrumentality of the United States operating under the Department of De╜fense" as directed by members of the Army and Air Force. Another court has held that AAFES is an agency of the United States within the scope of the Ad╜ministrative Procedure Act, noting that "an express or implied contract with the AAFES is construed to be an express or implied contract with the United States ... any judgment or settlement arising out of an express or implied contract with the AAFES is to be paid by the United States from funds appropriated from its Treasury . . . " See W.B. Fishburn Clean╜ers, Inc. v. Army & Air Force Exch. Serv., 374 F.Supp. 162, 164-65 (N.D.Tex.1974). The one court that has specifically held that AAFES and the IRS should be considered as one entity for setoff purposes did so without any analysis. See Hanssen v. DPP/AAFES (In re Hanssen), 203 B.R. 149, 150 (Bankr.E.D.Ark.1996) (stating only that "this Court will follow the long line of authority which establishes that, for setoff purposes, mutuality exists although distinct governmental entities are the creditors").
None of these cases specifically address╜es the Debtors' contention- i.e., that AAFES acts in a "distinctive private ca╜pacity" when it sells goods to military per╜sonnel and their families, thus triggering an exception to the general rule. The Debtors and AAFES agree that AAFES operates military exchanges at which mili╜tary personnel and their families may pur╜chase goods. The Supreme Court ex╜plained the role of military exchanges in Standard Oil Co. of Cal. v. Johnson, 316 U.S. 481, 62 S.Ct. 1168, 86 L.Ed. 1611 (1942) and stated that "[t]he object of the exchanges is to provide convenient and reliable sources where soldiers can obtain their ordinary needs at the lowest possible prices. Soldiers, their families, and civil╜ians employed on military posts here and abroad can buy at exchanges." Id. at 484-85, 62 S.Ct. 1168. The Court further found that profits from exchange transac╜tions "do not go to individuals. They are used to improve the solders' mess, to pro╜vide various types of recreation, and in general to add to the pleasure and comfort of the troops." Id. at 485, 62 S.Ct. 1168. The Supreme Court concluded that the exchanges were "arms of the government . . . essential for the performance of gov╜ernmental functions." Id.
Based upon the Supreme Court's analysis of military exchanges in Johnson, this Court concludes that AAFES is not acting in a distinctive private capacity but is acting as an agency of the government to fulfill a government function. The fact that AAFES offers credit to military per╜sonnel for their purchases and charges them interest for this service does not alter the nature and purpose of the military exchange, it simply makes it easier for military personnel to purchase goods. Thus, the general rule applies and AAFES and the IRS shall be considered a single entity for purposes of setoff under section 553 of the Bankruptcy Code.
E. ═ May AAFES setoff against exempt assets?
The Debtors have claimed a portion of the 2000 tax refund as exempt under sec╜tion 522(d)(5) of the Bankruptcy Code. See Schedule C (listing the 2000 tax refund as an asset and claiming $1,608.00 as ex╜empt). Relying on the majority view that the right of setoff under section 553 yields to the debtor's right to exempt and protect assets under section 522, see, e.g., In re Pace, 257 B.R. at 920; In re Alexander, 225 B.R. at 147 (listing cases and siding with the majority view that exempt prop╜erty may not be the subject of setoff), aff'd, 245 B.R. 280 (W.D.Ky.1999), the Debtors contend that AAFES cannot set╜off against the 2000 tax refund which be╜came exempt property when no one, in╜cluding AAFES, objected to their claimed exemptions. See 11 U.S.C. ╖ 522(1) ("Un╜less a party in interest objects, the proper╜ty claimed exempt on such list is ex╜empt."); Taylor v. Freeland, 503 U.S. 638, 643, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992) ("[u]nless a party in interest objects, the property claimed as exempt ... is ex╜empt.").
Generally, exempt property is not liable for prepetition debts unless the debt falls within one of the exceptions provided in section 522(c). See In re Bourne, 262 B.R. 745, 750 (Bankr.E.D.Tenn.2001). AAFES concedes that its setoff rights do not fall within any one of the section 522(c) exceptions. However, AAFES contends that its right to setoff under section 553 overrides the Debtors' claim of exemption under section 522(c).
While the courts are split on this issue - i.e. , does section 522(c) immunize exempt property from setoff, and the Fifth Circuit has specifically left the question open, see Luongo, 259 F.3d at 336 ("[b]e╜cause we find Appellant could not exempt the [tax] overpayment under ╖ 522, we leave open the question of whether ╖ 522(c) immunizes exempt property from setoff"), the Court does not have to reach this issue. Although the Luongo court was faced with setoff under 26 U.S.C. ╖ 6402(a) and this Court is faced with setoff under 26 U.S.C. ╖ 6402(d), the Fifth Circuit's analysis there is controlling. Be╜cause this Court has concluded that AAFES has a valid right of setoff, and because the amount of the Debt exceeds the amount of the 2000 tax refund, the Debtors are "not entitled to a refund and the tax refund did not become property of the estate. Absent an interest in the es╜tate to the refund, it could not properly be exempted by the debtor under ╖ 522." Luongo, 259 F.3d at 335. Thus, while the Debtors claimed the 2000 tax refund as exempt, they were not legally entitled to any refund and their attempt to exempt it is of no legal consequence. 3
3. As explained in In re Bourne, 262 B.R. 745 (Bankr.E.D.Tenn.2001), the purported inconsistency among section 522(c) (which the Debtors contend is controlling here), section 542(b) (which the Debtors contend is irrele╜vant here), and section 553 can be reconciled as follows:
Section 542(b)'s offset exception to the re╜quirement that a debt owed to the estate must be paid to the trustee is consistent with the offset preservation provision of ╖ 553. Furthermore, notwithstanding their apparent conflict, both of these provisions can be reconciled with ╖ 522(c)'s exemp╜tion protection language. Once a right of offset preserved by ╖ 553 has been estab╜lished in a debt owed to the estate, a debtor may claim an exemption only in the balance of the debt turned over to the estate after the offset has been exercised. There╜after, the exempted property is protected from all other prepetition debts pursuant to ╖ 522(c).
Id . at 756.
F. ══ May AAFES setoff the balance of the tax refund, notwithstanding its delay?
Under section 362(a)(7) of the Bankruptcy Code, the commencement of the Debtors' Chapter 13 case operated to stay "the setoff of any debt owing to the debtor that arose before the commence╜ment of the case under this title against any claim against the debtor." 11 U.S.C. ╖ 362(a)(7). Thus, when the IRS withheld the Debtors' 2000 tax refund and paid the monies to AAFES, the automatic stay was violated. The Debtors maintain that be╜cause of this violation, AAFES's right of setoff should be denied.
The courts which have considered this issue have disagreed as to whether the right of setoff should be denied to a credi╜tor who has violated the automatic stay. See Bourne, 262 B.R. at 759 (citing cases which have permitted offset notwithstand╜ing stay violation and cases denying offset due to stay violation). The Eleventh Cir╜cuit has held that section 362 does not "give the Bankruptcy Court the authority to deny all or part of a setoff in lieu of damages simply because the creditor ini╜tially violated the automatic stay." United States v. Ruff (In re Rush-Hampton In dus. ), 98 F.3d 614, 616 (11th Cir.1996). The Eleventh Circuit noted that "[n]o com╜pelling authority has been cited to us to support a holding that the bankruptcy court could impose a permanent stay of setoff, i.e., deny the right of setoff, ... without going beyond the discretion it is permitted in such matters." Id. at 617. The Fifth Circuit has not addressed the issue directly, but has held that the auto╜matic stay does not defeat a right of setoff; rather, setoff is merely stayed pending orderly examination of the debtor's and the creditor's rights. Stephenson, 967 F.2d at 1076. The Fifth Circuit noted that although the plaintiff conceded that he had never petitioned the court for relief from the automatic stay to assert his right to setoff, the omission was not fatal. Id. at 1077. The plaintiff could assert a right of setoff as a defense to a turnover action. Id.
Here, neither the Debtors nor any other party-in-interest is prejudiced if AAFES is allowed to exercise its right of setoff. As previously noted, the Debtors are not enti╜tled to compel payment of the 2000 tax refund to them. See pp. 4- 6, supra. Un╜der section 506(a) of the Bankruptcy Code, AAFES is treated as a secured creditor in the Debtors' case to the extent of $2,108.15 (the amount of the tax refund) and the Bankruptcy Code requires that AAFES be paid this amount (in present value dollars) under the Debtors' Chapter 13 plan for that plan to be confirmable over AAFES's objection. See 11 U.S.C. ╖ 1325(a)(5). 4
4. While this dispute was pending, the Debt╜ors' final Chapter 13 plan was confirmed, without objection, by Order entered on March 15, 2002. Under the confirmed plan, AAFES is treated as an unsecured creditor with a $163.64 claim. Unsecured creditors are esti╜mated to receive zero (0)% under the plan.
Because the Court has con╜cluded that no party is prejudiced by al╜lowing AAFES to exercise its right of setoff, the only remaining issue is whether AAFES's request for nine pro tune relief from the stay should be granted. In other words, should the automatic stay be an╜nulled in order to validate the offset al╜ready effectuated by the IRS on behalf of AAFES? Although not all circuit courts agree, in the Fifth Circuit, actions taken in violation of the automatic stay are voida╜ble, not void. See Sikes v. Global Marine, Inc., 881 F.2d 176, 178 (5th Cir.1989) ("We are persuaded that the better reasoned rule characterizes acts taken in violation of the automatic stay as voidable rather than void.").
If AAFES had filed its motion for relief from stay before it caused the IRS to pay the Debtors' 2000 tax refund to it, the Court would have granted that motion. Here, the fact that AAFES took its action prematurely, standing alone, does not present a sound basis to deny the ':Motion. Although given the opportunity, the Debt╜ors offered no evidence of any harm to them from granting the Motion nunc pro tune. Rather, the Debtors contend, with╜out cited authority, that "this Court, in the interest of its own jurisdiction and authori╜ty, should as a sanction under ╖╖ 362(h) and/or 105(a) deny the relief sought." See Debtors' Brief at p. 8.
While the Court is troubled by AAFES's violation of the automatic stay, because no party-in-interest has been prejudiced by AAFES's actions, the Court concludes that the Motion should be granted.
All requirements for setoff under section 553 of the Bankruptcy Code are satisfied here. AAFES has a valid non-bankruptcy right of setoff that section 553 preserved. AAFES and the IRS are the same entity for purposes of setoff.
Because the Debt exceeds the amount of the Debtors' 2000 tax refund, there is no net amount owing to them after setoff - ╜ i.e., there is no actual refund to become property of the estate. Thus, the Debtors could not properly claim it as exempt un╜der section 522(c).
Notwithstanding its delay in filing the Motion, the automatic stay of section 362 of the Bankruptcy Code shall be modified nunc pro tune to validate AAFES's setoff of the 2000 tax refund against the Debt.
An Order consistent with this Memoran╜dum Opinion will be entered separately.