United States Court of Appeals,
Eleventh Circuit.
No. 94-3073.
In re RUSH-HAMPTON INDUSTRIES, INC., Debtor.
UNITED STATES of America, Plaintiff-Appellant,
v.
Andrea A. RUFF, Trustee, Defendant-Appellee.
Oct. 28, 1996.
Appeal from the United States District Court for the Middle
District of Florida. (No. 94-223-CIV-ORL-19), George C. Young,
Judge.
Before TJOFLAT, Circuit Judge, and RONEY and CAMPBELL*, Senior
Circuit Judges.
RONEY, Senior Circuit Judge:
The sole question on this appeal is the correctness of the
bankruptcy court's denial of the United States' right to setoff
against an overpayment of 1979 taxes, post-petition interest on an
underpayment of 1978 taxes. The district court's affirmance of
that decision is before us for review. We vacate and remand for
further consideration.
The parties are well aware of the details of this case, which
need not be recited here. Although originally filed as a Chapter
11 bankruptcy reorganization, this case was converted to a Chapter
7 liquidation proceeding in February 6, 1986. Thereafter, on May
27, 1986, the IRS filed a claim for unpaid 1978 taxes plus interest
to the petition date. Later the trustee filed an amended tax
return for 1979. In February 1990, the IRS determined that the
*
Judge Levin H. Campbell, Senior U.S. Circuit Judge for the
First Circuit, sitting by designation.
debtor had made overpayment for its 1979 income taxes.
The IRS made a setoff of the 1978 taxes and prepetition
interest without seeking a waiver of the automatic stay provisions
of the Bankruptcy Act. After objection by the trustee, the
Government moved for the court to lift the stay. The trustee did
not oppose the motion. The court did lift the stay with the caveat
that the action did not affect the trustee's right to oppose the
proposed setoff "on its merits."
Although the United States had violated the automatic stay
provisions of Section 362 of the Bankruptcy Code, the court
nevertheless held that it "would not penalize the IRS for its
improper setoff" and allowed the 1978 underpayment plus prepetition
interest as a setoff against the refund of the 1979 overpayment.
It then held, however, that it "would not reward the IRS for
offsetting prior to receiving relief from the automatic stay by
allowing it to setoff post-petition interest." 159 B.R. 343, 347
(Bankr.M.D.Fla.1993). The district court affirmed, adopting the
findings of fact and conclusions of law of the bankruptcy court.
We affirm the district court's judgment to affirm the decisions and
rationale of the bankruptcy court in all respects except in the
denial of the setoff of post-petition interest. After oral
argument, briefs, and supplemental briefs, we fail to see how the
allowance of post-petition interest would "reward" the IRS for the
offset prior to the bankruptcy court's granting of relief from the
automatic stay as the IRS would have been entitled to post-petition
interest had it taken timely action to lift the stay. We,
therefore, vacate and remand for reconsideration of the denial of
relief in this regard.
The trustee has failed to convince us that the IRS is not
entitled to a setoff of post-petition interest "on the merits,"
that to allow that setoff now would reward IRS for effecting the
setoff before asking the court to lift the automatic stay, or that
the estate was somehow harmed by the violation of the automatic
stay provisions.
By statute, the Government earns interest on delinquent taxes
until they are paid. I.R.C. § 6601(a). By statute, the Government
must pay interest on refunds due a taxpayer until paid. I.R.C. §
6611(a). Generally, there is a one percent difference between the
interest rate on underpayments and the interest rate on
overpayments. I.R.C. § 6621(a). By statute, the United States is
entitled to credit against the refund the amount the taxpayer owes
for past taxes, 26 I.R.C. § 6402(a), which stops the running of
interest on both amounts. I.R.C. § 6611. Generally, were it not
for the filing of the bankruptcy proceeding by the debtor, the IRS
would clearly be entitled to setoff against the refund the amount
owed for 1978 taxes plus interest to the date of the setoff.
The Bankruptcy Code explicitly preserves such a right of
setoff, assuming the proper facts, which must be conceded in this
case.
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(a). The post-petition interest would be due the
IRS because it is for a period of time prior to the setoff.
Once the bankruptcy proceeding is filed, however, the
bankruptcy court has some discretion in connection with the setoff
in order to give full effect to the Bankruptcy Act and maintain
orderly administration of the bankrupt estate. The right to setoff
is automatically stayed until the matter is presented to the court
for a determination of the validity of the setoff and the need for
a stay in order to efficiently manage the bankruptcy proceedings.
11 U.S.C. § 362(a). Here the IRS should have obtained a lifting of
the stay before setoff rather than waiting until later, in which
case it would clearly have been entitled to post-petition interest.
Section 362 provides a damages remedy if a creditor makes a
setoff without first asking the court to lift the automatic stay.
(h) An individual injured by any willful violation of a
stay provided by this section shall recover actual damages,
including costs and attorneys' fees, and, in appropriate
circumstances, may recover punitive damages.
Nowhere does this statute give the Bankruptcy Court the authority
to deny all or part of a setoff in lieu of damages simply because
the creditor initially violated the automatic stay. The trustee
did not seek damages here.
There is some question as to the validity of denying the
setoff of post-petition interest as punitive damages against the
Government, see Small Business Admin. v. Rinehart, 887 F.2d 165
(8th Cir.1989); Hoffman v. Connecticut Dep't of Income
Maintenance, 492 U.S. 96, 109 S.Ct. 2818, 106 L.Ed.2d 76 (1989),
even if it could be concluded these are "appropriate circumstances"
for such relief. We need not explore that problem here, however,
because the bankruptcy court explicitly decided, and properly so,
we think, that it "would not penalize the IRS for its improper
setoff."
Although the automatic stay applies to all bankruptcy
proceedings, a major purpose is to protect the cash flow of
businesses or persons who are trying to survive under the
reorganization provisions of the statute.
The automatic stay is fundamental to the reorganization
process, and its scope is intended to be broad. See H.R.Rep.
No. 595, 95th Cong., 1st Sess. 340 (1977), reprinted in 1978
U.S.Code Cong. & Admin.News 5787, 5963, 6296-97; United
States v. Norton, 717 F.2d 767, 770-71 (3d Cir.1983).
A primary purpose of the automatic stay provision is to
afford debtors in Chapter 11 reorganizations an opportunity to
continue their businesses with their available assets.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 183 (1977), reprinted
in 1978 U.S.Code Cong. & Admin.News at 6144; In re Archer, 34
B.R. 28, 29-30 (Bankr.N.D.Tex.1983).
Small Business Admin. v. Rinehart, 887 F.2d 165, 166 (8th Cir.1989)
(Chapter 11 bankruptcy proceeding). In re Patterson, 967 F.2d 505
(11th Cir.1992) (Chapter 13 bankruptcy proceeding.)
For the most part, it is in the context of these
reorganization cases that the parties find the language which gives
the bankruptcy court discretion to continue the stay of the right
of setoff, even when the validity of that right has been
established. E.g., In re Albany Partners, Ltd., 749 F.2d 670, 675
(11th Cir.1984) (Chapter 11 bankruptcy proceeding); In re De
Laurentiis Entertainment Group, Inc., 963 F.2d 1269, 1276-77 (9th
Cir.), cert. denied, 506 U.S. 918, 113 S.Ct. 330, 121 L.Ed.2d 249
(1992) (same); In re Glasply Marine Indus., 971 F.2d 391, 394 (9th
Cir.1992) (same); In re Southern Indus. Banking Corp., 809 F.2d
329 (6th Cir.1987) (same); United States v. Norton, 717 F.2d 767,
770-71 (3d Cir.1983) (Chapter 13 bankruptcy proceeding); In re
Carney & Sons Trucking Services, Inc., 142 B.R. 497
(Bankr.M.D.Fla.1992) (Chapter 11 bankruptcy proceeding); In re
Medicar Ambulance Co., 166 B.R. 918 (Bankr.N.D.Cal.1994) (same);
In re Express Freight Lines, Inc., 130 B.R. 288, 290
(Bankr.E.D.Wis.1991) (Chapter 11 proceeding prior to filing of
adversary proceeding, converted to Chapter 7); In re Cross Keys
Motors, Inc., 19 B.R. 976, 977 (Bankr.M.D.Pa.1982) (Chapter 11
bankruptcy proceeding).
In other cases, courts have exercised discretion to continue
the stay after a finding that the party seeking relief acted
tortiously or in bad faith. E.g., In re Windsor Communications
Group, Inc., 79 B.R. 210 (E.D.Pa.1987) (One who converts the
property of another not entitled in equity to right of setoff); In
re Cascade Roads, 34 F.3d 756 (9th Cir.1994) (Chapter 7 proceeding
where court denied setoff to Government after finding it acted in
bad faith during litigation and willfully violated automatic stay
involving claimed setoff against a judgment for breach of contract
against the Forest Service). These cases are distinguishable on
two fronts: no finding of tortious or bad faith misconduct has
been made in this case, and these cases did not involve the
underpayment/overpayment provisions of the tax code.
This is a liquidation, not a reorganization in which cash flow
may be critical to success. Although filed as a Chapter 11
proceeding, it had been voluntarily converted to a Chapter 7
liquidation prior to the events that pose this case.
No compelling 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, under the circumstances of
this case, without going beyond the discretion it is permitted in
such matters.
The trustee does not cross-appeal the decision that the stay
should be lifted and that some setoff was appropriate, nor does she
effectively assert that some damage was caused to the estate by
effecting a setoff before moving to lift the automatic stay. The
major thrust of the trustee's argument seems to be that the court's
result was a correct response to the apparently haphazard and
inexcusable way in which the IRS has handled the matter. These
arguments, while impressive, fail to address the central question:
did the otherwise harmless violation of the automatic stay suffice
to deprive the IRS of the post-petition interest setoff to which by
law undoubtedly it would have been entitled had it first sought a
lifting of the stay from the bankruptcy court. We think the answer
on these narrow facts is "No."
We emphasize that nothing herein is meant to detract from the
bankruptcy court's well-established power under § 362(h), and also
under other provisions like § 105(a) and its so-called inherent
power, to impose proper sanctions, including damages, costs and
attorney's fees, for violations of the automatic stay. See, e.g.,
In re Pace, 159 B.R. 890 (Bankr.9th Cir.1993). The question here
is simply the appropriateness, in these particular circumstances,
of denying post-petition interest, whether as a sanction or for
whatever other reason.
In the course of this appeal, we called for supplemental
briefs as to certain questions concerning the time value of money
and the fact that both the underpayment and refund amounts were
drawing interest. We suggested that counsel were free to address
any other issues that might help the court in considering such
matters. Both briefs suggest some uncertainty in the record and in
the stipulations below. Government's supplemental brief: "[i]t
has also come to our attention that counsel for the parties may
have inaccurately stipulated to certain matters." In the trustee's
motion for extension of time to file her brief, she indicated that
she requested counsel for the Government to stipulate to certain
additional facts. In her brief, the trustee said that she "would
urge this Court to request a determination of how the government
arrived at the sums refunded to the Trustee and the amounts
retained for interest on the 1978 liability."
In view of the confusion this demonstrates as to the accuracy
of the amounts here involved, rather than simply reverse the
decision of the district court to disallow the setoff, we remand it
for further consideration. We leave to the bankruptcy court the
decision whether an accurate judgment can be entered on this
record, or whether the concerns of both counsel require a
redetermination of the amounts involved.
VACATED and REMANDED.