4th Cir.: Wood v. HUD- Tax Refund Offset did not Violation the Automatic Stay

Summary:

Following the decision in Copley, where it held that the IRS’s right to set off the debtors’ tax overpayment against their pre-existing tax debt superseded the debtors’ right to exempt the anticipated refund, the Fourth Circuit here held that, while HUD had offset against a the debtor's tax refund for a $23,000 foreclosure deficiency in violation of the automatic stay, that "the automatic stay can be retroactively annulled, thus legitimizing the creditor action." Accordingly, this was remanded to the bankruptcy court to determine if, in consideration of the government's rights under 26 U.S.C. §6402(d), the stay should be retroactively annulled or suffer sanction for a stay violation, but "[b]arring exceptional circumstances, the government’s motion for relief from the automatic stay in cases of this kind should ordinarily be granted."

Commentary:

There are remaining unaddressed questions from this decision. Other commentators have questioned whether an offset for a deficiency owed to HUD has "mutuality" between the debt and credit that is required by 11 U.S.C. §526(a). While there was issue of mutuality Copley, as it was the IRS was offsetting a tax refund against a tax liability, this is would be a more open question regarding offsets to pay other debts to the federal government. This would include most notably student loans. The federal government does often, however, assert a unitary executive theory, which in its more benign (and less dictatorial) aspects asserts that a debt owed to one federal agency is owed to the entire federal government (or at least executive branch.)

Additionally, the "retroactive annulment" of the automatic stay would seem to be contrary to the decision by the Supreme Court in Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, where it held that:

Put colorfully, “[n]unc pro tunc orders are not some Orwellian vehicle for revisionist history—creating ‘facts’ that never occurred in fact.” United States v. Gillespie, 666 F. Supp. 1137, 1139 (ND Ill. 1987). Put plainly, the court “cannot make the record what it is not.” Jenkins, 495 U. S., at 49.

Lastly, apparently unmentioned in briefs and in this opinion, is the fact that a debtor must, pursuant to 26 U.S.C. § 7433(d) (1) and Treas. Reg. § 301.7433-2(d)(1), exhaust administrative remedies with the IRS prior to receiving damages for a violation of the automatic stay See, e.g. In re Cooper.