Wright v. Burreau of Indian Affairs

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
MARK WRIGHT,
Debtor.
____________________________
MARK WRIGHT,
Plaintiff,
v.
BUREAU OF INDIAN AFFAIRS,
Defendant.
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Case No. 05-00626
(Chapter 7)
Adversary Proceeding No.
06-10025
PRELIMINARY DECISION AND ORDER RE MOTION FOR DEFAULT JUDGMENT
At the evidentiary hearing held on August 30, 2006, on the
plaintiff’s motion for default judgment, no one appeared from the
United States Attorney’s office to represent the Government’s
interests.
The plaintiff Wright appeared and in his testimony raised
additional payments, not pled in his complaint, made on debts
owed to or guaranteed by the Bureau of Indian Affairs (the
“Bureau”) and stated that he now seeks to recover under 11 U.S.C.
§§ 362(a) (automatic stay), 522 (subsections (g), (h), and (i))
(vesting debtor with rights of trustee as to certain avoidable
The Preliminary Decision and Order below is hereby
signed. Dated: September 1, 2006.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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transfers), 547 (preferential prepetition payments), and 549
(unauthorized postpetition transfers of property of the estate).
Wright agreed to amend and re-serve his complaint to address
those additional payments if he elects further to pursue them.
To memorialize what transpired at the hearing, and to guide
the parties as to the further conduct of this proceeding, this
preliminary decision sets forth:
• 	the facts laid out by the evidence adduced at the
hearing (which evidence is subject to further
supplementation by either party at a later stage), and
• 	the legal issues those facts present.
I
Wright filed his bankruptcy petition on April 20, 2005. 	He
now claims that there are four sets of payments he may recover
from the Government.
A. 	$2,692.30 in Prepetition Payroll Deductions to Repay
Moving Expense Advance. 	During the 90-day preference period of
11 U.S.C. § 547(b), $2,692.30 was withheld from Wright’s paycheck
as an employee of the Bureau for moving expenses which the Bureau
had advanced to him. 	(These are the only payments pled in the
complaint.) 	Before the 90-day period, Wright had executed an
authorization for a set amount to be deducted each payroll period
from his paycheck to pay this debt owed to the Bureau. 	There are
two components to the $2,692.30:
1. 	$1,076.92 Component: 	Wright did not attempt to
retract his authorization for payroll deductions until after
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$1,076.92 of the $2,692.30 in payroll deductions had been
made by the Bureau during the 90-day period. 	That $1,076.92
was thus a voluntary payment and cannot be recovered by
Wright because 11 U.S.C. § 522(g)(1)(A) requires that a
payment have been made involuntarily.
2. $1,615.38 Component: The additional $1,615.38 in
payroll deductions were made after Wright called his payroll
office and asked one of the payroll officers to cease the
payroll deductions. 	The payroll officer told Wright that
this was the way that the moving expense had to be repaid
and told Wright that it would not be possible to defer
repayment, and accordingly declined Wright’s request. 	My
understanding of Wright’s testimony is that he did not
acquiesce to the payroll officer’s decision not to honor his
request. 	On this record, the deduction of the $1,076.92 was
not paid voluntarily.
B. 	Deductions of $1,978.05 to Repay to Social Security
Administration Overpayment of Social Security Benefits. 	Wright’s
schedules in the main case reflect that he owed a disputed debt
to the Social Security Administration totaling $2,853,770.00.
Out of amounts owed Wright for travel expenses, the Bureau of
Indian Affairs deducted $1,978.05 in the 90-day preference period
preceding the filing of his petition towards payment to the
United States Treasury on account of this debt.
C. 	Postpetition Deduction from Pay of $538.46 for Debt Owed
Bureau for Prepetition Advance for Moving Expense. 	The Bureau
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continued to collect the prepetition debt owed it (for the moving
expense advance it had made to Wright) after Wright filed his
petition via withholdings from his salary as an employee.
Although some of those withholdings were refunded, $538.46 of
such postpetition withholdings were not. 	Because the automatic
stay of 11 U.S.C. § 362(a) barred such collection, Wright
contends he is entitled to recover that $538.46.
D. 	Postpetition Payment of $1,999.04 by Wright to Bank of
America on Debt Guaranteed by Bureau of Indian Affairs. 	Wright
made a postpetition payment of $1,999.04 to Bank of America owed
for a credit card obligation that he testified was guaranteed by
the Bureau. 	He made the payment out of his bank account only
after depositing his payroll check for the prepetition two-week
work period ending April 16, 2006 (accordingly, the funds were
estate property). 	Wright contends that this was an unauthorized
transfer of estate funds that is avoidable under 11 U.S.C. § 549.
He further contends that the payment was involuntary because (1)
the Bureau had a policy that employees at his grade level would
have their employment terminated if they were late in paying
their government credit card debt and (2) his division chief and
others at the Bureau told him that he would be fired if he did
not pay the Bank of America debt despite his having informed them
that he had filed a bankruptcy petition.
II
The legal issues this presents are as follows.
A. $2,692.30 in Prepetition Withholdings to Pay Travel
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Advance.
1. $1,076.92 Component. 	Of the $2,692.30 in payroll
deductions to pay Wright’s travel advance obligation, $1,076.92
was voluntarily made, and he thus is not entitled to make a
recovery.
2. $1,615.38 Component. 	Of the remaining $1,615.38 in
payments, Wright is not entitled to prevail unless he convinces
the court that the following analysis is in error. 	Under §
547(b)(5), Wright must show that the payment enabled the
Government to receive more than it would have received had the
payment not been made. 	A payment to a fully secured creditor
does not constitute a preference because it does not enable the
creditor to receive more than if the payment had not been made,
and this doctrine applies when the secured status arises from a
right of setoff. 	See, e.g., Braniff Airways, Inc. v. Exxon Co.,
U.S.A., 814 F.2d 1030, 1034 (5th Cir. 1987); Mason & Dixon Lines,
Inc. v. St. Johnsbury Trucking Co. (In re Mason & Dixon Lines,
Inc.), 65 B.R. 973, 977 (Bankr. M.D.N.C. 1986). 	Even if Wright
revoked his payroll deduction authorization, the Government still
had a right of setoff arising from the existence of mutual
obligations because the obligations both arose prepetition. 	See
Braniff, 814 F.2d at 1035 (setting forth requirements for setoff
to exist) and 1036-37 (explaining mutuality requirement). 	The
Government was fully secured for each dollar it collected by a
right of setoff and thus no preference arose when the Government
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1 The Government exercised its right of setoff by
withholding the $1,615.38 (through its agent the Bureau) and
applying the $1,615.38 to the debt. 	Had the Government not
exercised the setoff by applying the withheld $1,615.38 to the
outstanding debt, the Government would have had a right to hold
the $1,615.38 in suspense as subject to a right eventually to
exercise the right of setoff. 	See Citizens Bank of Maryland v.
Strumpf, 516 U.S. 16, 19-21 (1995). 	The right of setoff would
have been preserved upon the filing of the petition by 11 U.S.C.
§ 553(a), and would have given rise to an allowed secured claim
under 11 U.S.C. § 506(a). 	Id. 	Upon the automatic stay of 11
U.S.C. § 553(a) terminating, the Government would have been able
to exercise its right of setoff. 	Accordingly, the $1,615.38
payment did not enable the Government to receive more than had
the payment not been made.
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effected payment. 1
B. 	Deductions of $1,978.05 to Repay Overpayment of Social
Security Benefits to Social Security Administration. 	As in the
case of the collection of the prepetition collection of the
moving expense advance, Wright has the burden of persuading the
court that as a matter of law the Government’s right of setoff
did not immunize from preference attack its prepetition
collection of the Social Security debt from his pay. 	Because the
payment went to the U.S. Treasury, Wright should consider suing
the United States instead of just the Bureau if he elects to
pursue this further.
C. 	Postpetition Deduction from Pay of $538.46 for Debt Owed
Bureau for Prepetition Advance for Moving Expense. 	The
postpetition collection of $538.46 of the prepetition obligation
from Wright’s pay may have violated the automatic stay, but it
may have been a violation that did not harm Wright. 	If the
$538.46 was collected from amounts owed Wright for prepetition
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work, the collection would have been of an amount for which
§ 553(a) preserved a right of setoff. 	Absent proof of what pay
period was the source of the payment withheld, Wright has not
shown that he would have eventually have been entitled to receive
the $538.46 based on the debt having been discharged. 	If a §
553(a) right of setoff existed as to the pay from which the
$538.46 was deducted, that right of setoff would be unaffected by
Wright’s discharge. 	See, e.g., IRS v. Luongo (In re Luongo), 259
F.3d 323, 333 (5th Cir. 2001); 	Davidovich v. Welton (In re
Davidovich), 901 F.2d 1533, 1539 (10th Cir. 1990). 	Upon
termination of the automatic stay, the Government would have been
free to collect the $538.46. 	Without any harm to Wright having
arisen, Wright would not be entitled to recover any damages
arising from a technical violation of the temporary stay of the
exercise of the right of setoff under 11 U.S.C. § 362(a)(7). 	See
In re Rivera, 345 B.R. 229 (Bankr. E.D. Cal. 2005).
D. 	Postpetition Payment of $1,999.04 by Wright to Bank of
America on Debt Guaranteed by Bureau of Indian Affairs. 	At the
hearing, Wright appeared to contend that the $1,999.04 could be
recovered by way of 11 U.S.C. § 550(a)(1). 	If a trustee
succeeded under 11 U.S.C. § 549 in avoiding a postpetition
payment to a creditor whose claim was guaranteed by the
Government, the trustee could recover the amount of the payment
from the Government under 11 U.S.C. § 550(a)(1). 	The Government
would qualify under that provision as “the entity for whose
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2 As noted in Christy v. Alexander & Alexander of N.Y. Inc.
(In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson,
& Casey), 130 F.3d 52, 57 (2d Cir. 1997), the phrase “entity for
whose benefit” in 11 U.S.C. § 550(a) “references entities that
benefit as guarantors of the debtor, or otherwise, without ever
holding the funds.” [Citations omitted.] Accordingly, a trustee
could invoke § 550(a) to recover the amount of the payment from
the Government as a guarantor if it avoided the payment under
§ 549.
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benefit such transfer was made.” 2 However, a debtor may not step
into the shoes of the trustee if the payment was a voluntary
payment by the debtor. 	11 U.S.C. § 522(g)(1)(A). 	Accordingly,
to invoke § 550(a)(1), Wright must show both that he acted
involuntarily when he made the postpetition payment of $1,999.04
on his Bank of America credit card obligation, and that the
obligation was indeed guaranteed by the Bureau.
The Bureau might have violated 11 U.S.C. § 525 had it
terminated Wright’s employment for failing to pay Bank of
America, but Wright nevertheless made the decision to pay the
Bank of America in lieu of facing the risk of the Bureau
terminating his employment. 	Indeed, by making the payment to the
Bank of America out of estate funds, Wright violated 11 U.S.C. §
362(a)(3) by exercising control over property of the estate. 	His
duty was to not touch those funds until they became exempt under
11 U.S.C. § 522(l) or were abandoned to him. 	Although invading
estate funds in violation of § 362(a)(3) may have suited his
purposes, he had the option of not violating the statute and
suffering the consequences, if any, that might follow. 	A
transfer made to avoid consequences that would result from not
making the transfer is not by that reason an involuntary payment.
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“To hold that a transfer is involuntary merely because . . . [the
transferor] avoids an unpleasant consequence as a result of the
transfer . . . would result in no transfer short of a gift being
considered voluntary. 	This result does not seem to have been
intended by Congress.” 	Huebner v. Trapp (In re Huebner), 18 B.R.
193, 195 (Bankr. W.D. Wis. 1982). 	See also Terry v. Witten &
Carter, P.C. (In re Terry), 56 B.R. 538 (Bankr. D. Vt. 1986) (a
transfer made to settle an actual court action (an event much
further along than a mere threat of a court action to collect a
debt is a voluntary transfer). 	Wright may have acted under
threat of consequences, but he nevertheless was free not to make
the payment.
A transfer is only involuntary when it is beyond the
debtor's personal control. 	Redmond v. Tuttle, 698 F.2d 414, 418
(10th Cir. 1983) (citing Huebner, 18 B.R. at 195, as concluding
that the “history of section 522(g) indicates that Congress
intended to allow exemption of only those transfers beyond
debtor's personal control.”); see also Hunter v. Snyder, 108 B.R.
150, 152-53 (Bankr. N.D. Ohio 1989); In re Trevino, 96 B.R. 608,
613 (Bankr. E.D.N.C. 1989). 	Although the Bureau's threat may
have been improper, Wright nevertheless was free not to make the
payment, and thus the transfer was arguably not beyond his
personal control.
Wright might argue that the threat of termination of
employment was tantamount to the Bureau's holding a gun to his
head and coercing him to make the payment, thereby rendering it
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an involuntary payment. 	See In re Reaves, 8 B.R. 177 (Bankr.
S.D. 1981); see also In re Bloom, 28 B.R. 571, 573 (Bankr. D. Or.
1983) (stating that a “threat to take action to collect a debt by
legal means does not constitute such coercion as to transform the
voluntary grant of a security interest into an involuntary
transfer of property.”) (emphasis added). 	Nevertheless, a threat
of taking illegal action if a payment is not made, albeit
something not to be encouraged, does not necessarily give rise to
an involuntary payment. 	Wright understood, after all, that the
Bureau's threatened action would violate § 525, and he was free
to pursue remedies when the threat was made and also if the
Bureau persisted in that threat had he failed to make the
payment.
If Wright pursues this theory of recovery, he must convince
me that he acted involuntarily despite the foregoing analysis.
He may also pursue relief on any alternative basis that is
available to him.
III
In light of the foregoing, it is
ORDERED that if the plaintiff elects to pursue additional
claims not pled in the original complaint, then by September 29,
2006, the plaintiff shall file an amended complaint and request
issuance of a new summons setting a new scheduling conference.
It is further
ORDERED that if the plaintiff does not file an amended
complaint by September 29, 2006, then by that date the plaintiff
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11	O:\JUDGTEMP\Wright vs Bureau of Indian Affairs Prely Decsn re MFDefaultJ v4.wpd
shall file a memorandum showing cause why this adversary
proceeding ought not be dismissed on the merits.
[Signed and dated above.]
Copies to:
Office of U.S. Trustee
Debtor
Debtor’s counsel
Kenneth L. Wainstein, Esq.
United States Attorney
555 4th Street, NW
Washington, DC 20530
Attorney General of the United States
U.S. Dept. of Justice
Washington, DC 20530
Bureau of Indian Affairs
Dept. of the Interior
1849 C Street, NW
Washington, DC 20240
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