Webb v. Internal Revenue Service

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE: )
)
BERTHA MARIE WEBB, ) Case No.: 1:19-bk-00969
)
Debtor. ) Chapter 13
____________________________________)
)
BERTHA MARIE WEBB, )
)
Plaintiff, )
)
v. ) AP No.: 1:21-ap-00014
)
INTERNAL REVENUE SERVICE, )
)
Defendant. )
____________________________________)
MEMORANDUM OPINION
The Internal Revenue Service (“IRS”) seeks dismissal of the complaint filed against it by
Bertha Marie Webb (the “Debtor”) for failure to state a claim upon which relief can be granted.
The IRS contends that the court must dismiss the Debtor’s complaint requesting damages for
violation of the Court’s confirmation order because the Debtor’s plan, and the court’s confirmation
order, do not prohibit offset complained of by the Debtor. The Debtor opposes the motion. She
contends that she stated a plausible claim for contempt based upon the IRS’s offset of the Debtor’s
post-petition tax refund against tax claims treated in the confirmed plan.
For the reasons stated herein, the court will grant the motion to dismiss for failure to state
a claim.
I. STANDARD OF REVIEW
Under Federal Rule of Civil Procedure 12(b)(6), a party may seek to dismiss a complaint
against it when the complaint fails “to state a claim upon which relief can be granted." Fed. R. Civ.
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P. 12(b)(6); Fed. R. Bankr. P. 7012(b). When evaluating a motion to dismiss, the court must (1)
construe the complaint in a light favorable to the non-movant, (2) accept the factual allegations in
the complaint as true, and (3) draw all reasonable inferences in favor of the plaintiff. 2 Moore’s
Federal Practice – Civil § 12.34 (2018). After undertaking these steps, the claim for relief must
be “plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). To survive a Rule 12(b)(6) motion, the complaint must
contain “enough facts to state a claim to relief that is plausible on its face.” Bonds v. Leavitt, 629
F.3d 369, 385 (4th Cir. 2011) (quoting Twombly, 550 U.S. at 570 (2007)). In determining a motion
to dismiss, the court is not adjudicating whether a plaintiff will ultimately prevail on the merits of
the complaint; it is only determining if the plaintiff is entitled to offer evidence to support the
claims. Skinner v. Switzer, 562 U.S. 521, 529-30 (2011). In the Fourth Circuit, this standard
requires the plaintiff to articulate facts that, when accepted as true, show a plausibility of
entitlement to the relief sought. Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009). Failure
to meet this standard results in dismissal of the complaint. Id.
II. BACKGROUND
The relevant facts are uncontested. On November 11, 2019, the Debtor filed a Chapter 13
bankruptcy. In the Debtor’s schedules, she listed federal income taxes owed for the years 2013 and
2018. The Debtor filed her Chapter 13 plan the same day. The IRS later filed a proof of claim for
the 2018 taxes combined with estimated taxes owed for tax year 2019 in the total amount of
$14,427.89, for which it contends it is entitled to priority under 11 U.S.C. § 507(a). The proof of
claim explicitly stated that “All rights of setoff are preserved and will be asserted to the extent
lawful.” It further included a general unsecured claim of $9,936.30 for the 2013 taxes. On February
29, 2021, the court confirmed the plan in its current form, which treated the IRS’s claim for the
2018 and 2019 taxes as a priority claim to be paid in full through the terms of the plan.
On March 15, 2021, the IRS seized the Debtor’s 2020 income tax refund and applied it to
post-petition taxes for 2019, which according to a May 11, 2021 amended proof of claim totaled
$4,366.00 plus interest. The Debtor further alleges that the IRS has sent at least two collection
letters to collect the remainder of the 2019 taxes owed.1 On June 21, 2021, the Debtor filed this
1 While the Debtor does not adequately plead facts regarding the letters as they relate to contempt, the court notes
that the plan is silent as to collection and no other violation of the Bankruptcy Code is alleged.
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action, requesting that the court hold the IRS in contempt of the confirmed plan, seeking return of
the refund and damages.
III. DISCUSSION
The IRS asserts dismissal is appropriate because the Debtor failed to adequately state a
cause of action. Specifically, the IRS contends that the collection the Debtor complains of is not
prohibited by the Debtor’s plan or the court’s confirmation order. As a result, the IRS argues that
the Debtor fails to state a plausible claim for contempt. The Debtor concedes that the plan and
confirmation order did not explicitly prohibit offset but she nonetheless argues that she adequately
stated an action for contempt because the plan does not explicitly permit offset under the Treasury
Offset Program (“TOP”). For support, she relies on In re Ealy, in which the court denied the IRS
relief from the automatic stay to offset a post-petition tax refund against post-petition taxes owed.
392 B.R. 408 (Bankr. E.D. Ark. 2008). The IRS instead relies upon In re Pugh in which the court,
in examining In re Ealy, held that a plan “cannot force payment of a refund unauthorized by tax
law to a debtor while taxes are unpaid.” Notably, the Debtor only seeks relief for contempt of the
court’s confirmation order.2 The inquiry is accordingly whether contempt can be found where the
order allegedly violated was silent as to the purportedly violative activity.
Congress explicitly conferred contempt powers on bankruptcy courts through 11 U.S.C. §
105(a). In re Walters, 868 F.2d 665, 670 (4th Cir. 1989). As recently stated by the Fourth Circuit
in Life Techs. Corp. v. Govindaraj, a court generally cannot exercise its contempt power when
there is a reasonable doubt as to the wrongfulness of the conduct in question. 931 F.3d 259, 267-
68 (4th Cir. 2019) (citing Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (2019)). An order of
contempt is a serious reprimand and is appropriate only in the case of a deliberate violation in the
face of succinct directions to the contrary. See Gascho v. Glob. Fitness Holdings, LLC, 875 F.3d
795, 800 (6th Cir. 2017) (a court’s exercise of contempt is “reserved for those who fully understand
the meaning of a court order and yet choose to ignore its mandate.”) (citing Int’l Longshoremen’s
2 Of specific importance to this analysis is that Debtor’s plan is silent as to IRS treatment of tax refunds. The Debtor
has conceded this fact. This court recently analyzed application of TOP, 26 U.S.C. § 6402, to bankruptcy proceedings
in Lockhart v. Jackson (In re Lockhart), No. 1:20-ap-38, 2021 Bankr. LEXIS 1698 (Bankr. N.D.W. Va. June 24,
2021). However, that case addressed TOP refund interception in order to offset the debtor’s stimulus relief against
child support arrearages and its application under context of the automatic stay. Id. While TOP is involved here, the
court need not discuss the legality of the IRS’s actions because the Debtor only alleges the actions constituted contempt
of the confirmation order. Instead, this court is now faced with the question as to whether the IRS can be held in
contempt of the confirmation order when the plan is silent as to the interception of a post-petition tax refund.
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Ass’n v. Phila. Marine Trade Ass’n, 389 U.S. 64, 76 (1976)). Under the Taggert standard, a creditor
is only to be held in contempt where the “prohibited action requiring such a remedy is clear to both
parties involved.” 139 S. Ct. at 1802 (citing Schmidt v. Lessard, 414 U.S. 473, 476 (1974)).
In Chapter 13, a bankruptcy court’s order confirming a proposed Chapter 13 plan is a final
and binding judgment. United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 269 (2010).
Further, the confirmation of a plan acts as res judicata for all matters actually litigated and
addressed in the plan. Torres Martinez v. Arce (In re Martinez), 397 B.R. 158, 168 (B.A.P. 1st Cir.
2008); see Allen v. McCurry, 449 U.S. 90, 94 (1980). Once confirmed, the provisions of the plan
are binding on the debtor and all creditors. Torres Martinez, 397 B.R. at 165; In re Conley, No.
97-16705-SSM, 2000 Bankr. LEXIS 2026, at *6 (Bankr. E.D. Va. Sep. 28, 2000); 8 Collier on
Bankruptcy P 1327.02 (16th 2021).
The proposition that the plan is binding for all matters actually litigated also supports the
opposite interpretation of § 1327 of the Bankruptcy Code⎯that a creditor is not bound where the
plan is silent. Cen-Pen Corp. v. Hanson, 58 F.3d 89, 93 (4th Cir. 1995); see New Hampshire v.
McGrahan (In re McGrahan), 459 B.R. 869 (B.A.P. 1st Cir. 2011); Enewally v. Wash. Mut. Bank
(In re Enewally), 368 F.3d 1165 (9th Cir. 2004). Specifically, the Enewally court held a chapter
13 plan is not binding as to matters which are “not sufficiently evidenced in a plan to provide
adequate protection to the creditor.” 368 F.3d at 1172-73. Similar to the case at bar, the McGrahan
court held that the state Department of Health and Human Services could not be held in contempt
for seizing tax refunds when the plan did not specifically address that right. 459 B.R. at 875.
Because the plan was silent as to the right to intercept tax refunds, “[t]hat silence cannot be
interpreted as implicitly prohibiting [interception].” Id. Recently in this Circuit, a court held that
it could not find contempt where the defendant creditors relied on an interpretation of the plan
which was “objectively reasonable.” Newrez, LLC v. Beckhart, No. 7:20-CV-192-BO, 2021 WL
3361707, at *3 (E.D.N.C. July 6, 2021).
Here, the court finds that the Debtor’s plan, and thus the court’s confirmation order, was
silent as to the IRS’s collection activity complained of by the Debtor. Where the terms of the plan
were silent as to whether the IRS could offset a tax return otherwise permitted by applicable non-
bankruptcy law, it cannot be said that the plan properly apprised the IRS that the conduct
supporting the Debtor’s complaint was prohibited by the confirmation order. Accordingly, the
matter was not “actually litigated” and cannot bind the IRS. This court need not now address the
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legality of the offset, but only whether it was permissible as outlined by the terms of the
confirmation order. Although the plan and confirmation order did not explicitly permit TOP offset,
the Debtor conceded that the plan and confirmation order did not prohibit it. Because TOP
otherwise allows the IRS to engage in this collection outside bankruptcy and the plan and
confirmation order did not otherwise prohibit it, there is nothing supporting a finding that the IRS
was adequately on notice that it could not intercept the refund, which is a necessary finding to
support the drastic result of holding the agency in contempt of the confirmation order. Even
construing the facts in the light most favorable to the Debtor, without this explicit prohibition the
IRS cannot be held to have acted in deliberate breach of the confirmation order.
IV. CONCLUSION
Because the plan fails to address the permissibility of the IRS’s offset of a post-petition tax
refund, the Debtor has failed to show a plausibility of entitlement to the relief sought. Accordingly,
the IRS’s motion to dismiss is granted. Consistent with Fed. R. Civ. P. 58, made applicable by
Fed. R. Bankr. P. 7058, the court will enter a separate order granting the IRS’s motion to dismiss.
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