United States District Court, S.D. West Virginia, Beckley Division
IN RE: LARRY EDWARD WOOD, et al., Debtors.
LARRY EDWARD WOOD and JESSICA ANN WOOD, Appellees. U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD), Appellant,
MEMORANDUM OPINION AND ORDER
C. BERGEK, UNITED STATES DISTRICT JUDGE.
Court has reviewed the Memorandum Opinion and Order
(Document 1-1), the Judgment Order (Document 5-14),
Opening Brief of the Appellant U.S. Department of Housing
and Urban Development (HUD) (Document 6), Brief of
the Debtors/Appellees, Larry Edward Wood and Jessica Ann
Wood (Document 7), and Reply Brief of the Appellant
U.S. Department of Housing and Urban Development (HUD)
(Document 10). After careful consideration, the Court finds
that the decision of the Bankruptcy Court should be affirmed.
AND PROCEDURAL BACKGROUND
September 9, 2008, the Plaintiffs borrowed $39, 739.44 to
purchase a modular/mobile home. In the case of default, the loan
was insured by the United States Department of Housing and
Urban Development (HUD). The Plaintiffs ultimately defaulted
on the loan on July 31, 2014. HUD paid the deficiency
remaining after default on November 18, 2015-an amount
totaling $23, 066.66. On November 20, 2015, HUD notified the
Plaintiffs of the deficiency and made a demand for payment.
December 2015, HUD issued the Plaintiffs a Notice of Intent
to Collect by Treasury Offset, informing them that the United
States Department of the Treasury (the
“Treasury”) could offset the Plaintiffs' tax
overpayment amounts against the debt owed to HUD. On February
23, 2017, the Treasury Offset Program used $9, 961.00 of
federal tax overpayment to offset the amount of debt owed to
HUD, leaving a remaining balance owed to HUD of $15, 486.47
March 21, 2018, the Plaintiffs filed a bankruptcy petition,
and subsequently filed their federal and state income tax
returns on March 26, 2018. The returns demonstrated a federal
income tax overpayment of $6, 086 and a state income tax
overpayment of $316. The Treasury used the income tax
overpayment to offset the Plaintiffs' remaining debt to
HUD on April 4, 2018. No. offset was made using the state tax
Plaintiffs filed a complaint on May 17, 2018, seeking
avoidance of HUD's lien and refund of the offset funds
remitted to HUD. The Bankruptcy Court entered a Memorandum
Opinion on March 31, 2019, and a Judgment Order on April 15,
2019, ordering the United States to pay the Plaintiffs $6,
086. On April 15, 2019, the United States appealed the
decision of the bankruptcy court.
reviewing a decision of the bankruptcy court, a district
court functions as an appellate court and applies the
standards of review generally applied in federal courts of
appeal.” Paramount Home Entm't Inc. v. Circuity
City Stores, Inc., 445 B.R. 521, 526-27 (E.D. Va. 2010)
(citing In re Webb, 954 F.2s 1102, 1103-04 (5th Cir.
1992)). Legal conclusions are reviewed de novo and
factual findings are reviewed for clear error. In re
Harford Sands Inc., 372 F.3d 637, 639 (4th Cir. 2004). A
clearly erroneous factual finding exists when the reviewing
court “is left with the definite and firm conviction
that a mistake has been committed” after considering
all the evidence. Anderson v. City of Bessemer City,
470 U.S. 564, 573 (1985) (quoting United States v. United
States |Gypsum Co., 333 U.S. 364, 365 (1948)). For mixed
questions of fact and law, the factual portions are reviewed
for clear error and the legal portions are reviewed de
novo. Gilbane Bldg. Co. v. Federal Reserve Bank of
Richmond, Charlotte Branch, 80 F.3d 895, 905 (4th Cir.
law permits setoffs, meaning “entities that owe each
other money [can] apply their mutual debts against each
other, thereby avoiding ‘the absurdity of making A pay
B when B owes A.'” Citizens Bank of Md. v.
Strumpf, 516 U.S. 16, 18 (1996) (quoting Studley v.
Boylston Nat. Bank, 229 U.S. 523, 528 (1913)). Section
553(a) of the Bankruptcy Code governs setoffs, and states in
(a) Except as otherwise provided in this section and 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). A valid setoff requires proof of
four elements: (1) the creditor's claim arose before
commencement of the case; (2) the creditor's debt to the
debtor arose before the commencement of the case; (3) the
claim and debt must be mutual; and (4) the claim must be
valid and enforceable. Id.; see also U.S. Dept.
of Agriculture Rural Housing Svc. v. Riley, 485 B.R.
365 (W.D. Ky. 2012). “Section 553 does not actually
create any setoff rights, but merely preserves the setoff
rights that exist under applicable nonbankruptcy law.”
In re Addison, 533 B.R. 520, 525 (Bankr. W.D. Va.
2015), aff'd, No. 1:15-cv-00041, 2016 WL 223771
(W.D. Va. Jan. 19, 2016); see also Strumpf, 516 U.S.
Offset Program (TOP) allows the Federal Treasury to apply tax
overpayments to pre-existing debts owed to federal
agencies-in this case, HUD. 26 U.S.C. § 6402. Section
6402(d), which outlines the rule for collection of debts owed
to federal agencies, provides:
(1) In general. -Upon receiving notice from any Federal
agency that a named person owes a past-due legally
enforceable debt . . . to such agency, the Secretary shall-
(a) reduce the amount of any overpayment payable to such
person by the amount of such debt;
(b) pay the amount by which such overpayment is reduced under
subparagraph (a) ...