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In re Edward

United States District Court, S.D. West Virginia, Beckley Division

December 16, 2019

IN RE: LARRY EDWARD WOOD, et al., Debtors.
v.
LARRY EDWARD WOOD and JESSICA ANN WOOD, Appellees. U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD), Appellant,

          MEMORANDUM OPINION AND ORDER

          IRENE C. BERGEK, UNITED STATES DISTRICT JUDGE.

         The 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.

         FACTUAL AND PROCEDURAL BACKGROUND

         On September 9, 2008, the Plaintiffs borrowed $39, 739.44 to purchase a modular/mobile home.[1] 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.

         In 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 plus interest.

         On 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 overpayment.

         The 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.

         STANDARD OF REVIEW

         “When 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. 1996).

         DISCUSSION

         Federal 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 pertinent part:

(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.

         361, 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. at 20.

         The Tax 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) ...

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