United States District Court, W.D. Virginia, Roanoke Division
MICHAEL F. URBANSKI, District Judge.
This is an appeal from an order by the United States Bankruptcy Court for the Western District of Virginia pursuant to 28 U.S.C. § 158(a)(1) and Rule 8001(a) of the Federal Rules of Bankruptcy Procedure. In an April 1, 2014 memorandum opinion and order, the bankruptcy court found that the United States Department of Agriculture ("USDA") violated the automatic stay protecting appellee Adina Sexton's ("Sexton") bankruptcy estate. In a July 21, 2014 memorandum opinion and order, the bankruptcy court held that its April 1, 2014, order was a final order and denied the USDA's motion to reopen the adversary proceeding between Sexton and the USDA. The USDA filed its notice of appeal on July 31, 2014. The court heard oral argument on December 19, 2014. For the reasons that follow, the court affirms the bankruptcy court's July 21 order denying the reopening of the adversary proceeding because the USDA fails to show that the bankruptcy court abused its discretion. Furthermore, the USDA's appeal of the April 1 order is untimely, and it must be dismissed because the court lacks jurisdiction to hear it.
Sexton filed a Chapter 7 bankruptcy petition on February 13, 2013. Anticipating a $4, 200.00 tax refund for the 2012 tax year, Sexton listed the refund as an asset of her estate, claimed a homestead exemption for the $4, 200 under Virginia Code §§ 34-4 and 34-13, and filed a homestead deed with the Floyd County Circuit Court Clerk. One of the liabilities Sexton disclosed on Schedule F to her bankruptcy petition was a debt in the amount of $114, 617.42. That debt was the balance owed on a mortgage after an insufficient foreclosure sale. The guarantor of that mortgage was the USDA Rural Development Service, and because the debt represented a deficiency, it was wholly unsecured.
On March 6, 2013, weeks after Sexton filed her bankruptcy petition, the Department of Treasury and the USDA notified Sexton that her 2012 tax refund would be withheld and applied to the "Non-Tax Federal Debt" she owed to the USDA under the auspices of the Treasury Offset Program, 26 U.S.C. § 6402(d). Sexton's attorney notified the Department of Treasury of the pending bankruptcy proceeding and requested the funds be forwarded to the Chapter 7 trustee. Sexton's attorney received no response, and the trustee did not receive the funds.
On March 18, 2013, the Chapter 7 trustee made a report of no distribution due to a lack of assets in the estate. The bankruptcy court entered an order of discharge closing the case and discharging the liability owed to the USDA on May 14, 2013. Sexton filed a motion to reopen the bankruptcy case in June and instituted an adversary proceeding against the USDA challenging the withholding and application of her tax refund as a violation of the automatic stay. The USDA responded with motions to dismiss the adversary proceeding under Rule 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure and sought entry of a nunc pro tunc order retroactively validating the setoff of Sexton's 2012 tax refund.
In its April 1, 2014 memorandum opinion, the bankruptcy court ruled that the USDA's setoff of Sexton's tax refund violated the automatic stay. According to the bankruptcy court, Sexton's
right to recover her tax overpayment arose for the 2012 tax year at the midnight on December 31, 2012. By filing her bankruptcy petition on February 13, 2013... prior to the Secretary of the Treasury redirecting her overpayment... her interest in the overpayment vested in her bankruptcy estate and instantly acquired the protections of the automatic stay.
In re Sexton, 508 B.R. 646, 662 (Bankr. W.D. Va. 2014). The bankruptcy court also found the USDA willfully violated the stay under 11 U.S.C. § 362(k)(1) and denied the USDA's nunc pro tunc motion because the equities of the case weighed in Sexton's favor. Id. at 666-67. Finally, the court ordered the USDA to release the sequestered funds and granted Sexton leave to submit "further evidence for other costs and fees incurred due to the government's" willful violation of the stay. Id. at 668. The court entered a corresponding order, and the clerk's office noted in the order's docket entry: "Case to Be Closed if Applicable 04/15/2014." In re Sexton, Bankr. No. 13-70230, Adv. Pro. No. 13-07037 (Bankr. W.D. Va. Apr. 1, 2014), Disposition of Adversary 7:13-ap-7037, Dkt. No. 29. Sexton did not submit any further filings or evidence to the bankruptcy court.
The bankruptcy court closed the adversary proceeding on April 16, 2014 and closed Sexton's main bankruptcy case on May 8, 2014. On May 12, 2014, the USDA filed a motion to reopen the adversary proceeding on the grounds that the court's April 1 order was not a final order. The bankruptcy court denied the motion to reopen the adversary proceeding on July 21, 2014, and the USDA filed its notice of appeal on July 31, 2014.
According to the USDA, the bankruptcy court abused its discretion by relying on § 350 of the Bankruptcy Code in its analysis of whether to reopen the adversary proceeding. The USDA argues that the adversary proceeding was a distinct proceeding separate from the bankruptcy case, and, as in a civil case, the bankruptcy court should have reopened the adversary proceeding for entry of a final judgment. Furthermore, the USDA believes that the April 1 order was not a final order because it left the issue of actual damages unresolved. Finally, the USDA asserts that Sexton's anticipated tax refund was not part of her bankruptcy estate because Sexton only had an interest in the amount of the refund that exceeded the preexisting, unpaid governmental debt. The USDA draws a distinction between tax overpayments and tax refunds and argues that the overpayment creates a "potential claim" to the refund subject to other reductions from the Internal Revenue Code ("IRC"). Accordingly, the overpayment was properly applied to the USDA debt under IRC § 6402.
Sexton argues that the bankruptcy judge properly addressed the motion to reopen the adversary proceeding under § 350 of the Bankruptcy Code. Furthermore, even if § 350 did not apply to the motion to reopen, the USDA's motion should be viewed as an attempt to change, modify, or vacate the April 1 order under Rule 60(b). Because the USDA's reason for filing the motion to reopen was really an attempt to circumvent the rules of appellate procedure in order to timely note an appeal, Sexton argues there is no basis to find that the bankruptcy judge abused her discretion. Sexton does not address the merits of the April 1 order because, according to her, it was a final order, and the USDA did ...