Central District Consumer Bankruptcy Attorney's Association

It is not different. It's the trustee out there who is
Kenneth Jay Schwartz, Esq.
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________________________________
To: cdcbaa@yahoogroups.com
Sent: Thu, November 10, 2011 2:28:34 PM
Subject: Re: [cdcbaa] FW: Update from the State Bar Business Law Section'sINSOLVENCY LAW COMMITTEE
Naive question: how could a tax refund on pre-petition income, be any different
from any other account receivable? I have never had a trustee in any chapter
object to a claim of exemption of a tax refund; why would Chapter 13 be anydifferent?
Jason Wallach
jwallach@gladstonemichel.com
On Nov 10, 2011, at 2:18 PM, Nancy Clark wrote:
>
>
>My understanding is that the other Judges in Riverside have not signed on to
>Judge Jurys decision.
>
>
>Thank you,
>Nancy B. Clark
>
>100 N. Barranca Ave, Suite 250
>West Covina, CA 91791
>Tele: (626) 332-8600
>Fax: (626) 332-8644
>www.blclaw.com
>
>
>
>
>From:cdcbaa@yahoogroups.com [mailto:cdcbaa@yahoogroups.com] On Behalf Of Hale
>Andrew Antico
>Sent: Thursday, November 10, 2011 1:43 PM
>To: cdcbaa@yahoogroups.com
>Subject: FW: [cdcbaa] FW: Update from the State Bar Business Law Section's>INSOLVENCY LAW COMMITTEE
>
>
>Good Central District of CA case to protect some tax refunds from being turned
>over in a Chapter 13. If prepetition, it's an asset, and not income.
>
>Thanks for forwarding, Hank!
>
>Hale
>
>
________________________________
>From:cdcbaa@yahoogroups.com [mailto:cdcbaa@yahoogroups.com] On Behalf Of Henry
>Toles
>Sent: Thursday, November 10, 2011 1:19 PM
>To: cdcbaa@yahoogroups.com
>Subject: [cdcbaa] FW: Update from the State Bar Business Law Section's
>INSOLVENCY LAW COMMITTEE
>
>
________________________________
>From:Gall, Travis [mailto:Travis.Gall@calbar.ca.gov]
>Sent: Thursday, November 10, 2011 11:49 AM
>To: Sections: Bus Law Insolvency Constituency List
>Subject: Update from the State Bar Business Law Section's INSOLVENCY LAW
>COMMITTEE
> Insolvency Law Committee - Business Law Section of the State Bar
>of California
>
>Bankruptcy e-Bulletin
>
>Robert G. Harris
>Co-Chair
>Binder & Malter LLP
>2775 Park Avenue
>Santa Clara, CA 95050
>408-295-1700
>rob@bindermalter.com
>Elissa D. Miller
>Co-Chair
>Sulmeyer Kupetz
>333 S. Hope Street, 35th Fl.
>Los Angeles, CA 90071
>213-626-2311
>emiller@sulmeyerlaw.com
>Thomas R. Phinney
>Co-Vice Chair
>Parkinson Phinney
>400 Capitol Mall, Suite 2560
>916-449-1444
>tom@parkinsonphinney.com
>James P. Hill
>Co-Vice Chair
>Sullivan Hill Lewin Rez & Engel
>550 West C Street, 15th Floor
>San Diego, CA 92101
>619-233-4100
>hill@sullivanhill.com November 11, 2011
>Dear Insolvency Law Committee constituency list members, the following is a
>recent case update:
>Summary:
>In a well-reasoned opinion, the U.S. Bankruptcy Court for the Central District
>of California, Riverside Division, has held that tax refunds accrued on a>Chapter 13 debtors prepetition earnings, but received by the debtor
>postpetition, constitute property rather than income subject to turnover to
>the Chapter 13 trustee. See In re Diaz, B.R. , 2011 WL 4621448>(Bankr. C.D. Cal., Oct. 3, 2011).
>Facts:
>Debtors Marcos and Alma Diaz filed their Chapter 13 petition on March 26, 2010.
>They disclosed their expected 2009 tax refund on their Schedule B (Personal
>Property). The debtors exempted their tax refund on their Schedule C (Property
>Claimed as Exempt), utilizing the grubstake, or wild card,>forth in California Code of Civil Procedure 703.140(b)(5). In April, 2010,
>the debtors filed their 2009 tax returns, and received their tax refund on June
>2, 2010.
>On March 3, 2011, the debtors filed their proposed Chapter 13 plan using the
>mandatory form plan promulgated by bankruptcy courts in the Central District of
>California. Confirmation was uncontested and, in accord with procedural practice
>in the Riverside Division, the Chapter 13 trustee submitted the form of
>confirmation order, which was entered by the court on March 27, 2011.
>Notably, the plan and confirmation order provided for conflicting treatment of
>tax refunds. Particularly, while the plan itself was silent regarding tax>refunds, the confirmation order stated that all tax refunds would be utilized
>to pay creditors under the plan. This conflict therefore exists in all Chapter
>13 plans and confirmation orders in the Riverside Division.
>Subsequently, the trustee moved to dismiss the Chapter 13 case, as a result of
>the debtors failure to turn over the subject tax refund, and the debtors
>opposed the motion. The bankruptcy court denied the trustees motion, holding
>that the tax refund accrued on the debtors prepetition earnings did not
>constitute income to be used in making payments to creditors under the
>confirmed plan, and therefore was not subject to turnover to the Chapter 13
>trustee.
>
>Reasoning:
>Interpreting the confirmation order, the court concluded that the term >the plan referred only to tax refunds on income earned postpetition. In>reaching this conclusion, the bankruptcy court relied at least in part on the
>debtors understanding at the time of plan confirmation, which was apparent from
>their scheduled exemption of prepetition tax refunds.
>
>The court then addressed, and rejected, the trustees argument that Sections
>1322(a) and 1325(b) of the Code required that the debtors use their prepetition
>tax refund to pay creditors under their plan. The court noted that the
>trustees argument hinged on whether a tax refund is considered >
>Acknowledging that the term income is undefined in the Bankruptcy Code, the
>court noted that case law generally holds that prepetition tax refunds are in
>the nature of property, as opposed to income. See, e.g., Kokoszka v. Belford,
>417 U.S. 642, 648, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974)(noting that a tax refund
>earned prepetition is not the equivalent of future wages for the purpose of
>giving a debtor its fresh start); Segal v. Rochelle, 382 U.S. 375, 380, 86 S.Ct.
>511, 15 L.Ed.2d 428 (1966)(concluding that a prepetition tax refund was
>sufficiently rooted in the pre-bankruptcy past that it should be regarded as
>property); In re Feiler, 218 F.3d 948 (9th Cir. 2000)(holding that tax refunds
>are property).
>The court confirmed that Section 1322(a)(1) requires that the debtor submit his
>future earnings or other future income to the supervision and control of the
>trustee as is necessary to execute the plan. It therefore found that Section
>1322(a)(1)s deliberate inclusion of the word future>the income which must be devoted to a Chapter 13 plan to the debtor>postpetition earnings which exclude a tax refund accrued on a debtors
>prepetition income.
>Next, the court acknowledged that, pursuant to Section 1325(b)(1)(B), a Chapter
>13 plan must provide that all of the debtors projected disposable income to be
>received in the applicable commitment period will be used to pay creditors
>under the plan. However, rejecting the trustees argument that a tax refund
>constitutes projected disposable income, the court stressed that the plain
>language of the Code mandates that a trustee may receive only projected or
>future income. Accordingly, the court concluded that the debtors were not
>obligated to turn over to the trustee any tax refund earned in the prepetition
>year.
>The court stressed that the rationale for including tax refunds in the plan is
>to prevent debtors from overstating their tax withholdings. Explaining that a
>tax refund is received only when the taxes withheld on the debtors pay stub
>exceed the amount owed to the IRS, the court reasoned that tax refunds must be
>paid back to the estates creditors. The court clarified, however, that a
>debtors overstatement of prepetition taxes does not justify turnover of the
>overstated amount to creditors because, unlike a postpetition refund, the debtor
>would not have been required to turn over the corollary increase in income had
>they not overstated their tax expense.
>
>Concluding that prepetition tax returns did not constitute income which must be
>devoted to a Chapter 13 plan, the bankruptcy court recognized that trustees
>nonetheless have the ability to hold cases open until the final tax refund>accrued on earnings within the commitment period is received by the debtors.
>Accordingly, the bankruptcy court recommended that trustees permit debtors to
>elect either to contribute their prepetition tax refunds to their plan, or delay
>their discharge until such date as their final plan payment is submitted. >
>These materials were prepared by Monique Jewett-Brewster, of MacConaghy &>Barnier, PLC, in Sonoma, California.
>Thank you for your continued support of the Committee.
>Best regards,
>Insolvency Law Committee
>
>
>The Insolvency Law Committee of the Business Law Section of the California State
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