Defense Agency Gets Hit With Sanctions in Debtor’s Ch. 7 Case

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By Diane Davis

Nov. 18 — The Exchange, an agency of the federal government, improperly posted the income tax refund of an active duty U.S. Military member to her account after she filed for Chapter 7 relief and must pay the debtor sanctions ( In re Parrish , 2016 BL 381971, Bankr. W.D. Ky., No. 16-32030(1)(7), 11/16/16 ).

Judge Joan A. Lloyd of the U.S. Bankruptcy Court for the Western District of Kentucky Nov. 16 concluded that the Exchange’s violation of the automatic stay was inadvertent but awarded the debtor $250 in attorneys’ fees and $200 in sanctions.

Debtor Natasha Parrish defaulted on two lines of credit with the Exchange, which is an instrumentality of the U.S. Army and Air Force within the Department of Defense. The Exchange placed the delinquent debts into the Treasury Offset Program that allows the U.S. Treasury to offset any amount owed to a federal agency against any federal payments such as tax refunds.

Using a collection agency, the Exchange posted the debtor’s tax refund of $5,225 to the Exchange’s account with the Internal Revenue Service after the debtor had filed for Chapter 7 bankruptcy. In Chapter 7, a debtor’s nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors.

Under Bankrupty Code Section 362(7), a bankruptcy petition operates as a stay as to the “setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debt,” the court said.

The right to setoff exists, the court said, because the obligations owed by the debtor to the Exchange and the refund due to the debtor are mutual. However, the right to effect a setoff is stayed by the automatic stay, the court said.

The Exchange’s right to setoff doesn’t excuse its failure to seek relief from the automatic stay, the court said.

The violation of the automatic stay was inadvertent because there was a delay in communication between the Exchange’s collection agency and the IRS, the court said. As a result, the court awarded the debtor sanctions as compensation.

Julie Ann O’Bryan, Louisville, Ky., represented debtor Natasha Parrish; Chapter 7 Trustee Michael E. Wheatley, Prospect, Ky .; Asst. U.S.Trustee Charles R. Merrill, Louisville, Ky.

To contact the reporter on this story: Diane Davis in Washington, D.C. at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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