Editor's Note: David Morris is the Senior Deputy Prosecuting Attorney for the Marion County Prosecutor’s Office Child Support Division and an adjunct professor at Indiana University’s Robert H. McKinney School of Law.
In late 2010, the U.S. Supreme Court denied certiorari in State of Florida v. Rodriguez,[1] a case that examined, among other things, whether BAPCPA’s § 362 stay amendments, which enhanced a child support creditor’s ability to collect arrearages during bankruptcy, may be reconciled with the binding effect afforded confirmed chapter 13 plans under § 1327. Are the two sections hopelessly irreconcilable, as the Eleventh Circuit held, or may the two somehow be read in harmony? The Supreme Court’s failure to address the matter has left state and county child support agencies across the nation running scared and wondering whether the hard-fought battle to win BAPCPA’s § 362 amendments was nothing but a shallow victory.[2]
Background
Before BAPCPA, child support enforcement agencies had no authority, absent leave from the automatic stay, to enforce child support orders against a chapter 13 debtor via administrative processes such as income withholding and tax refund offset. Agencies were limited to actions against non-estate property. But there was often confusion over whether certain assets, such as a driver’s or professional license, were actually estate property. Thus, most child support enforcement agencies nationwide, intimidated by proceeding in federal court and fearing loss of sovereign immunity, simply opted to forego all civil enforcement against a chapter 13 debtor until the bankruptcy case closed and the automatic stay terminated. The automatic stay’s practical effect, therefore, was often a five-year delay in collecting child support against chapter 13 debtors. This delay obviously imposed a hardship upon custodial parents and families needing the support. But it also hampered the efforts of child support enforcement agencies trying to satisfy the performance standards necessary to obtain federal welfare assistance for the state.
A handful of state and county child support agencies sought relief from stay and forged ahead in federal court, with some success. But for bureaucrats dedicated to streamlining everything from A-Z, the bankruptcy process was comparatively arduous. Given ever-increasing caseloads, child support prosecutors became more selective in choosing those cases worth the venture in federal court.
Effective Oct. 17, 2005, BAPCPA seemingly changed things. Specifically, § 362(b)(2) added to those actions already exempt from stay the following five enforcement remedies to collect domestic support obligations:[3] (1) income withholding from estate property; (2) withholding, suspending or restricting driver’s, professional and recreational licenses; (3) reporting overdue support to consumer credit reporting agencies; (4) intercepting federal and state tax refunds; and (5) enforcement of medical support obligations. Moreover, BAPCPA reflected a heightened congressional preference for child support. The amended § 507, for example, posited unsecured claims for domestic-support obligations as a top priority, even ahead of administrative expenses.
BAPCPA brought new-found freedom for prosecutors seeking to collect child support against obligees who had declared bankruptcy. Indeed, the BAPCPA exemptions, when instituted by a IV-D child support collection agency, are largely computer-managed administrative processes that require relatively little prosecutorial oversight compared to such things as property foreclosures and contempt actions. Thus, in administering child support collections where debtors had filed for bankruptcy under BAPCPA, prosecutorial resources could be diverted away from ensuring compliance with the automatic stay by micro-managing a debtor’s case and toward more productive pursuits in other cases.
The Controversy
Chapter 13 debtors were not so elated. Some filed contempt actions against county and state child support agencies claiming that the agency’s actions to withhold income, suspend their license, report the arrearage to credit reporting agencies and intercept their tax refund violated the Code in two respects. First, they argued, the enforcement actions violated the § 362 stay. Second, for those with confirmed chapter 13 plans, the enforcement actions violated the terms of the confirmed plan.
Courts have routinely dismissed the first argument. It’s simply nonsensical to argue that one may be held in contempt for violating the stay by undertaking an action that is expressly not stayed. The second argument, however, is vexing and controversial: When a plan is confirmed and does not otherwise provide for the aforementioned BAPCPA collection devices, is the child support agency prohibited from undertaking them? To put it another way, does a child support creditor have a duty to oppose confirmation of a chapter 13 plan on grounds that the plan does not specifically provide for the enforcement actions the Code already expressly permits? And would such an objection warrant a plan amendment in any event?
On the one hand, § 362 expressly exempts the above-mentioned enforcement actions from the automatic stay. Unequivocally, a child support creditor may undertake those actions without bankruptcy court permission. Therefore, the argument goes, § 1327 does not nullify the § 362 exemptions. To hold otherwise would require the following ludicrous argument: “Your Honor, I object to Debtor’s plan because it does not say we can do those things Congress has already expressly said we can do.” Moreover, the view that a confirmed plan somehow nullifies § 362's exemptions is squarely antithetical to the Congressional preference afforded child support creditors in § 362 and elsewhere in the Code.
On the other hand, § 1327(a) provides that “[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.” Cases have consistently established that upon confirmation, res judicata applies and the terms of the plan and the confirmation order control. Under this view, creditors’ claims are administered only in accordance with the amounts and manner specified in the plan. To allow a child support creditor to upset orchestrated plan administration through such measures as tax offset and income withholding at the IV-D agency’s whim frustrates not only other creditors and destroys the finality a confirmation order provides, but vitiates the very reason for having a plan in the first place: to reduce chaos and fairly administer competing claims in an organized fashion.
So which argument wins?
The leading case to address this issue is In re Gellington.[4] To simplify the facts, the Texas Attorney General, seeking to collect the debtor’s child support arrearage as a IV-D agency, instituted a post-petition wage garnishment against the debtor’s income above the amount specified by the confirmed chapter 13 plan. The debtor brought an action for sanctions, alleging that the state violated the automatic stay. The bankruptcy court rejected the debtor’s argument, observing that § 362(b)(2)(C) expressly exempts from the stay wage withholding against estate property for domestic support obligations.
The court went on to explain, however, that while the state did not violate the stay, it had violated the terms of the confirmed plan. Said the Court:
Since § 1327(a) prohibits any creditor from asserting any additional interest than those provided for in the plan after confirmation, § 1327(a) and the general doctrine of res judicata serve the same purpose. The confirmation order must provide finality so that all parties may rely on it without concern that later actions could result in a subsequent change or revocation of the order. This is the objective of the confirmation process, to achieve finality. Confirmation is the bright line in the life of a Chapter 13 case at which all the important rights of creditors and responsibilities of the debtor are defined and after which all rights and remedies must be determined with reference to the plan.[5]
Observing that the state had rescinded its withholding order and promptly refunded the garnished amounts to debtor, the court imposed no sanctions against the state.
Relying on Gellington, the court in In re Fort[6] similarly held that while the Florida Department of Revenue, as a IV-D agency, did not violate the stay in its wage garnishment order, it did violate the terms of the confirmed plan. The court explained as follows:
If the State's contention that its post-confirmation collection activities are not affected by the provisions of a confirmed plan were to be accepted, then a creditor with protection against the automatic stay would be free to collect a debt in any way it sees fit, even if the confirmed plan provided for its claim in full. The Court declines to accept the State's argument in this regard and concludes, based on a plain reading of 11 U.S.C. § 1327(a), informed by the discussion of that section in Gellington, that Florida's post-confirmation continuation of a wage deduction order in effect against Mr. Fort's income, to the extent that it sought payment of such Debtor's pre-petition support obligation, did violate the provisions of § 1327(a).[7]
The court in In re Vasquez[8] took the opposite view. In holding that the State of Georgia was not barred by the terms of the confirmed plan from instituting a wage-withholding order, the court observed that “the BAPCPA amendments appear to manifest a strengthened Congressional resolve that Chapter 13 not provide a safe harbor from the pursuit of [child] support debts.” The court limited its holding, however, to the facts of the case, where the debtor’s proof of claim classified the domestic-support obligation as an unsecured nonpriority claim and where the plan did not provide for any payment, saying:
I do not reach the issue of whether § 1327 binds a DSO creditor under the plan when the proof of claim classifies the DSO as an unsecured priority claim under § 507(a)(1) and the claim is treated as such under the plan. Cf. In re Gellington, 363 B.R. 497 (Bankr. N.D. Tex. 2007) (holding that the State could not garnish the debtor's wages for a pre-petition child support arrearage, but instead was bound by a confirmed plan that provided for monthly payments on the debt).[9]
With Vasquez of little help to child-support creditors who file unsecured priority claims, the net result would appear that upon confirmation, § 362(b)(2) actions against estate property are nullified in chapter 13 cases. Indeed, this was the very holding of Rodriguez and McGrahan, supra. Because § 1327(a) forbids collection of any debt not confirmed by the plan, the § 362(b)(2) exception “has little or no practical effect in Chapter 13 situations.”[10]
But opponents of that view argue that it violates at least two canons of statutory construction. The first canon holds that multiple statutes relating to the same subject are in pari materia and should be read, construed and applied together so as to produce a harmonious statutory scheme. Accordingly, §§ 362 and 1327 should be read to operate harmoniously, thus binding other creditors upon confirmation, but leaving child support creditors free to pursue their claims subject to § 362's limitations. A second canon holds that even if the two sections do conflict, the specific prevails over the general. Thus, § 362's specific exemptions from stay should prevail over § 1327's general binding effect, especially considering the preferential treatment afforded domestic relations obligations in the Code. If this diminishes the extent to which the plan becomes unfeasible, they argue, the debtor can seek to modify it in accordance with § 1329.
All of this, of course, begs the question of congressional intent in adopting BAPCPA’s § 362 amendments. As applied to chapter 13 cases, was it merely to permit specified enforcement actions for the limited window between the bankruptcy filing date and confirmation? Or was the intention to facilitate expeditious collection of pre-petition domestic support arrearage through available IV-D remedies notwithstanding the res judicata effect ordinarily imposed by § 1327? Until the Supreme Court holds otherwise, the answer appears to be the former.
Where Are We Now?
If the reasoning of Rodriguez and McGrahan is correct, what exactly was the point in enacting the § 362 BAPCPA amendments? It is true that post-BAPCPA, § 362 affords greater leeway for IV-D actions in chapter 7 cases than the law previously allowed. For example, there was some confusion as to whether a tax refund earned pre-petition but actually intercepted post-petition constituted estate property. In addition, as mentioned above, appellate decisions differed as to whether a debtor has a property interest in a driving, professional or recreational license, which thus stays suspension. With BAPCPA’s § 362 amendments, these and similar issues are no longer of concern.
As for chapter 13 actions, McGrahan summarizes the rule:
When a debtor files for chapter 13, a support creditor, as described in § 362(b)(2)(F), may intercept tax refunds before the plan is confirmed since such acts are exempt from the automatic stay. A support creditor may even intercept tax refunds to recover arrears on postpetition domestic support obligations. However, once a plan is confirmed, the support creditor will receive payments that will fully satisfy its prepetition claim because that is a requirement for confirmation. See 11 U.S.C. § 1322(a)(2).
In addition, upon confirmation, the assets necessary to fund the plan become settled. Thus, wages that exceed that which is necessary to fund the plan are not estate property and may be garnished,[11] although it is highly doubtful that any child support agency will step into this minefield. Finally, as noted in footnote 5, supra, creditors may still proceed against non-estate property under § 362(b)(2)(B).
But unless some clarifying language is added to the Code, BAPCPA’s § 362 amendments with respect to pre-petition child support arrearages appear to have no effect upon confirmation insofar as wage withholding and tax-refund offsetting are concerned. License suspension is arguably problematic to child support creditors, but only if the license is viewed as estate property tied to the debtor’s ability to earn the income necessary to fund the plan. Whether medical-support enforcement poses a problem remains to be seen. Undeniably, sending a medical-support notice to the debtor’s employer requiring the debtor to insure a child on the debtor’s health insurance policy reduces the debtor’s income like a wage assignment order. The only difference is that the mandate to place the child on the health insurance policy is not directed at reducing any pre-petition child support arrearage. Finally, reporting the debtor’s arrearage to credit-reporting agencies does not appear at first blush to be problematic for child-upport creditors. But until the matter is settled in the courts, child-support creditors will tread lightly there too, if at all.
Given the vagaries just described, it’s not surprising that most child-support collection agencies administering chapter 13 cases have already reverted to their pre-BAPCPA avoidance practices. Indeed, this fact in part formed the basis for Florida’s request for Supreme Court review in Rodriguez. All in all, however, even though the Supreme Court refused to hear the case, child-support creditors aren’t too bad off. Domestic-support obligations are nondischargeable top-priority claims entitled to full payment under a plan unless agreed upon otherwise, and failure to pay post-petition support is a basis for both denying confirmation and dismissing the bankruptcy case altogether.[12]
[1]State of Florida v. Rodriguez, 367 Fed. Appx. 25, 2010 WL 597224 (C.A.11 (Fla.)), cert. denied, 131 S. Ct. 128, 178 L.Ed.2d 34, (U.S. Oct. 4, 2010) (NO. 09-1434).
[2]It is acknowledged, of course, that § 362 speaks not just to child support orders but to “domestic support obligations” as defined under § 101(14A), i.e., those that are “in the nature of alimony, maintenance or support.” This article, however, focuses exclusively on child support collections by federal, state and local agencies under Title IV-D of the federal Social Security Act, 42 U.S.C. § 651 et seq.
[3] Certain actions were already exempt from stay under § 362(b)(1) and (2) prior to BAPCPA’s enactment, including criminal prosecution and actions or proceedings to collect against non-estate property. § 362(b)(1) and (b)(2)(B), respectively. In addition, subsection (b)(2)(A) expressly exempts from stay actions or proceedings (1) to establish paternity; (2) to establish or modify domestic-support obligations; (3) concerning child custody or visitation; (4) for the dissolution of marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; and (5) regarding domestic violence. BAPCPA’s § 362(b)(2) amendments exempt from stay:
(1) the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute. § 362(b)(2)(C);
(2) withholding, suspension, or restriction of a driver’s license, a professional or occupational license, or a recreational license, under State law, as specified in section 466(a)(16) of the Social Security Act § 362(b)(2)(D);
(3) the reporting of overdue support owed by a parent to any consumer reporting agency as specified in section 466(a)(7) of the Social Security Act § 362(b)(2)(E);
(4) the interception of a tax refund, as specified in sections 464 and 466(a)(3) of the Social Security Act or under an analogous State law § 362(b)(2)(F); and
(5) the enforcement of a medical obligation, as specified under title IV of the Social Security Act § 362(b)(2)(G).
[4] 363 B.R. 497 (Bankr. N.D. Tex. 2007).
[5] In re Gellington, 363 B.R. at 502 (internal citations and quotations omitted).
[6] 412 B.R. 840 (Bankr. W.D. Va. 2009).
[7] Id. at 850. Other cases have followed accordingly. See In re Dagen, 386 B.R. 777, 783 (Bankr. D. Colo. 2008) (effect of confirmed plan, not the automatic stay, precluded collection of pre-petition debt); In re Worland, No. 08–2148–AJM–13, 2009 WL 1707512, at *2 (Bankr. S.D. Ind. June 16, 2009) (child support creditor did not violate the automatic stay but did violate the confirmation order where it intercepted the debtor’s tax refund and issued wage assignment order); In re Rodriguez, 367 Fed. Appx. 25, 28 (11th Cir. 2010) (state’s issuance of demand letters to collect unpaid child support violated terms of confirmed plan); In re McGrahan, 448 B.R. 611 (Bankr. D.N.H. 2011) (state’s tax interception to collect pre-petition debt violated terms of confirmed plan).
[8] 2007 WL 7023836 (Bankr. S.D. Ga. 2007) (unpublished).
[9]In re Vasquez, slip op. at 2. In its brief to the Eleventh Circuit Court of Appeals in Rodriguez, the State of Florida cited two pre-BAPCPA cases in which §§ 362 and 1327 were held not to conflict, In re Adams, 12 B.R. 540 (Bankr. D. Utah 1981), and In re Pacana, 125 B.R. 19 (B.A.P. 9th Cir. 1991). Adams, however, held only that income above that which was required to fund the plan could be garnished for alimony and support. Pacana held that § 1327 was no bar to a custodial mother enforcing her child support arrearage by wage assignment after confirmation. In that case, however, the plan classified the support arrearage as nonpriority and did not provide for payment. Moreover, both Adams and Pacana were decided before support claims were entitled to priority status and full payment under a plan, and thus under different circumstances than Gellington and Fort.
[10] In re Rodriguez, 367 Fed. Appx. at 28 (quoting Carver v. Carver, 954 F.2d 1573, 1577 (11th Cir. 1992)); In re McGrahan, 448 B.R. at 616.
[11] In re Adams, 12 B.R. 540, 543 (Bankr. D. Utah, 1981).
[12]All domestic support obligations, even those assigned to a state for past public assistance, are priority claims under § 507(a) and are nondischargeable under § 523(a)(5). A chapter 13 plan must provide for payment of the arrearage in full unless agreed otherwise or, under certain conditions, if the arrearage is assigned to the state. § 1322(a). Failure to pay post-petition support is a basis for both objecting to confirmation, §§ 1324(a) and 1325(a)(8), and bankruptcy case dismissal. § 1307(c)(11).