Section 1326 Preempts State Law on Levies to Collect Child Support, Fourth Circuit Says

The Bankruptcy Code preempts state law allowing recovery of child support arrears by levying on money held by a trustee when a chapter 13 case is dismissed, the Fourth Circuit held in a November 19 opinion.

The debtor owed about $75,000 in child support when he filed a chapter 13 petition. As required, the debtor began making payments to the trustee shortly after filing. Despite the debtor’s four attempts at confirming a plan, the bankruptcy court dismissed the case. The chapter 13 trustee was holding about $3,000 in payments the debtor had made before dismissal.

Under a state statute, the Virginia Division of Child Support Enforcement served a levy on the trustee, demanding that the trustee turn over the $3,000 to the state. The Virginia statute allows the Division the levy on any debt owing to someone who is behind on child support payments.

Because Section 1326(a)(2) seemingly required turning the $3,000 over to the debtor, the trustee sought directions from the bankruptcy court given the conflicting demand from the state. If a plan is not confirmed, the section provides that “the trustee shall return any payments not previously paid and not yet due and owing to creditors . . . to the debtor, after deducting any unpaid” administrative expenses.

Bankruptcy Judge Rebecca B. Connelly ruled that the statute compelled turning the $3,000 over to the debtor despite the levy and unpaid child support. The district court affirmed, prompting the state to appeal a second time.

The state lost again in a decision by Circuit Judge G. Steven Agee, who said that Judge Connelly wrote a “cogent opinion.”

Judge Agee ruled that the “plain language of the statute” required turning the money over to the debtor. He found “nothing at all absurd” in the result, given how Section 349(b)(3) provides that dismissal revests property in the entity that owned the property before bankruptcy.

“If anything,” he said, “the absurd result would be to ignore the plain statutory direction and create a ‘race to the trustee’ . . . .”

The state argued that the effect of the ruling in bankruptcy court was to override the state statute, in violation of the presumption that Congress does not intend to preempt a state law by enacting a federal statute.

Judge Agee cited the Supremacy Clause of the Constitution for the proposition state law is preempted to the extent it directly conflicts with federal law. In the case at bar, he said that a levy under state law “directly conflicts with the federal statutory mandate in Section 1326(a)(2) that the Trustee refund the post-petition payments to [the debtor].”