Matos v. Rivera (In re Matos)

United States Bankruptcy Appellate Panel for the First Circuit, No. PR 11-074, September 26, 2012
As a threshold matter, the BAP ruled that all tax refunds received by a Chapter 13 debtor are property of the estate whether pursuant to 11 U.S.C. sec. 541(a), to the extent they are rooted in pre-petition earnings, or 1306, to the extent they relate to earnings from services perfomed by the debtor post-petition. Reversing the rulings of the bankruptcy court, the BAP next determined that an objection to the Debtor's claimed exemption in the Refund (defined below) did not lie because (i) the Refund was property of the estate, (ii) the exemption was valid on its face, and (iii) the trial court incorrectly considered an alleged infirmity in plan confirmation, i.e., whether the refunds had to be devoted entirely to a plan pursuant to 11 U.S.C. secs 1322(a)(1) and 1325(b)(1)(B), to determine the validity of an exemption. Rather, consideration of that issue arises only if and when there is an objection to the plan. The BAP reserved comment on whether such an objection to an exemption is a necessary "placeholder" to preserve the objecting party's ability to object to plan confirmation on the ground that not all future earnings and income are being devoted to plan payments.
Procedural context:
Appeal from the United States Bankruptcy Court for the District of Puerto Rico of (i) an order sustaining the Chapter 13 Trustee's objection to an exemption claimed in an income tax refund and (ii) a later order refusing to reconsider the original order on the exemption.
The Debtor filed a Chapter 13 petition in October, 2010 and claimed an estimated tax refund for the pre-petition portion of 2010 as an exemption (the "Refund"). The Trustee objected on the basis that (i) the Refund was not property of the estate, (ii) the Refund was disposable post-petition income upon receipt which had to be devoted to payments under a Chapter 13 plan, and (iii) any plan not having the use of such income was non-confirmable. While the Debtor's plan did contemplate the use of all tax refunds toward the payment of creditors, the Trustee believed that the designation of the Refund as exempt and the Debtor's reservation of right to seek not to apply the Refund if need be were inconsistent with the requirements of 11 U.S.C. secs. 1322(a)(1) and 1325(b)(1)(B). The trial court allowed the Objection. While the Debtor eventually amended his plan to provide for the application of all tax refunds without exception, he still pressed his motion for reconsideration of the denial of his claim of exemption. The court denied this motion as well, and the appeal followed.
Boroff, Deasy and Bailey

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