Santiago v. Rivera (In re Santiago)
- Santiago v. Rivera (In re Santiago), BAP No. PR 11-075 (1st Cir. BAP Sep. 26, 2012) (for publication)
- The First Circuit Bankruptcy Appellate Panel REVERSED the ruling of the bankruptcy court, finding that anticipated tax refunds for pre-petition earnings or losses are property of the estate under section 541, not section 1306, and in order to consider whether such refunds must be paid into a chapter 13 plan under section 1325, an objection to the plan on such grounds must be raised before the plan is confirmed.
- Procedural context:
- The Bankruptcy Appellate Panel for the First Circuit reversed the U.S. Bankruptcy Court for the District of Puerto Rico's ruling sustaining the chapter 13 trustee’s objection to the claimed exemption in an income tax refund.
- The Debtors filed under chapter 13 in March of 2011. The Debtors scheduled an anticipated income tax refund for tax year 2010, and claimed the anticipated refund as exempt under section 522(d)(5). The chapter 13 trustee (the “Trustee”) objected, asserting the exemption violated the requirement of section 1325(b) that all projected disposable income be paid into the Debtors’ chapter 13 plan (the “Plan”). The Trustee did not object to the Plan. In August, 2011, the bankruptcy court confirmed the unopposed Plan, noting that the Trustee’s objection to the claimed exemption remained pending. In September, 2011 the bankruptcy court sustained the Trustee’s objection to exemptions. The Debtors appealed.
The BAP reviewed two arguments raised by the Trustee: (a) that an anticipated tax refund is property of the estate under section 1306, and (b) that a tax refund must be paid into a chapter 13 plan under section 1325(b).
A party objecting to an exemption bears the burden of proving the claimed exemption is invalid. The Trustee objected, claiming the refund is property of the estate under section 1306. The BAP cited two Supreme Court opinions for the proposition that tax refunds arising from pre-petition earnings or losses are considered property of the estate under section 541. On appeal, the Trustee conceded this point.
The Trustee also argued that the refunds are post-petition income which must be paid into the Plan under section 1325(b). However, the BAP indicated that section 1325 arises only after a plan objection is raised. Here, there were no objections to the Plan, which was confirmed by the bankruptcy court before entry of the order sustaining the Trustee’s exemption objection. Thus, issues arising from section 1325 are moot.
- Boroff, Deasy, and Bailey, United States Bankruptcy Appellate Panel Judges
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