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Summarizing by Bradley Pearce

State of New Hampshire v. McGrahan (In re McGrahan)

In re McGrahan, No. 09-13578 (B.A.P. 1st Cir. Dec. 7, 2011)
The B.A.P. concluded the bankruptcy court erred as a matter of law for two reasons. First, the bankruptcy court erroneously ruled that because the Second Modified Plan no longer contained a permissive provision for tax refund intercepts by the State, such intercepts became implicitly prohibited, and second, the bankruptcy court failed to follow its own prior ruling that nothing in the Modified Plan prohibited DHHS from taking any action to pursue collection of domestic support obligations under state or federal law. Thus, the B.A.P reversed the bankruptcy court’s decision and remanded for entry of an order consistent with the opinion.
Procedural context:
The State of New Hampshire Department of Health and Human Services appealed the United States Bankruptcy Court for the District of New Hampshire's order granting the debtor's motion to modify his confirmed chapter 13 plan.
In the debtor's first amended chapter 13 plan (the "First Amended Plan"), he listed DHHS as a creditor holding a $13,000 claim for unpaid child support. The First Amended Plan provided that DHHS's claim would be "paid in full through the plan." As required by § 1322(a)(2), the First Amended Plan included the following provision: "The Internal Revenue Service [sic] is seizing Income Tax Refunds to pay Child Support Arrears. The Proof of Claim of NH DHHS Dept. of Child Services will be decreased annually to reflect the amounts seized." The bankruptcy court confirmed the First Amended Plan. Thereafter, the debtor filed a priority proof of claim on behalf of DHHS in the amount of $13,862.39. The bankruptcy court allowed DHHS's claim. After confirmation, DHHS intercepted two of the debtor's federal income tax refunds (totaling $4,257.13) and applied the funds to its prepetition child support claim. DHHS did not amend its proof of claim and thus the chapter 13 trustee continued to make plan payments to DHHS based on its allowed claim without adjusting for the intercepted tax refunds. In October 2010, the debtor moved to modify the First Amended Plan to increase DHHS's claim from $13,000 to the amount of the allowed claim ($13862.39) and to remove the plan provision regarding DHHS's seizure of his tax refunds. No objections were filed, and the bankruptcy court granted the motion and approved the modified plan (the "Modified Plan"). DHHS moved for reconsideration of the order arguing that the modification deprived DHHS of its right to seize tax refunds under § 362(b)(2)(F) and, as such, the modification did not comply with § 1325(a) nor was it authorized under § 1329(a). The bankruptcy court denied the motion to reconsider on the basis that it was "moot due to the fact that there is no provisions in the modified plan or the order . . . that prohibits the state from taking any act[i]on to pursue collection of domestic support obligations under state or federal law." On December 15, 2010, the debtor filed an amended motion to modify his plan (the “Amended Motion to Modify”) and a proposed modified plan (the “Second Modified Plan”) seeking to reduce the amount of DHHS’s prepetition claim to account for the seized tax refunds and to add the following provision to the plan: "The Claim of NH DHHS Dept. of Child Support Services was filed in the amount of $13,862.39; however, since the inception of this Chapter 13 Bankruptcy the Creditor has intercepted the Debtor’s Federal Income Tax Refunds. The total amount of seized by the Creditor is $4,257.13; therefore the Claim of NH DHHS Dept. of Child Support Services, being paid through the Debtor’s Chapter 13 Plan of Reorganization, has been reduced to $9,605.26." In a response to the Amended Motion to Modify, DHHS requested that the bankruptcy court either: (1) expressly rule that the Second Modified Plan did not prohibit DHHS from exercising its right to intercept tax refunds as authorized by § 362(b)(2)(F); or (2) order the debtor to amend the Second Modified Plan to “expressly provide for the tax refund intercepts.” DHHS did not object to the reduction of its claim. In April 2011, the bankruptcy court granted the Amended Motion to Modify. The court concluded that while § 362(b)(2)(F) permitted a support creditor to intercept tax refunds before plan confirmation, once a plan that provides for full payment of the support creditor’s claim is confirmed, the support creditor may no longer intercept refunds. The bankruptcy court determined that because the Second Modified Plan provided for full payment of DHHS’s claim as required by § 1322(a)(2), and because nothing in §§ 1322 or 1325 requires a chapter 13 plan to include a provision permitting a support creditor to intercept tax refunds as described in § 362(b)(2)(F), DHHS was not permitted to intercept additional tax refunds.
Feeney, Tester, and Hoffman

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