By: Margaret A. Burks and David Wm. Ruskin

Marge Burks as well as Dave and Gloria Ruskin attended the 6th Circuit Court of Appeals oral arguments in United States v. Carroll, _B.R._, 2010 WL 338040 (E.D. Mich. 2010) on November 16, 2011. For the last several years, Eastern District of Michigan Chapter 13 Trustees David Ruskin, Tammy Terry, Krispen Carroll, Carl Bekofske and Tom McDonald have been receiving debtors’ tax refunds directly from the IRS pursuant to bankruptcy court mandated language in Orders Confirming Plans. The IRS objects to this practice and believes that it is too burdensome and that IRS computers are not up to the task.

In United States v. Carroll, the Chapter 13 Trustee appealed from a writ of mandamus and judgment entered by the United States District Court for the Eastern District of Michigan.  The district court order prohibits the bankruptcy court from entering Chapter 13 confirmation orders requiring the IRS to redirect tax refunds to the Chapter 13 Trustee rather than the debtors and prohibits the Trustees from seeking to enforce redirection of tax refund provisions in previously confirmed plans. The issues before the Sixth Circuit are: 1) whether a bankruptcy court can establish by rule or general order a requirement that all Chapter 13 plans provide for the turnover of tax refunds to the Trustee by the IRS; and, 2) whether the IRS enjoys sovereign immunity protecting it from orders of the bankruptcy court compelling it to turn over tax refunds to the trustees by motion, plan provision, or otherwise.

The three judge panel consisted of Judge Jeffrey S. Sutton, Judge Alan Eugene Norris and Judge Richard Allen Griffin. The attorney for the trustee was Randal Mashburn. Mr. Mashburn is designated to be Judge George Paine’s successor in Nashville, TN. The United States was represented by Peter Sklarew from the U.S. Department of Justice.

Neither Mr. Mashburn nor Mr. Sklarew was able to present much of their prepared arguments. Both attorneys were peppered with questions, as much addressing procedural matters as the substance of legal issues. The majority of the questions came from Judge Sutton, but all three judges asked many questions. Most of the questions were directed to the propriety of the remedy of mandamus and whether there was sufficient evidence for entry of a declaratory judgment.

Appellant Counsel Randal Mashburn had barely begun his legal argument when Judge Sutton asked if debtors want their tax refunds turned over to the Chapter 13 Trustees. He asked whether plans fail if the refund is not returned. Mashburn responded in the affirmative and stated that the IRS believed turning the refund over to Trustees was “inconvenient.”

Judge Sutton also questioned why the Trustees were named as defendants. He asked if the parties wanted a ruling on sovereign immunity and if mandamus was the proper remedy. Judge Sutton asked if whether a declaratory judgment was proper in this case. Mr. Mashburn responded, “If you ignore the way the case got here, we would like a ruling. Sovereign immunity does not apply. Section 542 and 106 cover the job. The IRS is wrong about sovereign immunity.”

Judge Griffin remarked that mandamus is an extraordinary remedy and suggested that it should be avoided when other remedies are effective. He asked if the debtors would squander assets and not comply with bankruptcy court orders if given the funds directly. Mr. Mashburn responded that debtors would intend to turn the assets over to the Trustees, but things happen such as transmissions failing, etc.

Judge Griffin then asked if the Trustees in Eastern Michigan “had been doing it this way” for years, why was it now a burden to the IRS?

Judge Sutton asked if there was any case or controversy since the U.S. Trustee and IRS are both part of the Executive Branch.

Then it was time for IRS counsel to argue.

Judge Norris asked how the court could affirm the district court ruling when the record appeared to have no evidence to support it. Judge Griffin inquired if this wasn’t a “confession of error” since the IRS agreed there was no evidence.

Judge Griffin asked why 11 U.S.C. § 1325(c) doesn’t apply in this instance. That section authorizes the bankruptcy court “after confirmation” to order any entity from whom the debtor receives income to pay all or part of it to the trustee. Counsel for the IRS responded that the statute says “after” confirmation, so any order assigning monies would have to be the subject of a separate order and entered after the confirmation order.

Judge Sutton was concerned whether this case was even “redress able” and noted the district court’s ruling did not seem to bar bankruptcy judges from doing anything, but rather enjoined the Trustees. He asked why the IRS did not contest just one case in the bankruptcy court, then appeal if necessary. Counsel for the IRS responded that if the IRS pursed this course, then the decision would not be binding precedent in other cases. Judge Griffin countered that the IRS could ask the district court to sit en banc and its opinion would then be of precedential effect.

Counsel for the IRS began to close with a number of points. Judge Sutton helped him count off his points and then Counsel’s time was up. Judge Sutton’s parting comment from the bench was, “Come up with a back-up plan. Start down that road. Silly to wait since you both want an answer.”

Writers’ Note: It appears likely the case will be remanded for more evidence on the declaratory judgment part of the holding.

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Margaret A. Burks was appointed as Chapter 13 Trustee for the Cincinnati area in July, 1992. She was ormer Law Clerk to the Honorable J. Vincent Aug, Jr. and former Counsel to PNC Bank. She graduated Salmon P. Chase College of Law 1985 and was on the Law Review of Chase College of Law. She is active in Cincinnati Bar Association Bankruptcy Committee and is a former Chairperson . She speaks at various seminars and graduated University of Cincinnati 1977 – Magna Cum Laude. She is a member of Phi Beta Kappa and a Board Member of the National Association of Ch. 13 Trustees.