United States Department of Agriculture et al v. Sexton

Filing 12

MEMORANDUM OPINION. Signed by District Judge Michael F. Urbanski on 03/31/2015. (bw)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF VIRGINIA
ROANOKE DIVISION
UNITED STATES DEPARTMENT OF
AGRICULTURE,

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Appellant,
v.
ADINA NAOMI SEXTON,
Appellee.

Civil Action No.: 7:14cv00453

By: Hon. Michael F. Urbanski
United States District Judge

MEMORANDUM OPINION
This is an appeal from an order by the United States Bankruptcy Court for the Western
District of Virginia pursuant to 28 U.S.C. § 158(a)(1) and Rule 8001(a) of the Federal Rules of
Bankruptcy Procedure. In an April 1, 2014 memorandum opinion and order, the bankruptcy court
found that the United States Department of Agriculture (“USDA”) violated the automatic stay
protecting appellee Adina Sexton’s (“Sexton”) bankruptcy estate. In a July 21, 2014 memorandum
opinion and order, the bankruptcy court held that its April 1, 2014, order was a final order and
denied the USDA’s motion to reopen the adversary proceeding between Sexton and the USDA. The
USDA filed its notice of appeal on July 31, 2014. The court heard oral argument on December 19,
2014. For the reasons that follow, the court affirms the bankruptcy court’s July 21 order denying
the reopening of the adversary proceeding because the USDA fails to show that the bankruptcy
court abused its discretion. Furthermore, the USDA’s appeal of the April 1 order is untimely, and it
must be dismissed because the court lacks jurisdiction to hear it.
I.
Sexton filed a Chapter 7 bankruptcy petition on February 13, 2013. Anticipating a $4,200.00
tax refund for the 2012 tax year, Sexton listed the refund as an asset of her estate, claimed a

homestead exemption for the $4,200 under Virginia Code §§ 34-4 and 34-13, and filed a homestead
deed with the Floyd County Circuit Court Clerk. One of the liabilities Sexton disclosed on Schedule
F to her bankruptcy petition was a debt in the amount of $114,617.42. That debt was the balance
owed on a mortgage after an insufficient foreclosure sale. The guarantor of that mortgage was the
USDA Rural Development Service, and because the debt represented a deficiency, it was wholly
unsecured.
On March 6, 2013, weeks after Sexton filed her bankruptcy petition, the Department of
Treasury and the USDA notified Sexton that her 2012 tax refund would be withheld and applied to
the “Non-Tax Federal Debt” she owed to the USDA under the auspices of the Treasury Offset
Program, 26 U.S.C. § 6402(d). Sexton’s attorney notified the Department of Treasury of the pending
bankruptcy proceeding and requested the funds be forwarded to the Chapter 7 trustee. Sexton’s
attorney received no response, and the trustee did not receive the funds.
On March 18, 2013, the Chapter 7 trustee made a report of no distribution due to a lack of
assets in the estate. The bankruptcy court entered an order of discharge closing the case and
discharging the liability owed to the USDA on May 14, 2013. Sexton filed a motion to reopen the
bankruptcy case in June and instituted an adversary proceeding against the USDA challenging the
withholding and application of her tax refund as a violation of the automatic stay. The USDA
responded with motions to dismiss the adversary proceeding under Rule 12(b)(1) and 12(b)(6) of the
Federal Rules of Civil Procedure and sought entry of a nunc pro tunc order retroactively validating the
setoff of Sexton’s 2012 tax refund.
In its April 1, 2014 memorandum opinion, the bankruptcy court ruled that the USDA’s
setoff of Sexton’s tax refund violated the automatic stay. According to the bankruptcy court,
Sexton’s
right to recover her tax overpayment arose for the 2012 tax year at
the midnight on December 31, 2012. By filing her bankruptcy
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petition on February 13, 2013 . . . prior to the Secretary of the
Treasury redirecting her overpayment . . . her interest in the
overpayment[ ] vested in her bankruptcy estate and instantly acquired
the protections of the automatic stay.
In re Sexton, 508 B.R. 646, 662 (Bankr. W.D. Va. 2014). The bankruptcy court also found the
USDA willfully violated the stay under 11 U.S.C. § 362(k)(1) and denied the USDA’s nunc pro tunc
motion because the equities of the case weighed in Sexton’s favor. Id. at 666-67. Finally, the court
ordered the USDA to release the sequestered funds and granted Sexton leave to submit “further
evidence for other costs and fees incurred due to the government’s” willful violation of the stay. Id.
at 668. The court entered a corresponding order, and the clerk’s office noted in the order’s docket
entry: “Case to Be Closed if Applicable 04/15/2014.” In re Sexton, Bankr. No. 13-70230, Adv. Pro.
No. 13-07037 (Bankr. W.D. Va. Apr. 1, 2014), Disposition of Adversary 7:13-ap-7037, Dkt. No. 29.
Sexton did not submit any further filings or evidence to the bankruptcy court.
The bankruptcy court closed the adversary proceeding on April 16, 2014 and closed Sexton’s
main bankruptcy case on May 8, 2014. On May 12, 2014, the USDA filed a motion to reopen the
adversary proceeding on the grounds that the court’s April 1 order was not a final order. The
bankruptcy court denied the motion to reopen the adversary proceeding on July 21, 2014, and the
USDA filed its notice of appeal on July 31, 2014.
II.
According to the USDA, the bankruptcy court abused its discretion by relying on § 350 of
the Bankruptcy Code in its analysis of whether to reopen the adversary proceeding. The USDA
argues that the adversary proceeding was a distinct proceeding separate from the bankruptcy case,
and, as in a civil case, the bankruptcy court should have reopened the adversary proceeding for entry
of a final judgment. Furthermore, the USDA believes that the April 1 order was not a final order
because it left the issue of actual damages unresolved. Finally, the USDA asserts that Sexton’s
anticipated tax refund was not part of her bankruptcy estate because Sexton only had an interest in
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the amount of the refund that exceeded the preexisting, unpaid governmental debt. The USDA
draws a distinction between tax overpayments and tax refunds and argues that the overpayment
creates a “potential claim” to the refund subject to other reductions from the Internal Revenue Code
(“IRC”). Accordingly, the overpayment was properly applied to the USDA debt under IRC § 6402.
Sexton argues that the bankruptcy judge properly addressed the motion to reopen the
adversary proceeding under § 350 of the Bankruptcy Code. Furthermore, even if § 350 did not apply
to the motion to reopen, the USDA’s motion should be viewed as an attempt to change, modify, or
vacate the April 1 order under Rule 60(b). Because the USDA’s reason for filing the motion to
reopen was really an attempt to circumvent the rules of appellate procedure in order to timely note
an appeal, Sexton argues there is no basis to find that the bankruptcy judge abused her discretion.
Sexton does not address the merits of the April 1 order because, according to her, it was a final
order, and the USDA did not timely note its appeal. Therefore, Sexton claims this court lacks
jurisdiction to review the April 1 order and asks the court to dismiss the USDA’s appeal as to that
order.
III.
The USDA seeks appellate review of two of the bankruptcy court’s orders: (A) the
bankruptcy court’s July 21, 2014 order denying reopening the adversary proceeding and (B) the
bankruptcy court’s April 1, 2014 order. In reviewing the decision of the bankruptcy court, a district
court must accept the bankruptcy court's findings of fact unless they are clearly erroneous and
review de novo the bankruptcy court's conclusions of law. See In re Harford Sands, Inc., 372 F.3d
637, 639 (4th Cir. 2004).
A.
The bankruptcy court denied the motion to reopen the adversary proceeding based largely
on § 350 of the Bankruptcy Code. Section 350 allows the court to reopen a bankruptcy case to
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“administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b). Courts are
generally split as to whether § 350 applies to the reopening of an adversary proceeding. The
Bankruptcy Court for the Northern District of Indiana relied on § 350 in determining whether to
reopen an adversary proceeding for resolution of a post-judgment fees issue in In re Manwarren,
No. 09-33752, Adv. Pro. 09-3129, 2011 Bankr. LEXIS 5701 (Bankr. N.D. Ind. June 24, 2011). In
that case, the court found there was “cause” under § 350 to reopen the adversary proceeding to
determine the issue of fees. Id. at *9. Other courts have found § 350 inapplicable to the reopening of
an adversary proceeding. See In re Sun Healthcare Grp., Inc., No. 99-03657, Adv. Pro. 01-7671,
Adv. Pro. 01-7480, 2004 WL 941190, at *1 (Bankr. D. Del. Apr. 30, 2004); In re Woodcock, 301
B.R. 530, 533 (B.A.P. 8th Cir. 2003).
Appellate review of a decision not to reopen under either § 350 of the Bankruptcy Code or
Rule 60 of the Federal Rules of Civil Procedure is for abuse of discretion. Hawkins v. Landmark Fin.
Co., 727 F.2d 324, 327 (4th Cir. 1984); Square Const. Co. v. Washington Metro. Area Transit Auth.,
657 F.2d 68, 71 (4th Cir. 1981).1 However, the USDA moved for entry of a final order pursuant to
Rule 54(b) and Rule 58 of the Federal Rules of Civil Procedure applicable to adversary proceedings
under Bankruptcy Rules 7054 and 7058, respectively. In re Sexton, Bankr. No. 13-70230, Adv. No.
13-07037 (Bankr. W.D. Va. May 12, 2014), Mot. Reopen Adversary Proceeding, Dkt. No. 33.
Nevertheless, appellate review of a lower court’s decision on a Rule 54(b) motion is for abuse of
discretion as well. Braswell Shipyards, Inc. v. Beazer East, Inc., 2 F.3d 1331, 1336 (4th Cir. 1993)
(“[O]ur conventional review of the district court’s Rule 54(b) certification is for an abuse of
discretion.”) (citing Para-Chem Southern, Inc. v. M. Lowenstein Corp., 715 F.2d 128, 132 (4th Cir.
1983)). A court abuses its discretion if it “bases[s] its ruling on an erroneous view of the law or on a

Sexton argues that if § 350 is inapplicable the motion to reopen for entry of a final order should be construed as a
motion pursuant to Rule 60(b) of the Federal Rules of Civil Procedure.
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clearly erroneous assessment of the evidence.” Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405
(1990).
The bankruptcy judge did not abuse her discretion by refusing to reopen the adversary
proceeding under § 350 of the Bankruptcy Code. First, there is no authority on this issue from the
Fourth Circuit, and courts outside the circuit are split as to whether a bankruptcy court ought to
address a motion to reopen an adversary proceeding under § 350. In addition, the bankruptcy court
explained its decision not to reopen the adversary proceeding in an eight-page, well-reasoned
opinion which provides this court with a basis to review the bankruptcy court’s reasoning. See
Braswell, 2 F.3d at 1336 (“[N]umerous courts have held that where the district court’s Rule 54(b)
certification is devoid of findings or reasoning in support thereof, the deference normally accorded
such a certification is nullified.”). As such, the court finds the bankruptcy court’s reliance on § 350
of the Bankruptcy Code in its decision not to reopen the adversary proceeding was not based “on an
erroneous view of the law.” Cooter & Gell, 496 U.S. at 405.
B.
Sexton argues this court lacks jurisdiction to hear an appeal from the April 1 order because
the USDA’s appeal is untimely. Because the court’s jurisdiction to hear a case is a threshold issue,
the court must determine whether the April 1 order was a final order that started the 14-day window
for noting an appeal before considering the merits of the appeal. The USDA argues that the
bankruptcy court’s April 1 opinion and order cannot be a final order because it left open the issue of
actual damages as well as fees and costs.
1.
In the memorandum opinion accompanying the April 1 order, the bankruptcy court made
the following statements: (1) “[t]he Court orders the government to release the sequestered funds
and reimburse the debtor for her actual damages;” (2) “The government intended its actions with
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knowledge of the automatic stay and, accordingly, must reimburse Ms. Sexton for actual damages,
attorney’s fees, and costs;” and (3) “the debtor may submit any further evidence for other costs and
fees incurred due to the government’s actions, and the Court will consider those fees at a future
hearing, if she so requests.” In re Sexton, 508 B.R. at 667-68. The bankruptcy court did not award
punitive damages. Id. at 668. Sexton’s complaint in the adversary proceeding requested relief in the
form of
(1) release of the $4,201 tax refund the government withheld; (2)
reimbursement of actual damages and costs expended in response to
the violation; (3) reimbursement of attorney’s fees; (4) sanctions for
the “willful violation” of the automatic stay, and (5) any other relief
the Court deems just and equitable.
Id. at 667.
In its motion to reopen the adversary proceeding, the USDA characterized Sexton’s
complaint as containing two claims: the first claim to recover the tax refund and a second claim for
damages under 11 U.S.C. § 362(k)(1). In re Sexton, Bankr. No. 13-70230, Adv. Pro. No. 13-07037
(Bankr. W.D. Va. May 12, 2014), Mot. Reopen Adversary Proceeding, Dkt. No. 33, at *2. That
assertion mischaracterizes the complaint—a request for damages is not a cause of action, but a
prayer for relief. However, Sexton’s complaint does contain two claims: one claim for a violation of
the stay and a separate claim alleging a willful violation of the automatic stay. Section 362 of the
Bankruptcy Code distinguishes between a violation of the automatic stay protecting the bankruptcy
estate and a willful violation of the automatic stay. See 11 U.S.C. §§ 362(a) and (k)(1); Davis v. IRS,
136 B.R. 414, 424 (E.D. Va. 1992) (decided under prior version of 11 U.S.C. § 362). Section
362(k)(1) does not require proof of damages to find a violation of the stay; damages must be proven
in order to be awarded. See In re Gallo, No. 07-10958C-13G, 2012 WL 3930320, at *3 (Bankr.
M.D.N.C. Sept. 10, 2012).

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In its July 21, 2014 opinion and order, the bankruptcy court concluded the April 1 order was
a final order because (1) it disposed of the pending motions and claims, and (2) Sexton was not
compelled to prove damages in order to prevail and, therefore, it was not necessary to delay entry of
a final judgment “in order to tax costs or award fees” under Federal Rule of Civil Procedure 58(e).
See In re Sexton, Bankr. No. 13-70230, Adv. Pro. No. 13-07037 (Bankr. W.D. Va. July 21, 2014),
Mem. Op., Dkt. No. 39, at *6-7.
2.
An order is final if it “‘ends the litigation on the merits and leaves nothing for the court to
do but execute the judgment.’” Hudson v. Pittsylvania Cnty, 774 F.3d 231, 234 (4th Cir. 2014)
(quoting United States v. Modanlo, 762 F.3d 403, 409 (4th Cir. 2014)). Simply because “‘the award
or amount of attorney’s fees for the litigation remains to be determined,’” that pending
determination does not strip an order of its finality. Id. (quoting Ray Haluch Gravel Co. v. Cent.
Pension Fund of Int’l Union of Operating Eng’rs & Participating Emp’rs, 134 S.Ct. 773, 777 (2014)
(Kennedy, J.)). The “concept of finality” in bankruptcy proceedings “is more flexible than in
ordinary civil litigation.” In re Fugazy, 982 F.2d 769, 775 (2d Cir. 1992). To be a final order, a
bankruptcy court’s order “‘must completely resolve all of the issues pertaining to a discrete claim,
including issues as to the proper relief.’” In re Atlas, 210 F.3d 1305, 1308 (11th Cir. 2000) (quoting
Fugazy, 982 F.2d at 776); see also First Owners’ Ass’n of Forty Six Hundred v. Gordon Props.,
LLC, 470 B.R. 364, 370 (E.D. Va. 2012).
Section 362 of the Bankruptcy Code mandates the award of “actual damages, including costs
and attorneys’ fees, and, in appropriate circumstances . . . punitive damages” for a willful violation of
the automatic stay, but the debtor bears the burden of proving any damages. 11 U.S.C. § 362(k)(1);
In re Gallo, No. 07-10958C-13G, 2012 WL 3930320, at *3 (M.D.N.C. Sept. 10, 2012).
“Determinations of liability without an assessment of damages are as likely to cause duplicative
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litigation in bankruptcy as they are in civil litigation, and because bankruptcy litigants may appeal to
district as well as to appellate courts, the waste of judicial resources is likely to be greater.” In re
Morrell, 880 F.2d 855, 856-57 (5th Cir. 1989). However, attorneys’ fees are separate from the merits
of a case even if attorneys’ fees are considered as part of the damages authorized by statute. Hudson,
774 F.3d at 234-35; In re Colon, 941 F.2d 242, 245 (3d Cir. 1991).
In re Atlas involved an appeal from a bankruptcy court order that awarded attorneys’ fees
and costs but left open the issue of punitive and actual damages under § 362. Atlas, 210 F.3d at
1308. That order did not “dispose of the trustee’s prayer for relief” because “the bankruptcy court
awarded actual damages, including attorney’s fees and costs, and considered the possibility of future
punitive damages, but deferred assessment of those damages.” Id. The bankruptcy court’s order in
that case stated:
Guy’s willful violation of the stay is subject to sanctions under 11
U.S.C. § 362(h) . . . . Therefore, it is-ORDERED as follows: . . . 2.
Pursuant to 11 U.SC. § 362(h), the Court awards damages in favor of
the Trustee and against James Guy in an amount to be fixed upon the
Trustee’s filing of a supplemental motion detailing the fees and costs
incurred as a result of Guy’s wrongful conduct. 3. The Court will
consider awarding punitive damages against James Guy if the
Complaint is not dismissed within two days after service of this
Order upon Guy.
Id. (emphasis omitted). The bankruptcy court’s order was not a final order “because [that order]
concerns an award of damages, not just attorney’s fees, which has not yet been assessed.” Id.
In this case, the bankruptcy court twice noted its award of actual damages to Sexton in the
April 1 memorandum opinion accompanying its order but granted Sexton the opportunity to
present evidence only as to attorneys’ fees and costs, not damages. Specifically, the court said
“[Sexton] may submit any further evidence for other costs and fees incurred due to the
government’s actions, and the Court will consider those fees at a future hearing, if [Sexton] so
requests.” In re Sexton, 508 B.R. at 668. What distinguishes this case from Atlas is that the
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bankruptcy court did not permit Sexton the opportunity to present evidence on any damages,
Sexton did not avail herself of the opportunity to present any evidence as to fees or costs, the court
did not impose sanctions or punitive damages, and the court closed the adversary proceeding after
the 14-day window for appeal expired. The only issues left open for resolution by the bankruptcy
court was the quantification of fees and costs, if any, not damages.
The bankruptcy court’s July 21, 2014 memorandum opinion, however, neglects to parse the
terms “damages” and “fees and costs.” The court first states the April 1 order “permitted Ms.
Sexton to submit evidence on actual damages to tax the government” then it construes the
government’s motion to reopen the adversary proceeding as “based on the fact that the Court never
ruled on the matter of attorney’s fees and costs.” In re Sexton, Bankr. No. 13-70230, Adv. Pro. No.
13-07037 (Bankr. W.D. Va. July 21, 2014), Mem. Op., Dkt. No. 39, at *2, *5. In footnote 9 to that
opinion, the bankruptcy court opined that “actual damages would be easily determined, as Ms.
Sexton’s counsel was pro bono, the Court waived the filing fee, and the debtor did not lose wages,
so there may have been no actual damages for her to tax the government.” Id. at *7 n.9. Indeed, that
opinion uses the terms “damages” and “fees and costs” interchangeably. The bankruptcy court
makes the same mistake later by noting “Sexton could petition for any actual damages, if she had
sustained any” but describes the April 1 opinion and order as “not leav[ing] any question open
regarding actual damages.” Id. at *7, *8.2
The bankruptcy court’s April 1 order was a final order on the merits because it granted
Sexton leave to present evidence only as to “other costs and fees incurred due to the government’s
actions.” In re Sexton, 508 B.R. at 668. It is clear from a reading of the opinion as a whole that the
bankruptcy court’s April 1 order only left the case open to determine fees and costs, if there were
any. The court could have ordered or permitted Sexton to submit evidence as to “actual damages”
This confusion is likely the result of the language of 11 U.S.C. § 362(k)(1) that provides for the recovery of “actual
damages, including costs and attorneys’ fees” for a willful violation of the automatic stay.
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or “actual damages, fees, and costs,” but it did not. Rather, the court permitted Sexton only to
produce evidence as to fees and costs.
The April 1 opinion and order did not award punitive damages. The bankruptcy court
denied the USDA’s motions to dismiss and motions for a nunc pro tunc order, found that the USDA
violated the automatic stay, and ordered the return of the $4,200 to Sexton. There was nothing more
for the bankruptcy court to do but execute the judgment, and Sexton had the option to present
evidence on her costs and fees. All that was left for the bankruptcy court to do was a “purely
mechanical, computational, or in short ‘ministerial’ task, whose performance was unlikely . . . to
affect the issue that the disappointed party want[ed] to raise on appeal.” In re Fox, 762 F.2d 54, 55
(7th Cir. 1985); see also In re Yates, No. BAP WY-04-036, 04-20069, 2005 WL 50188, at *3 (B.A.P.
10th Cir. Jan. 11, 2005) (per curiam) (“Here, the issue of attorney’s fees is separate and collateral to
the merits of the case because the bankruptcy court’s decision on whether the Appellant had
violated the automatic stay effectively ended the litigation.”).
As such, the USDA had fourteen days to file an appeal of the April 1 order, and it failed to
do so. F.R. Bankr. P. 8002(a)(1). Even if the USDA’s motion to reopen could have tolled the time to
notice an appeal, the USDA would still have been too late because it did not file its motion to
reopen until May 12—42 days after entry of the April 1 order and 26 days after the closing of the
adversary proceeding. The bankruptcy court’s April 1 order was a final order as to the merits of the
adversary proceeding and left open only the issue of attorney’s fees and costs. Therefore, the
USDA’s July 31, 2014 appeal of the April 1 order was untimely because it was filed 120 days after
the entry of the April 1 order, and the court lacks jurisdiction to hear it.
IV.
The USDA fails to show that the bankruptcy court abused its discretion by refusing to
reopen the adversary proceeding or that the April 1 order was not an immediately appealable final
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order. The April 1 order disposed of the merits of the adversary proceeding and left open only the
issue of attorneys fees and costs; therefore, it was a final order. The USDA failed to timely note its
appeal, and the court does not have jurisdiction to hear it. Accordingly, the court affirms the
bankruptcy court’s July 21 order and dismisses the USDA’s appeal of the April 1 order. A
corresponding Order consistent with this Memorandum Opinion will be entered this day.
The clerk is directed to send a copy of this Memorandum Opinion to all counsel of record.
Entered: March 31, 2015

/s/ Michael F. Urbanski
Michael F. Urbanski
United States District Judge

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