Shifflett v. Latitude Properties, Inc. ( 2017 )

PRESENT: All the Justices
ELIZABETH SHIFFLETT, ET AL.
OPINION BY
v. Record No. 161290 JUSTICE CLEO E. POWELL
December 14, 2017
LATITUDE PROPERTIES, INC., ET AL.
FROM THE CIRCUIT COURT OF ROCKINGHAM COUNTY
Thomas J. Wilson, IV, Judge
In this appeal, we consider whether a judgment creditor may obtain a lien by writ of fieri
facias on monies from future income tax refunds when a debtor has yet to file his or her income
tax returns.
I. BACKGROUND
The facts are undisputed. Latitude Properties, Inc. and Shen Valley Band Instrument
Service, Inc. (collectively, “Creditors”) obtained separate judgments against Rodney and
Elizabeth Shifflett and Cassandra Deane (collectively, “Debtors”). 1 Creditors issued to Debtors
writs of fieri facias along with summonses to answer interrogatories. Upon the return date for
the writs, January 5, 2016, based on the answers to the interrogatories, the
Harrisonburg/Rockingham General District Court (“general district court”) entered transfer
orders in favor of Creditors requiring Debtors turn over their 2015 income tax refunds to
Creditors upon receipt of funds or to demonstrate that a refund would not be received. The
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The underlying cases were filed separately, but because the issues are identical and the
transfer orders were entered on the same date, the circuit court, hearing the appeals from general
district court, jointly decided the cases by agreement of the parties.
transfer orders were appealed to the Circuit Court of Rockingham County (hereinafter “circuit
court”).
In circuit court, upon motions for summary judgment, Debtors argued that the general
district court lacked subject matter jurisdiction to enter the transfer orders as it was undisputed
that Debtors had not filed their 2015 income tax returns as of the return date of the writ. Debtors
argued their expected 2015 income tax refunds were contingent interests in property not subject
to a lien under Code § 8.01-501. In a letter opinion dated May 13, 2016, the circuit court ruled in
favor of Creditors, finding that Debtors
held a fixed property interest in their 2015 tax refunds as of
midnight of December 31st of 2015. Consequently, the liens of
fieri facias attached to those funds. Additionally, [] Code
§ 8.01-507 authorized the General District Court to enter the
transfer orders, irrespective of that lien.
The circuit court also found that “[a] tax refund is an intangible ‘under the control of the debtor,’
as the debtor makes the ultimate decision on whether to file a tax return.” By joint order
incorporating its letter opinion, the circuit court dismissed Debtors’ appeals with prejudice.
Debtors moved for reconsideration arguing that an intangible personal estate
contemplated by Code §§ 8.01-501 and -507 does not include an income tax refund if the
taxpayer has not filed a tax return. The circuit court denied the motion. This appeal followed.
II. ANALYSIS
On appeal, Debtors argue that the circuit court erred in dismissing their appeals with
prejudice and applying the orders of the general district court levying upon their potential 2015
income tax refunds because both courts lacked authority to exercise any power under Code
§§ 8.01-501 and -507. Debtors assert that they were not entitled to a refund within the meaning
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of Code § 8.01-501 and lacked “possession” or “control,” as required by Code § 8.01-507, over
their 2015 income tax refunds as they had yet to file 2015 income tax returns.
Creditors respond that the circuit court properly granted summary judgment and
dismissed the appeals. Creditors argue that Debtors’ 2015 income tax refunds were intangible
property interests that vested as of the close of the 2015 tax year, December 31, 2015, regardless
of whether Debtors had filed their 2015 income tax returns.
“[S]ummary judgment ‘shall not be entered’ unless no ‘material fact is genuinely in
dispute’ on a controlling issue or issues and the moving party is entitled to such judgment as a
matter of law.” Mount Aldie, LLC v. Land Trust of Va., Inc., 293 Va. 190, 196, 796 S.E.2d 549,
553 (2017) (quoting Rule 3:20). “Thus, in an appeal of a decision awarding summary judgment,
the trial court's determination that no genuinely disputed material facts exist and its application
of law to the facts present issues of law subject to de novo review.” Id. at 196-97, 796 S.E.2d at
553.
Code §§ 8.01-501 and -507 establish a procedure by which a judgment creditor may seek
to collect on a debt against a judgment debtor. Code § 8.01-501 provides, in pertinent part, that
Every writ of fieri facias shall . . . be a lien from the time it is
delivered to a sheriff or other officer, or any person authorized to
serve process pursuant to § 8.01-293, to be executed, on all the
personal estate of or to which the judgment debtor is, or may
afterwards and on or before the return day of such writ or before
the return day of any wage garnishment to enforce the same,
become, possessed or entitled, in which, from its nature is not
capable of being levied on under such sections.
Code § 8.01-507 provides:
Any real estate out of this Commonwealth to which it may appear
by such answer that the debtor is entitled shall, upon order of the
court or commissioner, be forthwith conveyed by him to the officer
to whom was delivered such fieri facias, and any money, bank
notes, securities, evidences of debt, or other personal estate,
tangible or intangible, which it may appear by such answers are in
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possession of or under the control of the debtor or his debtor or
bailee, shall be delivered by him or them, as far as practicable, to
such officer, or to some other, or in such manner as may be
ordered by the commissioner or court.
A judgment creditor cannot proceed against intangible property “without a valid lien on that
property by writ of fieri facias.” International Fidelity Ins. Co. v. Ashland Lumber Co., 250 Va.
507, 511, 463 S.E.2d 664, 666 (1995).
The writ of fieri facias creates a lien in favor of the judgment
creditor only to the extent that the judgment debtor has a
possessory interest in the intangible property subject to the writ.
Accordingly, when the judgment debtor has no interest in the
property . . . , the writ does not create a valid lien on that property.
Id. at 511, 463 S.E.2d at 666-67.
We have not addressed the issue of whether a prospective income tax refund can be the
subject of a writ of fieri facias under Code § 8.01-501 and be reached under Code § 8.01-507 if
the debtor has indicated that he expects a refund but has not filed an income tax return. Both the
circuit court and the appellees rely heavily on bankruptcy cases. We find the bankruptcy cases
instructive but not dispositive.
The Creditors rely on In re Sexton, 508 B.R. 646 (Bankr. W.D. Va. 2014), for the
proposition that a debtor’s interest in an income tax refund vests at midnight on December 31. In
Sexton, the debtor filed for Chapter 7 liquidation on February 13, 2013 and listed an anticipated
2012 federal tax refund as an asset of her estate. Thereafter, the Department of the Treasury (the
“Treasury”) notified Sexton that it would be withholding her tax refund in order to apply it to the
debt she owed to the United States Department of Agriculture Rural Development Service
(“DOA”). Sexton sought to enforce the automatic bankruptcy stay of 11 U.S.C. § 362(a) against
the DOA. The DOA argued that because “Sexton only possessed a contingent interest in the
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overpayment” it did not become property of the bankruptcy estate under the protection of the
automatic stay. In re Sexton, 508 B.R. at 652.
In addressing the argument, the bankruptcy court defined the issue as what kind of
interest a debtor has in a tax overpayment and to what extent is that interest a part of the debtor’s
bankruptcy estate. The bankruptcy court stated that Sexton’s right to recover her tax refund
arose for the 2012 tax year at midnight on December 31, 2012.
By filing her bankruptcy petition on February 13, 2013, which was
prior to the Secretary of the Treasury redirecting her overpayment
to the Department of Agriculture [the creditor], all of Ms. Sexton’s
eligible property, including her interest in the overpayment, vested
in her bankruptcy estate and instantly acquired the protections of
the automatic stay.
Id. at 662. The bankruptcy court found “that a debtor’s interest in her tax overpayment becomes
fixed at the close of the relevant tax year for the purposes of bankruptcy law. At that point, the
amount of overpayment is discernible, and the debtor is entitled to recover that amount from the
government.” Id. at 663 (emphasis added). By its terms, Sexton dealt solely with whether
income tax overpayments become part of the bankruptcy estate and did not address the issue
presented here.
The outcome in Sexton relied heavily on the nature of the bankruptcy estate. For
purposes of defining the bankruptcy estate the bankruptcy code is expansive. The bankruptcy
code defines “‘estate’ liberally to include all property interests of the debtor at the time she files
her petition, irrespective of whether the property interests are legal or equitable, tangible or
intangible, or vested or contingent.” Id. at 656 (quoting 11 U.S.C. § 541(a)). “[E]very
conceivable interest of the debtor, future, nonpossessory, contingent, speculative and derivative
is within the [bankruptcy estate].” Id. at 657 (citing In re Yonikus, 996 F.2d 866, 869 (7th Cir.
1993)). While an income tax overpayment becomes part of the bankruptcy estate at midnight on
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December 31, that is only to acquire the protections of the automatic stay that is implemented to
protect the bankruptcy estate’s holdings. See 11 U.S.C. § 362(a).
Unlike bankruptcy law, however, the scope of a property interest for purposes of a fieri
facias lien under Virginia law is much narrower. By its terms, Code § 8.01-501 limits the
property to which a creditor’s lien can attach to property of which the debtor is “possessed” or to
which the debtor is “entitled.” Moreover, Code § 8.01-507 differs from bankruptcy law in that it
defines the property that may be delivered to the sheriff for delivery to the creditor as “any
money, bank notes, securities, evidences of debt, or other personal estate, tangible or intangible,
which it may appear by such [interrogatory] answers are in possession of or under the control of
the debtor or his debtor or bailee.” (Emphasis added.) “‘When the language of a statute is
unambiguous, we are bound by the plain meaning of that language. Furthermore, we must give
effect to the legislature’s intention as expressed by the language used unless a literal
interpretation of the language would result in a manifest absurdity.’” Butler v. Fairfax Cty. Sch.
Bd., 291 Va. 32, 37, 780 S.E.2d 277, 280 (2015) (quoting Payne v. Fairfax Cty. Sch. Bd., 288
Va. 432, 436, 764 S.E.2d 40, 43 (2014)). “Entitle” is defined as: “to give a right or legal title to.”
Webster’s 3rd International Dictionary 758 (1993). “Possession” is defined as: “the act or
condition of having in or taking into one’s control or holding at one’s disposal.” Id. at 1770.
Here, the Debtors would have been entitled to tax refunds only after filing their federal
income tax returns. Debtors had not filed their 2015 federal income tax returns. Therefore, they
were not entitled to funds from the IRS, nor were they in possession or control of the 2015
income tax refunds. Creditors could therefore not obtain a property interest in income tax
refunds that were not possessed by or in the control of the Debtors. The 2015 income tax
refunds amounted to an inchoate property interest. Inchoate is defined as “not yet perfected; not
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yet made certain or specific; and not vested.” Id. at 1142. Debtors had not filed 2015 income tax
returns; therefore, Debtors did not have a vested property interest in their potential 2015 income
tax refunds. 2 Any 2015 income tax refunds owed to Debtors, was in the possession or control of
federal and state governments. Thus, the property interest of the debtor was at best contingent
upon the filing of an income tax return.
Unlike bankruptcy law, which for some purposes reaches “contingent interests,” we have
held as far back as Boisseau v. Bass, 100 Va. 207, 40 S.E. 647 (1902), that a debtor’s interest in
property that is uncertain or contingent is not subject to a fieri facias lien. “When a debt has a
present existence, although payable at some future day, it is subject to the lien of a fi[eri]
fa[cias], . . . but the rule is otherwise where the debt rests upon a contingency that may or may
not happen, and over which the court has no control.” Boisseau, 100 Va. at 210, 40 S.E. at 649.
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We also note that, as a practical matter, while a taxpayer’s potential right to receive a
refund of a federal tax overpayment may arise as of midnight on December 31 in each tax year
(assuming of course that the taxpayer’s fiscal year ends at that same time), whether any
overpayment will actually be refunded and remitted to the taxpayer is dependent on a number of
factors, including—as the circuit court noted—whether the taxpayer opts to file a tax return in
order to seek a refund, see, e.g., U.S. Dep’t of the Treasury, Internal Revenue Service,
Instructions for Form 1040, “Do You Have To File?” at 7-8 & chart A (2016) (indicating
threshold income amounts triggering requirement to file a federal tax return based on filing
status, i.e., single, married filing jointly, married filing separately, head of household, and
qualifying widow or widower with dependent child), as well as whether the overpayment
amount, as calculated by the taxpayer, or any part thereof is diverted by the Department of the
Treasury prior to being remitted to the taxpayer to satisfy certain other obligations that the
taxpayer may owe pursuant to a statutorily-authorized setoff. Moreover, the circuit court’s
observation, made in its May 13, 2016 letter opinion, that “the calculation of the refund amount
is nondiscretionary,” cannot mean that the amount of tax overpayment as calculated by the
taxpayer will automatically qualify for a refund and be remitted. That observation overlooks the
possibility that an Internal Revenue Service review and/or audit of the taxpayer’s return could
result in a change to the amount of overpayment originally claimed by the taxpayer, resulting in
a reduction, elimination or a finding that additional taxes are owed. This possibility further
supports our conclusion that the debtors’ 2015 income tax refunds amounted to an inchoate
property interest that was not vested as of midnight on December 31, 2015.
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“‘The debt itself must be in existence at the time of the service of the writ, free from any
contingency.’” Id. at 211, 40 S.E. at 649 (quoting 1 Freeman on Executions, sec. 165).
Application of the plain meaning of “in possession of,” “entitled to” and “under the
control” to the potential 2015 income tax refunds, for which 2015 income tax returns had not
been filed, shows that, for purposes of Code § 8.01-507, Debtors were not entitled to nor did they
have a fixed property interest in the 2015 income tax refunds at the time of the return date on the
writ of fieri facias. Accordingly, we will reverse the judgment of the circuit court granting
summary judgment and enforcing liens upon the potential 2015 income tax refunds of Debtors.
We will remand for further proceedings consistent with this opinion.
III. CONCLUSION
For the foregoing reasons, we hold that where an income tax return has not been filed by
the return date on a writ of fieri facias, any potential income tax refunds for the applicable tax
year are not “in possession of or under the control of the debtor” so as to be reachable by the lien
under Code §§ 8.01-501 and -507.
Reversed and remanded.
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