A creditors state law setoff right can be a its setoff rights to - PDF document

66฀Canal฀Center฀Plaza,฀Suite฀600฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abi.org Lowenstein฀Sandler฀ Lowenstein฀Sandler฀ (ABI,฀2011). They฀are฀both฀the฀ Roseland,฀N.J.,฀offjce.฀ Counsel฀in฀the฀fjrm’s฀ Scott฀Cargill฀is฀Of฀ Group฀in฀New฀York.฀ Creditors’฀Rights฀ Reorganization฀and฀ Bankruptcy,฀Financial฀ Sandler฀LLP’s฀ partner฀in฀Lowenstein฀ Bruce฀Nathan฀is฀a฀ LLP;฀Roseland,฀N.J. LLP;฀New฀York The Essential Resource for Today’s Busy Insolvency Professional Last in Line B Y B RUCE S. N ATHAN AND S COTT C ARGILL Failing to Adequately Assert Setoff Rights Could Jeopardize Recovery A creditor’s state law setoff right can be a its setoff rights to reduce its claim against the debtor valuable tool when confronting a debtor in from the amount of its obligations to the debtor. bankruptcy. The application of setoff rights The Tenth Circuit Court of Appeals ruled that provides a dollar-for-dollar reduction of the credi- a creditor’s setoff rights are not tied to the timely tor’s claim against a debtor, which could be valu- fjling of a proof of claim in the context of § 542 (b), Bruce S. Nathan able where creditor recoveries are either nonexis- even where the creditor had not filed a proof of tent or de minimis . The division among the courts claim and the claims bar date had passed. 5 The over how and when a creditor must assert its setoff Tenth Circuit reasoned that it would be unfair to rights can play a pivotal role in enhancing a credi- deny a creditor the ability to recover its obligations tor’s recovery or reducing its exposure. 1 to the debtor while at the same time requiring the creditor to fully satisfy its debt to the debtor. 6 Similarly, the U.S. Bankruptcy Court for the Setoff Rights Southern District of New York ruled that a defendant Section 553 of the Bankruptcy Code provides was entitled to raise setoff as a defense to an action that, subject to certain limited exceptions, the brought by a trustee for breach of fjduciary duties and Bankruptcy Code recognizes a creditor’s state law fraudulent transfer, notwithstanding that the defendant setoff rights when a debtor files for bankruptcy. 2 did not timely fjle a proof of claim. 7 The court held This includes codifying the requirement that setoff Scott Cargill that the “clear majority and better view … is that fjling is only permitted in mutual pre-petition obligations a proof of claim is not a prerequisite to asserting an between the debtor and creditor held in the same otherwise valid setoff.” 8 Conversely, two bankruptcy right or capacity. 3 court decisions that are generally cited for the proposi- tion that a creditor must fjle a proof of claim asserting Must a Creditor File a Proof of Claim its setoff rights actually involved creditors that did fjle to Preserve Setoff Rights? proofs of claim, but failed to assert their setoff rights. 9 Most courts agree that a creditor is not required to fjle a proof of claim to preserve its setoff rights 4 11 U.S.C. § 542(b) states in relevant part that “an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay during a debtor’s bankruptcy case prior to the such debt to, or on the order of, the trustee, except to the extent that such debt may be approval of a plan. The question of whether a offset under section 553 of this title against a claim against the debtor.” 5 Turner฀v.฀United฀States฀(In฀re฀G.S.฀Omni฀Corp.) , 835 F.2d 1317, 1318 (10th Cir. 1987); creditor has waived its setoff rights by not fjling a see฀also฀Suncrete฀Corp.฀v.฀Glusman฀(In฀re฀Suncrete฀Corp.) , 100 B.R. 102, 103-04 (Bankr. proof of claim can arise (1) when a debtor or trust- M.D. Fla. 1989) (creditor’s failure to file proof of claim, even after passage of claims bar date, did not prohibit creditor from raising setoff as a defense to debtor’s turnover action). ee attempts to collect an obligation owed by the 6 In฀re฀Omni฀Corp. , 835 F.2d at 1318. 7 Geltzer฀v.฀Bloom฀(In฀re฀Silverman฀Laces฀Inc.) , 404 B.R. 345, 365 (Bankr. S.D.N.Y. 2009). creditor to the debtor pursuant to § 542 (b) of the authors฀of฀ Trade 8 Id . at 365 (citing Davidovich฀v.฀Welton฀(In฀re฀Davidovich) , 901 F.2d 1533, 1539 (10th Cir. Bankruptcy Code, 4 and/or (2) when a creditor uses Creditor Remedies 1990); Bernstein฀v.฀IDT฀Corp.฀(In฀re฀Frigitemp฀Corp.) , 76 B.R. 275, 281 (S.D.N.Y. 1987); Neal฀v.฀Golden฀Knights฀Inc. , 1995 Bankr. LEXIS 2163, at **10-16 (Bankr. E.D. Va. Oct. 13, Manual: Trade 1995), aff’d , 1996 U.S. Dist. LEXIS 15442 (E.D. Va. April 10, 1996); In฀re฀Denby฀Stores , Creditors’ Rights 1 The doctrine of “recoupment” is a related but distinct concept from setoff and generally 86 B.R.at 777 n.8; In฀re฀Bousa฀Inc. , 2006 WL 2864964, at **5-6 (Sept. 29, 2006)). requires that offsetting obligations must arise from the same transaction. See฀NVF฀Co.฀v.฀ under the UCC and 9 See฀In฀re฀Britton , 83 B.R. 914 (Bankr. E.D.N.C. 1988); Tavormina฀v.฀ITT฀Commercial฀Fin.฀ New฀Castle฀County , 276 B.R. 340, 353 (D. Del. 2002), aff’d , 61 Fed. Appx. 778 (3d Cir. Corp.฀(In฀re฀Aquasport฀Inc.) , 115 B.R. 720 (Bankr. S.D. Fla. 1990), aff’d฀on฀other฀grounds , the Bankruptcy Code 2003). A body of case law has developed concerning the rights available to creditors with 155 B.R. 245 (S.D. Fla. 1992) (finding that creditor did not waive setoff rights), aff’d฀without฀ recoupment claims, as distinct from setoff rights, which is beyond the scope of this article. opinion , 985 F.2d 579 (11th Cir. 1993); see฀also฀Bank฀of฀Dixie฀v.฀King฀(In฀re฀Honeycutt฀Grain฀ 2 11 U.S.C. § 553(a). Co.฀Inc.) , 41 B.R. 678 (Bankr. W.D. La. 1984) (creditor must file proof of claim asserting 3 See฀Fisher฀v.฀the฀Outlet฀Co.฀(In฀re฀Denby฀Stores฀Inc.) , 86 B.R. 768, 76-77 (Bankr. S.D.N.Y. 1988). setoff rights before claims bar date and must file motion to exercise setoff rights).