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. e du/thir dc ir c uit_1998/15Filed January 20, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 97-7109

IN RE: CONTINENTAL AIRLINES,

Debtor

UNITED STATES OF AMERICA,

Appellant

v.

CONTINENTAL AIRLINES

THOMAS E. ROSS,

Trustee

An Appeal from the United States District Court
for the District of Delaware
Civil Action No. 93-cv-00485

Argued December 2, 1997

Before: COWEN, McKEE and ROSENN, Circuit Judges.

(Opinion Filed January 20, 1998)

Robert M. Loeb (Argued)
Room 3617 Main United States Department of Justice Civil Division, Appellate Staff 10th & Pennsylvania Avenue, N.W. Washington, D.C. 20530-0001 Counsel for AppellantGordon B. Conn, Jr. (Argued)

Laura D. Jones Robert S. Brady

Young, Conaway, Stargatt & Taylor
P.O. Box 391 Rodney Square North, 11th Floor Wilmington, DE 19899-0391 Counsel for Appellee

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal presents an issue pertaining to the rig ht of set-off by a pre-bankruptcy creditor after a plan o f reorganization has been approved by the bankruptcy court. Continental Airlines and its affiliates (Continenta l or Debtors) filed petitions for reorganization under C hapter 11 of the Bankruptcy Code. In April, 1990, the Bankrup tcy Court confirmed the Debtors' Joint Plan of Reorgani zation. In addition to ten federal government agencies that had timely filed proofs of claim, the General Services Administration of the United States (GSA or Governm ent) filed an amended proof of claim on May 25, 1993, af ter the confirmation of the plan, and specifically asserted a right of set-off for the first time. The Bankruptcy Court he ld that the Government could not exercise set-off rights wi th respect to $4.8 million due the Debtor and ordered it to pay the sum to the Debtors. The Government appealed to the
United States District Court for the District of De laware which affirmed. The Government then timely appealed to
this court.1 We also affirm.

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1. The bankruptcy court had jurisdiction over this matter pursuant to 28 U.S.C. S 157(b). The district court had jurisdictio n to review the bankruptcy court's decision pursuant to 28 U.S.C.S 158(a). This Court has appellate jurisdiction of the district court's order pursuant to 28

U.S.C. S 1291.

2I.

On December 3, 1990, Continental filed for Chapter 11 reorganization in the United States Bankruptcy Cour t for the District of Delaware. Subsequently, each of ten agencies of the United States Government filed separate proo fs of claim with the bankruptcy court for monies owed to them by Continental, which in aggregate totaled approxim ately $14.5 million. Continental submitted its revisedfin al reorganization plan to the bankruptcy court on Janu ary 13, 1993. Although the court resolved several objection s by the various agencies to Continental's proposed plan, no government agency sought to amend its proofs of cla im to assert any additional claims, including a right to set-off the $4.8 million owed by GSA. Accordingly, the bankrupt cy court entered its order confirming the plan on Apri l 16, 1993 without any objection from the Government.

Under the confirmed plan, the federal agencies were treated as general unsecured creditors, and were en titled to recover approximately 4.8% of their total claims. T he Government did not appeal the confirmation order. Meanwhile, in August 1992, in a suit unrelated to Continental's bankruptcy petition, the United State s District Court for the District of Columbia ordered GSA to return money it had wrongfully withheld from severa l airlines, including approximately $4.8 million with held from Continental.2 The Government sought a stay of the d istrict court's order in the United States Court of Appeals for the Federal Circuit. On April 12, 1993, the Federal Cir cuit issued an order denying the Government's request fo r a stay, but instead permitted it to deposit the dispu ted sum into the registry of the bankruptcy court while the Government attempted to set-off the $4.8 million it owed against the $14.5 million in claims due its agencie s.

Subsequently, on May 28, 1993, the GSA filed a moti on with the bankruptcy court seeking to set-off its cl aim against the funds deposited in the bankruptcy court 's registry. On September 30, 1993, the bankruptcy cou rt

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2. Alaska Airlines, Inc. v. Austin, 801 F. Supp. 76 0 (D. D.C. 1992). The facts of Alaska Airlines, Inc. v. Austin are not re levant to the issues raised on this appeal.

3denied the Government's motion, ruling that the

Government could not exercise its set-off rights wi th respect to the $4.8 million and ordered it to pay t he money to the Debtor. After the Government appealed, the D istrict
Court for the District of Delaware affirmed the ban kruptcy court's ruling.

II.

This Court's review of a district court's dispositi on of a bankruptcy appeal is plenary. The Court of Appeals
exercises "the same review of the district court's decision as that exercised by the district court. The bankruptc y court's findings of fact are reviewable only for clear erro r. Legal determinations are subject to plenary review." In r e Continental Airlines, 125 F.3d 120, 128 (3d Cir. 19 97) (internal citations omitted); accord In re Engel, 1 24 F.3d 567, 571 (3d Cir. 1997).

The Government argues that the $4.8 million it depo sited into the registry of the bankruptcy court and which the Government alleged it was entitled to set-off3 agai nst the $14.5 million owed by Continental were not "propert y of the [bankruptcy] estate." The Government contends t hat the bankruptcy court's confirmation of Continental' s reorganization plan did not extinguish its right of set-off vis-a-vis the $4.8 million held in the court's regi stry.4 The Government principally bases its argument on Citize ns Bank of Maryland v. Strumpf, 116 S. Ct. 286 (1995), which it argues overrules this Court's holding in United States v.

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3. 11 U.S.C. S 553 which governs set-offs does not define the term. The right of set-off, as generally understood, simply m eans that "the debts of two persons who are mutually indebted may be set of f against each other." Brian A. Blum, Bankruptcy and Debtor/Credit or S 22.2, at 348 (1993). "Its central premise is an ancient one well -grounded in practical logic: If A is indebted to B, and B is likewise ind ebted to A, it makes sense simply to apply one debt in satisfaction of t he other rather than require A and B to satisfy their mutual liabilities separately." 5 Collier

on Bankruptcy P 553.01 (Lawrence P. King ed., 15th rev . ed. 1997).

4. For purposes of this discussion it is unnecessar y to determine whether the Government did have a valid right of se t-off; thus, the right
will be assumed.

4Norton, 717 F.2d 767 (3d Cir. 1983), heavily relied on by

the bankruptcy court and the district court.

Norton held that a creditor's withholding of funds subject to a set-off violated the Bankruptcy Code's automat ic stay provision,5 and also adopted the viewpoint that set -off is not permitted after confirmation of a bankruptcy pl an of reorganization. In Norton, under facts similar to t hose presented on this appeal, this court held that the Government could not offset an outstanding tax refu nd against an outstanding tax liability after confirma tion of the debtor's plan. In their plan, as here, the debtors made no provision for set-off. Emphasizing that the Governm ent never objected to the plan, we concluded that it wo uld be
unreasonable for the Government to retain the tax r efund as security for the debtors' obligation. Instead, w e require the Government to pay over the refund and accept treatment under the plan as an unsecured creditor.

The Government primarily contends that this case is closely analogous to and governed by the recent dec ision of the United States Supreme Court in Strumpf and thus is not controlled by Norton. In Strumpf, the Supreme C ourt merely held that a bank's pre-confirmation temporar y withholding of a debt that it owed a depositor who was in bankruptcy, in order to protect its set-off rights, did not violate the automatic stay. The Court explained tha t the bank's "temporary refusal to pay was neither a taki ng of possession of [the depositor/debtor's] property nor an exercising of control over it, but merely a refusal to perform its promise." Id. at 290. Norton, therefore, is onl y overturned to the extent that it held that "state l aw . . . determine[s] when a set-off has occurred." 717 F.2d at 772 (emphasis added). Today, under Strumpf,"the questio n whether a set-off . . . has occurred is [now] a mat ter of federal law;" a bank's temporary withholding of fun ds on

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5. The automatic stay, 11 U.S.C. S 362(a), is "an i njunction that arises by operation of law immediately upon the commencement of the bankruptcy case. . . . Its effect is to impose a wide-ranging prohibition on all activity outside the bankruptcy forum to collect pre-petitio n debts from the debtor or to assert or enforce claims against the d ebtor's pre-petition property or estate property." Blum, Bankruptcy and Debtor/Creditor S 16.1, at 231.

5deposit subject to a set-off does not violate the a utomatic

stay. 116 S. Ct. at 289 (emphasis added). The Government's position, in this case, mischaracteriz es and overemphasizes both the relevance and importance of Strumpf. It reaches this conclusion by incorrectly arguing that pursuant to Strumpf, because the $4.8 million was still held in the registry of the court at the time Conti nental's reorganization plan was confirmed, "the funds plain ly were not `property of the estate' at that time." Thus, t he Government's argument continues, when the court confirmed the plan, the funds did not vest "free an d clear" in Continental as property of the bankruptcy estate

. Building on this premise, the Government concludes that the April 16, 1993 confirmation of Continental's pl an did not extinguish GSA's right to set-off the $4.8 mill ion owed to Continental against its $14.5 million in claims due its agencies.

As Continental points out, however, the Supreme Cou rt in Strumpf expressly refused to address the issue o f the effect of confirmation on set-offs, which is dispos itive to the resolution of this appeal. In a footnote in Strumpf , the Supreme Court unequivocally "decline[d] to address [the] contention . . . that the confirmation of [a bankru ptcy reorganization plan] preclude[s] [the] exercise of [a] set-off right." 116 S. Ct. at 290 n.**. This case, therefor e, is not controlled by Strumpf because the Government here f iled its motion to exercise its alleged set-off in the bankr uptcy
court almost six weeks after confirmation of Contin ental's reorganization plan (and over nine months after the district
court held the Government liable to Continental for the $4.8 million in the Alaska Airlines case).

Finally, the Government's contention that the Norto n court "incorrectly considered the funds held by the creditor to be property of the estate" which led to its"erro neous ruling that confirmation of the plan extinguishes a creditor's set-off rights" is without merit. (citin g 11 U.S.C. SS 1141(b), 1327 and Norton, 717 at 774). The Government's argument makes two critical mistakes a nd
thus misses the cumulative effect of the Norton an d Strumpf holdings. First, although Norton implicitly held th at the funds withheld by the creditor subject to set-off w ere

6"property of the estate," today under Strumpf, the relevant

"property of the estate" is instead the bankrupt de btor's claim to the funds as opposed to the possession of the physical funds themselves.

Second, the relevant funds at issue in this case ar e clearly distinguishable from those in both Norton a nd Strumpf. In both of those cases, the creditor retai ned possession of the funds; here the Government deposi ted the $4.8 million into the registry of the court pending an appeal. As this Court has noted, such deposits are comparable to the res of a trust. The "court acts a s trustee and is charged with the duty of determining the beneficiaries pursuant to the appeal. . . . [T]he [Government] has no beneficial interest (in the dep osit[ ]) [while the court] holds the money as . . . trustee for the rightful owners when and if they are determined by the court." Mid-Jersey Nat'l Bank v. Fidelity-Mortgage Investors, 518 F.2d 640, 643-44 (3d Cir. 1975). Thus, contrary to the Government's assertion, its set-off rights in the f unds did not remain unaffected by confirmation of the plan b ecause the Government no longer retained an interest in th em; under Norton, its set-off right was extinguished by the confirmation of the plan. Although the actual funds themselves may not have passed as property of the e state, upon confirmation of the plan, Continental did acqu ire a claim or interest in them subject only to final res olution of the Government's appeal. Norton continues to have v itality and survives Strumpf.

The Government argues before us, however, that to t he extent that Norton may control and hold that the confirmation of the plan extinguishes all set-off r ights not provided for in the plan, it was wrongly decided. T he Government asserts that the Bankruptcy Code's set-o ff provision in S 553 states in the clearest of terms that the rest of the Bankruptcy Code "does not affect" a cre ditor's right to set-off provided that the obligations betw een creditor and debtor are mutual and that both obliga tions arose prior to the commencement of the reorganizati on proceedings. Relying on 11 U.S.C. S 553(a), the Government, in effect, maintains that a pre-petitio n creditor's right to set-off may be exercised withou t regard to

7the status of the bankruptcy proceedings and the

confirmation of the debtor's reorganization plan. T he Government argues that In re De Laurentiis Entertai nment Group, Inc., 963 F.2d 1269 (9th Cir. 1992), support s its position. In De Laurentiis, the court considered th e tension

between 11 U.S.C. S 553 and 11 U.S.C. S 1141 of the Bankruptcy Code. Section 1141 provides for the disc harge of pre-petition debts after completion of a bankrup tcy proceeding.6 It also provides that any assets retai ned under the administration of reorganization are free and c lear of any pre-petition debts. 11 U.S.C. S 5537 protects t he right of a creditor to offset a mutual debt. After analyz ing the statutory sections and the applicable cases in othe r jurisdictions, the De Laurentiis court concluded th at S 553 must take precedence over S 1141. Although uncertai n, it also believed that the language of S 553 "seems int ended to control notwithstanding any other provisions of the Bankruptcy Code." 963 F.2d at 1276-77. The court, however, predicated its decision upon the particula r facts in

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6. 11 U.S.C. S 1141 provides in pertinent part:

(a) Except as provided in subsections (d)(2) and (d)(3) of this section, the provisions of a confirmed plan bind . . . any creditor . . .

whether or not such creditor . . . has accepted the plan.

. . .

(c) Except as provided in subsections (d)(2) and (d)(3) of this
section and except as otherwise provided in the plan or in the order confirming the plan, after confirmation of a plan, the property

dealt with by the plan is free and clear of all cl aims and interests of
creditors. . . . (d)(1) Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the con firmation of a plan --

(A) discharges the debtor from any debt that arose before the date of such confirmation . . . . (emphasis added ).

7. 11 U.S.C. S 553 provides in pertinent part:

(a) Except as otherwise provided in this sec tion and in sections

362 and 363 of this title, this title does not a ffect any right of a
creditor to offset a mutual debt owing by such credit or to the debtor thatarose before the commencement of the case un der this title against

a claim of such creditor against the debtor that arose before the commencement of the case . . . . (emphasis a dded).

8the case before it, including the creditor's dilige nt pursuit of

its set-off claim before the bankruptcy court "duri ng the entire period the reorganization plan was being con sidered." Id. at 1277. The court noted that the creditor, NBC , had filed a proof of claim and petition for relief from stay.

We believe that the material facts in De Laurentiis distinguish it from the case before us. We recogniz e that a right of set-off is preserved under S 553 in a bank ruptcy proceeding but we believe that the right must be ex ercised by the creditor in timely fashion and appropriately asserted in accordance with other provisions of the Bankrupt cy Code. Unlike the Government in this case, NBC, the creditor in De Laurentiis, timely filed its proof o f claim in the bankruptcy court and claimed its right of set-o ff against
its debt to the Debtor. NBC also filed a motion for relief from the automatic stay prior to confirmation of th e plan.
The Government did neither of these in this case. I n the instant case, the plan of reorganization proceeded on the justifiable assumption that the reorganized debtor faced no set-off claim. On the other hand, in De Laurentiis, the bankruptcy court converted NBC's set-off claim into an adversary proceeding and NBC "pursued its claim dil igently before the bankruptcy court at all times." Id. at 1 271. There was no adversary proceeding here prior to plan confirmation, and the facts in both cases are mater ially
different.

The Government also cites to In re Davidovich, 901 F.2d 1533 (10th Cir. 1990) and two bankruptcy court case s. Davidovich involved an arbitration debt to the debt or from his former law partner, and the debtor, under the f acts of the case, had notice of the set-off claim. The cour t, however, only discussed the right of set-off under S 553 but made no analysis of the provisions of S 1141 of the Bankruptcy Code. As to the bankruptcy court cases, In Re Weigand, 199 B.R. 639, (Bankr. W.D. Mich. 1996) rel ies largely on De Laurentiis only, and the facts of In re Womack, 188 B.R. 259 (Bankr. E.D. Ark. 1995) are distinguishable. Womack, unlike this case, involved a secured debt of the Government, income tax liabilit y, payment of which was provided by the confirmed plan . The

debtors had a refund due from the Government for an

9overpayment on a subsequent tax year. After the

confirmation of the plan, the Government sought to set-off the refund against the debt due it under the plan a nd the bankruptcy court permitted it. The bankruptcy court concluded that the set-off might in fact be of bene fit to the
debtors and to some of the creditors because the re duction of the claim of the United States under the plan wi ll permit acceleration of payment to other creditors. Id. at 262. Because the plan provided for the ultimate payment of the debt due the Government, allowing the set-off merel y accelerated its payment, and there was no need to d iscuss
the conflict between S 553 and S 1141 of the Bankru ptcy
Code.

Thus, we are not persuaded by the cases relied on b y the Government that S 1141 may be disregarded when a se t-off is asserted. Norton did not extinguish non-secured set-off claims, nor do we, provided they are timely asserte d. In the instant case, the Government would have the court t reat a
non-secured claim as a secured claim to the disadva ntage of all other general creditors. The Government here has no statutory secured claims as it did in Womack for in come tax liability. Furthermore, allowing the Government und er the facts of this case to come forward after the plan o f reorganization has been confirmed and sua sponte de cide that it has a valid set-off without timely filing a proof of claim and asserting the set-off in the reorganizati on proceedings, has a probability of disrupting the pl an of reorganization. It may also unnecessarily protract the bankruptcy proceedings and consume judicial resourc es. Furthermore, it is unfair to other creditors and th e debtor, and can conceivably undermine the plan of reorganiz ation and the objectives and structure of the Bankruptcy Code.

Thus, because the Government attempted to exercise its set-off right after confirmation of the plan, the Government's remaining arguments are unpersuasive. Norton still controls in this Circuit and precludes the Government's exercise of any set-off right it may h ave had once Continental's plan was approved. As the Govern ment correctly notes, "a panel of this court is bound to follow the holdings of published opinions of prior panels of t his court unless overruled by the court en banc or the holdin g is

10undermined by a subsequent Supreme Court case."

Nationwide Ins. Co. v. Patterson, 953 F.2d 44, 46 ( 3d Cir. 1991).

III.

To summarize, we reaffirm the ruling in Norton and hold that the right of a creditor to set-off in a bankru ptcy reorganization proceeding must be duly exercised in the bankruptcy court before the plan of reorganization is confirmed; the failure to do so extinguishes the cl aim.

Accordingly, the judgment of the district court uph olding the bankruptcy court's ruling that the Government's set-off rights, if any, were extinguished upon confirmation of Continental's Plan of Reorganization will be affirm ed. Costs taxed against the appellant.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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