*

Judge Levin H. Campbell, Senior U.S. Circuit Judge for the

First Circuit, sitting by designation. 

United States Court of Appeals,

Eleventh Circuit.

No. 94-3073.

In re RUSH-HAMPTON INDUSTRIES, INC., Debtor.

UNITED STATES of America, Plaintiff-Appellant,

v.

Andrea A. RUFF, Trustee, Defendant-Appellee.

Oct. 28, 1996.

Appeal from the United States District Court for the Middle

District of Florida. (No. 94-223-CIV-ORL-19), George C. Young,

Judge.

Before TJOFLAT, Circuit Judge, and RONEY and CAMPBELL*

, Senior

Circuit Judges.

RONEY, Senior Circuit Judge:

The sole question on this appeal is the correctness of the

bankruptcy court's denial of the United States' right to setoff

against an overpayment of 1979 taxes, post-petition interest on an

underpayment of 1978 taxes. The district court's affirmance of

that decision is before us for review. We vacate and remand for

further consideration.

The parties are well aware of the details of this case, which

need not be recited here. Although originally filed as a Chapter

11 bankruptcy reorganization, this case was converted to a Chapter

7 liquidation proceeding in February 6, 1986. Thereafter, on May

27, 1986, the IRS filed a claim for unpaid 1978 taxes plus interest

to the petition date. Later the trustee filed an amended tax

return for 1979. In February 1990, the IRS determined that the
debtor had made overpayment for its 1979 income taxes.

The IRS made a setoff of the 1978 taxes and prepetition

interest without seeking a waiver of the automatic stay provisions

of the Bankruptcy Act. After objection by the trustee, the

Government moved for the court to lift the stay. The trustee did

not oppose the motion. The court did lift the stay with the caveat

that the action did not affect the trustee's right to oppose the

proposed setoff "on its merits."

Although the United States had violated the automatic stay

provisions of Section 362 of the Bankruptcy Code, the court

nevertheless held that it "would not penalize the IRS for its

improper setoff" and allowed the 1978 underpayment plus prepetition

interest as a setoff against the refund of the 1979 overpayment.

It then held, however, that it "would not reward the IRS for

offsetting prior to receiving relief from the automatic stay by

allowing it to setoff post-petition interest." 159 B.R. 343, 347

(Bankr.M.D.Fla.1993). The district court affirmed, adopting the

findings of fact and conclusions of law of the bankruptcy court.

We affirm the district court's judgment to affirm the decisions and

rationale of the bankruptcy court in all respects except in the

denial of the setoff of post-petition interest. After oral

argument, briefs, and supplemental briefs, we fail to see how the

allowance of post-petition interest would "reward" the IRS for the

offset prior to the bankruptcy court's granting of relief from the

automatic stay as the IRS would have been entitled to post-petition

interest had it taken timely action to lift the stay. We,

therefore, vacate and remand for reconsideration of the denial of
relief in this regard.

 The trustee has failed to convince us that the IRS is not

entitled to a setoff of post-petition interest "on the merits,"

that to allow that setoff now would reward IRS for effecting the

setoff before asking the court to lift the automatic stay, or that

the estate was somehow harmed by the violation of the automatic

stay provisions.

 By statute, the Government earns interest on delinquent taxes

until they are paid. I.R.C. § 6601(a). By statute, the Government

must pay interest on refunds due a taxpayer until paid. I.R.C. §

6611(a). Generally, there is a one percent difference between the

interest rate on underpayments and the interest rate on

overpayments. I.R.C. § 6621(a). By statute, the United States is

entitled to credit against the refund the amount the taxpayer owes

for past taxes, 26 I.R.C. § 6402(a), which stops the running of

interest on both amounts. I.R.C. § 6611. Generally, were it not

for the filing of the bankruptcy proceeding by the debtor, the IRS

would clearly be entitled to setoff against the refund the amount

owed for 1978 taxes plus interest to the date of the setoff.

The Bankruptcy Code explicitly preserves such a right of

setoff, assuming the proper facts, which must be conceded in this

case.

Except as otherwise provided in this section and in sections

362 and 363 of this title, this title does not affect any

right of a creditor to offset a mutual debt owing by such

creditor to the debtor that arose before the commencement of

the case under this title against a claim of such creditor

against the debtor that arose before the commencement of the

case....

11 U.S.C. § 553(a). The post-petition interest would be due the
IRS because it is for a period of time prior to the setoff.

 Once the bankruptcy proceeding is filed, however, the

bankruptcy court has some discretion in connection with the setoff

in order to give full effect to the Bankruptcy Act and maintain

orderly administration of the bankrupt estate. The right to setoff

is automatically stayed until the matter is presented to the court

for a determination of the validity of the setoff and the need for

a stay in order to efficiently manage the bankruptcy proceedings.

11 U.S.C. § 362(a). Here the IRS should have obtained a lifting of

the stay before setoff rather than waiting until later, in which

case it would clearly have been entitled to post-petition interest.

Section 362 provides a damages remedy if a creditor makes a

setoff without first asking the court to lift the automatic stay.

(h) An individual injured by any willful violation of a

stay provided by this section shall recover actual damages,

including costs and attorneys' fees, and, in appropriate

circumstances, may recover punitive damages.

Nowhere does this statute give the Bankruptcy Court the authority

to deny all or part of a setoff in lieu of damages simply because

the creditor initially violated the automatic stay. The trustee

did not seek damages here.

There is some question as to the validity of denying the

setoff of post-petition interest as punitive damages against the

Government, see Small Business Admin. v. Rinehart, 887 F.2d 165

(8th Cir.1989); Hoffman v. Connecticut Dep't of Income

Maintenance, 492 U.S. 96, 109 S.Ct. 2818, 106 L.Ed.2d 76 (1989),

even if it could be concluded these are "appropriate circumstances"

for such relief. We need not explore that problem here, however,

because the bankruptcy court explicitly decided, and properly so,
we think, that it "would not penalize the IRS for its improper

setoff."

 Although the automatic stay applies to all bankruptcy

proceedings, a major purpose is to protect the cash flow of

businesses or persons who are trying to survive under the

reorganization provisions of the statute.

The automatic stay is fundamental to the reorganization

process, and its scope is intended to be broad. See H.R.Rep.

No. 595, 95th Cong., 1st Sess. 340 (1977), reprinted in 1978

U.S.Code Cong. & Admin.News 5787, 5963, 6296-97; United

States v. Norton, 717 F.2d 767, 770-71 (3d Cir.1983).

A primary purpose of the automatic stay provision is to

afford debtors in Chapter 11 reorganizations an opportunity to

continue their businesses with their available assets.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 183 (1977), reprinted

in 1978 U.S.Code Cong. & Admin.News at 6144; In re Archer, 34

B.R. 28, 29-30 (Bankr.N.D.Tex.1983).

Small Business Admin. v. Rinehart, 887 F.2d 165, 166 (8th Cir.1989)

(Chapter 11 bankruptcy proceeding). In re Patterson, 967 F.2d 505

(11th Cir.1992) (Chapter 13 bankruptcy proceeding.)

For the most part, it is in the context of these

reorganization cases that the parties find the language which gives

the bankruptcy court discretion to continue the stay of the right

of setoff, even when the validity of that right has been

established. E.g., In re Albany Partners, Ltd., 749 F.2d 670, 675

(11th Cir.1984) (Chapter 11 bankruptcy proceeding); In re De

Laurentiis Entertainment Group, Inc., 963 F.2d 1269, 1276-77 (9th

Cir.), cert. denied, 506 U.S. 918, 113 S.Ct. 330, 121 L.Ed.2d 249

(1992) (same); In re Glasply Marine Indus., 971 F.2d 391, 394 (9th

Cir.1992) (same); In re Southern Indus. Banking Corp., 809 F.2d

329 (6th Cir.1987) (same); United States v. Norton, 717 F.2d 767,

770-71 (3d Cir.1983) (Chapter 13 bankruptcy proceeding); In re
Carney & Sons Trucking Services, Inc., 142 B.R. 497

(Bankr.M.D.Fla.1992) (Chapter 11 bankruptcy proceeding); In re

Medicar Ambulance Co., 166 B.R. 918 (Bankr.N.D.Cal.1994) (same);

In re Express Freight Lines, Inc., 130 B.R. 288, 290

(Bankr.E.D.Wis.1991) (Chapter 11 proceeding prior to filing of

adversary proceeding, converted to Chapter 7); In re Cross Keys

Motors, Inc., 19 B.R. 976, 977 (Bankr.M.D.Pa.1982) (Chapter 11

bankruptcy proceeding).

In other cases, courts have exercised discretion to continue

the stay after a finding that the party seeking relief acted

tortiously or in bad faith. E.g., In re Windsor Communications

Group, Inc., 79 B.R. 210 (E.D.Pa.1987) (One who converts the

property of another not entitled in equity to right of setoff); In

re Cascade Roads, 34 F.3d 756 (9th Cir.1994) (Chapter 7 proceeding

where court denied setoff to Government after finding it acted in

bad faith during litigation and willfully violated automatic stay

involving claimed setoff against a judgment for breach of contract

against the Forest Service). These cases are distinguishable on

two fronts: no finding of tortious or bad faith misconduct has

been made in this case, and these cases did not involve the

underpayment/overpayment provisions of the tax code.

This is a liquidation, not a reorganization in which cash flow

may be critical to success. Although filed as a Chapter 11

proceeding, it had been voluntarily converted to a Chapter 7

liquidation prior to the events that pose this case.

No compelling authority has been cited to us to support a

holding that the bankruptcy court could impose a permanent stay of
setoff, i.e., deny the right of setoff, under the circumstances of

this case, without going beyond the discretion it is permitted in

such matters.

The trustee does not cross-appeal the decision that the stay

should be lifted and that some setoff was appropriate, nor does she

effectively assert that some damage was caused to the estate by

effecting a setoff before moving to lift the automatic stay. The

major thrust of the trustee's argument seems to be that the court's

result was a correct response to the apparently haphazard and

inexcusable way in which the IRS has handled the matter. These

arguments, while impressive, fail to address the central question:

did the otherwise harmless violation of the automatic stay suffice

to deprive the IRS of the post-petition interest setoff to which by

law undoubtedly it would have been entitled had it first sought a

lifting of the stay from the bankruptcy court. We think the answer

on these narrow facts is "No."

 We emphasize that nothing herein is meant to detract from the

bankruptcy court's well-established power under § 362(h), and also

under other provisions like § 105(a) and its so-called inherent

power, to impose proper sanctions, including damages, costs and

attorney's fees, for violations of the automatic stay. See, e.g.,

In re Pace, 159 B.R. 890 (Bankr.9th Cir.1993). The question here

is simply the appropriateness, in these particular circumstances,

of denying post-petition interest, whether as a sanction or for

whatever other reason.

In the course of this appeal, we called for supplemental

briefs as to certain questions concerning the time value of money
and the fact that both the underpayment and refund amounts were

drawing interest. We suggested that counsel were free to address

any other issues that might help the court in considering such

matters. Both briefs suggest some uncertainty in the record and in

the stipulations below. Government's supplemental brief: "[i]t

has also come to our attention that counsel for the parties may

have inaccurately stipulated to certain matters." In the trustee's

motion for extension of time to file her brief, she indicated that

she requested counsel for the Government to stipulate to certain

additional facts. In her brief, the trustee said that she "would

urge this Court to request a determination of how the government

arrived at the sums refunded to the Trustee and the amounts

retained for interest on the 1978 liability."

In view of the confusion this demonstrates as to the accuracy

of the amounts here involved, rather than simply reverse the

decision of the district court to disallow the setoff, we remand it

for further consideration. We leave to the bankruptcy court the

decision whether an accurate judgment can be entered on this

record, or whether the concerns of both counsel require a

redetermination of the amounts involved.

VACATED and REMANDED.