United States Court of Appeals,

Fifth Circuit.

No. 91–1820.

In the Matter of CORLAND CORPORATION, Debtor.

JAMES L. STEPHENSON, and UNITED BANK, N.A., Appellants Cross–Appellees,

v.

DUKE SALISBURY, Appellee Cross–Appellant.

Aug. 12, 1992.

Appeals from the United States District Court For the Northern District of Texas.

Before GOLDBERG, HIGGINBOTHAM, and DAVIS, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Appellants appeal the dist rict co urt's judgment allowing the bankruptcy trustee to avoid a

postpetition transfer of property of the estate and denying appellant Stephenson a setoff. Because

we conclude that the transfer was a third-party payment on a guaranty and did not involve property

of the estate, we reverse on both issues and remand for further proceedings. The Trust ee

cross-appeals the admission of certain evidence and the denial of leave to amend his complaint; we

find no error and affirm the judgment on both these issues.

I.

In 1980 the First National Bank of Lancaster loaned Clint Murchison, Jr. and Empire Leasing

Co., one of his companies, $375, 000 in return for a promissory note. Empire, in turn, loaned

$275,000 of that $375,000 to a company controlled by appellant James L. Stephenson, Jr., in return

for a note. Both notes were renewed several times. By the time Murchison renewed the note to the

Bank on October 22, 1984, the First National Bank of Lancaster had become appellant United Bank,

N.A. (the Bank), the obligor had changed from Empire to another Mu r chison company, Corland

Corporati on, and the principal amount of the note had been reduced to $250,000. Thus the October

22, 1984 note evidenced a debt of $250,000 owed by Corland to United Bank; we will refer to thisrenewal as the Corland Note. Stephenson personally guaranteed the Corland Note. That same day,

Stephenson gave Corland his own note for $250,000, with the identical i nterest rate and pay m ent

terms through maturity as the Corland Note; we will refer to this renewal as the Stephenson Note.

Stephenson, therefore, was directly liable to Corland on the Stephenson Note and secondarily liable

to the Bank as the guarantor of the Corland No t e. No o ne has adequately explained why the

transaction was structured in this manner.

The parties intended payments to Corland on the Stephenson Note to cover payments Corland

owed the Bank under the Corland Note. This intent can be inferred from the fact that the two notes

have identical p ayment terms, and from the explicit "credit language" of the Stephenson Note to

Corland, which provides that

all payments on this note shall be applied by Corland to its note of li ke am ount and date

payable to United Bank, N.A. James L. Stephenson, Jr. shall have the right to make payment

direct to United Bank, N.A. on that Corland Note and receive c redit on thi s [Stephenson]

[N]ote.

At first, the parties' actions com ported with this intent. On January 22, 1985, Stephenson took a

check for $14,410.41 to TXSO, Inc., a Murchison ent it y, as his periodic payment due under the

Stephenson Note. TXSO, in turn, then issued a check for $14,410.41 and took it to the Bank as a

periodic payment due under the Corland Note.

But this procedure changed in April 1985 when Corland filed for bankruptcy. After thi s

event, Stephenson began making periodic principal and interest payments directly to the Bank. The

Bank then credited those payments against the amount it was owed under the Corland Note. These

periodic payments total ed $94,831.30 between April 1985 and April 1987. Although no evidence

was presented that the Bank made any demand on Stephenson to make the periodic payments, there

is evidence that the Bank demanded that Stephenson make the ballo on payment due under the

Corland Note on April 22, 1987. Stephenso n complied, and on April 22, 1987, paid the Bank1 Stephenson obtained the funds to make the balloon payment through a new loan from the

Bank.

2 The Trustee previously had sought to enjoin Stephenson from making, and the Bank from

accepting, the balloon payment of $220,636.33. The bankruptcy court denied this petition as

moot after the balloon payment was actually made. $220,636.33, thereby extinguishing the Corland Note. 1

Duke Salisbury, estate trustee, by and through D.M. Lynn, plan trustee of Corland (Trustee),

sued Stephenson and the Bank under § 549 of the Bankruptcy Code to avoid Stephenson's payments

to the Bank. 2 The Trustee contends that the payments were made pursuant to the Stephenson Note

and t hus constituted postpetition transfers of property of the estate. Stephenson and the Bank

(together, "the defendants") maintain that the payments were made pursuant to Stephenson's guaranty

on the Corland Note, not as payments on the Stephenson Note. Stephenson also sought to set off

his payments to the bank against the debt he owed to Corland under the Stephenson Note.

After a trial, the bankruptcy court concluded that the Trustee could avoid the payments and

that Stephenson was not entitled to setoff. The court awarded judgment as follows:

1. Against Stephenson and Bank, jointly and severally, for $315,477.63 (the balloon payment plus

the periodic payments);

2. Against the Bank for $54,955.62 in interest;

3. Against Stephenson for $110,122,37 ($425,600 principal and interest due under the Stephenson

Note less the amount payable under # 1 above); and

4. Against Stephenson for $42,560 in attorney's fees (based on 10% of Stephenson Note).

The district court affirmed, primarily on the basis of the bankruptcy court's opinion.

Stephenson and the Bank timely appealed, and the Trustee timely cross-appealed.

II.

We review the bankruptcy and district courts' findings of fact for clear error, but their legal3 This argument was not stated clearly, if at all, in the Trustee's briefs.

conclusions de novo. M

atter of Consolidated Bancshares, Inc., 785 F.2d 1249, 1252 (5th Cir.1986).

A.

We first address whether Stephenson paid the Bank pursuant to his guaranty of the Corland

Note, or purs uant to his obligation to Corland under the Stephenson Note. The bankruptcy and

district courts concluded that the payments were made as constructive payments on the Stephenson

Note. Critically, however, neither court addressed the effect, if any, of the guaranty.

Init ially w e must determine whether a valid guaranty existed. The record contains three

documents dated October 22, 1984: the Corland Note between Corland and United Bank;

Stephenson's guaranty of the Corland Note; and Stephenson's note to Corland. The guaranty is

proper on its face. At trial, counsel for the Trustee read Stephenson's deposition into the record; in

that deposition, Stephenson stated that he guaranteed the October 22, 1984 Corland Note. In

addition, defense counsel offered the guaranty into evidence after Charles Floyd, the Bank's chairman

and chief executive officer, identified the document; the bankruptcy court admitted the document

without objection. And in its April 1988 denial of the defendants' motion for summary judgment, the

bankruptcy court stated that Stephenson guaranteed the October 22, 1984 Co r land Note. At oral

argument to us, 3 counsel for the Trustee suggested that the guaranty may have been backdated; she

also conceded, however, that she had no proof of this fact. We conclude that a valid guaranty existed

on October 22, 1984 whereby Stephenson guaranteed payment on Corland's promissory note to the

Bank.

We now turn t o the question of whether Stephenson's payments to the Bank were made

pursuant to his guaranty of the Corland Note, or whether they were constructive paymen t s on the

Stephenson Note. In its Findings of Fact and Conclusions of Law, the bankruptcy court did not

mention the guaranty at all. The general rule, however, "is that upon default of the maker of a note4 The guaranty provides in part:

Guarantors expressly waive diligence on the part of the said Creditor in the

collection of any and all said indebtedness, protest, notice and all extensions that

may be granted to the Debtor, and said Creditor shall be under no obligation to

notify us, or either of us, of its acceptance hereof, nor of any advances made or

credit extended on the faith hereof, nor of the failure of said Debtor to pay said

indebtedness as it matures. in the payment thereof a guarantor of it becomes liable to the holder and the relationship of debtor

and creditor is at once established between the guarantor and the holder of the note." U nited States

v. Select Meat Co., 275 F.Supp. 38, 45 (W.D.Tex.1967). Corland owed the Bank quarterly payments

on the Corland Note. When Corland filed for bankruptcy in April 1985, it defaulted on its payments

to the Bank. Stephenson then stepped in to make the payments to the Bank. It is of no consequence

that the Bank did not demand payment from Stephenson pursuant to the guaranty. The terms of the

guaranty expressly waived demand on Stephenson. 4 This is consistent wit h Texas law, which

provides that if an instrument is not paid when due, a guarantor must "pay it according to its tenor

without resort by the holder to any other party"; "presentment, notice of dishonor and protest are

not necessary to charge the user." V.T.C.A., Bus. & C. §§ 3.416(a) and (e). The commentary to this

provision explains th at "t he liability of the indorser becomes indistinguishable from that of a

co-maker." I

d. comment. Once Corland defaulted on its note to the Bank, Stephenson, as guarantor,

became liable on the note according to its terms. U niversal Metals & Machinery, Inc. v. Bohart, 539

S.W. 2d 874, 877 (Tex.1976); H opkins v. First Nat'l Bank at Brow nsville, 551 S.W.2d 343, 345

(Tex.1977).

The Trustee offers three reasons why we should deem the payments to the Bank as

constructive payments on the Stephenson Note rather than as payments pursuant to the guaranty of

the Corland Note. The Trustee argues first that the defendants admitted that Stephenson made the

payments as constructive payments on the Stephenson Note. During discovery, the Trustee asked

the defendants to admit the following:5 Fed.R.Civ.P. 36(b) provides, in part, that "[a]ny matter admitted under this rule is

conclusively established unless the court on motion permits withdrawal or amendment of the

admission." Admit or deny that Stephenson, since January of 1985, has made payments on the Stephenson

Note to United Bank, N.A., making the final payment in April of 1987.

Trustee's Request for Admission No. 9. Bot h defendants admitted this statement. The Trustee

contends that this admission conclusively establishes that the payments were constructive payments

on the Stephenson Note. The Trustee even goes so far as to cross-appeal the bankruptcy court's

admission of any evidence that contradicted this admission. 5

We note init ially that the bankruptcy court did not mention Request No. 9 as a basis for

concluding that Stephenson made constructive payments on the note owed to Corland. Further, the

defendants respond, correctly, that only "deliberate, clear and unequivocal" statements can constitute

conclusive judicial admissions. See B ackar v. Western States Producing Co., 547 F.2d 876, 880 n.

4 (5th Cir.1977). The defendants point to their denial of Request No. 11, which asked:

Admit or deny that the payments made by Stephenson to United Bank, N.A., since January

of 1985, reflected as payment s of the Corland Note, were pursuant to the obligation of

Stephenson to Corland under the Stephenson Note.

In their response to Request No. 11, then, the defendants directly denied the proposition for

which the Trustee interprets their response to Request No. 9 as admitting. When combined with the

other evidence adduced at trial concerning the validity of the guaranty, the admission to Request No.

9 is not co nclusive on the question of whether the payments were made pursuant to the guaranty.

It follows that Stephenson's answer to Request No. 9 does not constitute a judicial admission. We

therefore reject the Trustee's argument.

As to the Trustee's contention that the bankruptcy court erred by admitting into evidence all

of defendants' answers to the Trus t ee's Requests for Admission, including Request No. 11, we

conclude that the court did not abuse its discretion in doing so. See C ranberg v. Consumers Unionof U.S., Inc., 756 F.2d 382, 392 (5th Cir.1985) (great latitude is allowed in the conduct of a bench

trial). The Trustee's first cross appeal is therefore without merit.

The Trustee argues next that the defendants have waived any argument concerning the

guaranty by not pleading it. The Trustee filed its First Amended Complaint against both defendants

in April 1987. Neither defendant raised the guaranty in its answer or motion to dismiss in May 1987.

Defendants, however, did raise the issue of the guaranty in their motion for summary judgment in July

1987, to which the Trustee fully responded. The trial in this case did not begin until October 1989,

over two years later. Thus defendants' failure to raise the guaranty in their initial pleadings did not

cause unfair surprise or impair the Trustee's abilit y to respond, and we will not consider defendants

to have waived the argument. L ucas v. United States, 807 F.2d 414, 417–18 (5th Cir.1986); B ull's

Corner Restaurant, Inc. v. Director of the Fed. Emergency Mgt. Agcy., 759 F.2d 5 00, 502 (5th

Cir.1985).

Finally, the Trustee suggests that giving force to the guaranty would render the credit

language of the Stephenson Note redundant. The credit language gave Stephenson the right to make

payments on the Corland Note (Corland's debt to the Bank) directly to the Bank and to recei ve a

corresponding credit by Corland on the debt owed it by Stephenson. The parties hotly dispute the

validity and effect of this credit language. We need not reach this issue, however. It is enough to

note that enforcing the guaranty in no way renders the credit language redundant. Guaranties exist

for the creditor's benefit. The Bank gains an additional obligor by virtue of the guaranty, but gains

nothing from the credit language of the Stephenson Note. It is true that the credit language appears

merely to restate the right of subrogation a guarantor has against the maker of a note when the

guarantor pays pursuant to a guaranty, but that is not the same as saying that the guaranty serves no

further purpose. The Trustee's argument concerning this possible redundancy is best directed at the

validity of the credit language, not at the validity of the guaranty.6 The following hypothetical helps illustrate. Suppose Stephenson pays the Corland estate

$250,000 in full payment (excluding interest) of the Stephenson Note. The Bank, in turn, has a

$250,000 claim against the estate on the Corland Note. If the Trustee ends up paying the estate's

unsecured creditors only 50% on their claims, the Bank will receive only $125,000 from the

estate. The Bank then sues Stephenson on the guaranty to collect the other $125,000. The

result: Stephenson has paid a total of $375,000. In short, Stephenson faced two debts that were due and owing simultaneously: his obligation

to Corland under the Stephenson Note, and his obligation to the Bank pursuant to his guaranty of the

Corland Note. No one has suggested a reason why Stephenson did not have the option of choosing

which debt to pay. Stephenson says that he paid pursuant to the guaranty. This is cert ainly a

plausible assertion. After all, he had a direct obligation to the Bank on the guaranty. Moreover, it

would have been irrational for Stephenson to have chosen to pay the Stephenson Note instead of the

guaranty because he would have exposed himself t o the potential of additional liability. 6 In other

words, Stephenson had nothing to gain, but possibly something to lose, by paying the Stephenson

Note rather t han his guaranty of the Corland Note. Under the circumstances we see no reason to

reject Stephenson's contention that he paid the Bank under the guaranty.

We co nclude, therefore, that the bankruptcy and district courts erred in characterizing

Stephenson's payments to the Bank as constructive paymen ts on the Stephenson Note owed to

Corland; rather, the payments were pursuant to Stephenson's guaranty of the Corland Note owed

to the Bank. We also find that the Trustee's first cross appeal concerning the admission of certain

evidence to be without merit. Our disposition of these issues renders unnecessary any analysis of

Stephenson's alternative suggestion that the payments fall within the "earmarking" doctrine of Coral

Petroleum v. Banque Paribas–London, 797 F.2d 1351 (5th Cir.1986), or the Bank's suggestion that

the bankruptcy court erred by admitting and relying on irrelevant "bad-guy" evidence.

B.

Next, we address the consequences that follow from our conclusion that the payments to the

Bank were pursuant to Stephenson's guaranty of the Corland Note. The first consequence is that theTrustee may not use § 549 to avoid the transfers.

Section 549 of the Bankruptcy Code permits a trustee to avoid any postpetition transfer of

"property of the estate." 11 U.S.C. § 549(a)(1). It is undisputed that Stephenso n made direct

payments to the Bank only after Corland filed for bankruptcy. Thus the Trustee may avo id t ho se

transfers as long as the funds constitute property of the Corland estate. Payments on a guaranty,

however, are not "property of the estate" because the funds come from the guarantor, not the debtor.

Lawrence P. King, 4 Collier on Bankruptcy ¶ 547.03[2] at 547–25 (Matthew Bender, 15th ed. 1992)

( Collier ) (analyzing similar requirement under § 547); I n re Flooring Concepts, Inc., 37 B.R. 957,

961, 963 (Bankr. 9th Cir.1984) ("Payments made by a contract debtor of a bankrupt to a creditor of

the bankrupt do not become part of the bankruptcy estate where there is an independent obligation

on the part of the debtor to pay the creditor."); Brow n v. First Nat'l Bank of Little Rock, 748 F.2d

490, 491 (8th Cir.1984); I n re Page, 18 B.R. 713, 715, 716 (D.D.C.1982); I n re Steelvest, Inc., 112

B.R. 852, 855 (Bankr.W.D.Ky.1990).

The Trustee spends considerable time arguing that Stephenson did not mak e the payments

pursuant to the guaranty and the consequences that follow from that conclusion, but never argues in

the alternative the consequences that follow from a conc lusio n t hat the payments were, in fact,

pursuant to the guaranty. To hold, as the Trustee suggests, that payments by guarantors are

avoidable woul d be to render guaranties worthless in bankruptcies. Lenders obtain guaranties for

protecti on against just this type of scenario. We therefore reverse the district court's judgment

permitting the Trustee to recover under §§ 549 and 550(a) from either Stephenson or the Bank the

amounts that Stephenson paid to the Bank. We also reverse the judgment against the Bank for

$54,955.62 in interest. We turn next to the Trustee's direct claim against Stephenson for payment

of the Stephenson Note.

C.7 Section 553(a), entitled "Setoff," provides:

(a) ... 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 except to the extent that—

....

(2) such claim was transferred, by an entity other than the debtor, to such

creditor—

(A) after the commencement of the case; or

(B)(i) after 90 days before the date of the filing of the petition; and

(ii) while the debtor was insolvent; or

(3) the debt owed to the debtor by such creditor was incurred by such

creditor—

(A) after 90 days before the date of the filing of the petition;

(B) while the debtor was insolvent; and

(C) for the purpose of obtaining a right of setoff against the debtor.

11 U.S.C. § 553(a). Stephenson contends that the bankruptcy and district courts erred by not allowing him to set

off the payments he made to the Bank against the debt he owed directly to Corland.

Section 553(a) permits creditors to set o ff mutual, prepetition claims and debts with the

de bt o r if such setoff would be recognized under nonbankruptcy law. 7 Initially we consider the

bankruptcy court's conclusion that Stephenson is precluded fro m asserting a right of setoff by the

automatic stay of § 362. We agree that setoff is explicitly encompassed by the automatic stay. See

11 U.S.C. § 362(a)(7). The automatic stay, however, "does not defeat the right of setoff; rather,

setoff is merely stayed pending an " o rderly examination of the debtor's and creditor's rights.' " 4

Collier ¶ 553.05[2] at 553–35 (citation omitted).

Stephenson concedes that he never petitioned for relief from the automatic stay to assert his8 Section 542(b) provides:

(b) ... 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 such debt to, or on the order of,

the trustee, except to the extent that such debt may be offset under section 553 of

this title against a claim against the debtor.

11 U.S.C. § 542(b) (emphasis added). right to setoff. This omission, however, is not fatal. The Trustee has sued Stephenson in a turnover

proceeding under § 542(b) to collect on the Stephenson Note. Section 542(b) expressly excepts

funds that can be setoff pursuant to § 553. 11 U.S.C. § 542(b) 8 ; B raniff Airways, Inc. v. Exxon Co.,

U.S.A., 814 F.2d 1030, 1037 (5th Cir.1987). Thus the "right to setoff also may be interposed initially

as a defense in a turnover proceeding" under § 542(b). 4 C ollier ¶ 553.05[2] at 535–37. Although

Stephenson did not plead setoff in his original answer or in his motion for summary judgment, he did

file, at the bankruptcy court's invitation, a br ief supporting setoff as early as November 1987, to

which the Trustee responded. Further, the joint pre-trial order lists setoff in the summary of claims

and defenses. We conclude that Stephenson properly asserted setoff in response to the Trustee's

demand on the Stephenson Note, w it hout violat ing the automatic stay . We therefore turn to the

merits of the setoff question.

It is clear that, in Texas, a guarantor who has paid a maker's creditor pursuant to a guaranty

may offset those payments against a debt the guarantor o therwise owes to the m aker. H ighlands

Cable Television, Inc. v. Wong, 547 S.W.2d 324, 327 (Tex.Civ.App.—Austin 1977, writ ref'd n.r.e.)

(citing Fox v. Kroeger, 119 Tex. 511, 35 S. W.2d 679 (1931)) (guarantor who pay s on guaranty

obtains direct claim against maker); C PS Int'l, Inc. v. Harris & Westmoreland, 784 S.W.2d 538, 544

(Tex.App.—Texarkana 1990) ("object of a setoff is to adjust the indebtedness between the parties

and allow recovery of only the balance that is due"). The question here, then, is whether Stephenson

satisfies the requirements for a setoff under § 553.

The only requirements for setoff are that the debts and claims be mutual and prepetition; the9 Section 509(a) provides:

(a) ... an entity that is liable with the debtor on, or that has secured, a claim of a

creditor against the debtor, and that pays such claim, is subrogated to the rights of

such creditor to the extent of such payment.

11 U.S.C. § 509(a). "debts and claims do not have to be of the same character before setoff may be applied." B raniff, 814

F.2d at 1035. We address mutuality first. Stephenson owes a debt to the debtor (Corland) under the

Stephenson Note. The debtor (Corland), in turn, owed the Bank a debt under the Corland Note.

Stephenson paid the debtor's debt to the Bank pursuant to his guaranty of the Corland Note. Section

509(a) provides that guarantors become subrogated to the rights of the credi t ors they pay to the

extent of their payments. 9 "Where an entity acting as a surety or guarantor for the debtor has a claim

a gainst t he debtor for reimbursement, based on such entity's payment to another creditor of the

debtor, the claim may be set off against a debt owed by such entity to the debtor. Mutuality is evident

because the surety's claim for reimbursem ent and the debtor's debt are owing between the same

parties." 4 C

ollier ¶ 553.04[5] at 553–32 (footnotes omitted). Thus mutuality of parties exists here.

Next we must determine whether both mut ual debts owing between Stephenson and the

debtor arose prepetition. It is undisputed that Stephenson's debt to Corland under the Stephenson

Note arose prepetition. The question, then, is whether Corland's debt to Stephenson "arose before

the commencement of the case." 11 U.S.C. § 553(a). Stephenson paid the Bank directly only after

Corland declared bankruptcy. The bankruptcy court concluded that Stephenson's payments to the

Bank constituted postpetition transfers under §§ 549 and 553(a)(2). The bankruptcy court's

conclusion stemmed from its belief that Stephenson made constructive payments on the Stephenson

Note. Our conclusion that Stephenson paid the Bank pursuant to his guaranty of the Corland Note

changes the analysis. We must consider the impact of subrogation. The Bank would have had a

prepetition claim against the estate under the Corland Note. Stephenson, as guarantor, paid the Bank

the amount owed and is now subrogated to the Bank's claim. Thus Stephenson is subrogated to the

Bank's prepetition claim, and stands in the shoes of a prepetition creditor. See M atter of United10 See note 7.

Sciences of America, Inc., 893 F.2d 720, 724 (5th Cir.1990); In re Flanagan Bros., Inc., 47 B.R.

299, 303 (Bankr.D.N.J.1985). Neither court below nor the Trustee has cited any authority for the

proposition that postpetition payments on a guaranty are ineligible for setoff. Indeed, where, as here,

a guarantor pays a debtor's creditor in full, § 509(a)'s right of subrogation has meaning o nly if the

payment is made postpetition; otherwise, there would be nothing to subrogate because a p re petition

payoff to the creditor would leave the creditor with no cl aim against the estate. See 3 C ollier ¶

509.02 at 509–6–7. We are satisfied that Stephenson's claim against Corland "arose" prepetition for

purposes of setoff under § 553.

Nor i s t he Trust ee correct when he suggests that the Bank "transferred" its claim to

Stephenson postpetition in violation of § 553(a)(2)(A). 10 The Bankruptcy Code defines "debt" as a

"liabilit y on a claim." 11 U.S.C. § 101(12) (1992). A "claim," in turn, is defined as a "right to

payment, whether o r not such right is reduced to judgment, liquidated, unliquidated, fixed,

contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11

U.S.C. § 101 (5)(A). When Stephenson signed the guaranty on the Corland Note, he immediately

incurred a contingent liabilit y to the Bank and gained a contingent claim against Corland in the event

he p aid o n the guaranty. His claim was simply unmatured at the time of the petition. U nited

Sciences

, 893 F.2d at 724; B raniff, 814 F.2d at 1036. Thus there was no postpetition "transfer"

within the meaning of § 553(a)(2). U nited Sciences, 893 F.2d at 724, 725; F lanagan Bros., 47 B.R.

at 303.

The bankruptcy court provided one additional reason for denying setoff, although the Trustee

does not seek to defend the lower courts' decision on this basis. The bankruptcy court denied setoff

in part because it found t hat Stephenson acquired the Bank's claim "for the purpose of setoff" in

violation of § 553(a)(2). We note init ially t hat motive is not explicitly mentioned in § 553(a)(2),

although it is mentioned in § 553(a)(3)(C). Even under § 553(a)(3), however, illicit motive, alone,11 Section 548 provides:

(a) The Trustee may avoid any transfer of an interest of the debtor in property, or

any obligation incurred by the debtor, that was made or incurred on or within one

year before the date of the filing of the petition, if the debtor voluntarily or

involuntarily— is not enough. To come within § 553(a)(3)'s proscription, the debt owed to the debtor (Corland) by

such cre dit o r (Stephenson) must have been incurred within the 90 days preceding bankruptcy.

Stephenson's debt to Corland, the Stephenson Note, was incurred more than 90 days before Corland's

b ankruptcy. Thus Stephenson's motive is not a sufficient basis for being denied set o ff under §

553(a)(2) or under § 553(a)(3).

It follows that the district court erred in completely prohibiting Stephenson from offsetting

his payments to the Bank against t he amo unt he owes Corland under the terms of the Stephenson

Note. A remand is necessary, however, to determine the extent of setoff permitted. It is undisputed

that Stephenson made the periodic principal and interest payments to the Bank for two years before

making the balloon payment of $220,636.33 in April 1987 . Neither party has briefed to us the

question of whether, assuming setoff is available, Stephenson is entitled to setoff his principal and

interest payments, or whether he is limit ed to his principal payments alone. We express no view on

this issue.

We therefore vacate the district court's denial of setoff and its award of attorney's fees to the

Trustee, and remand the case for a determination of the extent of setoff permitted by the Code. Our

decision renders moot Stephenson's challenge to the amount of attorney's fees awarded.

III.

We t urn finally to the Trustee's second cross appeal. The Trustee contends that the

bankruptcy court erred in refusing him leave to re-amend the complaint to include an allegation of

fraudulent transfer under § 548 of the Code. 11 We disagree.(1) made such transfer or incurred such obligation with actual intent to

hinder, delay, or defraud any entity to which the debtor was or became, on

or after the date that such transfer was made or such obligation was

incurred, indebted; ...

11 U.S.C. § 548(a)(1). We review a trial court's order denying leave to amend for an abuse of discretion. D ussouy

v. Gulf Coast Investment Corp., 660 F.2d 594, 597 (5t h Cir.1981). This discretion is particularly

broad where, as here, the court already allowed the plaintiff to amend his complaint once. Fidelity

Fin. Corp. v. Federal Home Loan Bank of San Francisco, 792 F.2d 1432, 1438 (9th Cir.1986). The

Trustee concedes that he made known his theory of fraudulent transfer in November 1987 when

responding to defendants' motion for summary judgment. Yet the Trustee did not request leave to

amend his complaint to add a claim of fraudulent transfer until September 1989, just six weeks before

trial. Under these circumstances, denying the request for leave to amend was not an abuse of

discretion.

IV.

For the foregoing reasons, we REVERSE the district court's judgment granting the Trustee

the right to avo id St ephenso n's postpetition payments to the Bank and; VACATE its award of

attorney's fees and interest to the Trustee, and its denial of Stephenson's right to setoff; and

REMAND for a determination on the extent of setoff permitted. We also AFFIRM the district court

on both issues raised by the Trustee in its two cross appeals.

AFFIRMED in part, REVERSED and VACATED in part, and REMANDED.