Source: https://law.justia.com/cases/federal/appellate-courts/F2/835/1317/296180/
Timestamp: 2020-08-10 23:06:25
Document Index: 505545650

Matched Legal Cases: ['§ 553', '§ 78', '§ 542', '§ 553', '§ 502', '§ 727', '§ 362', '§ 502']

17 Collier Bankr.cas.2d 1429, Bankr. L. Rep. P 72,158in Re G.s. Omni Corporation, Debtor,james H. Turner, Trustee for the Liquidation of G.s. Omnicorporation, Appellee, v. United States of America; Donald T. Regan, Secretary Oftreasury; Roscoe L. Egger, Jr., Commissioner Ofthe I.r.s.; G.l. Mihlbachler, Districtdirector of I.r.s., Appellants, 835 F.2d 1317 (10th Cir. 1987) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Tenth Circuit › 1987 › 17 Collier Bankr.cas.2d 1429, Bankr. L. Rep. P 72,158in Re G.s. Omni Corporation, Debtor,james H. Tu...
17 Collier Bankr.cas.2d 1429, Bankr. L. Rep. P 72,158in Re G.s. Omni Corporation, Debtor,james H. Turner, Trustee for the Liquidation of G.s. Omnicorporation, Appellee, v. United States of America; Donald T. Regan, Secretary Oftreasury; Roscoe L. Egger, Jr., Commissioner Ofthe I.r.s.; G.l. Mihlbachler, Districtdirector of I.r.s., Appellants, 835 F.2d 1317 (10th Cir. 1987)
U.S. Court of Appeals for the Tenth Circuit - 835 F.2d 1317 (10th Cir. 1987) Dec. 30, 1987
The Government, creditor, appeals from an order of the district court affirming a bankruptcy court decision ordering the Government to turn over to James A. Turner, trustee, tax refunds due G.S. Omni Corporation, debtor, because the Internal Revenue Service's (IRS) failure to file a timely proof of claim precluded it from exercising a right of setoff. On appeal, the Government argues that the district court and bankruptcy court erred in holding that the timely filing of a proof of claim is a prerequisite to asserting a right of setoff under 11 U.S.C. § 553. We reverse.
The debtor was a securities broker and dealer from March, 1980, to February, 1982. By the end of February, debtor had ceased doing business, and the Securities Investor Protection Corporation filed in the bankruptcy court for appointment of a trustee for purposes of liquidating the debtor. In March, 1982, the bankruptcy court appointed the trustee and ordered liquidation of the debtor's property pursuant to the Securities Investor Protection Act. See 15 U.S.C. §§ 78aaa-78lll.
Any analysis of the issue starts with the statutory underpinning of the turnover action, 11 U.S.C. § 542(b). In circumscribing the duty of a creditor owing a matured debt to the estate, Sec. 542(b) mandates the debt be paid to the trustee "except to the extent that such debt may be offset under section 553 of this title." It is important to note, however, that the Sec. 542(b) right to exercise the defense of setoff is not limited by time constraints nor tied to the filing of a proof of claim. See In re Central Equip. & Serv. Co., 61 B.R. 986, 988 (Bankr.N.D. Ga. 1986); In re Sutton Invs., Inc., 53 B.R. 226, 230 (Bankr.W.D. La. 1985); In re Whitman, 38 B.R. 395, 398 (Bankr.D.N.D. 1984); In re Ford, 35 B.R. 277, 279 (Bankr.N.D. Ga. 1983); In re Fulghum Constr. Corp., 23 B.R. 147, 152-53 (Bankr.M.D. Tenn. 1982), vacated on other grounds, 706 F.2d 171 (6th Cir. 1983).
Thus, one who turns to Sec. 553 discovers, in general terms, that a creditor's pre-bankruptcy setoff rights are not affected by the Bankruptcy Code, except in certain defined instances. Id. The only one of those instances remotely applicable here is that a creditor cannot set off a claim which has been disallowed. 11 U.S.C. § 553(a) (1).
The circumstances which lead to the disallowance of a claim are set forth in 11 U.S.C. § 502(b). None of these deal with failure to file a proof of claim. Hence, we reason, since setoff can be asserted in the absence of disallowance, and since a claim cannot be disallowed for failure to file, it must be concluded a creditor's failure to file a proof of claim cannot affect the creditor's right to assert the defense.
There must be a fundamental distinction drawn between the provisions of the Code which deal with a proof of claim and its effect on the administration and distribution of the estate, and the debt which gives rise to a claim. While a creditor who wishes to participate in the distribution of an estate is required to file a proof of its claim, and while that participation can be denied by the disallowance of the claim, the underlying debt continues to exist. Indeed, were it not for the continuing existence of the debt (or "claim") there would be no need for a discharge of debts issued pursuant to 11 U.S.C. § 727(b).
Accordingly, we reason that even though a creditor may be prevented from participating in the distribution of the estate, the debt has viability until it is discharged. Naturally, without relief from the automatic stay, the debt cannot be enforced, 11 U.S.C. § 362, but it is still imbued with other attributes. One of those is the right of setoff. 4 Collier on Bankruptcy, 15th Ed. p 553.05 (1986).
Making the right to assert the attribute of setoff dependent upon the filing of the proof of claim is an intrusion into the creditor's rights which is not contemplated in the Bankruptcy Code. It is also an improper application of the provisions of 11 U.S.C. § 502(b).