Opinion ID: 1959683
Heading Depth: 1
Heading Rank: 4

Heading: Effect of Bankruptcy on the Setoff Right

Text: Having determined that, at the time of default, PCU had a contractual right to set off the debtor's mortgage loan deficiency against the funds in the accounts, we turn to the issue of whether the debtor's later bankruptcy affected this right. Section 553(a) of 11 U.S.C., the Bankruptcy Code, preserves, protects, and limits setoff rights in bankruptcy cases, as follows: Except as otherwise provided in this section and in sections 362 and 363 of this title, this title [bankruptcy] 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. (Emphasis added.) Under 11 U.S.C. § 553(a), federal bankruptcy law recognizes and preserves a creditor's setoff right when four conditions exist: (1) the creditor holds a `claim' against the debtor that arose before the commencement of the [bankruptcy] case; (2) the creditor owes a `debt' to the debtor that also arose before the commencement of the case; (3) the claim and debt are `mutual'; and (4) the claim and debt are each valid and enforceable. 5 Lawrence P. King, Collier on Bankruptcy ķ 553.01[1] at 553-7 (15th rev. ed.2000). In this case, we hold that PCU's setoff claim satisfied all the requirements of 11 U.S.C. § 553(a). PCU held a valid and enforceable claim [1] against debtor when debtor failed to make payments and defaulted on his mortgage loan in March 1996 (almost seven months before the filing of debtor's bankruptcy petition). According to the rules and regulations of the accounts, each of the several signatories possessed joint ownership of the accounts and each enjoyed the unilateral authority to withdraw all the funds therein without first obtaining the consent from any other signatory. [2] Thus, because debtor possessed an ownership interest in the accounts, PCU owed him and the Coutures the obligation to repay the amounts on deposit. Finally, because debtor possessed an ownership interest in the accounts and was liable on the defaulted mortgage loan, both obligations [were] held by the same parties, in the same capacity and were therefore mutual when the debtor defaulted in repaying the mortgage loan. In re Selma Apparel Corp., 155 B.R. 241, 243 (Bankr.S.D.Ala. 1992) (holding that even though the code does not define the term mutual, mutuality has been found [when] both obligations are held by the same parties, in the same capacity). Accordingly, a debtor's bankruptcy does not affect any right of a creditor to offset a mutual debt. 11 U.S.C. § 553(a). Hence, PCU was entitled to hold the funds in the accounts during the bankruptcy proceedings and to set off the mortgage-loan deficiency against these funds, notwithstanding the discharge of debtor's underlying mortgage-loan obligation in the bankruptcy.