Opinion ID: 4777078
Heading Depth: 2
Heading Rank: 2

Heading: The United States was entitled to waive its

Text: right to set off the Tax Refund in order to settle its remaining and superior claim. We now turn to whether the United States was entitled to waive its setoff rights to settle its superior claim. We agree with the Bankruptcy Court’s thorough analysis of this issue. See LTC Holdings, 597 B.R. at 575–78. The text and structure of Section 509, which subordinates a surety’s partially subrogated claim “for the benefit of” the obligee, 11 U.S.C. § 509(c), make clear that the obligee may use its setoff rights to vindicate its own remaining interests.5 Moreover, we agree 5 Our holding is limited to cases where, as here, the surety has not “paid in full” the portion of the obligee’s claim to which it stood as surety. Because we resolve this issue under that “narrow” construction of Section 509(c), we do not address the broader issue of how an obligee may use its setoff rights to vindicate its own remaining interests on other claims against the debtor once a surety has made payment in full on the portion of the obligee’s claim to which it stood as surety. 24 with the Second Circuit’s conclusion in Chateaugay II that an obligee may waive its setoff rights even after a surety has made payments that would confer subrogation rights under Section 509. See 94 F.3d at 776 (concluding that a surety was subrogated to the government’s right to set off a tax refund because the government had not waived the right, but explaining that “if the [government had] waived its right of setoff then [the surety] would have no interest in the refund”). On appeal, as in the Bankruptcy Court proceedings, “ICSP has not cited anything that bars the United States from releasing its setoff rights” under the circumstances here. LTC Holdings, 597 B.R. at 575. Thus, we agree with the Bankruptcy Court’s conclusion that Section 509(c) “places the surety in line behind the obligee, who may exhaust the funds to satisfy his own claim.” Id. Instead of contesting this point, ICSP has primarily argued that the United States’ waiver did not extinguish the rights that ICSP reserved in the Settlement Order. We will now address whether the waiver extinguished ICSP’s ability to be subrogated to the setoff rights.