Opinion ID: 1959683
Heading Depth: 1
Heading Rank: 5

Heading: Preservation of Setoff Right From Discharge

Text: We also hold that, under 11 U.S.C. § 553 of the code, PCU was not required to file a proof of claim to protect its setoff right from discharge in bankruptcy. Neither § 553 nor any other provision of the code requires a creditor to file a proof of claim to protect its setoff right. On the contrary, 11 U.S.C. § 553(a) expressly provides that nothing in the code affects a creditor's right to exercise its setoff rights, except for §§ 362, 363 and § 553 itself (which make no mention of the need for filing any proofs of claim). Although 11 U.S.C. § 501(a) states that a creditor  may file a proof of claim, (emphasis added), its history confirms that this is not a mandatory provision: This subsection [§ 501(a)] is permissive only, and does not require filing of a proof of claim by any creditor. It permits filing where some purpose would be served, such as where a claim that appears on a list    was incorrectly stated or listed as disputed, contingent, or unliquidated, [or] where a creditor with a lien is undersecured and asserts a claim for the balance of the debt owed him.    In other instances, such as in no-asset liquidation cases,    filing of a proof of claim may simply not be necessary. S. Rep. No. 95-989, at 61 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5847. (Emphasis added.) Here, PCU would have been required to file a proof of claim only if it had wanted to share (to the extent of its deficiency claim) in any general unsecured assets remaining in the debtor's bankruptcy estate. But this Chapter 7 bankruptcy was a no-asset liquidation case[] in which no assets remained in the debtor's estate for distribution to unsecured creditors. Thus, filing a proof of claim [would] simply not [have been] necessary for a creditor like PCU because there would be no assets remaining in the debtor's estate from which a distribution could be made. Even assuming that debtor's bankruptcy had not been a no-asset liquidation case[], PCU's failure to file a proof of claim would have resulted only in the loss of its claim to a pro rata share of any assets remaining in the estate to which it was entitled as a general unsecured creditor â but not in the loss of its secured claim or setoff right. And even though PCU's contractual setoff right is not quite the same thing as a mortgage or a security interest.    [T]here is little to distinguish between a creditor's status [in a bankruptcy proceeding] arising from a right of setoff and its status arising from some other type of security entitlement. 4 Lawrence P. King, Collier on Bankruptcy, ķ 506.03[1][b] at 506-17 (15th rev. ed. 2000) (quoting In re Elcona Homes Corp., 863 F.2d 483, 485 (7th Cir.1988) (The only sense we can make of the rule is that it recognizes that the creditor who owes his debtor money is like a secured creditor; indeed, the mutual debts, to the extent equal, secure each party against the other's default.)). Indeed, a right of setoff has been described as a security of the most perfect kind. In re Yale Express System, Inc., 362 F.2d 111, 114 (2d Cir.1966). As a result, courts have held that 11 U.S.C. § 553 takes precedence over § 524(a)(2) (the discharge provision) in a Chapter 7 case so that a right of setoff    survives a discharge just as much as a claim secured by a mortgage or any other lien. In re Thompson, 182 B.R. 140, 154 (Bankr. E.D. Va.1995); see also In re Buckenmaier, 127 B.R. 233, 237 (B.A.P. 9th Cir.1991) (holding that 11 U.S.C. § 553 takes precedence over § 524(a)(2) in Chapter 7 case); Posey v. United States Department of the Treasury, 156 B.R. 910, 915 (W.D.N.Y. 1993) (same); In re Runnels, 134 B.R. 562, 565 (Bankr.E.D.Tex.1991) (same). The Tenth Circuit Federal Court of Appeals has followed this reasoning and held that filing of a proof of claim is not a prerequisite to asserting a right to setoff under 11 U.S.C. § 553 and that a discharged debt may be setoff upon compliance with the terms and conditions stated in section 553 â regardless of whether a proof of claim has been filed or not. In re Davidovich, 901 F.2d 1533, 1539 (10th Cir. 1990). Observing that it would also `be unfair to deny a creditor the right to recover an established obligation while requiring the creditor to fully satisfy a debt to a debtor,' id., the Tenth Circuit held that a creditor's right to setoff was a universally recognized right grounded in principles of fairness that was not, with a few limited exceptions, affected by the Bankruptcy Code. Id. Finally, we agree with the Wiegand court that by allowing PCU to exercise its setoff right [t]he primary purpose of discharge in bankruptcy is not disserved. In re Wiegand, 199 B.R. at 642. [T]he primary purpose of discharge is to prohibit post-bankruptcy debt collection. Id. As was the situation in Wiegand, the creditor in this case (PCU) is not seeking to collect a debt from debtor but rather merely offset[ting] its obligation to [debtor] with that of [debtor's] to [PCU]. Id.