Court Opinion

ID: 9689995
Source: CourtListenerOpinion
Date Created: 2023-08-24 18:51:24.761234+00
Date Added: 2024-06-11T18:18:53.175619
License: Public Domain

HUGHES, Bankruptcy Judge,
concurring:
I concur. I write separately merely to express by way of dicta my view of how 11 U.S.C. § 553, providing for offset of mutual debts, may affect the judgment to be entered by the trial court on remand.
The question raised by the two actions below and by this appeal is whether a debt- or in possession (or a trustee in bankruptcy) may take judgment on Spartan Plastics’ promissory note as well as recover the personal property sold by Verco Industries to Spartan Plastics. I agree that it can. I suggest, however, that the judgment may be subject to offset in a post-judgment proceeding.
Although we do not know the basis for the trial judge’s ruling, it would be supportable in my opinion if he had (1) determined the amount of Spartan’s claim against the estate and (2) permitted setoff pursuant to 11 U.S.C. § 553. While setoff is largely a question of law susceptible to resolution by us, the amount of Spartan’s claim is a question of fact, which can be determined only in the trial court. Furthermore, allowance of that claim is barred until the property subject to the avoided transfer has been recovered by the estate. 11 U.S.C. § 502(d). That too raises a question of fact that is outside the present record.
A
Spartan Plastics is entitled to a claim against the estate arising from the avoidance of the fraudulent transfer. Buffum v. Peter Barceloux Co., 289 U.S. 227, 53 S.Ct. 539, 77 L.Ed. 1140 (1933); Misty Management Corp. v. Lockwood, 539 F.2d 1205 (9th Cir. 1976); Barber v. Coit, 144 F. 381 (6th Cir. 1906). Both the Ninth Circuit in Misty and the Sixth Circuit in Barber stated that a rule to the contrary, i. e., denying the fraudulent transferee a claim against the estate, would be inequitable because it would permit the estate to retain the consideration paid for the property as well as recover the property. As Judge Sneed stated in Misty, “the transferee guilty of fraudulent behavior may nevertheless prove a claim against the bankrupt estate, once he returns the fraudulently conveyed property to the estate.” The Bankruptcy Code recognizes that such claims arise in 11 U.S.C. § 502(h).
The claim is measured by the consideration paid for the property subject to the avoided transfer. Buffum, supra; Misty Management Corp., supra. Thus, a person who has surrendered property fraudulently transferred to him may prove a claim for the consideration advanced for the transfer. 4 Collier on Bankruptcy, 15th ed. p. 548-70. Inasmuch as only the bulk sale portion of *353the contract was avoided, the claim no doubt will bear the same relationship to the total consideration of $305,765 paid by Spartan Plastics as the value of the bulk sales property bore to the whole of the consideration given by Verco Industries.
B
The trial judge may permit Spartan Plastics to set-off the foregoing claim against the judgment to be entered on remand if the elements of 11 U.S.C. § 553 are satisfied. In relevant part, section 553 allows “a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case ... against a claim of such creditor that arose before the commencement of the case ...”
The estate’s claim is based on a note given by Spartan Plastics to Verco Industries before the commencement of the case. Any claim Spartan Plastics can establish that arises from recovery of the fraudulently conveyed property “shall be determined and shall be allowed . . . the same as if such claim had arisen before the date of the filing of the petition.” 11 U.S.C. § 502(h). Thus the timing elements of section 553 are satisfied.
“To be mutual, the debts must be in the same right and between the same parties, standing in the same capacity.” 4 Collier on Bankruptcy, 15th ed. p. 553-22. A claim that is deemed to have arisen before bankruptcy is by necessary implication deemed to have been owed to the estate’s predecessor, here Verco Industries. Thus, from a pre-bankruptcy perspective, the two debts were between the same parties in their corporate capacities. “Likewise it has been said that ‘mutual’ means ‘the creditor’s debt must be owed to the estate of the debtor and the estate’s debt must be owed to the creditor’.” 4 Collier, supra, p. 553-22, McDaniel National Bank v. Bridwell, 74 F.2d 331 (8th Cir. 1934). Spartan’s debt under the note is to the estate; Spartan’s claim, when fixed, will be against the estate. Mutuality is therefore satisfied.
It is perhaps necessary to emphasize the narrow application of setoff in this analysis. It does not affect the avoiding powers of a trustee in bankruptcy in any degree. It would be otherwise if Spartan’s claim could defeat the estate’s invalidation of the bulk sale; this is not possible, however, because the claim is not allowable until the bulk sale property has been surrendered to the estate. 11 U.S.C. § 502(d).