Court Opinion

ID: 804198
Source: CourtListenerOpinion
Date Created: 2012-07-12 17:17:37+00
Date Added: 2024-06-11T18:00:11.353250
License: Public Domain

Case: 11-50761   Document: 00511918201    Page: 1   Date Filed: 07/12/2012

         IN THE UNITED STATES COURT OF APPEALS
                  FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                  Fifth Circuit

                                                                FILED
                                                               July 12, 2012
                                 No. 11-50761
                                                               Lyle W. Cayce
                                                                    Clerk

In the Matter of: LISA ANN GALAZ,

                       Debtor,

RAUL GALAZ,

                       Appellant,

versus

LISA ANN GALAZ,

                       Appellee.

                Appeal from the United States District Court
                     for the Western District of Texas
                             No. 5:10-CV-1031
   Case: 11-50761       Document: 00511918201         Page: 2     Date Filed: 07/12/2012

                                       No. 11-50761

Before DAVIS, SMITH, and DENNIS, Circuit Judges.
PER CURIAM:*

       Raul Galaz appeals a decision granting Lisa Ann Galaz’s setoff defense,
allowing her to deduct her past-due child support obligations from the amount
he owes her from an unrelated litigation instead of paying him the past-due
amount. In affirming the bankruptcy court, the district court ruled that Raul
waived arguments not presented to the bankruptcy court and that waiting to
grant or deny setoff until after the unrelated litigation was not an abuse of dis-
cretion. Concluding that Raul waived some arguments, and the bankruptcy
court correctly addressed the others, we affirm.

                                              I.
       Raul and Lisa Ann were divorced in 2002. In 2007, Lisa Ann filed for
bankruptcy under Chapter 13. Although a 2002 state-court order required her
to obtain and maintain health-insurance coverage and equally share with Raul
the medical-care costs for their children, she failed to do so starting in January
2008. In March 2008, she also removed to bankruptcy court a lawsuit involving
claims against Raul and others (the “Adversary Proceeding”).
       In July 2009, Raul moved for relief from the automatic stay to obtain back
child support; in response, Lisa Ann sought permission to pursue claims for back
child support against him. The issue went to arbitration, where Raul was
ordered to make monthly support payments, but Lisa Ann was directed to pay

       *
        Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.

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                                      No. 11-50761

$9,727 to Raul for previous medical expenses and attorney’s fees (all of which
were deemed in the nature of child support).
       Raul then began trying to collect that support payment. In December
2009, he filed in the bankruptcy court a motion to direct payment of child
support obligations and to require the trustee to issue him the $9,727. Lisa Ann
responded that the Adversary Proceeding against Raul was for far more than
$9,727; she invoked setoff as a defense. A hearing was held in January 2010, but
the bankruptcy court continued consideration of the motion until after the trial
in the Adversary Proceeding. When the trial was over, the bankruptcy court
said it was taking the matter under advisement, and it continued consideration
indefinitely.1
       In August 2010, Raul filed a renewed motion to direct payment, contend-
ing that the court could not delay awarding him the $9,727 merely because there
was a possibility that Lisa Ann would obtain a judgment against him. The court
held a hearing and declared that the defense of setoff applied, explaining that
although the judgment had not yet been entered in the Adversary Proceeding,
the specific amount would be known soon. In November 2010, the bankruptcy
court issued a judgment in the Adversary Proceeding for $500,000 against Raul.
       The district court affirmed. Though the court located Texas caselaw sup-
porting Raul’s argument that the Adversary Proceeding’s judgment and the child
support obligation payments lacked mutuality, the court found he had waived
that argument by failing to raise mutuality in the bankruptcy court. It also
declared that the bankruptcy court did not abuse its discretion by granting con-

       1
         Although the court issued two orders shortly thereafterSSone granting Raul’s motion
and the other vacating that grantSSthose orders were unexplained, and nothing suggests they
are relevant.

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                                 No. 11-50761

tinuances rather than deciding to grant or deny the motion to direct payment of
child-support obligations.

                                       II.
      In his pro se appeal, Raul argues that the district court erred in holding
that he waived the argument that his child support claim could not be offset
against the judgment for lack of mutuality. Neither this court nor a district
court will review an issue presented for the first time on appeal of a bankruptcy
court’s decision. Crosby v. Orthalliance New Image (In re OCA, Inc.), 552 F.3d
413, 424 (5th Cir. 2008). Raul offers two arguments for reversing the finding of
waiver: (1) He repeatedly maintained that the child support obligations could
not be offset, which adequately raised the issue in the bankruptcy court, and
(2) the bankruptcy court revealed that it recognized he was arguing a lack of
mutuality when it noted that setoff would be for unrelated debts. Both of these
arguments fail.
      Setoff is a longstanding fixture in bankruptcy law having its roots in
equity. Without setoff, where a debtor and creditor owe each other separate
debts, the solvent party would pay the bankrupt party the amount owed, then
stand in line with other creditors to try to recover the debt the bankrupt party
owed it. That would often result in the solvent party’s paying the full amount
of its debt and getting back only a fraction of what it was owed from the bank-
rupt party. Offset, however, allows the solvent party to reduce the amount paid
by the amount the bankrupt party owes him.
      Under § 553, setoff has three requirements: (1) The creditor has both a
claim against and owes a debt to the debtor, both of which arose pre-petition;

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                                         No. 11-50761

(2) the claim and the debt are mutual, and (3) both claim and debt are valid and
enforceable. 11 U.S.C. § 553(a). But here, the debtorSSnot the creditorSSis seek-
ing a setoff, so § 558 applies instead of § 553. See 11 U.S.C. § 558. Because
§ 558 “preserves to the Debtor the defenses it would have had pre-petition,” some
courts conclude that the court must examine the transaction as though the bank-
ruptcy had not been filed, eliminating the requirement that both debts be pre-
petition obligations.2 In In re Braniff Airways, Inc., 42 B.R. 443, 452-53 (N.D.
Tex. Bankr. 1984), and Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030,
1036-37 (5th Cir. 1987), it was held that even under § 558, pre-petition debt
cannot be set off against post-petition debt, because then they would not be
mutual.3
       Although Raul argued that setoff was improper, his justification was that
child support is a priority claim; that is distinct from the lack-of-mutuality argu-
ment he presented on appeal. An argument must “be pressed, and not merely
intimated. In short, the argument must be raised to such a degree that the trial
court may rule on it.” Butler Aviation Int’l, Inc. v. Whyte (In re Fairchild Aircraft
Corp.), 6 F.3d 1119, 1128 (5th Cir. 1993) (internal quotation marks and citations
omitted). If a party does not argue a point plainly enough for the trial court to
recognize and rule on it, that argument is waived on appeal.

       2
        See Second Pa. Real Estate Corp. v. Papercraft Corp. (In re Papercraft Corp.), 127 B.R.
346, 350 (Bankr. W.D. Pa. 1991).
       3
         We explain this to clarify that the prepetition/postpetition distinction is still relevant
in this circuit in § 558 cases, given that the district court cited In re Circuit City Stores, Inc.,
No. 08-35653, 2009 WL 4755253, at *3 (Bankr. E.D. Va. Dec. 3, 2009), for the proposition that
courts ignore the pre-petition/post-petition distinction in § 558 cases. That decision is not the
law in this circuit. Because Raul waived his mutuality arguments by failing to raise them in
the bankruptcy court, the split over this issue is not determinative here.

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                                      No. 11-50761

       The record demonstrates that Raul argued that setoff was inappropriate
because the child support claim was of a higher priority,4 but now he contends
that child support is different from other types of debt and therefore cannot be
set off against ordinary debt. To support this, he reasons that the payments are
really for the childSSmerely held by the parent in a fiduciary capacitySSand that
such support payments are treated differently from other debt under Texas Law
(i.e., not terminating on death of the obligee).
       These new lack-of-mutuality arguments are completely distinct from
Raul’s initial argument to the bankruptcy court against setoff, to the effect that
child support claims are of a higher priority. A priority claim is one that gets
paid from the estate before others, providing its holder a greater likelihood of
repayment, and does not generally affect the applicability of setoff.5 Because
Raul presented the argument that his claim’s priority status prohibited setoff,
the bankruptcy court specifically addressed the issue of priority when it made
its decision. In the oral discussion of the order, the court stated:
       I’m not saying the claim shouldn’t be paid or shouldn’t be allowed as
       a priority claim. What I’m saying is . . . the claim against Mr. Galaz
       by Lisa Galaz . . . far exceeds the claim by Mr. Galaz against Lisa
       Galaz.
       ....
             The claim of Mr. Galaz is non-dischargeable, in any event, and

       4
          E.g., Renewed Motion To Direct Payment of Child Support Obligations, ¶ 3 (“Child
support obligations are an unsecured priority claim, and take precedence over all other unse-
cured non-priority claims.”); id. ¶ 7 (“This court cannot deny the immediate application of
RAUL GALAZ’s judgment (and priority claim against Debtor’s estate) based on the mere possi-
bility of Debtor’s future judgment against Raul Galaz.”). Raul also claims (unopposed by Lisa
Ann) that he made this priority argument at other times before the bankruptcy court.
       5
         5 COLLIER ON BANKRUPTCY ¶ 553.03[3][f][vi] (“In general, the priority of a claim is
irrelevant under section 553 . . . .”).

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                                      No. 11-50761

       will be credited against any judgment, or it will be allowed as a non-
       dischargeable priority claim in the event that the judgment is set
       aside for any reason.

The priority nature of the claim is still given its full value: It gets fully credited
against the amount Raul owes Lisa Ann, or if that judgment against him is set
aside, he retains a priority claim. Because no argument was presented that
some other theory against mutuality existed, none was addressed.
       Raul also provides a portion of the record that he argues shows the bank-
ruptcy court recognized mutuality was at issue. The court asked, “There’s really
no defense to [the child support claim], other than offset, for unrelated claims
against [Raul]?” Raul maintains that by recognizing that the only way setoff
applied was between unrelated claims, the bankruptcy court recognized that
mutuality was at issue. The quoted statement, however, does not indicate a rec-
ognition that mutuality was disputed. The context shows that the court had
been asking Lisa Ann’s counsel whether there was any defense to Raul’s request
for the funds. After Lisa Ann’s counsel described that she was seeking a larger
judgment against Raul, the court made that statement. It was likely just
descriptive, given that the defense was actually setoff of an unrelated claim.
       In fact, the mutual obligations that the doctrine of setoff contemplates
usually arise from separate transactions and thus are unrelated.6 The court was
likely just describing that this fit into the usual case rather than the rarer situa-
tion in which setoff was for more closely related claims.7 The relatedness of the

       6
           Id. ¶ 553.03[3][f].
       7
        Because the court had recently been discussing with the parties that previously the
Galazes had argued about who owed whom child support payments, finally resolving that
                                                                              (continued...)

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                                      No. 11-50761

facts underlying the debts is not part of the inquiry and does not call mutuality
into question. Therefore, this brief note by the bankruptcy court that the setoff
was for an unrelated claim does not demonstrate that the court recognized Raul
to be arguing that setoff should be disallowed for lack of mutuality.

                                            III.
       Raul argues that the bankruptcy court abused its discretion in waiting to
decide on his motion to award him child support based on the possibility that
Lisa Ann would win an unrelated lawsuit against him. We review grants or
denials of continuances for abuse of discretion. See United States v. Lewis, 476
F.3d 369, 387 (5th Cir. 2007). Raul’s argument has two components: (1) The
judgment had not yet been awarded, so it was only a possibility when he filed his
motion; and (2) child support obligations are exempt from the automatic stay in
the bankruptcy code. No party cited caselaw concerning whether waiting until
the unrelated lawsuit resolved was within or beyond the bankruptcy court’s
discretion.
       First, the fact that the judgment had not yet been handed down does not
prohibit the bankruptcy court from finding setoff appropriate. Setoff is not pro-
hibited just because the claim sought to be used for setoff is disputed.8 The court
had already scheduled a trial to assess Lisa Ann’s claim and had been dealing
with that case against him for many months. Because a defense of setoff had
been advanced, it makes sense that the bankruptcy court would want to wait on

       7
        (...continued)
issue through arbitration, the court may have been unsure whether the alleged setoff was for
a related claim.
       8
           See 5 COLLIER ON BANKRUPTCY ¶ 553.03[1][e].

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                                  No. 11-50761

ordering money paid out of the estate to determine whether setoff was appro-
priate, as long as the court did not believe doing so would cause undue delay.
With a trial in the Adversary Proceeding already scheduled for the near future,
the bankruptcy court could reasonably believe there would be no undue delay in
waiting to see whether money really needed to be paid out of the bankruptcy
estate. Moreover, because the Adversary Proceeding had been moved to the
bankruptcy court and had been there for some time, the court presumably knew
the claim was not frivolous.
      Raul’s additional argumentSSthat because child-support obligations are
exempt from the automatic stay in the bankruptcy code, the bankruptcy court
cannot delay releasing those fundsSSmisunderstands the scope of that provision:
Section 362(b) does exempt child support obligations from the automatic stay,
but refusing to stay something as a matter of course is not the same as guar-
anteeing immediate payment. Section 362 is not meant to put child support obli-
gations beyond the reach of the entirety of the bankruptcy system; it merely
recognizesSSsimilar to the fact that such claims receive priority statusSSthat
these claims are considered more important.
      For example, § 362(b)(2)(B) still stays collection of such obligations from
property of the bankruptcy estate. Nothing in the Bankruptcy Code suggests the
bankruptcy court should not consider child-support obligations in the overall
administration of the estate, so if justice requires waiting on paying out the obli-
gations, the bankruptcy court may do so in a specific case. Exempting child-sup-
port obligations from the automatic stay means that usually these claims should
not be delayed by bankruptcy; it does not mean there are no exceptional circum-
stances in which such a delay is warranted.

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                                  No. 11-50761

      Here, a defense of setoff was claimed, based on a soon-to-be-tried claim
that the bankruptcy court had managed long enough to know was not frivolous.
Moreover, regardless of the outcome after the continuance, Raul would be entit-
led to the benefits of his claim: He either maintains a non-dischargeable priority
claim, or he gets a valuable setoff. On these facts, we cannot say the court
abused its discretion in waiting to determine whether setoff was warranted
before ordering payments from the bankruptcy estate.
      The judgment of the district court, affirming the bankruptcy court, is
AFFIRMED.

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