Setoff and Recoupment in Bankruptcy -- Setoff (cont'd)
| D. Setoff Admits The Claim. By setting off, the creditor generally admits the debtor's claim. In re Klingberg Schools, 68 B.R. 173, 178 (N.D. Ill. 1986) (setoff "confesses" the indebtedness alleged in the complaint).
E. United States Right To Setoff. The United States has the same common law right to setoff as any other creditor. See, e.g., United States v. Munsey Trust, 332 U.S. 234 (1947); Malman v. United States, 207 F.2d 897 (2d Cir. 1953); In re Art Metal USA, Inc., 109 B.R. 74, 78 (Bankr. D.N.J. 1989); Southeastern Airways Corp. v. United States, 673 F.2d 368, 379 (Ct. Cl. 1982) (setoff common law right available to any creditor). Thus, the United States can assert a right of setoff independent of any statutory grant of authority to the executive branch. See, e.g., United States v. Tafoya, 803 F.2d 140, 141 (5th Cir. 1986); In re Metropolitan Hosp., 110 B.R. 731, 740 (Bankr. E.D. Pa. 1990), aff'd, 131 B.R. 283 (E.D. Pa. 1991); In re Hazelton, 85 B.R. 400 (Bankr. E.D. Mich. 1988), rev'd on other grounds, 96 B.R. 111 (E.D. Mich. 1988); but see In re Chateaugay Corp., 1995 WL 386483 (S.D.N.Y. Jun. 28, 1995) (no common law setoff right between IRS and other federal agencies). For additional support look to statutes and regulations which provide a basis for setoff or recoupment. See, e.g., 26 U.S.C. § 6402(a) (IRS may setoff taxpayer's overpayment of tax against tax liability for prior years); 31 U.S.C. § 3720A (federal agencies may refer past due debt to Treasury for offset against tax overpayment pursuant to 26 U.S.C. § 6402(d)); 31 U.S.C. § 3716 (administrative offset statute); 31 U.S.C. § 3728 (United States can setoff judgement against it to recover a debt plaintiff owes to the United States); 7 C.F.R. § 1951.103 (1995) (CFSA can setoff debts to the United States against ongoing Conservation Reserve Program payments); 13 C.F.R. § 140.5 (1993) (SBA offset); 41 C.F.R. § 101-41.102(a)(3) (GSA can setoff amounts due to the United States from ongoing payments to carriers); Federal Acquisition Regulation, 48 C.F.R. §§ 32.611, 32.612 (1992) (United States can setoff obligations between itself and parties contracting with the United States).
F. Limits On The United States' Setoff Rights. A federal statute or regulation, of course, may limit offset rights of the United States. See, e.g., 31 U.S.C. § 3720A (federal agency referring debt to Treasury for offset must first notify person of plan to refer the debt and give debtor at least 60 days to present evidence that debt is not past due or legally enforceable). Compare McCall Stock Farms, Inc. v. United States, 14 F.3d 1562, 1567 (Fed. Cir. 1993) ("Debt Collection Act was intended to supplement, not displace, the government's pre-existing offset rights under the common law"); Bosarge v. United States, 5 F.3d 1414 (11th Cir. 1993) (Federal Debt Collection Procedure Act, 28 U.S.C. § 3001 et seq., expressly exempts common law or statutory right to offset or recoupment, see § 3003(c), from its requirements); Cecile Indus., Inc v. Cheney, 995 F.2d 1052 (Fed. Cir. 1993) (offset of claims from different contracts (setoff) not governed by Debt Collection Act, 31 U.S.C. § 3701 et seq.); Allied Signal, Inc. v. United States, 941 F.2d 1194 (Fed. Cir. 1991) (offset of claims from the same contract (recoupment) is not governed by the DCA); Cascade Pac. Int'l v. United States, 773 F.2d 287, 295-96 (Fed. Cir. 1985) (any procurement contract subsequent to 1979 containing CDA "all-disputes" clause reserved the common law right to offset money owed by defaulted contractor); Amoco Prod. Co. v. Fry, 904 F. Supp. 3 (D.D.C. 1995) (DCA merely supplements common law right to offset) with Allison v. Madigan, 951 F.2d 869 (8th Cir. 1991) (administrative setoff must comply with DCA).
G. Mechanics Of Setoff.
H. Setoff And The Proof Of Claim. Nothing in § 553 requires that a right of setoff be asserted in a proof of claim to be preserved. To the contrary, § 553 expressly provides that nothing in the Code affects a creditor's right to setoff unless explicitly stated in § 553, which makes no mention of proofs of claim. Despite this, whether failing to file a proof of claim or failure to assert a right of setoff in a proof of claim may waive that right is subject to controversy. Compare In re Davidovich, 901 F.2d 1533, 1539 (10th Cir. 1990) (proof of claim not prerequisite to retention of setoff right); Willcox v. Goess, 92 F.2d 8, 16 (2d Cir. 1937), cert. denied, 303 U.S. 647 (1938) (setoff under Bankruptcy Act allowable on provable claim even if no proof made and bar date passed); Bloor v. Shapiro, 32 B.R. 993, 1002 (S.D.N.Y. 1983) (setoff permissible even in absence of timely filed proof of claim); In re Aquasport, Inc., 155 B.R. 245, 247 (S.D. Fla. 1992), aff'd, 985 F.2d 579 (11th Cir. 1993); In re Concept Clubs, Inc., 154 B.R. 581, 589 (D. Utah 1993); Stratton v. Equitable Bank, 104 B.R. 713, 735 (D. Md. 1989); In re Calderone, 166 B.R. 825, 830 (Bankr. W.D. Pa. 1994); In re Selma Apparel Corp., 155 B.R. 241, 244 (Bankr. S.D. Ala. 1992); In re Suncrete Corp., 100 B.R. 102, 104 (Bankr. M.D. Fla. 1989); In re Denby Stores, 86 B.R. 768, 777 (Bankr. S.D.N.Y. 1988); Lawrence P. King, 4 Collier on Bankruptcy ¶ 553.01, at 553-6 (15th ed. 1993) (all allowing setoff without filing proof of claim) and In re Custom Ctr., Inc., 163 B.R. 309, 315-17 (Bankr. E.D. Tenn. 1994) (failure to assert setoff in original proof of claim does not waive right to setoff) with In re Britton, 83 B.R. 914, 919-921 (Bankr. E.D.N.C. 1988); In re Butler, 61 B.R. 790 (Bankr. S.D. Fla. 1986); and 4 Collier on Bankruptcy ¶ 553.07, at 553-43 (all asserting that failure to preserve setoff in proof of claim is waiver of that right). See also In re Village Craftsman, Inc., 160 B.R. 740, 748 (Bankr. D.N.J. 1993) (setoff waived when creditor files unsecured proof of claim and does not object to unsecured treatment in plan of reorganization); In re Apex Int'l Mgmt. Servs., Inc., 155 B.R. 591 (Bankr. M.D. Fla. 1993); In re Sound Emporium, 48 B.R. 1 (Bankr. W.D. Tex. 1984) (both holding that setoff permitted if failure to assert that right in proof was good faith mistake and led to no detrimental reliance by other parties). That setoff should be asserted in the proof of claim at all is inconsistent with the nature of setoff as an affirmative defense. Setoff does not assert a claim (a right of payment) against the estate -- it merely seeks to reduce the recovery demanded by the estate. In re Concept Clubs, Inc., 154 B.R. 581, 588-89 (D. Utah 1993); accord In re M & L Business Machine Co., 178 B.R. 270, 272 (Bankr. D. Colo. 1995); Posey v. Dep't of Treasury, 156 B.R. 910, 919 (W.D.N.Y. 1993) (both holding that setoff when asserted as merely an affirmative defense, i.e., the party does not seek an affirmative recovery, is not a "claim" in bankruptcy); cf. In re Calderone, 166 B.R. 825, 830 (Bankr. W.D. Pa. 1994) ("A creditor asserting setoff is not requesting distribution from the bankruptcy estate res but is seeking to satisfy a debt owed to it by the debtor to the extent of the debt it owes to the debtor. Setoff permits parties to 'net' their respective obligations."). Contra In re Town & Country Home Nursing Servs., 963 F.2d 1146, 1150-51 (9th Cir. 1991) (asserting a setoff right results in an informal proof of claim).
I. Avoidance Of The Setoff
See, e.g., Braniff Airways v. Exxon, 814 F.2d 1030 (5th Cir. 1987); In re Moreira, 173 B.R. 965, 970-71 (Bankr. D. Mass. 1994) (§ 553(b) only applies to prepetition, rather than postpetition, setoffs); In re Lawndale Steel Co., 155 B.R. 990 (Bankr. N.D. Ill. 1993) (court compares §§ 553(b), 547; discusses legislative history); In re Express Freight Lines, 130 B.R. 288 (Bankr. E.D. Wis. 1991); In re Keystone Foods, 145 B.R. 502, 507 (Bankr. W.D. Pa. 1992) (setoff is a miniature preference section protecting certain preferences; to the extent setoff is improper look at the transaction as a preference, and disallow that part that improves the creditor's position in 90 days prior to bankruptcy); In re Fox, 62 B.R. 432 (Bankr D.R.I. 1986). The creditor is limited to the lowest amount of the difference between the credit and claim during the 90-day prebankruptcy period (the creditor's point of maximum exposure). 11 U.S.C. § 553(b). However, in cases where the United States' prepetition setoff is mandated by statute, some courts have refused to apply this limitation. See Lee v. Schweiker, 739 F.2d 870 (3d Cir. 1984) (Social Security Administration's recoupment of past overpayments to debtor from monthly entitlement payments within 90 days before petition not avoidable; § 553(b) aimed at banks who could pressure debtor to make deposits in anticipation of bankruptcy. Because SSA had no discretion, debtor's entitlement deemed payable prior to the 90 days for purposes of the "improvement in position" test.); accord Cresta v. United States, 58 B.R. 588 (E.D. Pa. 1986); In re Moses, 91 B.R. 994 (Bankr. M.D. Fla. 1988).
t to setoff where creditor's claim is disallowed on the merits. See In re Ionosphere Clubs, Inc., 177 B.R. 198 (Bankr. S.D.N.Y. 1995) (creditor must be able to prove its claim to exercise its right to setoff that claim); In re Sutton Invs., 53 B.R. 226 (Bankr. W.D. La. 1985); 11 U.S.C. § 553(a)(1). In contrast, where the claim is disallowed for technical reasons (i.e., late filing), the right of setoff is unaffected. See generally In re Davidovich, 901 F.2d 1533, 1538-39 (10th Cir. 1990); In re Schaffer, 173 B.R. 393, 397 (Bankr. N.D. Ill. 1994) (discussing difference between a late filed claim which cannot be "deemed allowed" under § 502(b) and a claim which is "disallowed"). J. Setoff After Discharge. A creditor may setoff a prepetition debt after discharge without violating the statutory injunctive provisions of the Bankruptcy Code. See, e.g., In re DeLaurentiis Entertainment Group, Inc., 963 F.2d 1269 (9th Cir. 1992) (§ 553 takes precedence over § 1141 in chapter 11 case); In re Davidovich, 901 F.2d 1533 (10th Cir. 1990) (same); In re Holder, 182 B.R. 770 (Bankr. M.D. Tenn. 1995) (same); In re Pettibone Corp., 161 B.R. 960, 964 (N.D. Ill. 1993) (in dictum, "we do not agree ... that the Confirmation Order, [or] § 524 ... prohibit [postpetition] setoffs"), aff'd in part and remanded in part on other grounds, 34 F.3d 536 (7th Cir. 1994); In re Buckenmaier, 127 B.R. 233 (Bankr. 9th Cir. 1991); Posey v. Dep't of Treasury, 156 B.R. 910, 915 (W.D.N.Y. 1993); Reich v. Davidson Lumber Sales Emp. Ret. Plan, 154 B.R. 324, 334 (D. Utah 1993); In re Thompson, 182 B.R. 140, 154 (Bankr. E.D. Va. 1995); In re Runnels, 134 B.R. 562, 565 (Bankr. E.D. Tex. 1991); In re Eggemeyer, 75 B.R. 20, 22 (Bankr. S.D. Ill. 1987) (all holding that § 553 takes precedence over § 524(a)(2) in chapter 7 case); In re Womack, 188 B.R. 259 (Bankr. E.D. Ark. 1995); In re Tillery, 179 B.R. 576, 578 (Bankr. W.D. Ark. 1995); In re Warwick, 179 B.R. 582, 584-85 (Bankr. W.D. Ark. 1995); In re Olson, 175 B.R. 30, 32 (Bankr. D. Neb. 1994); In re Whitaker, 173 B.R. 359, 362-63 (Bankr. S.D. Ohio 1994); In re Orlinski, 140 B.R. 600 (Bankr. S.D. Ga. 1991) (all holding that setoff rights survive confirmation of chapter 13 plan); In re Custom Ctr., Inc., 163 B.R. 309, 316 (Bankr. E.D. Tenn. 1994) (§ 524 does not preclude postdischarge setoff); Record Club of America v. United Artists, 80 B.R. 271 (S.D.N.Y. 1987) (old Bankruptcy Act § 68 (setoff) takes precedence over Bankruptcy Act § 14(f) (discharge)). Contra Norton v. IRS, 717 F.2d 767, 774 (3d Cir. 1983) (§ 1327 confirmation takes precedence over § 553); In re Dezarn, 96 B.R. 93 (Bankr. E.D. Ky. 1988) (setoff right does not survive chapter 7 discharge). This is consistent with the principle that, although a discharge extinguishes the personal liability of the debtor, discharge does not extinguish the actual debts. Discharge of the debtor does not eradicate in rem liability which may exist against assets, including monies. See, e.g., Dewsnup v. Timm, 112 S. Ct. 773, 778 (1992) ("ordinarily, ... secured interests survive bankruptcy" -- discharge only relieves the debtor of personal liability for the debt and does not affect in rem actions against property); In re Gibson, 172 B.R. 47, 49 (Bankr. W.D. Ark. 1994) (debt survives bankruptcy; in rem liability remains extant). Nonbankruptcy courts have concurrent jurisdiction with the bankruptcy court to decide whether invocation of a postdischarge setoff right violates the bankruptcy discharge. In re Ford, 188 B.R. 523, 526-27 (Bankr. E.D. Pa. 1995).
K. Setoff And Turnover Proceedings Under § 542. While a trustee can sue in a turnover action under 11 U.S.C. § 542 to collect funds due the estate, § 542(b) expressly excepts funds that can be setoff pursuant to § 553. Thus the right to setoff is a defense to a turnover proceeding under § 542(b). In re Corland Corp., 967 F.2d 1069, 1077 (5th Cir. 1992); In re Suncrete Corp., 100 B.R. 102, 103-04 (Bankr. M.D. Fla. 1989); see also In re Flynn, 143 B.R. 798 (Bankr. D.R.I. 1992) (excellent discussion of interplay between §§ 553, 362, and 542 in context of bank freeze of monies subject to setoff); see generally, United States v. Inslaw, Inc., 932 F.2d 1467, 1472-73 (D.C. Cir. 1991) (withholding property that is subject to disputed legal claims is not a violation of § 362(a)(3); such a "view would turn every act of the possessor that implicitly asserts his title over disputed property into a violation of § 362(a) ... creating a kind of universal end-run around the limits on turnover."); In re Atlantic Computer Sys., 173 B.R. 858, 861-62 (S.D.N.Y. 1994) (creditor asserting setoff/recoupment rights is entitled to resolution of its rights and reasonable time to comply with decision if adverse before it can be penalized for not turning over the funds; court rejects argument that creditor must turn over funds prior to resolution of rights of setoff/recoupment); In re CIS Corp., 172 B.R. 748, 759 (S.D.N.Y. 1994) (turnover action does not properly involve property subject to dispute; turnover appropriate where "its purpose is the collection rather than the creation, recognition or liquidation of a matured debt"); In re Ven-Mar Int'l Inc., 166 B.R. 191, 192 (S.D. Fla. 1994) (same).
L. Setoff As A Voidable Preference Under § 547. Section 547 allows the Trustee to avoid preferential transfers. However, setoff is governed exclusively by § 553 and is not avoidable as a preference under § 547. In re Dillard Ford, Inc., 940 F.2d 1507, 1512 (5th Cir. 1991); Lee v. Schweiker, 739 F.2d 870, 873 n.4 (3d Cir. 1984); In re Kalenze, 175 B.R. 35 (Bankr. D.N.D. 1994)("Only if the court finds the setoff invalid and additionally concludes that no right of setoff exists, is section 547 applied."); In re Centolella, 142 B.R. 624, 627 (Bankr. N.D.N.Y. 1992); In re Pineview Care Ctr. Inc., 142 B.R. 677, 678 (Bankr. D.N.J. 1992), aff'd, 152 B.R. 703 (D.N.J. 1993).
M. Setoff And Sovereign Immunity. The Bankruptcy Reform Act of 1994 substantially altered 11 U.S.C. § 106; sovereign immunity has been waived for most sections under which setoff is contested by debtors or trustee, i.e., §§ 542, 553. However, under the old § 106, withholding payment based upon a right of setoff should not itself have waived sovereign immunity. The old section 106(b) and (c) did not allow for affirmative money judgments against the United States in any case. United States v. Nordic Village, 112 S. Ct. 1011 (1992). Old section 106(a) waived sovereign immunity for affirmative money judgments for claims which were compulsory counterclaims to a filed proof of claim of the United States. In re 995 Fifth Ave. Assocs., 127 B.R. 533, 537 (S.D.N.Y. 1991), aff'd, 963 F.2d 503, 509 n.1 (2d Cir. 1992); Davis v. IRS, 136 B.R. 414, 420 (E.D. Va. 1992); In re Moulton, 133 B.R. 248, 250 (Bankr. M.D. Fla. 1991); In re Wildwerering, 130 B.R. 294, 295-96 (Bankr. S.D. Iowa 1991). Setoff, without filing a proof of claim, did not, therefore, waive sovereign immunity because setoff does not assert a claim against the estate -- it merely seeks to reduce the recovery demanded by the estate. In re Concept Clubs, Inc., 154 B.R. 581, 588-89 (D. Utah 1993); accord In re M & L Business Machine Co., 178 B.R. 270, 272 (Bankr. D. Colo. 1995) (setoff when it is merely an affirmative defense, i.e., the party does not seek an affirmative recovery, is not a "claim" in bankruptcy); Posey v. Dep't of Treasury, 156 B.R. 910, 919 (W.D.N.Y. 1993) (same); cf. In re Calderone, 166 B.R. 825, 830 (Bankr. W.D. Pa. 1994) ("A creditor asserting setoff is not requesting distribution from the bankruptcy estate res but is seeking to satisfy a debt owed to it by the debtor to the extent of the debt it owes to the debtor. Setoff permits parties to 'net' their respective obligations."). Contra In re Town & Country Home Nursing Servs., 963 F.2d 1146, 1150-51 (9th Cir. 1991) (asserting a setoff right results in an informal proof of claim and a waiver of sovereign immunity); In re Taylor, 148 B.R. 361 (S.D. Ga. 1992); In re Operation Open City, Inc., 148 B.R. 184 (Bankr. S.D.N.Y. 1992), aff'd 170 B.R. 818 (S.D.N.Y. 1994) (same); In re Inslaw, 76 B.R. 224, 229-30 (Bankr. D.D.C. 1987), aff'd 83 B.R. 89 (D.D.C. 1989), rev'd on other grounds, 932 F.2d 1467 (D.C. Cir. 1991) (same).
N. Setoff And The Uniform Commercial Code. Article 9 of the UCC expressly states that it does not apply to any right of setoff, so its filing requirements are irrelevant in asserting setoff. However, courts have held it governs the priority between a right to setoff and a perfected security interest. In re Davidson Lumber Sales, Inc., 66 F.3d 1560 (10th Cir. 1995); In re Apex Oil Co., 975 F.2d 1365 (8th Cir. 1992). Generally, we should argue that the debtor cannot assign greater rights than it possesses. Therefore, if the debtor would lose to our right of setoff, so must the secured creditor, who is, after all, asserting only a derivative right. A secured creditor with priority over other creditors is still subject to setoff as a counterclaim or defense. See, e.g., Rochelle v. United States, 521 F.2d 844, 855 (5th Cir. 1975) (subordinated claims still subject to setoff by United States); Hayden v. Standard Accident Ins. Co., 316 F.2d 598 (9th Cir. 1963) (surety's subordinated claim still subject to setoff); In re Defense Servs., Inc., 104 B.R. 481 (Bankr. S.D. Fla. 1989) (United States can set off subordinated claim); In re Don's Elec., Inc., 65 B.R. 399, 403 (Bankr. W.D. Wis. 1986) (bank's security interest in accounts receivable still subject to setoff); see generally United Cal. Bank. v. Eastern Mt. Sports, 546 F. Supp. 945, 963-64 (D. Mass. 1982) (setoff allowed against secured creditor only if claim "accrues" before assignment).
O. Setoff And Disallowance Of Claims Under § 502(d). Section 502(d) permits the disallowance of a creditor's claims if that creditor fails to turnover property of the estate. However, if the property is held subject to setoff, the creditor is entitled to continue to hold it or have it placed in an interest bearing segregated account pending a determination of its setoff rights. See In re Davis, 889 F.2d 658 (5th Cir. 1989); In re Atlantic Computer Sys., 173 B.R. 858, 861-62 (S.D.N.Y. 1994) (court must give party a reasonable time to turnover monies after its asserted setoff/recoupment rights are resolved before § 502(d) can be invoked); In re Chase & Sanborn Corp., 1991 Bankr. LEXIS 223 (Bankr. S.D. Fla. Jan. 30, 1991); see generally Citizens Bank of Maryland v. Strumpf, 116 S. Ct. 286, 289 (1995) (creditor may withhold funds subject to setoff).
P. Setoff And The Statute Of Limitations. That a statute of limitations bars a government suit to collect an amount due does not bar the government from invoking its administrative remedies to offset the debt against other claims by the debtor against the government. See, e.g., Thomas v. Bennett, 856 F.2d 1165, 1169 (8th Cir. 1988); In re Mid Atl. Fund, Inc., 60 B.R. 604, 609-10 (Bankr. S.D.N.Y. 1986) (statutory limitation periods generally have no application to offsetting counterclaims and other matters of defense).
Q. Setoff And The Automatic Stay. Setoffs found to violate the automatic stay do not justify denial of an otherwise valid right of setoff. Instead, violations of the stay are punished under § 362(h), which does not authorize denial of setoff as a sanction. At best the debtor should be entitled to damages suffered on account of the stay violation which should be zero unless the debtor was willing and able to provide adequate protection for the creditor's security interest in the amounts held subject to setoff. 11 U.S.C. §§ 506(a), 363(a),(c)(2), and (e); see generally In re Hudson, 168 B.R. 449, 453 (Bankr. S.D. Ga. 1994) (court finds IRS withholding is a violation of the stay but permits setoff nonetheless; violation of stay only entitles debtor to recovery under § 362(h)); In re Midway Indus. Contractors, Inc., 167 B.R. 139, 144 (Bankr. N.D. Ill. 1994) (offset in violation of the stay is not "sufficient reason to deny the [IRS] the modification of the stay" -- court sanctions IRS under (h) instead), rev'd, 178 B.R. 734 (N.D. Ill. 1995) (IRS adjustments are not setoff; § 362(h) does not apply to corporate debtors); In re Lough, 163 B.R. 586, 589 (Bankr. D. Idaho 1994) ((h) does not allow for sanctions for freezing funds even if a technical violation of the automatic stay); In re Custom Ctr., Inc., 163 B.R. 309, 318-19 (Bankr. E.D. Tenn. 1994) (withholding funds, even if a violation of the automatic stay, does not justify denial of otherwise valid right of setoff); In re Gribben, 158 B.R. 920 (S.D.N.Y. 1993) (setoff without relief from stay a mere "faux pas" and does not justify denial of an otherwise valid right of setoff). But see In re Operation Open City, Inc., 148 B.R. 184 (Bankr. S.D.N.Y. 1992), aff'd 170 B.R. 818, 825 (S.D.N.Y. 1994) (setoff in violation of stay is void and warrants turnover order against creditor).
R. Setoff Of Fraudulent Conveyances Under § 544(b). Courts have generally denied the setoff of a creditor's obligation to return monies obtained through a fraudulent conveyance. In re Acequia, Inc., 34 F.3d 800, 817 (9th Cir. 1994).
S. Setoff Against The United States. Setoff by a debtor against the United States is not controlled by § 553. Rather, a debtor's right to setoff against the United States arises from state law, § 106(c) (waiver of sovereign immunity for setoff against the United States), § 502(b)(1), and § 558. In re Westchester Structures, Inc., 181 B.R. 730, 738-42 (Bankr. S.D.N.Y. 1995); cf. In re Stevens, 187 B.R. 48, 52 (Bankr. S.D. Ga. 1995) (Trustee's power to withhold payment from creditor to recover earlier overpayment is not derived from any right of setoff granted by § 553; rather a trustee's right to setoff is based on "the overall scheme of bankruptcy administration.").
T. Applying Setoff Funds. Frequently, where the United States tries to setoff its claims against its debts, debtors argue that we should be forced to allocate those setoff funds in a particular manner. We naturally want to setoff those funds against general unsecured claims which are not likely to be paid in full (if at all) while leaving our secured or priority claims unsatisfied with the expectation that we may actually recover more overall this way. There is no authority supporting an argument that the debtor may compel our allocation of setoff funds. In re Lawson, 187 B.R. 6 (Bankr. D. Idaho 1995) (Debtor demanded that the IRS allocate its setoff to satisfy its priority claims because to do otherwise would give the IRS a "preference" over other unsecured creditors. The court rejected this argument, noting that setoff inherently gives a creditor a preference over other creditors and that the IRS has the right to apply the setoff as it wishes).
Updated February 19, 2015