Summary of a Recent
Judicial
Development in
Bankruptcy
Set Off Requires Mutual, Valid and Enforceable Prepetition Debts
That Have Matured at the Time of Filing the Motion for Relief
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Bergman, No. 07-40285, 2007 Bankr. LEXIS 3047 (Bankr. D. Kan. Sept. 10, 2007), the United States Bankruptcy Court for the District of Kansas held that the creditor had failed to establish its right to set off and thus denied its motion for relief from automatic stay.
Background
Debtors filed for Chapter 12 relief in March 2007. Id. at *7. The Nemaha County Co-op Association (NCCA), of which the Debtors were active members, moved for relief from automatic stay to offset its claim against the Debtors' equity in the NCCA. Id.
Arguments
Debtors argued that the NCCA had not established the elements for relief from stay and had no right to set off. Id. at *2.
NCCA argued that under its bylaws, it had a right to offset its claim against the Debtors' deferred patronage allocations and stock. Id. at *9.
Analysis and Holdings
Relief from stay may be granted under § 362(d)(1) for cause. Id. at *7. The moving party must establish cause, and failure to do so requires dismissal of the motion. Id. The court explained that "the right of set off allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A." Id. at *8. Under Kansas law, the elements of set off are that two parties owe each other money, and that the debts must have matured at the time of the motion for set off. Id. at *9. The court held that the NCCA did not have a right to set off because the Debtors' deferred patronage allocations were not presently due, so the debt had not matured. Id. at *16. The court went on to explain that, even if NCCA had established a right to set off under Kansas law, they had still not satisfied the elements for setoff under § 553. Id. To preserve the right of set off under § 553, four conditions must exist: "(1) the creditor holds a claim against the debtor that arose prepetition; (2) the creditor owes a debt to the debtor that arose prepetition; (3) the claim and the debt are mutual; and (4) the claim and the debt are valid and enforceable." Id. at *17. The court found that NCCA had only established the first criteria, that the Debtors' obligation to NCCA arose prepetition. Id. Therefore, the court dismissed NCCA's motion for relief from automatic stay because NCCA failed to establish their right to set off. Id. at *18.
The case was decided on Sept. 10, 2007.