Summary of a Recent
Judicial Development in
Bankruptcy

Creditor Seeking Relief Only After Plan Confirmation
Waives Right to Offensive Setoff

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Klaassen, No. 01-14724, 2005 Bankr. LEXIS 1958 (Bankr. D. Kan. Oct. 7, 2005), the United States Bankruptcy Court for the District of Kansas held that a creditor/cooperative had waived its right to offensive setoff by not asserting that right in a timely manner.

Background

The Andale Farmers Cooperative Company (Co-op) of which the Chapter 12 Debtors were members moved for relief from automatic stay for the purpose of allowing an offset pursuant to 11 U.S.C.A. § 553. Id. at *1. As members, the Debtors were entitled to patronage credits, and the Co-op sought setoff for the value of goods sold against the credits. Id. at *1-2. In making its claim, the Co-op relied on its bylaws, which provided that the Association "shall be entitled to setoff, against any claims which it may have against any member or participating patron, any amounts which the Association may owe the patron." Id. at *2. The Debtors opposed the setoff. Id.

Arguments

The Debtors argued that the patronage credits did not constitute a debt of the Co-op to the Debtors and so offset is not available and, alternatively, that if the Co-op had a right of set off, it was waived by delaying the assertion until after confirmation of the Debtors' Chapter 12 plan, to which the Co-op did not object. Id.

The Co-op argued that it was entitled to a right of setoff under its own bylaws and under the laws of Kansas. Id.

Analysis and Holdings

The court began by explaining that the right to setoff requires a valid and enforceable mutual debt between a debtor and creditor that arose pre-petition. Id. at *8. The debts must also be mature (i.e., presently due). Id. at *9. The court held that the association's bylaws did not trump legal precedent, and merely authorized common law setoff. Id. at *12. The court had previously held that patronage credits did not constitute an amount which the association owes the patron. Id. Furthermore, cooperative equity credits are intangibles which can only be perfected by filing, and the Co-op had not filed such a claim. Id. at *13-14. Thus the court held that the Co-op had failed to satisfy its burden to prove entitlement to offset. Id. at *15.

The court went on to consider whether, even if the Co-op did have a right to offset, it had waived that right by not asserting it sooner. Id. at *16. The Co-op had not objected to the plan confirmation, in which they were listed as an unsecured creditor, and did not file its motion for relief until two months after the confirmation. Id. at *17. The court held that "offensive offset is not available to satisfy an unsecured claim the payment of which is provided for by the confirmed plan when the creditor did not object to confirmation based upon the right to offset and where relief from stay to pursue offset was not filed until after confirmation." Id. at *28. Since the Co-op had by its conduct waived its right to offset, the court denied its motion for relief from stay. Id.

The case was decided on October 7, 2005.