553 B.R. 902
Bankr. N.D. Ala.2016Background
- Edwards Specialties obtained a $1,735,944.24 state-court judgment (plus interest) against Olive and Olive Properties for breach of contract; Alden R. Edwards is the sole shareholder of Edwards Specialties.
- Olive acquired by assignment prepetition state-court judgments originally held by North Alabama Bank against Edwards Specialties, Alden Edwards, and related entities totaling $796,589.98 (recorded Aug. 6, 2010); the assignment and related agreement were executed May 29, 2014.
- The assignment agreement contemplated use of the assigned judgments to satisfy Edwards Specialties’ judgment against the Olive entities and split any net recovery above $1.6 million; Aspen Homes (Olive-owned) entered a purchase contract contingent on the assignment.
- Edwards Specialties sued in state court; the action was removed to bankruptcy and the trustee sought joint administration of Alden Edwards’ and Edwards Specialties’ Chapter 7 cases.
- Edwards Specialties argued the assignment lacked consideration, that the assigned judgments lack mutuality for setoff under 11 U.S.C. § 553, and alternatively urged limitation of setoff to the purchase price paid by Olive (relying on In re Fisker).
- The bankruptcy court found the assignment supported by sufficient consideration, that setoff is available under Alabama law (Ala. Code § 6-8-80) and § 553, but limited mutuality to assigned judgments that were against Edwards Specialties and Alden Edwards (not those against other entities).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of assignment / consideration | Assignment invalid or unsupported by sufficient consideration (Edwards Specialties) | Assignment supported by recitals, split-of-recovery provision, and Olive's promise re: Aspen Homes (Olive) | Assignment valid; recitals and the split/requisite promises provide sufficient consideration |
| Whether assignee may set off assigned judgments under Alabama law | Even if assignment valid, setoff should be denied or limited because it prejudices other creditors; rely on Fisker to cap recovery | Alabama law permits setoff of judgments; Fisker (credit-bid context) inapplicable (Olive) | Setoff allowed; Fisker credit-bid analysis inapplicable; strong federal policy favors setoff absent compelling reasons |
| Mutuality under 11 U.S.C. § 553 | Assigned judgments lack mutuality because (a) Olive is assignee, (b) significant portion of assigned judgments are against non-Edwards Specialties entities, (c) third-party Alden Edwards is jointly liable | Assignment can create mutuality; mutuality exists to the extent judgments are against Edwards Specialties and Alden Edwards jointly and severally (Olive) | Mutuality exists only for assigned judgments that were entered against Edwards Specialties and Alden Edwards (not for judgments solely against other entities) |
| Scope of allowable setoff (amount) | If allowed, setoff should be limited to amount Olive paid or otherwise be denied to protect creditors (Edwards Specialties) | Olive may set off by face value of assigned judgments (plus interest) (Olive) | Olive may set off Edwards Specialties’ judgment by the face value of the assigned judgments that are mutual (total $796,589.98 plus interest) |
Key Cases Cited
- Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995) (§ 553 preserves prepetition setoff rights under nonbankruptcy law)
- Celotex Corp. v. Catrett, 477 U.S. 317 (1986) (summary judgment standard)
- Woodrum v. Ford Motor Credit Co. (In re Dillard Ford, Inc.), 940 F.2d 1507 (11th Cir. 1991) (three § 553 requirements: mutual debts, prepetition, and exceptions)
- Securities & Exchange Comm’n v. Elliott, 953 F.2d 1560 (11th Cir. 1992) (strong policy favoring setoff; setoff not treated as impermissible preference)
- Medical Ctr., Inc. v. NCRIC, Inc. (In re Columbia Hosp. for Women Medical Ctr., Inc.), 461 B.R. 648 (Bankr. D. Del. 2011) (assignment can supply mutuality and assignment supported by split-of-recovery consideration)
- In re Chestnut Co., Inc., 39 B.R. 519 (Bankr. D.S.C. 1984) (mutuality exists where obligations are joint and several)