564 B.R. 196
Bankr. S.D.N.Y.2017Background
- CRS sold substantially all assets to Noor under an APA; Noor later paid roughly $7.25M but disputed remaining payments and allegedly withheld certain receivables post-closing. Trustee sued Noor in an adversary proceeding for turnover, breach, and avoidance (including constructive fraudulent transfer).
- Noor asserted affirmative defenses and filed a proof of claim claiming ~ $135,419 in fixed damages and ~$8.48M in contingent damages tied to possible future liabilities (tax, labor, immigration, DOE/Medicaid violations). Noor sought to set off those contingent claims against any judgment or liability to the estate.
- Trustee moved to strike Noor’s setoff defense and disallow setoff to the extent based on contingent claims, arguing New York law bars setoff of contingent claims and §553 does not create a federal setoff right.
- The parties agreed New York law governs nonbankruptcy setoff rights; Noor conceded most of its claimed damages were contingent and unaccrued.
- The court held §151 DCL and New York common law do not permit setoff of contingent claims and, following Supreme Court precedent, §553 only preserves preexisting nonbankruptcy setoff rights; thus Noor may not set off contingent claims. Noor’s contingent unsecured claim remains subject to allowance/estimation/objection.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Noor) | Held |
|---|---|---|---|
| May contingent claims be used for setoff under §553? | New York law and §553 do not permit setoff of contingent, unliquidated claims. | §101(5) broadly defines "claim" to include contingent claims; §553 should allow setoff of such claims in bankruptcy. | No. Contingent claims cannot be set off; §553 preserves nonbankruptcy setoff rights but does not create new federal setoff rights. |
| Does the Bankruptcy Code create an independent federal right of setoff? | The Code does not create one; §553 preserves rights established under nonbankruptcy law. | §553 or other Code provisions should be read to allow setoff beyond state-law limits. | No. Supreme Court authority (Strumpf) and subsequent cases hold §553 preserves, not creates, setoff rights. |
| Did Noor satisfy §553’s additional requirements (mutuality and that debts arose prepetition)? | Even if asserted, Noor’s contingent claims lack the finality (all transactions giving rise to liability) required to have arisen prepetition. | Noor contends some claims relate back to the APA and thus arose prepetition. | Noor failed to show that all transactions necessary for liability occurred prepetition; most contingent claims do not satisfy §553’s requirements. |
| Should Noor’s contingent claim be disallowed/expunged entirely? | Trustee sought full disallowance. | Noor argued contingent claims qualify as "claims" under §101(5) and should survive the claims process even if not usable for setoff. | Noor’s contingent unsecured claim survives for now (subject to objection/estimation); only setoff based on those contingent claims is barred. |
Key Cases Cited
- Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995) (Bankruptcy Code does not create federal right of setoff; §553 preserves nonbankruptcy setoff rights)
- United States v. Whiting Pools, Inc., 462 U.S. 198 (1983) (treatment of estate interests and turnover under the Code)
- McCollum v. Hamilton Nat’l Bank of Chattanooga, 303 U.S. 245 (1938) (pre-Code/Act discussion of mutual debts and limits on setoff under federal penalty statute)
- In re Bennett Funding Group, Inc., 146 F.3d 136 (2d Cir. 1998) (§553 preserves nonbankruptcy setoff rights; does not create a federal setoff right)
- In re Lehman Bros. Holdings Inc., 439 B.R. 811 (Bankr. S.D.N.Y. 2010) (§553 does not create independent setoff rights; analyze applicable nonbankruptcy law first)
- In re Chestnut Co., Inc., 39 B.R. 519 (Bankr. D.S.C. 1984) (discussed limits of §553 but decided prior to Strumpf)