Nicolaos P. Spirakis, 13-07462

Debtors Nicolaos and Mary Spirakis (partners) filed Chapter 11 on December 3, 2013; Nicolaos later died in 2014.
Spiliotis and N. Spirakis were 50/50 business partners in a school and co-owners of two Wilshire Boulevard parcels purchased about 2000.
A partnership buy-sell agreement required the surviving partner, if exercising the buy option after the other’s death, to purchase the deceased partner’s partnership interest and interest in the Wilshire properties; the bankruptcy court calculated the purchase price as $70,000.
In 2010 N. Spirakis pledged (and apparently encumbered) the Wilshire properties as collateral for his son’s loan; foreclosure followed and N. Spirakis filed bankruptcy to stop it.
Spiliotis filed a $1,000,000 proof of claim for breach of fiduciary duty/negligent misrepresentation and asserted a secured setoff of $70,000; debtors objected to the secured portion under 11 U.S.C. § 553.
The bankruptcy court held the debt subject to setoff did not arise prepetition; the district court affirmed that ruling on appeal.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Spiliotis may claim a prepetition setoff under § 553 (i.e., whether the debt she asserts arose before the bankruptcy petition)	Spiliotis: her claim is a prepetition (contingent) claim because the partnership/buy-sell agreement created the right to payment before the petition; contingent claims qualify for setoff	Debtors: the right to payment did not exist prepetition because two conditions (death and exercise of buy option by surviving partner) had not occurred until after the petition; therefore no prepetition mutual debt for setoff	Court: The conduct giving rise to the debt occurred postpetition (Spiliotis’ exercise occurred after filing), so the debt did not arise prepetition and § 553 setoff requirements fail; bankruptcy court affirmed

Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995) (describing the bankruptcy setoff principle and availability of setoff in bankruptcy)
United States v. U.S. Gypsum Co., 333 U.S. 364 (1948) (standard for clearly erroneous factual findings)
In re White, 487 F.3d 199 (4th Cir. 2007) (appellate review standards for bankruptcy factual and legal conclusions)
In re Litton, 330 F.3d 636 (4th Cir. 2003) (mixed questions of law and fact reviewed de novo)
Durham v. SMI Indus. Corp., 882 F.2d 881 (4th Cir. 1989) (North Carolina mutual-debt setoff principles as applied in bankruptcy)
U.S. Through Agr. Stabilization & Conservation Serv. v. Gerth, 991 F.2d 1428 (8th Cir. 1993) (for setoff, a debt arises when all transactions necessary for liability have occurred)