835 F.2d 1317 | 10th Cir. | 1987
17 Collier Bankr.Cas.2d 1429, Bankr. L. Rep. P 72,158
In re G.S. OMNI CORPORATION, Debtor,
James H. TURNER, Trustee for the Liquidation of G.S. Omni
Corporation, Appellee,
v.
UNITED STATES of America; Donald T. Regan, Secretary of
Treasury; Roscoe L. Egger, Jr., Commissioner of
the I.R.S.; G.L. Mihlbachler, District
Director of I.R.S., Appellants.
No. 86-1065.
United States Court of Appeals,
Tenth Circuit.
Dec. 30, 1987.
Thomas R. Lamons, Attorney, (Roger M. Olsen, Asst. Atty. Gen.; Michael L. Paup, Wynette J. Hewett, Attorneys, with him on the brief), Tax Div., Dept. of Justice, Washington, D.C., for appellants.
Maria J. Flora, Attorney, (Daniel W. Rumsey, Attorney, with her on the brief), Gorsuch, Kirgis, Campbell, Walker and Grover, Denver, Colo., for appellee.
Before McKAY, MOORE and BALDOCK, Circuit Judges.
PER CURIAM.
The Government, creditor, appeals from an order of the district court affirming a bankruptcy court decision ordering the Government to turn over to James A. Turner, trustee, tax refunds due G.S. Omni Corporation, debtor, because the Internal Revenue Service's (IRS) failure to file a timely proof of claim precluded it from exercising a right of setoff. On appeal, the Government argues that the district court and bankruptcy court erred in holding that the timely filing of a proof of claim is a prerequisite to asserting a right of setoff under 11 U.S.C. Sec. 553. We reverse.
The debtor was a securities broker and dealer from March, 1980, to February, 1982. By the end of February, debtor had ceased doing business, and the Securities Investor Protection Corporation filed in the bankruptcy court for appointment of a trustee for purposes of liquidating the debtor. In March, 1982, the bankruptcy court appointed the trustee and ordered liquidation of the debtor's property pursuant to the Securities Investor Protection Act. See 15 U.S.C. Secs. 78aaa-78lll.
Notice of liquidation and the six month limitation for filing proofs of claim was published in local newspapers. The IRS offices in Ogden and Denver were sent formal notice of the liquidation and the proof of claim filing deadline of September 27, 1982. The IRS did not file a proof of claim by the bar date.
On September 15, 1982, the trustee filed Form 4446, Corporate Application for Quick Refund of Overpayment of Estimated Tax, requesting a refund of estimated income taxes. The IRS sent the trustee part of the amount requested. It set off the remaining amount against unpaid tax liabilities. In March, 1983, the trustee filed Form 1129, Corporate Application for (Tentative) Refund Due to Net Operating Loss after Carrybacks, claiming corporate income tax refunds. The IRS refused to make any refunds and asserted it was entitled to set off the entire amount of the refund against debtor's unpaid tax liabilities.
On March 7, 1984, the trustee commenced this turnover proceeding in the Bankruptcy Court seeking the amounts he had claimed as refunds and interest, costs, and attorney's fees. The trustee contended that the Government was not entitled to exercise any setoff rights, because it had not filed a timely proof of claim. The Bankruptcy Court agreed and ordered the Government to turn over the money sought by the trustee. The district court affirmed.
The question presented is whether a creditor may assert a right of setoff against the claims of a bankruptcy estate without filing a proof of claim before the bar date. The bankruptcy court held, in effect, that failure to file a timely proof of claim terminated the claim in all its aspects, including the creditor's right to assert the setoff as a defense to the action by the trustee. In its analysis, the bankruptcy court was persuaded that allowing the creditor to assert the defense of setoff would unfairly permit the creditor to obtain a greater portion of its debt than other creditors. The court therefore believed that disallowance of the right of setoff was mandated by the need for "procedural consistency ... crucial to the fair and orderly operation of bankruptcy law." The court concluded that the preclusive effect of the failure to file a proof of claim must work against the right to assert a setoff. We disagree with this analysis.
Any analysis of the issue starts with the statutory underpinning of the turnover action, 11 U.S.C. Sec. 542(b). In circumscribing the duty of a creditor owing a matured debt to the estate, Sec. 542(b) mandates the debt be paid to the trustee "except to the extent that such debt may be offset under section 553 of this title." It is important to note, however, that the Sec. 542(b) right to exercise the defense of setoff is not limited by time constraints nor tied to the filing of a proof of claim. See In re Central Equip. & Serv. Co., 61 B.R. 986, 988 (Bankr.N.D.Ga.1986); In re Sutton Invs., Inc., 53 B.R. 226, 230 (Bankr.W.D.La.1985); In re Whitman, 38 B.R. 395, 398 (Bankr.D.N.D.1984); In re Ford, 35 B.R. 277, 279 (Bankr.N.D.Ga.1983); In re Fulghum Constr. Corp., 23 B.R. 147, 152-53 (Bankr.M.D.Tenn.1982), vacated on other grounds, 706 F.2d 171 (6th Cir.1983).
The right of setoff is one which is grounded in fairness. It would be unfair to deny a creditor the right to recover an established obligation while requiring the creditor to fully satisfy a debt to a debtor. Hence, the right of setoff is universally recognized. 4 Collier on Bankruptcy 15th Ed. p 553.02 (1986).
Thus, one who turns to Sec. 553 discovers, in general terms, that a creditor's pre-bankruptcy setoff rights are not affected by the Bankruptcy Code, except in certain defined instances. Id. The only one of those instances remotely applicable here is that a creditor cannot set off a claim which has been disallowed. 11 U.S.C. Sec. 553(a)(1).
The circumstances which lead to the disallowance of a claim are set forth in 11 U.S.C. Sec. 502(b). None of these deal with failure to file a proof of claim. Hence, we reason, since setoff can be asserted in the absence of disallowance, and since a claim cannot be disallowed for failure to file, it must be concluded a creditor's failure to file a proof of claim cannot affect the creditor's right to assert the defense.
There must be a fundamental distinction drawn between the provisions of the Code which deal with a proof of claim and its effect on the administration and distribution of the estate, and the debt which gives rise to a claim. While a creditor who wishes to participate in the distribution of an estate is required to file a proof of its claim, and while that participation can be denied by the disallowance of the claim, the underlying debt continues to exist. Indeed, were it not for the continuing existence of the debt (or "claim") there would be no need for a discharge of debts issued pursuant to 11 U.S.C. Sec. 727(b).
Accordingly, we reason that even though a creditor may be prevented from participating in the distribution of the estate, the debt has viability until it is discharged. Naturally, without relief from the automatic stay, the debt cannot be enforced, 11 U.S.C. Sec. 362, but it is still imbued with other attributes. One of those is the right of setoff. 4 Collier on Bankruptcy, 15th Ed. p 553.05 (1986).
Making the right to assert the attribute of setoff dependent upon the filing of the proof of claim is an intrusion into the creditor's rights which is not contemplated in the Bankruptcy Code. It is also an improper application of the provisions of 11 U.S.C. Sec. 502(b).
Setoff must be distinguished from a claim requesting a distribution from the liquidation of an estate. Here the Government sought only to exercise its right to a setoff as a defense to the turnover action. Instead of seeking a distribution from the liquidation of the estate or double recovery, the Government attempted to satisfy its claim only to the extent of the money due from the Government to the debtor. As long as the debt owed the Government continued to exist, the Government had the right to do so.
Accordingly, we hold that until discharge is ordered, a creditor need not file a proof of claim as a prerequisite to asserting a right of setoff pursuant to Sec. 553. The judgment of the United States District Court for the District of Colorado is REVERSED. This action is REMANDED to the district court with instructions to remand to the bankruptcy court for further proceedings addressing the Government's right to setoff pursuant to the requirements of Sec. 553.
