G.S. Omni Corp., In re

• Citation: 835 F.2d 1317
• Decision Date: 30 December 1987
• Docket Number: No. 86-1065,86-1065
• Parties: 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.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1317

835 F.2d 1317

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...