In re Braniff Airways, Inc., Bankruptcy No. 482-00369.
| Decision Date | 07 August 1984 |
| Docket Number | Bankruptcy No. 482-00369. |
| Citation | 42 BR 443 |
| Parties | In re BRANIFF AIRWAYS, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
COPYRIGHT MATERIAL OMITTED
Daniel M. Lewis, Richard P. Schifter, Brian P. Leitch, Arnold & Porter, Washington, D.C., for debtor/movant.
Edward L. Rothberg, Atty., Tax Division, Dept. of Justice, Dallas, Tex., for the United States (Internal Revenue Service).
J. Christopher Kohn, Tracy Whitaker, Stephanie Wickouski, Attys., Civil Division Dept. of Justice, Washington, D.C., for the United States (all other respondent agencies).
ORDER DENYING DALFORT'S MOTION TO ALLOW SETOFF OF CERTAIN CLAIMS OF DALFORT AGAINST THE UNITED STATES AGAINST CERTAIN DEBTS OF DALFORT TO THE UNITED STATES
1. On February 27, 1984, Dalfort Corporation ("Dalfort" or "Braniff") (formerly Braniff Airways Incorporated) filed a Motion to Allow Setoff of Certain Claims of Dalfort Against the United States Against Certain Debts of Dalfort to the United States ("Setoff Motion").
2. On February 15, 1984, the United States moved for a Summary Judgment in an interpleader action captioned Aetna Casualty & Surety Co. v. Braniff Airways, Inc., Adversary Proceeding No. 483-0467. The subject of the interpleader action is a $200,000 certificate of deposit which collateralizes an air carrier blanket bond, issued by Aetna Casualty as surety, given by Braniff to the United States Customs Service with regard to certain potential duties and penalties. The interpleader action also involves the setoff issues raised by Dalfort and the United States in the Setoff Motion, and is therefore discussed in this Order.
3. In its Setoff Motion, Dalfort seeks to setoff certain receivables due Dalfort from the United States against certain claims of the United States against Dalfort. The United States, in opposition to the Setoff Motion, urges the Court: (1) to require Dalfort to use its claim to partially offset general unsecured claims of the United States, and (2) to require Dalfort to pay the priority tax claims of the United States in full.
4. The parties have stipulated the material facts, and have submitted written briefs on the legal issues. On May 7, 1984, the Court heard oral argument. Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure as incorporated by Bankruptcy Rule 7052, the Court hereby enters the following findings of fact, conclusions of law and order denying the Setoff Motion.
5. The various debts between the parties are set forth in the Stipulation attached hereto as Exhibit A. These amounts have been stipulated for purposes of the Setoff Motion only, and each party has reserved its rights to contest the precise amount owing after a ruling on the Setoff Motion.
6. In general, the United States has pre-petition non-priority claims against Braniff in the approximate amount of $8.9 million, principally for claims of various government agencies for unused air travel tickets and pension excise tax claims of the IRS.
7. The United States also has a claim against Braniff for employment taxes due with respect to the payment of 11 U.S.C. § 507(a)(3) priority wage claims in the approximate amount of $4.2 million. $2.9 million of this amount represents income and FICA taxes actually withheld from the payment of the priority wage claims to the employees. The remaining $1.3 million constitutes the employer's share of taxes due on the priority wage claims.
8. The United States also has a pre-petition priority claim against Braniff for federal unemployment tax with respect to wages paid before its petition in the amount of $11,125.00.
9. The United States also has a pre-petition non-priority claim against Braniff for $52,359.00 in Customs duties and penalties.
10. The United States also has a pre-petition non-priority claim against Braniff for $155,647 in customs duties and penalties for which Aetna Casualty & Surety Co. ("Aetna") is liable as a surety. The bond issued by Aetna is fully collateralized by a certificate of deposit received from Braniff.
11. Braniff, on the other hand, has pre-petition claims against the United States of approximately $4.5 million, principally for government transportation requests ("GTR's") which were used by government officials but never paid for.
12. Dalfort requests that the approximately $4.5 million dollars it holds in claims against the United States be setoff in the following manner:
13. First, to extinguish the approximately $155,647.00 in debts and penalties that it owes the Customs Service, for which Aetna is obligated as surety; second, to extinguish the $11,125.00 that Dalfort owes the IRS for unpaid, pre-petition unemployment taxes; third, to extinguish the approximately $1.2 million dollars that it owes the IRS for the employer's share of FICA as a result of the payment of priority wage claims; fourth, to extinguish the approximately $100,000.00 in unemployment taxes which it owes the IRS as the result of the payment of priority wage claims for work performed prior to the filing of the Chapter 11 petition; fifth, to extinguish the approximately $2.9 million dollars that it owes the IRS for the employee's share of FICA, and for income taxes withheld on wages as a result of the payment of priority wage claims; sixth, to extinguish any such other priority claims to the United States as may exist; and seventh, to extinguish unsecured claims of the United States.
14. In opposition, the government argues that its claims for taxes arising out of the payment of priority wage claims to former employees pursuant to 11 U.S.C. § 507(a)(3) () arose post-petition, and, pursuant to Section 553, cannot be setoff against the pre-petition obligations of the government to Dalfort until full setoff of any pre-petition claims against Dalfort has been accomplished or adequate protection has been furnished.1
15. Although Section 553 of the Bankruptcy Code speaks in terms of the creditor's right of setoff, the debtor has the right to assert setoff as well. Compare 11 U.S.C. § 553 with 11 U.S.C. §§ 106(b), 541(e); Carstens v. McLean, 7 F.2d 322 (9th Cir.1925); In re Standard Furniture Co., 3 B.R. 527, 531 (Bankr.S.D. Cal.1980). In the instant case, the Court faces the question of how to apply setoff when the methods proposed by the debtor and creditor are in conflict, and the Bankruptcy Code does not provide a clear answer to this question.
16. The creditor's right of setoff in bankruptcy is explicitly set forth in Section 553(a) of the Bankruptcy Code which provides in pertinent part:
"Except as otherwise provided in this section and in Sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case . . ." (emphasis ours)
The debts and claims are not required to be of the same character before the principle of setoff may be applied. The only requirements for setoff under Section 553 are: (1) the debts and claims must be mutual, and (2) they must be pre-petition.
17. Although Section 553 does not mention a debtor's right of setoff by its terms, the Bankruptcy Code implicitly recognizes the use of offset by a debtor as a "defense" which the debtor may assert under Section 541(e) of the Code. 11 U.S.C. § 541(e); In re Standard Furniture Co., 3 B.R. 527, 531 (Bankr.S.D.Cal.1980). Section 541(e) provides in part: "That the estate shall have the benefit of any defense available to the debtor as against an entity other than the estate . . ."
18. Equality of distribution among creditors is a fundamental policy of bankruptcy law. See, e.g., Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 219, 61 S.Ct. 904, 907, 85 L.Ed. 1293 (1941); Yellowhouse Machinery Co. v. Mack (In re Hughes), 704 F.2d 820, 822 (5th Cir.1983); H.R.Rep. No. 595, 95th Cong., 1st Sess. 177-78 (1977), U.S.Code Cong. & Admin. News 1978, pp. 5787, 6138; 4 Collier on Bankruptcy ¶ 547.03 (15th Ed.1983). The privilege of setoff is at odds with this fundamental policy because setoff permits a creditor to obtain full satisfaction of a claim by extinguishing an equal amount of the creditor's obligation to the debtor, i.e., in effect, the creditor receives a "preference". Denying setoff, on the other hand, would result in the creditor paying into the estate the full amount owed while receiving only a pro rata distribution ultimately made to all unsecured creditors. Notwithstanding this conflict with the policy of equality of distribution among creditors, however, setoff has long been permitted in bankruptcy. New York County National Bank v. Massey, 192 U.S. 138, 146, 24 S.Ct. 199, 201, 48 L.Ed. 380 (1904).
19. The basic doctrine of setoff arose in a nonbankruptcy context as a practical tool to eliminate unnecessary transactions between parties holding mutual debts. Thus, the Supreme Court has stated that setoff "is grounded on the absurdity of making A pay B when B owes A." Studley v. Boylston National Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 808, 57 L.Ed. 1313 (1913).
20. According to the Third Circuit, "The historical antecedents of setoff rights are long and venerable and are based on the common sense notion that `a man should not be compelled to pay one moment what he will be entitled to recover back the next'". United States v. Norton, 717 F.2d 767, 773 (3d Cir.1983).
21. Setoff in bankruptcy is rooted in equity. ...
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