In re Calore Express Co., Inc.

• Decision Date: 02 May 2002
• Docket Number: No. 01-1464.,01-1464.
• Citation: 288 F.3d 22
• Parties: In re CALORE EXPRESS COMPANY, INC., Debtor. United States, Appellant, v. Fleet Bank of Massachusetts, Appellee.
• Court: U.S. Court of Appeals — First Circuit

288 F.3d 22

In re CALORE EXPRESS COMPANY, INC., Debtor United States, Appellant, v. Fleet Bank of Massachusetts, Appellee.

No. 01-1464.

United States Court of Appeals, First Circuit.

Heard January 11, 2002.

Decided May 2, 2002.

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Peter Sklarew, Attorney, Tax Division, Department of Justice, with whom Claire Fallon, Acting Assistant Attorney General, and D. Patrick Mullarkey, Acting Deputy Assistant Attorney General, were on brief for appellant.

Debra K. Mayfield with whom Deborah J. Hart-Klein and Ruberto, Israel & Weiner, P.C. were on brief for appellee.

Before LYNCH, Circuit Judge, CAMPBELL, Senior Circuit Judge, and LIPEZ, Circuit Judge.

LYNCH, Circuit Judge.

This is a bankruptcy case in which the federal government asserts a right to set off the claims of two agencies, the Internal Revenue Service and the General Services Administration, against contract claims of the debtor as to the General Services Administration. If the government is correct, Fleet Bank of Massachusetts owes it several hundred thousand dollars, almost all from unpaid tax claims against the now-defunct debtor. Proceedings before the bankruptcy court did not go smoothly, primarily because the government did not keep the court or the other parties informed of its intent to assert its setoff rights or of the steps it took to do so. As a result we face, some seven years into the life of the case, the government's appeal of the bankruptcy court's ruling in a summary hearing that the government either waived its setoff rights or had no rights to assert. The debtor by now is long gone, and the government wishes to seek restitution from Fleet, the debtor's primary creditor, which the bankruptcy court permitted to sell the debtor's assets.

We reverse the entry of judgment against the government, because the bankruptcy court could not draw the legal conclusions it did without developing facts to support them and because we disagree with its conclusions about the priority of the government's setoff rights under the Uniform Commercial Code as interpreted by the Massachusetts courts. Our decision today does not guarantee the government success on its restitution claim if and when a court better develops the facts involved in this case. We then remand the case to the district court for appropriate disposition.

The decision does resolve some important questions. The following aspects of this opinion either decide new issues or clarify areas of the law:

1. We hold that this court has jurisdiction to review an order of the bankruptcy court refusing to lift the automatic stay when the order resolves all issues between the parties.

2. We further define the scope of a hearing on a motion for relief from the automatic stay before the bankruptcy court under the Federal Rules of Bankruptcy Procedure and Grella v. Salem Five Cent Savings Bank, 42 F.3d 26 (1st Cir.1994). We conclude that the question of waiver by a party of its rights is not outside the permissible scope of such a hearing.

3. We set forth principles for determining whether a creditor has waived the right of setoff in a bankruptcy proceeding. We hold that a creditor in bankruptcy proceedings may expressly waive a right of setoff; that a court may imply a waiver of a right of setoff from the creditor's conduct if that conduct fairly demonstrates the creditor's intent; and that a waiver of setoff rights, whether express or implied, is not necessarily irrevocable unless the case is a proper one for a court to apply estoppel.

4. We hold that although priority of the federal government's rights to set off claims against debts is a matter of federal common law, federal common law for present purposes incorporates state law, in this case section 318 of pre-revision Article Nine of the Uniform Commercial Code.

We also reject the argument of the IRS that it should be excused from an error it made in filling out a government form.

I.

The legal questions presented by this case turn largely on its history. That history is complex, and we recount it in some detail. Calore Express Company filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on May 5, 1995, in the District of Massachusetts. Calore had done business as a freight transportation company since its founding in the late 1940s, its operations diversifying over time. In the mid-1990s, however, Calore's business suffered from increased competition and a series of mishaps, until a threat by one of Calore's lenders to foreclose liens on some of its equipment led to the 1995 Chapter 11 filing.

Among Calore's largest creditors at the time was Shawmut National Bank.¹ Before the petition, Calore owed Shawmut approximately $2.8 million, and Shawmut had a security interest in many of Calore's assets, including its accounts receivable. After the petition, Calore remained debtor-in-possession and asked the bankruptcy court to permit it to reach an emergency financing agreement with Shawmut. Shawmut agreed to continue lending, with the amount of the loans determined partly by Calore's postpetition accounts receivable, and partly by the amount of those accounts collected. To secure this new credit, Calore asked the court to give Shawmut a superpriority claim and a security interest in all its assets under 11 U.S.C. § 364(c), including assets acquired postpetition and both pre- and postpetition accounts receivable. The bankruptcy court approved this arrangement in an interim order on May 17 and in numerous subsequent periodic orders beginning on June 28, 1995. The June 28 order read in relevant part:

Lender shall have a super-priority claim... with respect to obligations incurred pursuant to the [loan] over any and all administrative expenses [with exceptions not relevant here].

The Debtor is hereby authorized to grant and by entry of this Order does grant a security interest in all postpetition assets to the Lender and valid, binding, enforceable and perfected Liens in and to all collateral security ... including, without limitation,

All ... accounts ... now owned or in which the Debtor has any interest including all pre-petition collateral ... or hereafter acquired or in which the Debtor obtains an interest....

Eventually the court permitted Calore and the Bank to renew the arrangement by simple stipulation. The court held hearings during this time to monitor Calore's borrowing.

Calore had done business with the General Services Administration, and forthcoming payments from the GSA made up part of the accounts receivable on which Calore was borrowing. Calore also owed money to the Small Business Administration and the Internal Revenue Service. At the beginning of the case, therefore, there existed at least the possibility that the government might attempt to set off the GSA's debts to Calore against Calore's debts to the government. Nothing in the record reveals the scope of the GSA's contractual obligations at that time, or whether it was predictable that the GSA would continue to make postpetition payments to Calore.

Calore's debts to the IRS arose from its failures to pay various payroll taxes withheld from its employees' wages. Some of these failures were prepetition, some postpetition. On December 7, 1995, and January 25, 1996, the IRS through its own counsel filed proofs of claims for prepetition taxes. The second proof claimed dramatically more than had the first because the IRS then took the position that Calore was liable for certain taxes incurred by another corporation, CFS Air Cargo, a corporation nominally separate from Calore but which the IRS considered Calore's alter ego. As of January 25, 1996, the IRS amended its proof to claim a total of $3,105,612.90 in prepetition taxes, including penalties and interest.

As to postpetition debts, on November 20 and December 5, 1995, on February 28 and June 6, 1996, and on September 23, 1997, the IRS filed requests for payment of the postpetition payroll taxes as administrative expenses under 11 U.S.C. § 503(b). As of September 23, 1997, the IRS claimed a total of $479,134.77 in postpetition taxes, including penalties and interest. Calore disputed the exact amounts of the pre- and postpetition tax debts, and these amounts have not yet been established by any court. The GSA through its own counsel also filed a proof of claim on February 1, 1996, claiming that Calore owed it $6,734.24 in overcharges.

None of these filings informed the court or the other parties of any specific intention by the government to set off the GSA's debts to Calore against Calore's tax debts, or of whether the GSA would continue to incur debts to Calore. Some contained language disclaiming setoffs. For example, the IRS filed its prepetition proofs of claim on then-current copies of Official Bankruptcy Form 10. Form 10 then stated that "[i]n filing this claim, claimant has deducted all amounts that claimant owes to debtor";² an attachment, entitled "Proof of Claim for Internal Revenue Taxes," stated that "[t]his claim is not subject to any setoff or counterclaim." Moreover, although a setoff claim qualifies as a secured claim under 11 U.S.C. § 506(a), in its December 7 filing, the IRS identified its entire prepetition claim, then amounting to $146,609.36, as unsecured, although it specified that $133,281.24 of the claim should receive priority status under 11 U.S.C. § 507(a)(8). In its later January 25 filing, the IRS identified $2,448,520.69 of its $3,105,612.90 claim as secured, $572,683.35 as priority unsecured, and $84,408.86 as general unsecured. The security interest it identified was a tax lien against CFS. It left unchanged the language of Form 10 concerning the deduction of amounts owed and the language in the attachment concerning the absence of setoffs and counterclaims. There is no determinative evidence as to whether IRS employees actually knew that the GSA owed Calore money...