In re Lopes
| Decision Date | 01 August 1997 |
| Docket Number | Adversary No. 95-1131,Bankruptcy No. 95-10566.,Civil Action No. 96-554L |
| Parties | In re Lydia LOPES, Debtor. Lydia LOPES, Plaintiff, Appellee, v. UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, Defendant, Appellant. |
| Court | U.S. District Court — District of Rhode Island |
Christopher M. Lefebvre, Pawtucket, RI, for Plaintiff/Appellee.
Robin E. Feder, U.S. Attorney's Office, Providence, RI, for Defendant/Appellant.
This matter is before the Court on appeal from an Order ("Order") issued by Judge Arthur Votolato of the United States Bankruptcy Court for the District of Rhode Island on June 17th, 1996. Appellant, the United States Department of Housing and Urban Development ("HUD"), seeks review of the Bankruptcy Court's decision granting summary judgment in favor of Appellee, Lydia Lopes ("Lopes"). For the reasons that follow, the Order is reversed, and the case is remanded to the Bankruptcy Court for entry of judgment for HUD.
The material facts are undisputed. In February 1994, HUD, as mortgage holder, foreclosed upon the home of Lydia Lopes, leaving a deficiency balance of $14,000 owing to it by Lopes. On February 27, 1995, Lopes received a notice, after the fact, that the Internal Revenue Service ("IRS") had paid her 1994 federal income tax refund in the amount of $3,362 to HUD, as a partial payment on the remaining amount she owed to HUD. On March 13, 1995, Lopes filed for relief under Chapter 7 of the Bankruptcy Code, after which she brought this adversary proceeding in Bankruptcy Court requesting reimbursement from HUD of the amount paid to HUD by the IRS.
Both Lopes and HUD made motions for summary judgment. In support of her motion, Lopes argued that the IRS payment to HUD was an avoidable setoff under 11 U.S.C. § 553(b) of the Bankruptcy Code because it occurred within the ninety day period before she filed for bankruptcy protection. HUD contended that the setoff was proper and not voidable under § 553(b). After hearing arguments from both parties, the Bankruptcy Court granted summary judgment in favor of Lopes on grounds not addressed by either of the parties. Judge Votolato decided that the setoff was improper because of a lack of mutuality of obligation between the parties, i.e., that HUD and not the IRS was Lopes' creditor. See In re Lopes, 197 B.R. 15, 17-18 (Bankr.D.R.I.1996). The Court also held that, even if mutuality did exist, the setoff was nonetheless impermissible as a voidable preference under 11 U.S.C. § 547(b). Id. at 18. Thereafter, HUD filed an appeal to this Court pursuant to 28 U.S.C. § 158(a), arguing that mutuality did in fact exist between Lopes, on one side, and HUD and the IRS, on the other, because the United States is a unitary creditor for setoff purposes in bankruptcy. After hearing the arguments of counsel, this Court took the matter under advisement. It is now in order for decision.
When reviewing an order of a bankruptcy court under 28 U.S.C. § 158(a), a district court may set aside factual findings only when they are clearly erroneous. See In re Anderson, 128 B.R. 850, 852 (D.R.I.1991). However, when questions of law are involved, de novo review is the appropriate standard. Id. The main question presented here, whether the United States is a unitary creditor for bankruptcy purposes, and the other issues in this case are purely questions of law. Therefore, this Court will review the Bankruptcy Court's decision de novo.
Rooted in the common law, the setoff mechanism "allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding `the absurdity of making A pay B when B owes A'". Citizens Bank of Maryland v. Strumpf, ___ U.S. ___, ___, 116 S.Ct. 286, 289, 133 L.Ed.2d 258 (1995) (quoting Studley v. Boylston Nat'l Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 808, 57 L.Ed. 1313 (1913)). Stated another way, the right of setoff "allows parties that owe mutual debts to state the accounts between them, subtract one from the other and pay only the balance." In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 896 F.2d 54, 57 (3d Cir.1990). In order to use the setoff mechanism, mutuality must exist between the parties. Mutual debts are "in the same right and between the same parties, standing in the same capacity." 4 Collier on Bankruptcy § 553.94 (15th ed.1992); see also Darr v. Muratore, 8 F.3d 854, 860 (1st Cir.1993).
It is well settled under the common law that the United States is a unitary creditor, a status which allows mutuality to exist in a situation where different government agencies, departments or entities are involved. The Supreme Court clearly established the federal government's right to use the setoff mechanism in Gratiot v. United States, 40 U.S. (15 Pet.) 336, 10 L.Ed. 759 (1841): "The United States possess the general right to apply all sums due for such pay and emoluments, to the extinguishment of any balances due to them by the defendant, on any other account." Id. at 370. Thus, in Gratiot, the Court held that where the United States Army owed pay to a chief engineer, the United States could setoff this debt against a debt owed by the engineer to the Department of the Treasury. Id.
A similar situation was presented in Cherry Cotton Mills, Inc. v. United States, 327 U.S. 536, 105 Ct.Cl. 824, 66 S.Ct. 729, 90 L.Ed. 835 (1946), where a flour tax refund was owed the petitioner under the Agricultural Adjustment Act, and the petitioner owed the Reconstruction Finance Corporation ("RFC") the balance due on a promissory note. The General Accounting Office directed the Treasury Department to issue a check payable to the RFC in the amount of the petitioner's tax refund as a setoff against the petitioner's debt owed the RFC. Id. at 537, 66 S.Ct. at 729. The petitioner sued the United States to recover the tax refund, contending that there was no mutuality because of the RFC's corporate status. Id. Again recognizing the general rule that the United States is a unitary creditor, the Supreme Court held that the setoff was proper, finding that the RFC's corporate status did not change the fact that it was essentially an agency of the United States Government. Id. at 539, 66 S.Ct. at 730. As the Court stated:
Every reason that could have prompted Congress to authorize the Government to plead counterclaims for debts owed to any of its other agencies applies with equal force to debts owed to the R.F.C. Its Directors are appointed by the President and confirmed by the Senate; its activities are all aimed at accomplishing a public purpose; all of its money comes from the Government; its profits, if any, go to the Government; its losses the Government must bear.
The same is true of the relationship between HUD and the IRS. The United States is necessarily comprised of many different departments or entities, each with a specialized structure and purpose. However, these entities are part of the same whole — namely, the United States Government. See Small Bus. Admin. v. McClellan, 364 U.S. 446, 450, 81 S.Ct. 191, 195, 5 L.Ed.2d 200 (1960) (); United States Dep't of Agric. v. Remund, 330 U.S. 539, 541-42, 67 S.Ct. 891, 892-93, 91 L.Ed. 1082 (1947) (similar).
Moreover, numerous statutory provisions authorize the United States to use inter-agency setoffs to satisfy debts, demonstrating a Congressional intent that the United States be deemed a unitary creditor for virtually all purposes. For example, 31 U.S.C. § 3720A authorizes the Secretary of the Treasury to use tax refunds as payment of past-due legally enforceable debts owed to any federal agency. Similarly, 31 U.S.C. § 3716(a) provides that "after trying to collect a claim from a person . . . the head of an executive, judicial, or legislative agency may collect the claim by administrative offset."1 See also 31 U.S.C. § 3728 ().
Although this case evolved in Bankruptcy Court and involves bankruptcy law principles, that does not in any way render common law setoff rights inapplicable. On the contrary, as a general rule, setoff rights recognized by the common law are also valid in bankruptcy, as section 553 of the Bankruptcy Code explicitly preserves setoff rights found in non-bankruptcy law. Section 553(a) states that "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 under this title against a claim of such creditor against the debtor that arose before the commencement of the case." (emphasis added). As the First Circuit stated in Darr v. Muratore, 8 F.3d 854 (1st Cir.1993), "Section 553 does not create new substantive law, but incorporates in bankruptcy the common law right of setoff, with a few additional restrictions." Id. at 860.2
While the First Circuit has not yet addressed the exact issue before this Court, other circuits have relied on Cherry Cotton Mills to declare that the United States and its agencies are unitary creditors in bankruptcy. Luther v. United States, 225 F.2d 495 (10th Cir.1954), is a particularly instructive case because it presented an almost identical question to that before this Court. There, the Tenth Circuit decided that the United States is a unitary creditor in bankruptcy, permitting the debtor's income tax refund to be paid to the Community Credit Corporation to offset the debtor's obligation to that entity. Id. at 498. In so holding, the Court found Cherry Cotton Mills controlling and dismissed the argument that the setoff would be improper due to a lack of mutuality. Id. More recently, the Tenth Circuit reaffirmed this conclusion in In re Turner, 84 F.3d 1294 (10th Cir.1996), where a setoff was allowed of Agricultural Stabilization and...
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