In re Myers

• Decision Date: 29 March 2004
• Docket Number: No. 02-2350.,02-2350.
• Citation: 362 F.3d 667
• Parties: In re Wesley Allen MYERS and Sonja Diane Myers, Debtors. United States of America, on behalf of the Department of Agriculture Farm Service Agency, Appellant, v. Wesley Allen Myers, Sonja Diane Myers, and Ronald E. Holmes, Trustee, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

362 F.3d 667

In re Wesley Allen MYERS and Sonja Diane Myers, Debtors United States of America, on behalf of the Department of Agriculture Farm Service Agency, Appellant, v. Wesley Allen Myers, Sonja Diane Myers, and Ronald E. Holmes, Trustee, Appellees.

No. 02-2350.

United States Court of Appeals, Tenth Circuit.

March 29, 2004.

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Edward Himmelfarb, Appellate Staff Civil Division, Department of Justice (Robert D. McCallum, Jr., Assistant Attorney General, Washington, D.C., David C. Iglesias, United States Attorney, Albuquerque, N.M., and William Kanter, Appellate Staff Civil Division, Department of Justice, Washington, D.C., with him on the briefs), Washington, D.C., for Appellant.

George M. Moore, George M. Moore & Associates, Albuquerque, N.M., for Appellees.

Before LUCERO, BALDOCK, and TYMKOVICH, Circuit Judges.

BALDOCK, Circuit Judge.

In March 2000, Wesley Allen Myers and Sonja Diane Myers (Debtors) filed a Chapter 12 bankruptcy petition in the United States Bankruptcy Court. The Farm Service Agency (FSA), an agency within the United States Department of Agriculture, filed a motion for relief from the automatic stay to setoff government program payments owed to Debtors. The bankruptcy court denied the FSA's motion, holding administrative regulations prohibited setoff. On appeal, the Bankruptcy Appellate Panel (BAP) affirmed on alternative grounds, focusing on § 553 of the Bankruptcy Code. In re Myers, 284 B.R. 478 (10th Cir. BAP 2002). Section 553 provides in relevant part:

[T]his 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[.]

11 U.S.C. § 553(a). The BAP held the FSA could not setoff payments owed to Debtors under § 553 because the FSA did not have a "claim" against Debtors. Myers, 284 B.R. at 480. On appeal, the FSA maintains both the bankruptcy court and the BAP erred in denying FSA's right to setoff.

We have jurisdiction to review final bankruptcy decisions under 28 U.S.C. § 158(d). When reviewing BAP decisions, we independently review the bankruptcy court decision. In re Albrecht, 233 F.3d 1258, 1260 (10th Cir.2000). We review de novo the proper application of the Bankruptcy Code. In re Midkiff, 342 F.3d 1194, 1197 (10th Cir.2003). Applying this standard, we hold the FSA's right to setoff fails under § 553 because the FSA did not owe a debt to Debtors "that arose before the commencement of" the bankruptcy case. Accordingly, we affirm.

I.

Debtors are family farmers who borrowed money from the FSA between 1969 and 1980. Liens on Debtors' real property secured the loans. Debtors defaulted on the loans in 1995. The next year, Debtors entered into a seven year executory "Production Flexibility Contract" (PFC) with the Commodity Credit Corporation (Commodity Corp.). Under the PFC, the Commodity Corp. contractually agreed to pay Debtors an annual PFC payment in exchange for compliance with various planting, conservation, and land-use restrictions.¹ Debtors received their first PFC payment in 1996. The next year, however, the FSA setoff the 1997 PFC payment and applied it to Debtors' defaulted loans.²

In January 1997, the FSA filed a foreclosure action against Debtors' real property. Debtors thereafter filed a Chapter 12 bankruptcy petition, which they later converted to a Chapter 7 petition. The filing of the bankruptcy petition automatically stayed the FSA's foreclosure action. See 11 U.S.C. § 362(a)(1). The filing of the petition also terminated the PFC. See 7 C.F.R. § 1412.201(b) (2002).³ Neither the Chapter 7 trustee, nor Debtors, assumed the PFC. See id.; see also 11 U.S.C. § 365. As a result of the termination, the Commodity Corp. did not make any PFC payments to Debtors in 1998 or 1999. At the close of the Chapter 7 proceedings, Debtors obtained a discharge of all personal liability. See 11 U.S.C. § 727. After the discharge, Debtors entered into a stipulated judgment with the FSA in the amount of $436,942.30, plus interest, secured solely by Debtors' real property. The FSA proceeded with its foreclosure action.

In March 2000, two days before the FSA's foreclosure sale, Debtors filed a second bankruptcy petition under Chapter 12. The Chapter 12 petition again stayed the FSA's foreclosure proceedings. Debtors submitted a proposed Chapter 12 repayment plan. See 11 U.S.C. § 1221. The bankruptcy court confirmed the plan over FSA's objections. The plan permitted Debtors to keep their property if they paid the appraised value of the property, $390,000, plus interest, to the FSA over a twenty-five year period.

In July 2000, Debtors filed a motion in the bankruptcy court seeking to "assume" or reaffirm the previously terminated PFC. See 7 C.F.R. § 1412.207(a)(3) (2002).⁴ The bankruptcy court entered a stipulated order granting Debtors' motion. The stipulation provided, among other things: (1) Debtors could enroll in farm related payment programs, such as the PFC; (2) Debtors entered into the PFC dated July 28, 2000 as a "successor in interest" to the PFC approved June 18, 1996; (3) the 1996 date governed for purposes of setoff; and (4) Debtors did not admit the FSA had any right of setoff. The Commodity Corp. approved Debtor's "successor in interest" PFC. At that point, Debtors were eligible for the remaining three years of PFC payments under the contract, i.e., 2000, 2001, and 2002. After Debtors entered into the "successor in interest" PFC, the FSA sought relief from the automatic stay to setoff the 2000, 2001, and 2002 PFC payments. The FSA's motion was denied.

II.

Setoff is a right grounded in concepts of fairness and equity. G.S. Omni Corp. v. United States, 835 F.2d 1317, 1318 (10th Cir.1987). The right of setoff "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 v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) (quoting Studley v. Boylston Nat'l. Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 57 L.Ed. 1313 (1913)). By definition, setoff is a "common right, which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him." Gratiot v. United States, 40 U.S. 336, 370, 15 Pet. 336, 10 L.Ed. 759 (1841). In the bankruptcy context, setoff allows one creditor to be paid more than other creditors.⁵ See In re IML Freight, Inc., 65 B.R. 788, 792 (Bankr.D.Utah 1986). "In the absence of... setoff, the creditor might be forced to pay in full the amount owed to the debtor, but be limited to no more than a pro rata recovery of his claim against the debtor." Id. (internal quotation omitted).

The Bankruptcy Code does not create a federal right of setoff. Strumpf, 516 U.S. at 18, 116 S.Ct. 286. Setoff in bankruptcy is neither automatic nor mandatory; rather, its application rests within the sound discretion of the bankruptcy court. 5 Collier on Bankruptcy ¶ 553.02[3] (15th ed. rev.2003). Section 553 of the Code simply preserves setoff rights that might otherwise exist under federal or state law. Strumpf, 516 U.S. at 18, 116 S.Ct. 286. Therefore, the threshold determination is whether an independent right of setoff exists outside of bankruptcy. See id. If such a right exists, only then do we look to § 553 to establish whether the conditions of setoff are satisfied. 5 Collier on Bankruptcy ¶ 553.01[2].

Under § 553, a creditor with an independent right of setoff may setoff a debtor's obligations only if the creditor satisfies three elements. First, the creditor must owe a debt to the debtor that "arose before the commencement of" the bankruptcy proceedings. Second, the creditor must have a claim against the debtor that "arose before the commencement of" the bankruptcy proceedings. Third, the creditor's and debtor's obligations must be mutual. 11 U.S.C. § 553(a); Davidovich v. Welton, 901 F.2d 1533, 1537 (10th Cir.1990). In other words, a right to setoff under § 553 arises only when the mutual debt and claim both arose pre-petition. See United States v. Gerth, 991 F.2d 1428, 1431 (8th Cir.1993).

In determining whether a debt is pre-petition or post-petition, executory contracts, such as the PFC in question, present special problems. See Gerth, 991 F.2d at 1432-33; In re Buckner, 218 B.R. 137, 145 (10th Cir. BAP 1998). An executory contract is "a contract that has not as yet been fully completed or performed" and in which future obligations remain. Black's Law Dictionary 395 (6th ed.1991).⁶ Agricultural contracts, such as the PFC, are executory in nature because material performance remains due on both sides. See Gerth, 991 F.2d at 1431; Buckner, 218 B.R. at 145; In re Ratliff, 79 B.R. 930, 933 (Bankr.D.Colo.1987). Given the nature of executory contracts, the determination of whether a debt under a contract arises pre-petition or post-petition can be problematic because the debtor generally enters into the executory contract pre-petition while performance remains due post-petition. Buckner, 218 B.R. at 145.

The Bankruptcy Code defines "debt" as "liability on a claim" and the term "claim" as the "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, disputed, undisputed, legal, equitable, secured or unsecured." 11 U.S.C. §§ 101(12), (5)(A). In Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991), the Supreme Court stated a "right to payment" means "nothing more nor less than an enforceable obligation." (internal quotation omitted). Accordingly, a debt arises pre-petition for set-off purposes when some "right to payment" exists pre-petition; that is, when an enforceable obligation exists at the time the debtor files his bankruptcy petition. See Buckner, 218 B.R....