In re Roberts, Case No. 18-11927-t12

CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of New Mexico
Writing for the CourtHon. David T. Thuma United States Bankruptcy Judge
Docket NumberCase No. 18-11927-t12
Decision Date19 May 2020


Case No. 18-11927-t12


May 19, 2020


Before the Court is the United States Department of Agriculture-Farm Service Agency's ("FSA's") motion for relief from the automatic stay so it can set off its obligation to make subsidy payments to Debtors with Debtors' obligations to it under a note and mortgage. Debtors object on several grounds and ask instead that the Court order turnover of the subsidy payments. The Court, having heard arguments of counsel and reviewed the pertinent loan and subsidy documents, concludes that setoff is not permitted because FSA's obligation to Debtors arose postpetition while Debtors' obligation to FSA arose prepetition. The prepetition/postpetition nature of the obligations prevents FSA from exercising its setoff rights. FSA's stay relief motion therefore will be denied and Debtors' turnover motion granted.


For the limited purpose of ruling on the stay relief motion, the Court finds:1

Debtors borrowed $300,000 from FSA on November 4, 2010. The loan was evidenced by a promissory note signed by the Debtors. The note requires annual payments of $16,014 every

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January 1 for 40 years. Payment of the note is secured by a mortgage on 49.1 acres of land in De Baca County, New Mexico. The mortgage was recorded November 4, 2010.

Debtors paid the note as agreed through January 2018.

Before 2017, Debtors enrolled in two FSA subsidy programs, a Price Loss Coverage program ("PLC") and a Market Facilitation Program ("MFP"). Under both programs, FSA pays money to farmers like Debtors if certain commodity prices drop below certain specified levels.

Debtors filed this case on July 31, 2018. Originally filed as a chapter 11 case, it was converted to chapter 12 on December 19, 2019.

Debtors did not make the note payments to FSA due in January of 2019 and 2020. The postpetition defaults total $32,028.

Postpetition, Debtors were entitled to receive the following amounts from the PLC and MFP subsidy programs:

Date Payable

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A. Setoff in General.

Judge Peck discussed setoff in In re Lehman Brothers Holdings Inc., 404 B.R. 752 (Bankr. S.D.N.Y. 2009):

Setoff originated in early Roman law and was later incorporated into the English legal system in 1705. See Sepinuck, The Problems With Setoff: A Proposed Legislative Solution, 30 Wm. & Mary L. Rev. 51, 51-52 (1988). . . . The central premise of the right of setoff is the adjustment of mutual obligations. "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 of Maryland v. Strumpf, 516 U.S. 16, 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, 57 L.Ed. 1313 (1913)).

404 B.R. at 756. Setoff is best understood as a defense to payment of an otherwise valid obligation. See, e.g., Copley v. United States (In re Copley), ___ F.3d ___, 2020 WL 2374542 (4th Cir.):

The "defense of setoff" preserved in the bankruptcy code is precisely that, a defense. . . . It allows a creditor with a valid claim against a bankruptcy debtor to assert the value of that claim as a defense to a demand to pay a separate debt owed to the debtor.

2020 WL 2374542, at *3; Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 20 (1995) ("a defense of setoff"); In re New Haven Foundry, Inc., 285 B.R. 646, 650 (Bankr. E.D. Mich. 2002) (setoff is a defense, not a security interest subject to Article 9 of the UCC); Genesis Marine, L.L.C. of Delaware v. Hornbeck Offshore Services, L.L.C., 951 F.3d 629, 631 (5th Cir. 2020) ("affirmative defenses of setoff and accord and satisfaction"); see generally In re Quisenberry, 295 B.R. 855, 859 (Bankr. N.D. Tex. 2003) (setoff is a right, not a lien or security interest); In re

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Holder, 182 B.R. 770, 776 (Bankr. M.D. Tenn. 1995) ("the common law concept of setoff is a right, not a lien").3

The United States has the same rights of setoff as a private party. In United States v. Myers (In re Myers), 362 F.3d 667 (10th Cir. 2004), the Tenth Circuit held:

"[t]he existence of the federal government's general common law setoff right has been well established for over a century." 5 Collier on Bankruptcy ¶ 553.04[3].

362 F.3d at 674; see also United States v. Munsey Trust Co. of Washington, D.C., 332 U.S. 234, 239 (1947) (government has the same right of setoff as every other creditor); In re Chateaugay Corp., 94 F.3d 772, 779 (2d Cir. 1996) (government has a common law right of setoff); United States v. Tafoya, 803 F.2d 140, 141 (5th Cir. 1986) ("right of setoff is inherent in the U.S. Government"); Applied Companies v. United States, 144 F.3d 1470, 1476 (Fed. Cir. 1998) ("it is well settled that the government retains its setoff right unless there is some explicit statutory or contractual provision that bars its exercise").4

Setoff is generally waived if not timely asserted as an affirmative defense in litigation.5 Further, several courts have held that filing a proof of claim without asserting setoff waives any right of offset. See, e.g., Tavormina v. ITT Commercial Finance Corp (In re Aquasport, Inc.), 115 B.R. 720, 721-22 (Bankr. S.D. Fla. 1990), aff'd, 985 F.2d 579 (11th Cir. 1993). In this case, however, FSA filed its proof of claim on September 21, 2018, before Debtors defaulted on the loan

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and before they became entitled to receive any of the subsidy payments at issue. There was no waiver.

B. Setoff in Bankruptcy Cases.

"Setoff became a recognized doctrine of United States bankruptcy law with the passage of the Act of 1800 and is preserved today in section 553 of the Bankruptcy Code." Lehman Brothers, 404 B.R. at 756. Section 553 of the Code provides in part:

(a) 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 under this title against a claim of such creditor against the debtor that arose before the commencement of the case . . . .

The Tenth Circuit held in In re Commercial Financial Services, Inc., 43 Fed. App'x 309 (10th Cir. 2002) (unpublished):

"Although no federal right of setoff is created by the Bankruptcy Code, 11 U.S.C. § 553(a) provides that, with certain exceptions, whatever right of setoff otherwise exists is preserved in bankruptcy." Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995).

43 Fed App'x at 311.

Under § 553, the offsetting obligations must have arisen prepetition and must be "mutual." Lehman Brothers, 404 B.R. at 757. Mutuality exists when "debts and credits are in the same right and are between the same parties, standing in the same capacity." Scherling v. Hellman Elec. Corp. (In re Westchester Structures, Inc.), 181 B.R. 730, 739 (Bankr. S.D.N.Y. 1995). In addition, both offsetting claims must be valid and enforceable. Clemens v. West Milton State Bank (In re Clemens), 261 B.R. 602, 605 (M.D. Pa. 2001), citing 5 Collier on Bankruptcy ¶ 553.01[1] (15th ed.).

There is case law holding that the decision to allow setoff is within the sound discretion of the bankruptcy court. See, e.g., Lehman Bros., 404 B.R. at 757 (citing In re Bennett Funding

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Group, Inc., 146 F.3d 136, 138 (2nd Cir. 1998), and Bohack Corp. v. Borden, Inc., 599 F.2d 1160, 1164 (2d Cir. 1979)). This likely is an overstatement. At the Fourth Circuit recently explained:

Although bankruptcy courts historically have had discretion to disallow a setoff, see Cumberland Glass Mfg. Co. v. De Witt, 237 U.S. 447, 454-55, 35 S. Ct. 636, 59 L. Ed. 1042 (1915), that discretion always has been limited. See N.J. Nat'l Bank v. Gutterman (In re Applied Logic Corp.), 576 F.2d 952, 957 (2d Cir. 1978) ("The rule allowing setoff ... is not one that courts are free to ignore when they think application would be 'unjust.'"). Indeed, a court's discretion to disallow a setoff generally is confined to those circumstances when the validity of the right of setoff can be questioned under other law outside the bankruptcy code. See 5 Collier on Bankruptcy ¶ 553.02[3] (16th ed. 2020) ("[A] right of setoff should be recognized in bankruptcy unless the right is invalid in the first instance under applicable nonbankruptcy law, or unless it is otherwise proscribed by some express provision of the

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