In re Williams

• Decision Date: 23 July 2018
• Docket Number: No. 17-13118 ta13,17-13118 ta13
• Parties: In re: TANYA LEREE WILLIAMS, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

In re: TANYA LEREE WILLIAMS, Debtor.

No. 17-13118 ta13

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

July 23, 2018

OPINION

Before the Court is whether the debtor's ex-husband can set off or recoup his alimony and property settlement obligations to her with her property settlement obligation to him. The Court has reviewed the marital settlement agreement between the parties and the applicable law, and concludes that the proposed setoff/recoupment is permissible.

I. FACTS

Steve Williams and Debtor were husband and wife. Debtor petitioned for divorce in 2016, in New Mexico's Thirteenth Judicial District Court. On September 1, 2017, Debtor and Mr. Williams filed a Verified Marital Settlement Agreement, which they had signed a few days before (the "MSA"). A final divorce decree was entered on October 6, 2017.

Under the MSA, in the section entitled "Community Debts," Debtor agreed, inter alia, that the following would be her sole and separate debts, which she would pay:

Her Chase cards ending in 3722 and 7829; and

Her three (3) Capitol 1 cards ending in 9218, 6856 and 5431

Her Kirtland Federal Credit Union card ending in 8458; and

Her debt to Shirley Smith; and

Debt due and owing to Wells Fargo account ending in 1670.

Mr. Williams is liable for the Wells Fargo debt. The record does not indicate if Mr. Williams is liable for any other community debts Debtor agreed to pay.

On the other hand, Mr. Williams agreed, in a section of the MSA entitled "Alimony," that:

Petitioner [Debtor] is not self-supporting; therefore, Respondent [Mr. Williams] shall pay lump-sum non-modifiable spousal support of $322.00 per month to Petitioner, for a period of ten (10) years, beginning on September 1, 2017 and continuing on the first day of each month thereafter.

Mr. Williams also assumed the sole obligation to pay at least 15 community debts, including the mortgage on the former marital residence.

Debtor filed this bankruptcy case on December 12, 2017, about two months after the divorce was finalized. The case was filed as a chapter 7 case. On December 26, 2017, Debtor filed her bankruptcy schedules and statement of financial affairs. Her Schedule E/F listed no priority claim and $150,678 of general unsecured claims, including the Wells Fargo Bank debt of $16,855.

On January 10, 2018, Debtor filed a motion to convert her case to a chapter 13 case. No objections were filed, and on February 9, 2018, the Court entered the conversion order.

Debtor filed a chapter 13 plan on February 26, 2018, and a corrected version on February 27, 2018. In her plan, Debtor proposes to pay $250 a month for 36 months, or a total of $9,000. Debtor does not propose to pay any secured or priority claims. If attorney fees are $3,500 and trustee fees total $900, about $4,600 would be available to pay general unsecured creditors.¹

The bar date in this case was April 20, 2018. Four claims were filed, totaling $130,765.82, by Mr. Williams ($18,000); Kirtland Federal Credit Union ($4,086.53); Couture Law ($3,567.48); and New American Funding ($105,111.81).² If all filed claims are allowed, the dividend to creditors would be about 3.5%.

Debtor amended her plan on April 23, 2018; the amendment does not affect the issue before the Court.

The asserted basis for Mr. Williams' claim is "Amount owed under Marital Settlement Agreement." Mr. Williams attached the MSA to his proof of claim, and asserted that the "claim is secured by right to setoff." Mr. Williams' offsetting obligations are identified as "Amount owed to Debtor as property settlement and fixed alimony." Also attached to the proof of claim are several bills from Wells Fargo for the credit card account Debtor agreed to pay. The most recent account balance (as of March 16, 2018) was $15,210.62.

Debtor objected to the claim on April 16, 2018, arguing that Mr. Williams' claim is unsecured because he has no right of setoff or recoupment. Mr. Williams disagrees, and argues that he is entitled to set off his alimony and property settlement obligations to Debtor with Debtor's property settlement obligations to him.

II. DISCUSSION

A. Setoff.

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, except to the extent that—

. . .

(2) such claim was transferred, by an entity other than the debtor, to such creditor--

(A) after the commencement of the case;

. . .

The Tenth Circuit stated in In re Commercial Financial Services, Inc., 43 Fed. App'x 309, 311 (10^th Cir. 2002): " '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.

Here, any setoff rights Mr. Williams may have would arise under New Mexico law. In New Mexico, setoff is recognized as an equitable right, harkening back to English courts of equity. See Sunwest Bank of Roswell, N.A. v. Miller's Performance Warehouse, Inc., 112 N.M. 492, 494 (S. Ct. 1991). The purpose of setoff is "to achieve equity and justice by adjusting in one suit all conflicting claims between parties that were readily susceptible to an expedient and final resolution. Id., citing Federal Sur. Co. v. Union Indem. Co., 161 Tenn. 621, 33 S.W.2d 421 (S. Ct. 1930).³ See also Amaya v. Santistevan, 114 N.M. 140, 144 (Ct. App. 1992) ("a bank has the well-established common-law right to set off funds on general deposit against a debt owed by a depositor to the bank"); Walck v. City of Albuquerque, 117 N.M. 651, 653 (Ct. App. 1994) (allowing setoff of interim wages earned by a reinstated employee against the city's backpay obligation); Staab v. Garcia Y Ortiz, 3 N.M. 33 (S. Ct. 1884) (setoff defense allowed). See generally N.M.S.A. § 47-8-45 (allowing tenant opposing a petition for restitution of rented residential premises to assert any "legal or equitable defense, setoff or counterclaim"); N.M.S.A. § 39-4C-7(C) (allowing the assertion of a setoff in any money against a foreign-money claim); N.M.S.A. § 42-4-15 (allowing setoff in a real property ejectment action); N.M.S.A. § 59A-41-45 (allowing setoff in the insurance company liquidation context). There does not seem to be anything out of the ordinary about the right of setoff under New Mexico law.

A good discussion of setoff is found 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). 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. . . . 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.

In general, setoff is proper if the offsetting obligations arose pre-petition and are "mutual." Id. 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). Both offsetting claims must be valid and enforceable. In re Clemens, 261 B.R. 602, 605 (M.D. Pa. 2001), citing 5 Collier on Bankruptcy ¶ 553.01[1] (15^th ed.).

The decision to allow setoff is within the sound discretion of the bankruptcy court. Lehman Bros., 404 B.R. at 757 (citing In re Bennett Funding Group, Inc., 146 F.3d 136, 138 (2^nd Cir. 1998), and Bohack Corp. v. Borden, Inc., 599 F.2d 1160, 1164 (2^nd Cir. 1979). "Equity favors the right of setoff as a means to avoid multiplicity of lawsuits, inconvenience, injustice and inefficient use of judicial resources." Id., citing Bennett, 146 F.3d at 139.

On the petition date, Mr. Williams owed Debtor about $38,640 in alimony, together with an unknown amount under the property settlement terms of the MSA. This qualifies as a "debtowing by such creditor to the debtor that arose before the commencement of the case. . . ." § 553(a). Mr. Williams does not dispute his obligation to pay this debt.

Similarly, it appears undisputed that Debtor is indebted to Mr. Williams under the MSA. The amount is not clear. The minimum amount likely is the unpaid balance of the Wells Fargo credit card. However, if Mr. Williams is liable for the Chase, Capital One, and Kirkland credit card debts identified in the MSA, the claim would increase by about $25,000, according to Debtor's schedules.

Section 553 "only permits setoff of mutual pre-petition debts. It does not permit a creditor to collect a pre-petition debt by withholding payment of a post-petition debt owed to the debtor." In re Ruiz, 146 B.R. 877, 879 (Bankr. S.D. Fla. 1992) (emphasis in original); U.S. v. Holden, 258 B.R. 323, 327 (D. Vt. 2000) (quoting Ruiz); In re Enright, 2015 WL 4875483, at *3 (Bankr. D.N.J) (same); In re Alliance Well Service, LLC, 577 B.R. 389, 394 (Bankr. D.N.M. 2017) (citing In re Myers, 362 F.3d 667, 672 (10^th Cir. 2004)).

Here, even though most of Mr. Williams' payments to Debtor are scheduled to be made post-petition, the debt itself arose...