U.S. v. Maxwell

• Decision Date: 25 November 1998
• Docket Number: No. 97-3108,97-3108
• Citation: 157 F.3d 1099
• Parties: 40 Collier Bankr.Cas.2d 1423, 33 Bankr.Ct.Dec. 332, Bankr. L. Rep. P 77,812, 42 Cont.Cas.Fed. (CCH) P 77,386 UNITED STATES of America, Plaintiff-Appellant, v. Andrew MAXWELL, not individually but as Trustee of the Estate of Pyramid Industries, Inc., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1099

157 F.3d 1099

40 Collier Bankr.Cas.2d 1423, 33 Bankr.Ct.Dec. 332,

Bankr. L. Rep. P 77,812,

42 Cont.Cas.Fed. (CCH) P 77,386

UNITED STATES of America, Plaintiff-Appellant, v. Andrew MAXWELL, not individually but as Trustee of the Estate of Pyramid Industries, Inc., et al Defendants-Appellees.

No. 97-3108.

United States Court of Appeals Seventh Circuit.

Argued May 15, 1998.

Decided Oct. 2, 1998.

Rehearing Denied Nov. 25, 1998.

Thomas P. Walsh, Office of U.S. Atty., Civil Division, Chicago, IL, William Kanter, Sandra Wien Simon (argued), Department of Justice, Civil Division, Appellate Section, Washington, DC, for United States.

Timothy J. McGonegle, Law Offices of Andrew J. Maxwell, Chicago, IL, for Andrew J. Maxwell.

Robert C. Samko (argued), Chicago, IL, for All American Corp.

Peter G. Swan, Emalfarb, Swan & Bain, Highland Park, IL, for Gerson Electric Construction Co.

Kurt A. Muller, Chicago, IL, for Lazzaro Cos., Inc.

Before POSNER, Chief Judge, and FLAUM and DIANE P. WOOD, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

The bankruptcy laws generally permit a creditor to offset, on a dollar-for-dollar basis, a debt it owes to the bankrupt party against a pre-commencement debt that the bankrupt owed to the creditor. See 11 U.S.C. § 553(a). There are circumstances under which setoff will be denied--fraud, collusion, and the like--but nothing in the statute suggests that the simple fact that the creditor is the United States is one of those circumstances. In this case, however, both the bankruptcy court and the district court effectively created a new exception to the right of setoff in bankruptcy, when they ruled that the "pervasive nature" of the federal government limited the right of one federal agency to set off its debts owed to a bankrupt against the bankrupt's debts owed to another federal agency. No such offset would be permitted, under the lower courts' rule, unless the only affected parties would be the debtor and the federal government.

While there may be particular cases in which federal interagency setoff should be denied (although we decline here to speculate about which cases might fall within that set), we can find no authority in the Bankruptcy Code or other law for a new across-the-board "pervasive nature" or "federal interagency" exception to the right of setoff. Furthermore, we find nothing in the record before us that would justify denial of setoff in this case. We therefore reverse the district court's denial of setoff to the United States.

I

In 1984, the U.S. Small Business Administration ("SBA") loaned Pyramid Industries ("Pyramid") $310,000. Smaller loans followed in 1988 and 1989. In 1987, the U.S. Navy contracted with Pyramid to do construction work at the Glenview Naval Air Station in Glenview, Illinois. Pyramid provided the Navy with performance and payment surety bonds, as required by the Miller Act, 40 U.S.C. § 270a. There is no evidence that the Navy did anything to confirm that Pyramid's sureties were legitimate or that they had the resources to cover Pyramid's obligations in the event Pyramid failed to perform on its contract with the Navy or failed to pay any subcontractors it might hire. Construction began shortly after the Navy-Pyramid contract was signed, with Pyramid subcontracting some of the work to All American Corporation ("All American") and Gerson Electric Company ("Gerson").

Two years later, Pyramid filed for bankruptcy under Chapter 11 of the Bankruptcy Code; some time later, the case was converted to a Chapter 7 proceeding. Only then did the Navy and Pyramid's subcontractors, including All American and Gerson, learn that Pyramid's performance and payment bonds were worthless. One of the bondsigners had gone bankrupt in June 1990 and the other disappeared (apparently having lied about his assets on the bond form). Pyramid had done a good job of fooling the Navy, or the Navy had done a poor job of confirming the quality of Pyramid's performance and payment bonds, or both. For the sum of $51,050, the Navy settled its contractual obligations for work performed by or through Pyramid with the bankruptcy trustee, Andrew Maxwell, on February 27, 1990.

As is almost definitionally the case in bankruptcies, there were more hands outstretched for the $51,050 than there were dollars to go around. Among them was the SBA, which held secured claims against Pyramid totaling $490,574.88, which represented amounts due on the 1984, 1988, and 1989 loans. All American had an unsecured claim for $54,817.71, and Gerson had a claim (which it argued was secured, an issue the lower courts did not address) for $95,208.50. A number of other claimants were also in the picture, but they do not figure in this appeal.

In August 1993, the United States filed a complaint--including a setoff claim--to determine the SBA's rights and priority in the $51,050, naming as defendants Maxwell and Pyramid's subcontractors on the Navy job, including All American and Gerson. The government followed up with a motion for summary judgment, and All American and Gerson responded with answers denying the SBA's right to offset its claim and asserting equitable liens against the $51,050. Maxwell filed his own answer, in which he took no position on the merits of any of the other parties' claims, but vigorously defended his right to compensation and reimbursement for his work as trustee.

On July 22, 1994, the bankruptcy court denied the government's motion for summary judgment against All American and Gerson. After determining that creditors with setoff rights have priority over holders of equitable liens, and that lienholders in turn have priority over secured creditors, the bankruptcy court rejected the government's claim that the SBA was entitled to the Navy's payment to Pyramid's estate as a setoff. The court held that despite the priority that a setoff creditor normally would enjoy, the setoff provision of the Bankruptcy Code, 11 U.S.C. § 553, forbids setoff between agencies of the federal government when the debtor is a bankrupt, because federal agencies are separate entities under the terms of §§ 101 and 553 and therefore lack the mutuality necessary for setoff to apply. In the alternative, the bankruptcy court, relying on its equitable power to grant or deny setoff, found that public policy favors denial of setoff between agencies of the United States and a bankrupt debtor, both because setoff undermines the goal of treating similarly situated creditors alike, and because the "pervasive nature" of the federal government unacceptably amplifies the effects of setoff.

After its motion to reconsider was rejected by the bankruptcy court, the United States appealed to the district court, which affirmed the bankruptcy court, but only on the lower court's public policy rationale. The district court rejected the bankruptcy court's conclusion that federal agencies are separate entities for purposes of §§ 101 and 553 of the Bankruptcy Code, but it agreed with the bankruptcy court that equitable considerations supported a denial of setoff in this case. Like the bankruptcy court, the district court identified three such factors that weighed in favor of that outcome. First, the court noted that equal treatment of similarly situated parties is a basic principle of bankruptcy law. Second, the district court agreed with the bankruptcy court that setoff makes it impossible to provide equal treatment to creditors, since setoff gives some creditors (those "lucky" enough to have a qualifying pre-existing debt to the bankrupt) an advantage over...