US Through Small Business Admin. v. Rinehart, CIV. 88-3024.

Decision Date10 August 1988
Docket NumberNo. CIV. 88-3024.,CIV. 88-3024.
Citation88 BR 1014
PartiesUNITED STATES of America, Acting Through the SMALL BUSINESS ADMINISTRATION, Plaintiff/Appellant, v. Harold RINEHART and Marilyn Rinehart, Defendants/Appellees.
CourtU.S. District Court — District of South Dakota

Jon Haverly, Sioux Falls, S.D., for plaintiff/appellant.

James P. Hurley, Rapid City, S.D., and Jonathan K. Van Patten, Vermillion, S.D., for defendants/appellees.


DONALD J. PORTER, Chief Judge.

This appeal from the United States Bankruptcy Court, District of South Dakota, raises the question of whether the appellant, the United States of America acting through the Small Business Administration (SBA), violated the automatic stay provision of 11 U.S.C. § 362(a) by retaining a check payable to the appellees, Harold Rinehart and Marilyn Rinehart, to preserve a right to offset under 11 U.S.C. § 553. Because the finding of the Bankruptcy Court that the SBA attempted to effect an offset or setoff in violation of the automatic stay is not clearly erroneous, the judgment of the Bankruptcy Court is affirmed. However, because the Bankruptcy Court erroneously applied the law to hold that the SBA did not stand in the same capacity as the Agricultural Stabilization and Conservation Service — Commodity Credit Corporation (ASCS-CCC) to assert a right of setoff under section 553, the Court disagrees with that portion of the Bankruptcy Court's opinion.

The Court has jurisdiction over this appeal under 28 U.S.C. § 1334(a). The standard of review is set forth in Rule 8013 of the Bankruptcy Rules. Rule 8013 provides that findings of the Bankruptcy court shall not be set aside unless they are clearly erroneous. Hanson v. First Bank, 828 F.2d 1310, 1312 (8th Cir.1987); Bankr.R. 8013. Conclusions of law must be overturned if they are erroneous. Bankr.R. 8013.


The facts of the case giving rise to this appeal are set out with particularity in the opinion of the Bankruptcy Court. See In re Rinehart, 76 B.R. 746, 747-48 (Bankr.D. S.D.1987). The facts relevant to the appeal are as follows. On April 1, 1987, the ASCS-CCC issued a check representing farm program payments to Harold Rinehart and Marilyn Rinehart, chapter 11 debtors. Pursuant to previously received Department of Agriculture approval, the check was sent to the SBA who sought to setoff the amount of the ASCS-CCC check against the amount the Rineharts owed the SBA. The SBA received the ASCS-CCC check on April 6, 1987. When the Rineharts did not receive their ASCS-CCC check, they initiated an order to show cause proceeding in bankruptcy to effect a turnover of the payment. Only after initiating this proceeding did the Rineharts learn that the check was in the hands of the SBA. On May 15, 1987, over one month after receiving the Rinehart check, the SBA filed a motion for relief from the automatic stay to offset the ASCS-CCC payment. The SBA retained possession of the check until the hearing on the debtors' motion to show cause.


The Bankruptcy Court began its analysis of the issues raised in the motion to show cause hearing with a discussion of whether the SBA had a right to setoff against the ASCS-CCC payment. Central to resolution of this issue is the issue of whether the SBA stood in the same capacity as the ASCS-CCC to satisfy the mutuality requirement for offset under 11 U.S.C. § 553. Section 553 provides that a creditor may offset or setoff a "mutual debt" owing the debtor by the creditor. Mutuality requires that "`the debts must be in the same right and between the same parties standing in the same capacity.'" 76 B.R. at 750 (quoting 4 Collier on Bankruptcy ¶ 553.042, at 553-18 (15th ed. 1987)). In considering whether the SBA had a right to a section 553 offset against the ASCS-CCC check payable to the debtors, the Bankruptcy Court held that the SBA and the ASCS-CCC did not stand in the same position for purposes of a section 553 offset. This Court disagrees.

After noting that the Debt Collection Act, 31 U.S.C. § 3701 et seq., 13 C.F.R. § 140.5, and 7 C.F.R. § 13.6 expressly provide that the SBA as a federal agency may effect an administrative offset against other federal agencies, the Bankruptcy Court nevertheless reaches the following conclusion:

Unlike the ASCS and CCC, which are both within the Department of Agriculture, the SBA is an agency that is directly responsible to the President and independent of all other federal agencies. Moreover, they are in different departments, they are managed and supervised by different secretaries and administrators, their budgets are separate and in no way related to one another (payment to the debtors under the farm program will have no effect on the budget or budgeting of SBA), and, finally, they are agencies which provide completely different services. Although both agencies are admittedly part of the government, the SBA has not established that they are `in the same capacity\' for Section 553 purposes, but simply insists they are. Id. at 754 (footnote omitted).

The Court is not persuaded by this reasoning.

No federal district court has decided whether the SBA and the ASCS-CCC stand in mutual capacity to effect an offset under 11 U.S.C. § 553. At least four other bankruptcy courts have recently decided whether mutuality exists between federal agencies to allow a section 553 offset. See In re Mehrhoff, 88 B.R. 922 (Bankr.S.D.Ia. 1988); In re Britton, 83 B.R. 914 (Bankr.S. D.N.C.1988); In re Hazelton, 85 B.R. 400 (Bankr.E.D.Mich.1988); In re Thomas, 84 B.R. 438 (Bankr.N.D.Tex.1988). Three of these courts have declined to follow In re Rinehart. See In re Britton, 83 B.R. 914, 919 (Bankr.E.D.N.C.1988); In re Hazelton, 85 B.R. 400, 404 (Bankr.E.D.Mich.1988); In re Thomas, 84 B.R. 438, 440 (Bankr.N.D. Tex.1988). This Court is in agreement with the opinion of the United States Bankruptcy Court for the Northern District of Texas in In re Thomas. Id. In deciding whether the FmHA, SBA, and CCC could offset disaster payments in that opinion, the court refused to interpret the government's long-recognized right of setoff differently in bankruptcy. See 84 B.R. at 439-40. This Court agrees that in deciding whether federal agencies stand in the same capacity for section 553 offsets, there is no authority for distinguishing between the capacity of parties in relation to each other outside of bankruptcy and that capacity following the filing of a bankruptcy petition.

Section 553 of the Bankruptcy Code recognizes setoff rights existing prior to a bankruptcy filing. 11 U.S.C. § 553; see also In re Britton, 83 B.R. at 917-18. The common law has long-recognized the right of the United States to setoff amounts it is obligated to pay from amounts it is entitled to receive. See Cherry Cotton Mills v. United States, 327 U.S. 536, 539, 66 S.Ct. 729, 730, 90 L.Ed. 835 (1946); Gratiot v. United States, 40 U.S. 336, 369 (1841). In Cherry Cotton Mills v. United States, the Supreme Court upheld a setoff by the General Accounting Office for a debt owed the Reconstruction Finance Corporation (RFC) against a tax refund payable by the Department of the Treasury. 327 U.S. at 537. In reaching this result, the Court upheld a decision of the Court of Claims that the RFC was "`part of the Government,'" although the issue of mutuality for setoff purposes was not addressed expressly. 327 U.S. at 538, 66 S.Ct. at 729-30. The government's inherent right of setoff has also been recognized by the federal courts. See, e.g., United States v. Tafoya, 803 F.2d 140, 141-42 (5th Cir.1986) and cases cited therein.

Recently, the United States Bankruptcy Court for the Southern District of Iowa has held that the SBA and the ASCS-CCC do not stand in mutual capacity to effect an offset under 11 U.S.C. § 553. See In re Mehrhoff. After reviewing the Secretary of the Department of Agriculture's regulations governing setoffs, the Mehrhoff court concludes:

Clearly, a review of the very detailed regulations set out above mandates finding that the ASCS-CCC as the entity owing a debt to the debtor is never in the same capacity as the governmental agency to whom the debtor owes a debt, except when the ASCS-CCC is in fact one of the debtor\'s creditors. . . .

This Court disagrees.

Section 13.4(f) of Title 7 of the Code of Federal Regulations provides:

Setoff shall be made and appropriate notification thereof forwarded to the debtor in all cases (but in none other) where:
. . . . .
(f) A person is otherwise indebted to any agency of the United States and the Administrator, ASCS, or his designee, has specifically authorized setoff. 7 C.F.R. § 13.4(f) (1988).

An "agency of the United States" is defined by 7 C.F.R. § 13.2(b) as "any department, establishment, commission, administration, authority, board, bureau, or service of the United States, or any corporation all of the capital stock of which is owned by the United States." 7 C.F.R. § 13.2(b) (1988). This definition clearly encompasses the Small Business Administration.

Regulations governing debt collection by administrative offset by the SBA provide in relevant part:

SBA may, after attempting to collect a claim from a person under normal SBA collection procedures, collect the claim by means of administrative offset. 13 C.F.R. § 140.5(a) (1988).

Section 140.5(a) of Title 13 of the Code of Federal Regulations and 7 C.F.R. § 13.2(b) authorize the SBA to offset against sums owed by the ASCS-CCC. This authority is not automatic, however. As the court in Mehrhoff correctly states, the SBA must comply with the requirement of 13 C.F.R. § 140.5(a) and 7 C.F.R. 13.6(b). 1988 Bankr. 103717. These regulations provide that the SBA must first make "reasonable efforts through other administrative means available to it to collect the indebtedness" before seeking an administrative offset against sums owing from another agency. 7 C.F.R. § 13.6(b) (1988). In addition, the SBA must follow procedures to notify the debtor of the offset. See...

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