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17 Collier Bankr.Cas.2d 1429, Bankr. L. Rep. P 72,158
In re G.S. OMNI CORPORATION, Debtor,
James H. TURNER, Trustee for the Liquidation of G.S. Omni
Corporation, Appellee,
v.
UNITED STATES of America; Donald T. Regan, Secretary of
Treasury; Roscoe L. Egger, Jr., Commissioner of
the I.R.S.; G.L. Mihlbachler, District
Director of I.R.S., Appellants.
No. 86-1065.
United States Court of Appeals,
Tenth Circuit.
Dec. 30, 1987.
Thomas R. Lamons, Attorney, (Roger M. Olsen, Asst. Atty. Gen.; Michael
L. Paup, Wynette J. Hewett, Attorneys, with him on the brief), Tax Div.,
Dept. of Justice, Washington, D.C., for appellants.
Maria J. Flora, Attorney, (Daniel W. Rumsey, Attorney, with her on the
brief), Gorsuch, Kirgis, Campbell, Walker and Grover, Denver, Colo., for
appellee.
Before McKAY, MOORE and BALDOCK, Circuit Judges.
PER CURIAM.
The Government, creditor, appeals from an order of the district court affirming
a bankruptcy court decision ordering the Government to turn over to James A.
Turner, trustee, tax refunds due G.S. Omni Corporation, debtor, because the
Internal Revenue Service's (IRS) failure to file a timely proof of claim
precluded it from exercising a right of setoff. On appeal, the Government
argues that the district court and bankruptcy court erred in holding that the
timely filing of a proof of claim is a prerequisite to asserting a right of setoff
under 11 U.S.C. Sec. 553. We reverse.
The debtor was a securities broker and dealer from March, 1980, to February,
1982. By the end of February, debtor had ceased doing business, and the
Securities Investor Protection Corporation filed in the bankruptcy court for
appointment of a trustee for purposes of liquidating the debtor. In March, 1982,
the bankruptcy court appointed the trustee and ordered liquidation of the
debtor's property pursuant to the Securities Investor Protection Act. See 15
U.S.C. Secs. 78aaa-78lll.
Notice of liquidation and the six month limitation for filing proofs of claim was
published in local newspapers. The IRS offices in Ogden and Denver were sent
formal notice of the liquidation and the proof of claim filing deadline of
September 27, 1982. The IRS did not file a proof of claim by the bar date.
On September 15, 1982, the trustee filed Form 4446, Corporate Application for
Quick Refund of Overpayment of Estimated Tax, requesting a refund of
estimated income taxes. The IRS sent the trustee part of the amount requested.
It set off the remaining amount against unpaid tax liabilities. In March, 1983,
the trustee filed Form 1129, Corporate Application for (Tentative) Refund Due
to Net Operating Loss after Carrybacks, claiming corporate income tax refunds.
The IRS refused to make any refunds and asserted it was entitled to set off the
entire amount of the refund against debtor's unpaid tax liabilities.
On March 7, 1984, the trustee commenced this turnover proceeding in the
Bankruptcy Court seeking the amounts he had claimed as refunds and interest,
costs, and attorney's fees. The trustee contended that the Government was not
entitled to exercise any setoff rights, because it had not filed a timely proof of
claim. The Bankruptcy Court agreed and ordered the Government to turn over
the money sought by the trustee. The district court affirmed.
The question presented is whether a creditor may assert a right of setoff against
the claims of a bankruptcy estate without filing a proof of claim before the bar
date. The bankruptcy court held, in effect, that failure to file a timely proof of
claim terminated the claim in all its aspects, including the creditor's right to
assert the setoff as a defense to the action by the trustee. In its analysis, the
bankruptcy court was persuaded that allowing the creditor to assert the defense
of setoff would unfairly permit the creditor to obtain a greater portion of its
debt than other creditors. The court therefore believed that disallowance of the
right of setoff was mandated by the need for "procedural consistency ... crucial
to the fair and orderly operation of bankruptcy law." The court concluded that
the preclusive effect of the failure to file a proof of claim must work against the
right to assert a setoff. We disagree with this analysis.
Any analysis of the issue starts with the statutory underpinning of the turnover
action, 11 U.S.C. Sec. 542(b). In circumscribing the duty of a creditor owing a
matured debt to the estate, Sec. 542(b) mandates the debt be paid to the trustee
"except to the extent that such debt may be offset under section 553 of this
title." It is important to note, however, that the Sec. 542(b) right to exercise the
defense of setoff is not limited by time constraints nor tied to the filing of a
proof of claim. See In re Central Equip. & Serv. Co., 61 B.R. 986, 988
(Bankr.N.D.Ga.1986); In re Sutton Invs., Inc., 53 B.R. 226, 230
(Bankr.W.D.La.1985); In re Whitman, 38 B.R. 395, 398 (Bankr.D.N.D.1984);
In re Ford, 35 B.R. 277, 279 (Bankr.N.D.Ga.1983); In re Fulghum Constr.
Corp., 23 B.R. 147, 152-53 (Bankr.M.D.Tenn.1982), vacated on other grounds,
706 F.2d 171 (6th Cir.1983).
The right of setoff is one which is grounded in fairness. It would be unfair to
deny a creditor the right to recover an established obligation while requiring the
creditor to fully satisfy a debt to a debtor. Hence, the right of setoff is
universally recognized. 4 Collier on Bankruptcy 15th Ed. p 553.02 (1986).
Thus, one who turns to Sec. 553 discovers, in general terms, that a creditor's
pre-bankruptcy setoff rights are not affected by the Bankruptcy Code, except in
certain defined instances. Id. The only one of those instances remotely
applicable here is that a creditor cannot set off a claim which has been
disallowed. 11 U.S.C. Sec. 553(a)(1).
10
The circumstances which lead to the disallowance of a claim are set forth in 11
U.S.C. Sec. 502(b). None of these deal with failure to file a proof of claim.
Hence, we reason, since setoff can be asserted in the absence of disallowance,
and since a claim cannot be disallowed for failure to file, it must be concluded a
creditor's failure to file a proof of claim cannot affect the creditor's right to
assert the defense.
11
There must be a fundamental distinction drawn between the provisions of the
Code which deal with a proof of claim and its effect on the administration and
distribution of the estate, and the debt which gives rise to a claim. While a
creditor who wishes to participate in the distribution of an estate is required to
file a proof of its claim, and while that participation can be denied by the
disallowance of the claim, the underlying debt continues to exist. Indeed, were
it not for the continuing existence of the debt (or "claim") there would be no
need for a discharge of debts issued pursuant to 11 U.S.C. Sec. 727(b).
12
Accordingly, we reason that even though a creditor may be prevented from
participating in the distribution of the estate, the debt has viability until it is
discharged. Naturally, without relief from the automatic stay, the debt cannot
be enforced, 11 U.S.C. Sec. 362, but it is still imbued with other attributes. One
of those is the right of setoff. 4 Collier on Bankruptcy, 15th Ed. p 553.05
(1986).
13
Making the right to assert the attribute of setoff dependent upon the filing of the
proof of claim is an intrusion into the creditor's rights which is not
contemplated in the Bankruptcy Code. It is also an improper application of the
provisions of 11 U.S.C. Sec. 502(b).
14
Setoff must be distinguished from a claim requesting a distribution from the
liquidation of an estate. Here the Government sought only to exercise its right to
a setoff as a defense to the turnover action. Instead of seeking a distribution
from the liquidation of the estate or double recovery, the Government
attempted to satisfy its claim only to the extent of the money due from the
Government to the debtor. As long as the debt owed the Government continued
to exist, the Government had the right to do so.
15
Accordingly, we hold that until discharge is ordered, a creditor need not file a
proof of claim as a prerequisite to asserting a right of setoff pursuant to Sec.
553. The judgment of the United States District Court for the District of
Colorado is REVERSED. This action is REMANDED to the district court with
instructions to remand to the bankruptcy court for further proceedings
addressing the Government's right to setoff pursuant to the requirements of Sec.
553.
