Brown & Cole filed Chapter 11 on November 7, 2006. Associated moved for allowance and payment of its $6,379,879.51
priority claim for 20-Day Goods. Brown & Cole asserted its
setoff rights attributable to its pre-petition damage claims
against Associated as grounds for disallowing Associated’s
20-Day Goods priority claim.
The Bankruptcy Court allowed Associated’s Section 503(b)
(9) priority claim. The court rejected Brown & Cole’s setoff
defense because it was based on a lower priority pre-petition
breach of contract unsecured claim that lacked the necessary
mutuality, as a prerequisite for setoff, to justify challenging
Associated’s higher priority administrative expense claim.
Associated appealed the Bankruptcy Court’s decision to the
Ninth Circuit Bankruptcy Appellate Panel.
The Ninth Circuit Bankruptcy Appellate Panel ended up
reversing the Bankruptcy Court’s allowance of Associated’s
Section 503(b)(9) priority claim. The court ruled that Brown
& Cole could setoff its pre-petition breach of contract claim
against Associated in reduction of Associated’s Section 503(b)
(9) priority claim against Brown & Cole. The court noted that
Associated’s priority claim f