claim against Associated, and therefore did not determine
whether Brown & Cole had valid setoff rights. As a result, the
court was not called upon to allocate Brown & Cole’s setoff
rights between Associated’s more valuable Section 503(b)(9)
priority claim and less valuable lower priority pre-petition
general unsecured claim.
Circuit City Stores
On November 10, 2008, Circuit City, a specialty retailer of
consumer electronics, filed Chapter 11. On the filing date,
Circuit City operated 712 retail stores and nine outlet stores
throughout the United States and Puerto Rico and employed
approximately 39,600 employees. On January 16, 2009, the
Bankruptcy Court pulled the plug on Circuit City, authorizing going-out-of-business sales at Circuit City’s remaining
567 stores. Circuit City completed their going-out-of-business sales on March 8, 2009.
The court allowed Circuit City to setoff
the pre-petition credits claims in
reduction of the claimants’ more
valuable Section 503(b)(9) priority
claims, rather than their less valuable
lower priority pre-petition general
unsecured claims.
On October 13, 2009, Circuit City filed objections to numerous Section 503(b)(9) claims. In their objections, Circuit City
sought to setoff the Pre-petition Credits Claims in reduction
of the creditors’ Section 503(b)(9) priority claims, even
though these creditors also had less valuable nonpriority general unsecured claims against Circuit City that could have
been reduced by the setoff.
to the claimant. Circuit City, therefore, asserts the requisite
mutuality of obligation to satisfy its burden of proof for setoff. Circuit City then asserted the right to setoff the Pre-petition Credits Claims in reduction of the trade creditors’ Section 503(b)(9) priority claims, instead of reducing the trade
creditors’ less valuable lower priority pre-petition general
unsecured claims.
Circuit City argued that the bankruptcy court has the discretion to first allocate Circuit City’s setoff rights to reduce priority claims in furtherance of the objectives of the Bankruptcy
Code to provide the greatest possible recovery to unsecured
creditors. Circuit City stated that if it could not setoff the Prepetition Credits Claims in reduction of Section 503(b)(9) priority claims, Section 503(b)(9) claimants would receive a
windfall of full payment of both their Section 503(b)(9)
claims and a portion of their pre-petition general unsecured
claims equal to the amount of the Pre-petition Credits Claims
applied in reduction of their general unsecured claims. That
would reduce the recovery to Circuit City’s pre-petition general unsecured creditors.
The Section 503(b)(9) claimants opposed Circuit City’s invocation of setoff rights to reduce their priority claims. Some claimants argued that Circuit City should be required to first use its
Pre-petition Credits Claims to reduce Section 503(b)(9) claimants’ pre-petition general unsecured claims that enjoy lower
priority status, instead of first reducing their Section 503(b)(9)
priority claims. Otherwise, Circuit City would defeat Congress’
determination in enacting Section 503(b)(9) to grant trade