to exercise its setoff rights any way it chose. The court went as
far as to suggest that Circuit City’s setoff rights under Section
558 were not conditioned on the mutual debts between Circuit City and the Section 503(b)(9) claimant both being prepetition obligations—Circuit City could setoff pre-petition
claims against post-petition obligations it owes. As a result,
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.
The court also noted that Section 558 does not require Circuit City to exercise its setoff rights to first reduce creditors’
lower priority pre-petition general unsecured claims before
reducing the priority portion of their claims. That left it to
the Circuit City court to allow Circuit City to offset the Prepetition Credits Claims in reduction of trade creditors’ more
valuable Section 503(b)(9) priority claims. The court concluded that would further the Bankruptcy Code’s goal of
equitable treatment for all creditors by maximizing the distribution to all creditors in the case.
Conclusion
The Circuit City court’s decision to allow Circuit City to setoff its pre-petition claims against trade creditors in reduction
of their more valuable Section 503(b)(9) priority claims,
instead of their less valuable lower priority pre-petition
unsecured claims, is not good news for trade creditors. The
court’s holding threatens to dilute the effectiveness of the
Section 503(b)(9) 20-Day Goods priority claim as an effective trade creditor remedy! The holding may also discourage
trade creditors from extending post-petition credit to Chapter 11 debtors because it states that a debtor could setoff its
pre-petition claims against a creditor in reduction of the
creditor’s post-petition administrative priority claims against
the debtor. ●
Bruce Nathan, Esq. is a partner in the New York City office of the law
firm of Lowenstein Sandler PC. He is a member of NACM and is on
the Board of Directors of the American Bankruptcy Institute and is a
former co-chair of ABI’s Unsecured Trade Creditors Committee. He
can be reached via email at [email protected].
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Business Credit february 2010
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