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The Intersection of Construction Law and Bankruptcy

In the current economic landscape, many project participants are filing bankruptcy. For the practitioner, the in-tersection between construction law and bankruptcy may be unfamiliar. This article discusses the common problems encountered and practical considerations that arise when a construction project participant files bankruptcy. The relevant issues will be addressed in five parts, and in roughly the order in which they are encountered during the bankruptcy process.

Part One deals with whether the funds being pursued are even “property of the debtor’s bankruptcy estate.” If not, recovery of the funds may be pursued outside of the bankruptcy context, which the practitioner will want to figure out as soon as possible. Likewise, a practitioner must determine a course of action with respect to other issues immediately upon filing, such as whether to pursue reclamation rights or rights provided to suppliers under section 503(b)(9) of the Bankruptcy Code (the Code). [FN1] Part Two discusses issues related to isolating or segregating the funds in question from the assets of the estate, which typically requires prompt action at the very outset of the case in order to avoid waiving important rights. Part Three is a discussion of jurisdictional issues essential to determining whether the bankruptcy court is the only court in which the dispute may be heard. In certain circumstances, the bankruptcy court must or may be convinced to refrain. Part Four discusses a practitioner’s steps after the court determines that the funds in question are “property of the estate,” and the bankruptcy court is the proper forum. The first and most important action involves protecting contractor lien claims (mechanic’s/materialmen’s lien claims). This section discusses preservation of lien claims, as well as asserting rights of setoff and recoupment. Finally, Part Five deals with issues typically arising later in the progression of the case, when the creditor may find itself in more of a defensive posture, such as might be the case in preference actions.

Part One: Key Terms for Understanding Bankruptcy Law

In order to thoroughly understand the interplay between construction law and bankruptcy law, one must under-stand several key bankruptcy concepts. For example, the difference between claims arising prepetition versus postpetition can be critical. The petition date is the date on which the bankruptcy petition is first filed. Claims arising prepetition are generally treated with lower priority, whereas postpetition claims are treated with greater priority. A creditor should submit a proof of claim, which is a written statement of the creditor submitted to show the basis for, and amount of, the claim. [FN2]

Property of the estate is another essential term in dealing with bankruptcy. The bankruptcy estate is a separate legal entity, and the assets of the debtor’s estate are property of the estate. [FN3] The assets included as property of the estate depend on various factors but broadly include “all legal or equitable interests of the debtor in property as of the [petition date].” [FN4] This concept is discussed more thoroughly in Part Two.

On the petition date an injunction is automatically imposed to prevent creditors from taking action against property of the estate (“automatic stay”). [FN5] The purpose of the automatic stay is to give the debtor an opportunity to determine how to administer the assets and claims of the estate, while “[placing] all creditors on a level playing field as they vie for their share of the distressed debtor’s assets.” [FN6] Some limited exceptions to the automatic stay exist in the Code, but, generally, relief from the administration of the asset by a bankruptcy court must be obtained through a court order. A knowing violation of the automatic stay can void any action taken and subject the violating party to damages. [FN7]

In bankruptcy, the entry of a discharge order will bar a creditor from collecting the debt from the debtor. This *12 result is established by law through a discharge injunction. [FN8] In some instances, creditors’ claims may be exempt from the discharge, and a general discharge may be denied or revoked because of certain behavior by the debtor. [FN9]

Part Two: Isolating or Segregating Funds From Assets of the Estate

Property of the Estate

When a construction or development entity declares bankruptcy, the first job of an attorney is to determine what assets are property of the estate. Statutory trusts arising under applicable state law, express trust agreements between the parties, or constructive or equitable trusts imposed by the court may enable the client to successfully gain a priority claim to the funds in question, or otherwise segregate the funds owed to the client from those of the debtor’s estate. The mere fact that a debtor lists an asset as property of the estate does not necessarily make it so in light of other controlling law.

The determination as to what is property of the estate is important because a creditor’s position can be impacted in several ways. As long as the debtor remains in possession, a creditor can make a claim to a priority right against the claims of other creditors. To the extent the debtor has paid the funds in question to the creditor within the preference period, preference liability can be defended against on the theory that there has not been a transfer of an “interest of the debtor in property.”

Property of the estate includes “all legal or equitable interest of the debtor in property as of the commencement of the case.” [FN10] To determine whether the debtor had a legal or equitable interest in the asset, or whether an express or constructive trust should be applied, applicable state law controls. [FN11] It is, however, important to note that filing a bankruptcy petition does not augment a debtor’s property rights with respect to the property in question. [FN12]

Selected Issues in Determining Whether Assets Are “Property of the Estate”

Executory contracts are considered property of the estate. Though the term executory is not specifically defined under the Code, it generally means the owner and the debtor in possession (DIP) owe obligations to one another. [FN13] Construction contracts are commonly executory, and, thus, a debtor’s interest in such a contract is included as property of the estate. [FN14] The trustee or DIP, therefore, has the authority to assume or reject the contracts. [FN15]

Courts remain split as to whether surety bonds should be considered executory. The determination can be sig-nificant because a trustee or DIP may not have the authority to assume a contract that is a financial accommodation. [FN16] However, bonds may not be property of the estate. [FN17] Despite this, a surety company may be subject to sanctions for failing to obtain relief from the automatic stay. [FN18] For example, a surety’s unilateral termination of a bond after the DIP has filed bankruptcy violates the automatic stay because this qualifies as the commencement of a “proceeding,” thereby violating § 362(a)(1) of the Code. [FN19] A mere claim against a DIP surety bond, on the other hand, does not require relief from the stay.

Courts are not in agreement as to whether progress payments should be considered property of the estate. Some courts have held the surety has an equitable right to such funds, [FN20] whereas others have found the surety’s right to be inferior to the right of the debtor. [FN21] Upon the filing of a bankruptcy, a surety company can, and should, file a proof of claim in order to protect its interests. [FN22] The time for filing a claim against a bankruptcy estate can be extended for two years, but there are many exceptions to this rule. [FN23]

In some situations the lender may be competing with the interest of the surety company. If no default has occurred in regard to the contract, the lender should prevail over the surety’s claim to assets. Conversely, if there is a default, the surety company should prevail with regard to future work under arguments of equity and adequate protection.

The Code supports the right of a surety to be protected as a financing entity, [FN24] though not as a secured creditor. Secured creditors are adequately protected, but a surety company may not be treated as a secured creditor. If, for example, the DIP is not in default, the surety’s right may be inferior to other lenders and to the DIP personally. The surety, in some situations, may be able to enhance the protection provided under the Code by filing a financing statement, thereby becoming a secured creditor.

Express Trusts

An express trust is generally created by declaring the intent to create a trust, along with identifying the trustee, beneficiary, and the res. [FN25] However, such trusts also may be created by statute. [FN26] If an express trust is imposed, the assets in question will not become property of the estate. [FN27]

Certain states have enacted “builders’ trust fund” statutes, which some practitioners may be too quick to assume automatically create an express trust, such as would prevent funds being held by the debtor from ever becoming property of the estate. The analysis is not so simple. A trust fund statute is not necessarily a trust fund statute for purposes of bankruptcy. Differences in language affect whether a trust fund statute creates the necessary “express *13 trust” to prevent the property from becoming part of the debtor’s estate. Otherwise, the statute may simply provide a remedy to an aggrieved creditor without going so far as actually segregating the funds from a debtor’s estate.

The distinction appears to be whether the trust was created at the moment the funds came into the debtor’s pos-session or whether the obligation arose after the commission of a misapplication of the funds. As the U.S. Supreme Court said in Davis v. Aetna Acceptance Co., “It is not enough that, by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio. He must have been a trustee before the wrong and without reference thereto.” [FN28]

This critical distinction has been recognized by nearly all circuits. Where obligations arise at the moment the funds came into the debtor’s possession, the applicable builders’ trust fund statute creates a trust, preventing the funds from becoming property of the bankruptcy estate. On the other hand, where the obligations arise after the fact of a wrongdoing, there is no such trust.

Parties may argue, particularly in states without statutory express trusts, that funds represented by joint check agreements should never became property of the estate. If a joint check agreement specifically meets the criteria for an express trust, [FN29] the argument may prevail with the property remaining separate from the bankruptcy estate. [FN30] Not all joint check agreements, however, meet the applicable criteria. For example, a unilateral letter of instruction from the debtor with no consideration that is revocable at will is not sufficient to establish an express trust. [FN31]

Constructive Trusts

What happens if there has not been an express trust created, either by statute or written agreement? Can a sub-contractor still seek to have a “constructive trust” imposed on certain payments from the owner to the contractor, such that even though the proceeds are property of the debtor’s estate, they can nonetheless be equitably separated and directed to the benefit of the supplier? The first step in the analysis depends on state law, because bankruptcy courts will defer to the applicable state law in determining whether a constructive trust has come into existence.

Some circuits appear to be amenable to the idea of a “constructive trust” where the circumstances warrant. In this regard section 541(d) treats constructive trusts the same as express trusts. [FN32] For instance, the Third Circuit specifically upholds the concept of constructive trusts for purposes of excluding from debtor’s property that property in which the debtor holds only legal, but not equitable, title. [FN33] Other courts appear to make the distinction not between legal versus equitable title, but whether the circumstances warrant the imposition of a constructive trust under applicable state law, even as both legal and equitable interests remain in the hands of the debtor. [FN34] Many of these cases, however, require the ability to trace the funds in question. [FN35]

Regardless of the distinction relied on by the court concerning legal versus equitable title, there is a common thread to constructive trusts: unlike an “express” or “resulting” trust, which can never be included in “property of the estate,” a constructive trust is a remedy for circumstances in which equity demands that a trust be imposed after considering all the facts. [FN36]

Certain other courts, following the lead of the Sixth Circuit in In re Omegas Group, Inc., [FN37] reject the entire concept of constructive trusts in bankruptcy, or at least for purposes of segregating assets. The Omegas court held that when a prepetition fraud that would allegedly permit imposition of a constructive trust on the debtor’s assets injures the creditor, but when no constructive trust is imposed prior to the debtor’s bankruptcy filing, the creditor’s proper remedy is not to seek to exclude assets from property of the estate based on a constructive trust not yet in existence. Rather, the proper remedy is to file a nondischargeability complaint to except the resulting debt from discharge. [FN38] As the court noted in In re Foros, a “constructive trust” is a remedy for unjust enrichment, not a real trust; therefore the existence of grounds for imposition of a constructive trust does not lead to the conclusion that the beneficiary has an equitable, or any other, interest in the property. Instead, the beneficiary has a particular remedy for a legal wrong. [FN39]

There is reason to believe that the Sixth Circuit’s approach, besides being the minority approach on the issue, will be abandoned. Not only has the holding been regularly criticized, distinguished, and not followed, but it also appears to be inconsistent with the U.S. Supreme Court’s pronouncements on the issue, as well as the majority of circuits.

As noted by the court in Paul J. Paradise & Assocs., Inc.:

The Omegas decision is appealing in that it applies a bright line rule to resolve the confusion over the applicability of constructive trusts to bankruptcy law. Not surprisingly, it has met with approval by some bankruptcy courts. However, the Sixth Circuit panel’s blanket statement in Omegas, that constructive trusts come into existence at the time they are expressly recognized by a court, made without citation to any case authority, runs counter to the teaching of Third Circuit and Supreme Court law, that courts must look to state law to determine whether and when constructive trusts attach in bankruptcy law. The majority state law rule is *14 contrary to that announced by the Omegas court; that is, the majority rule is that constructive trusts attach or relate back to the time of the unlawful act that led to the creation of the trust. While the Delaware Supreme Court has described the constructive trust as an “equitable remedy,” that Court has also stated that “the duty to transfer the property relates back to the date of the wrongful act that created the constructive trust.” Thus, Delaware law appears to be in accord with the majority rule. [FN40]
So in those states where constructive trusts may be recognized, what has been held sufficient and what has been held insufficient?

1. Merely establishing a procedure for joint checks, revocable at will by any party, is not sufficient to establish a constructive trust. [FN41]

2. A persuasive factor in inducing courts to impose a constructive trust, despite whatever other failures a joint check agreement may have, is whether the agreement creates an independent obligation on the part of the owner to pay the supplier, and the supplier relies on that independent obligation. [FN42]

3. Courts also apparently have been persuaded when there is clear evidence that the entire payment represented by the joint check is solely for the benefit of the supplier and no portion thereof appears to be for markup to the debtor. Therefore, while the funds may well be “property of the estate” because of the failure to create a specific res identified in the joint check agreement, the court nevertheless may make a distinction between “legal title” and “equitable interest” and order the check paid to the supplier. In such case, there is an explicit or implicit finding that the debtor is a mere “conduit.” [FN43]

4. On the other hand, where both parties have an independent interest in the check, then notwith-standing any language in a joint check agreement, it is property of the estate. [FN44]

5. Where the debtor has effectively entirely given up control over the payment, a constructive trust has been found to be warranted. [FN45]

6. Where a constructive trust on a check has been found to be warranted, courts have not been im-pressed by debtors’ creative attempts to treat their obligations to sign over the joint checks as being “executory contracts” subject to rejection in bankruptcy. Because courts retain the right to approve or reject a proposed rejection of an executory contract under the Business Judgment Rule, a court can prevent an attempt to cir-cumvent a finding of constructive trust by such unique maneuverings of a debtor. [FN46]

Another way to declare assets as beyond the reach of the debtor is by virtue of reclamation rights under state law. Under this theory, recovery of certain assets delivered to the project may be permitted. [FN47] Although bankruptcy courts recognize reclamation as a remedy based in state law rather than recognizing it as a separate bankruptcy right, the Code nevertheless affects the timing provisions of reclamation. Specifically, the 2005 amendments to the Code extend the 10-day period to up to 45 days (or, if the 45 days expire after commencement of the case, the demand must be made within 20 days of commencement of the case). [FN48] Still, counsel should note that a creditor may not wish to pursue reclamation rights in light of a new provision added by the 2005 amendments to the Code. Section 503(b)(9) now provides for administrative expense status for goods sold in the ordinary course of the debtor’s business (as opposed to the ordinary course of the creditor’s business). Relevant issues to consider include the timing of when the goods were received by the debtor and their value.

Part Three: Jurisdictional Issues

When a construction project participant is placed in bankruptcy, various jurisdictional issues exist.

Courts can obtain jurisdiction over a particular issue or assets in several different ways. The most common theory is core jurisdiction, which is determined by whether the matter at hand relates to the underlying bankruptcy case. [FN49] Another legal maxim is “related to” jurisdiction. The test to establish whether a particular civil case relates to the bankruptcy is “whether the outcome of that proceeding could conceivably have any effect on the estate to be administered.” [FN50] In other words, the court will ask whether the action could impact the debtor’s rights.

Abstention is another jurisdictional issue that is relevant in bankruptcy proceedings. Generally, abstention is a judicially created doctrine to resolve conflicts between federal and state courts. [FN51] In bankruptcy, however, abstention is statutory. [FN52] Mandatory abstention for the bankruptcy court exists where a timely motion for abstention is made, the case is based solely on a state law cause of action, the proceeding is “related to a title 11 case but is not a core proceeding,” the proceeding could only have been brought in state court (except for the bankruptcy case), and the bankruptcy court finds the action will be timely adjudicated. [FN53] The bankruptcy court also has the option to abstain if doing so is in the interest of justice or in respect of state law. This principle, known as “permissive abstention,” is not limited to state law claims. Instead, courts may use their discretion to abstain to permit other federal courts or administrative boards to hear disputes. [FN54]

*15 An action originally brought in state court can be “removed” to the district court in the district where the action is pending provided the district court has original jurisdiction over the claim. [FN55] Courts are split as to whether removal is the only option in such situations or whether abstention is appropriate. [FN56] An action can, however, be “remanded” to a lower court for further proceedings at any time. [FN57]

Courts must defer cases to another forum where “enforcement of the claim requires the resolution of issues which, under a regulatory scheme, have been placed within the special competence of an administrative body; in such a case the judicial process is suspended pending referral of such issues to the administrative body for its views.” [FN58] Although the court has the discretion to retain jurisdiction, the deferral of the issues is generally not within the discretion of the court. [FN59] Res judicata and collateral estoppel are procedural issues that may arise in bringing claims against a bankruptcy estate, [FN60] and decisions can have preclusive effect.

Part Four: Steps Taken After Assets Are Deemed Property of the Estate

Mechanic’s Liens

Most states have mechanic’s liens statutes that provide that unpaid contractors, laborers, or vendors can bring causes of actions against owners. [FN61] Such liens often play a vital role in construction cases and require special treatment in bankruptcy proceedings.

Mechanic’s liens may be involved in a bankruptcy under three situations. First, the contractor may be the debtor in bankruptcy. Second, the debtor may be the lien claimant. Third, the debtor may be the owner.

If the contractor files bankruptcy, a subcontractor may have a mechanic’s lien claim. The subcontractor may be required to obtain a personal judgment against the contractor in order to protect the lien. [FN62] In order to adequately protect its interests, the subcontractor also may need to petition for an order that the judgment is deemed executed without sufficient property of the contractor. [FN63]

Under the filing of bankruptcy by a lien claimant, the lien is considered property of the estate. [FN64] Thus, the lien belongs to the trustee or DIP. After the petition is filed, no major decisions can be made without the trustee or DIP and the approval of the bankruptcy court.

If the bankruptcy debtor is the owner, the lien claimant has several options. The claimant may attempt to obtain relief outside of the bankruptcy process. To enforce the lien outside of bankruptcy, the claimant must first petition the court for relief from the automatic stay or request that the trustee abandon the property in question. Alternatively, the claimant may seek relief through the bankruptcy process by filing a secured claim. [FN65] A lien may be of little value if the lien is junior to a lender’s secured claim in the debtor’s real property. In addition to the priority rules under state law, lien claimants should be aware of section 510(c)(1) of the Code and the principle of equitable subordination as a potential means of attacking a senior interest holder’s priority. Under section 510(c)(1), if a senior interest holder engages in inequitable conduct, the court may “subordinate for purpose of distribution all or part of an allowed claim [by the senior interest holder] to all or part of another allowed claim [by a junior interest holder].” [FN66]

Perfection of Mechanic’s Liens [FN67]

Upon filing of bankruptcy, the automatic stay applies to all actions against the estate. [FN68] A mechanic’s lien, however, can be recorded or filed even though the stay would otherwise prevent such action. [FN69] By statute, the filing of a lien does not violate the automatic stay, but merely perfects the lien. [FN70] If a claimant can perfect a mechanic’s lien prepetition, it should be able to do so postpetition, provided the filing is within the time limit applicable under state law, where the mechanic lien statute allows the lien to relate back in time. [FN71] In other words, where a lien relates to services or materials provided prepetition, it can be filed postpetition, [FN72] provided a relation back provision applies under applicable state law for perfection of mechanic’s liens and materialmen. [FN73] Perfection is allowed under the Code if the lien is filed under section 547(e)(2)(A) within the time fixed for such seizure or commencement. [FN74] Additionally, parties must comply with section 546(b), which “permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection … [and further] provides for the maintenance or continuation of perfection of an interest in property to be effective against an entity that acquires rights in such property before the date on which action is taken to effect such maintenance or continuation.” [FN75]

Though a claimant may perfect a mechanic’s lien while the automatic stay is in effect, the stay prevents the claimant from filing a lawsuit to enforce the lien. The stay is terminated when the trustee abandons the property, relief or discharge is granted, or the case is dismissed. [FN76] The claimant can proceed to enforce the lien at that time.

With regard to perfection, lis pendens mechanic’s liens generally have the same protections as afforded mechanic’s liens. [FN77] The issue is one of state law, so protections may vary among jurisdictions. In some circuits, merely because a creditor could have filed a mechanic’s lien does not allow the creditor to avoid a preference. [FN78] Such a rule may leave a contractor in an uncertain position. If the contractor is not paid, it can file a lien, which will likely be repaid to the extent there is equity for it to attach. On the other hand, if the contractor is paid, there is no need to file a lien, but the contractor may be subject to a preference attack.

Avoidance of Mechanic’s Liens by Trustees

In a bankruptcy proceeding, a trustee may attempt to avoid a mechanic’s lien. The Code provides that the trustee can avoid a transfer by the debtor within 90 days prior to the filing date. [FN79] Several defenses can be asserted, including relation-back of the lien to an earlier date.

Section 547(c)(6) limits a trustee’s ability to avoid a *16 mechanic’s lien. [FN80] Generally, the Code seeks to preempt state law, [FN81] but a carve-out exists for statutory liens. [FN82] State law typically limits the ability of a trustee to avoid a mechanic’s lien. A mechanic’s lien is a statutory lien. Thus, a trustee cannot avoid a lien once it is perfected, [FN83] so long as the perfection relates back to a prepetition date. But there would be no need to avoid an unperfected lien!

Mechanic’s liens can be useful tools in bankruptcy proceedings, but it is essential to understand the specific implications that may arise.

Setoff and Recoupment–the Right of Setoff

Setoff is a right rooted in equity that permits the adjustment of mutual obligations by applying one debt in satisfaction of the other. [FN84] The doctrine traces its origins to Roman law. Setoff was first incorporated into English bankruptcy law in 1705, and into the American Bankruptcy Act of 1800. [FN85] The right of setoff continues to be recognized in modern bankruptcy practice. [FN86]

Several provisions of the Code operate to preserve, protect, and limit rights of setoff in bankruptcy. In particular, section 553(a) recognizes and preserves rights of setoff where four conditions exist: [FN87] (1) a creditor holds a claim against the debtor that arose before the filing of the bankruptcy case, (2) that creditor owes a debt to the debtor that also arose before the commencement of the case, (3) the creditor’s claim and debtor’s debt are mutual, and (4) the creditor’s claim and the debtor’s debt are each valid and enforceable.

The first requirement of section 553(a) is that a creditor must hold a prepetition claim against the debtor. Section 101 defines “claim” to include any “right to payment, whether such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” By this language, Congress intended to adopt the broadest available definition for the term “claim.” [FN88]

A claim is not ineligible for setoff simply because it is disputed. A court may permit the setoff of a claim not-withstanding a dispute as to its amount, and then later revisit the amount of the setoff or reverse the setoff to the extent that the disputed claim is ultimately resolved in the debtor’s favor. Alternatively, the court may elect to resolve the dispute initially in the course of determining whether and in what amount to allow a setoff. [FN89]

In addition, section 553(a) requires that in order to be eligible for setoff the creditor’s claim must have arisen prior to the date of the filing of the debtor’s bankruptcy petition. In general, a claim is considered to have arisen prepetition if all of the elements of liability for the claim arose before the petition date. [FN90] The issue of whether a claim arose before or after the commencement of the bankruptcy case is a question of federal bankruptcy law. [FN91] Determining whether all of the elements of a claim arose before or after the commencement of the case is typically a straightforward analysis. The facts must be analyzed carefully, though, because sometimes that analysis can produce counterintuitive results.

One example of such a claim is the claim of a creditor settled during the course of the bankruptcy case itself. Intuitively, one would not expect that the mere settlement of a prepetition claim would render the claim postpetition in nature, and therefore ineligible for setoff. However, in Cooper-Jarrett, Inc. v. Central Transport, Inc., [FN92] the Third Circuit ruled that a postpetition settlement agreement that resolved the debtor’s prepetition breach of contract action against a creditor effectively converted that creditor’s prepetition debt into a postpetition liability, thereby rendering the debt ineligible for setoff under section 553 against the creditor’s prepetition claim. [FN93]

The second requirement of section 553 for setoff is that the debtor must owe a prepetition debt to the creditor against which the setoff may be taken. [FN94] The term “debt” is defined in section 101 as a “liability on a claim.” Thus, for purposes of satisfying this requirement of section 553, the meaning of the term “debt” is virtually identical to the meaning of the term “claim.” [FN95]

The third requirement of section 553 recognized by courts is that the creditor’s claim and debtor’s debt must be “mutual.” [FN96] Courts have held that this requirement should be strictly construed. [FN97] The term “mutual” is not defined by the Code, and the interpretive case law is rather confusing. Some courts have required that the prepetition claim and the prepetition debt must be owed between the “same parties,” and that the parties must be acting in the same “capacity.” [FN98] Other courts have required that the obligations must be owed in the same “right.” [FN99] Some cases suggest that the obligations need not be of the same “character” and that the prepetition claim and prepetition debt need not have arisen in any particular order [FN100] or out of the “same transaction.” [FN101]

The requirement that the prepetition claim and prepetition debt must exist between the “same parties” prevents triangular setoffs, in which A attempts to setoff an obligation owed by B against B’s debt to C. Such triangular setoffs are generally not allowed under nonbankruptcy law, and are also not permitted under section 553. [FN102] This rule, for example, prevents a subsidiary from setting off a debt owed to the debtor against a debt the debtor owes to another related subsidiary. [FN103] This rule also applies to parent and subsidiary corporations. [FN104]

The mutuality requirement to invoke the right of setoff in bankruptcy also requires that the parties must owe their obligations to each other in the same “capacity.” The requirement of “same capacity” differs from the “same parties” requirement in that it does not relate to the identity of the parties, but rather to the relationship between those parties. [FN105] The parties to a setoff in bankruptcy must not only be the same as the parties to the original obligations, but those parties must also stand in the same capacity with respect to each other. [FN106]

For example, courts have held that a bank cannot set off monies deposited by a debtor in a qualified retirement account at the bank against a general debt owed by the debtor to the bank, because the bank holds the retirement *17 account deposit as a trustee and not as a creditor of the debtor-depositor. [FN107] However, the requirement of “same capacity” does not prevent setoff if the obligations sought to be offset between the parties are unrelated to either party’s fiduciary responsibilities. [FN108]

Finally, the mutuality requirement to invoke a right of setoff in bankruptcy also requires that the parties’ obligations to each other must be owed in the same “right.” [FN109] This means that each party to the setoff must own its claim in its own right severally, with the right to collect in its own name in its own right severally. [FN110] The requirement that the parties’ obligations to each other be in the “same right,” for purposes of setoff in bankruptcy, subsumes the separate question of whether any obligations sought to be offset are owed jointly with some other entity. [FN111] The “same right” requirement simply enforces the general rule that joint obligations are not subject to setoff against separate debts in bankruptcy. [FN112]

Generally, the character of the obligations is irrelevant for purposes of mutuality under section 553. In the context of setoff in bankruptcy, a contract claim may be set off against a tort claim, and a statutory claim may be offset against an obligation arising in equity. [FN113]

However, under general equitable principles, certain types of claims by a debtor are not subject to setoff by a creditor. For example, a creditor whose liability to the debtor arises from violations of the Truth in Lending Act may not offset that liability to the debtor by its own claim against the debtor. [FN114]

Several courts have stated that a creditor whose liability to a debtor arises from fraud has no right of setoff under section 553. [FN115] Likewise, where a creditor’s liability to the debtor is based upon the wilful conversion of the debtor’s property, such as by a preferential transfer or a fraudulent conveyance, courts have refused to recognize such liability as a basis for setoff in bankruptcy. [FN116]

The fourth requirement of section 553(a) for setoff is that the creditor’s claim and the debtor’s debt must each constitute a valid obligation. [FN117] A prepetition setoff taken with respect to an obligation that is invalid under applicable nonbankruptcy law may be subject to avoidance.

The Source of the Right of Setoff

It is important to bear in mind that section 553 does not create a federal right of setoff, but merely preserves in the bankruptcy forum whatever rights of setoff otherwise exist under applicable nonbankruptcy law. [FN118] It follows that a court may not invoke section 553 to enlarge a party’s right to setoff in bankruptcy. [FN119] Thus, in determining whether a creditor is entitled to claim a right to setoff in bankruptcy, a court must first look to nonbankruptcy law to ascertain the source of the underlying right. [FN120] The substantive right to a setoff must arise independently under state or federal law.

However, the issue of whether setoff is permitted under section 553 in bankruptcy is a federal question that must be resolved by reference to the applicable provisions of the Code. [FN121] Thus, even if a setoff would be allowed under applicable nonbankruptcy law, it will not be permitted in bankruptcy if the requirements for allowance under section 553 are not met. [FN122]

Setoff Subject to Automatic Stay

As discussed in Part One, the commencement of a case under the Code triggers the automatic stay of section 362. In particular, section 362(a)(7) expressly enjoins “the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor.” [FN123]

The automatic stay of section 362 does not defeat a creditor’s right of setoff, but rather enjoins enforcement of the right pending the orderly examination of the debtor’s and creditor’s rights in the bankruptcy proceeding. [FN124] Because the automatic stay remains in effect, a creditor must affirmatively seek and obtain relief from the automatic stay under section 362(d) in order to assert its right of setoff. [FN125]

It has been held that a creditor does not violate the automatic stay of section 362 by raising the existence of a right of setoff as a defense in a turnover proceeding under section 542. [FN126] However, it has also been held that, in an adversary proceeding brought by the trustee against the creditor, the creditor must first obtain relief from the automatic stay before asserting its right of setoff as a counterclaim in that adversary proceeding. [FN127]

The courts are divided over the issue of whether a setoff taken in violation of the automatic stay is void ab initio or merely voidable. A majority of courts have held that any action taken in violation of the automatic stay is void ab initio. [FN128] A minority of courts have held that an action taken in violation of the automatic stay is merely voidable. [FN129]

Setoff and Treatment as a Secured Claim

Section 506(a) expressly provides that “[a]n allowed claim of a creditor … that is subject to setoff under Section 553 of this title, is a secured claim … to the extent of the amount subject to setoff … and is an unsecured claim to the extent that … the amount so subject to setoff is less than the amount of such claim.” Simply put, a creditor holding a valid right of setoff is to be treated as the holder of a secured claim to the extent of the right. With respect to the secured claim of a creditor holding a right of setoff, the creditor is entitled to all protections *18 afforded secured creditors under the Code, including adequate protection. [FN130]

Setoff, Recoupment, and Turnover

Section 542(b) specifically provides:

an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee, except to the extent that such debt may be offset under Section 553 of this title against a claim against the debtor.
Thus, a setoff may be a defense to a trustee’s claim for turnover.

Waiver of Right by Failure to Assert Setoff in Bankruptcy Proceeding

Generally, a creditor must timely assert its right of setoff in the debtor’s bankruptcy proceeding, or risk losing the right altogether. [FN131] Although in general a creditor must file a proof of claim in order to share in any distribution from a debtor’s bankruptcy estate, [FN132] a creditor that fails to file a proof of claim does not necessarily waive its right of setoff for all purposes.

There is a split of authority on the issue of whether a creditor that fails to indicate a right of setoff in its proof of claim can assert such a right. Some courts have held that a creditor can still assert its right of setoff notwithstanding such failure. [FN133] Other courts have stated that a creditor’s failure to assert its right of setoff in its proof of claim filed in the bankruptcy amounts to a waiver of that right. [FN134] Nonetheless, even if a creditor has a right to setoff under nonbankruptcy law, allowance of that right in bankruptcy is not mandatory but rather is within the discretion of the court. [FN135] Courts appear to have adopted the view that the failure to file a proof of claim does not bar a creditor from asserting the right to setoff in a defensive manner against a debt owed to the debtor, but that such failure will prevent the creditor from receiving any distribution from the bankruptcy estate on account of the claim it asserts as a setoff. [FN136]

Effect of Confirmation or Discharge on Right of Setoff

Courts are divided over whether, in light of section 553(a), a creditor’s right of setoff is affected by confirmation of a plan of reorganization or liquidation, or by discharge of the debtor. A majority of courts have held or stated that confirmation and discharge do not prohibit the defensive use of setoff by a creditor in a subsequent action by the debtor against the creditor. [FN137] Various bankruptcy courts have followed the logic of these decisions. [FN138] A minority of courts, however, have taken the opposite view. [FN139]

Setoffs as Avoidable Preferences or Fraudulent Transfers

In general, a prepetition setoff is not avoidable as a preference under section 547 [FN140] or as a fraudulent transfer under section 548 or section 544. [FN141] A prepetition setoff may be avoidable as a preference or fraudulent transfer, however, if the setoff was invalid under applicable non-bankruptcy law, or if the setoff does not satisfy the requirements of sections 553(a)(2) or 553(a)(3). Even if a creditor’s claim is disallowed under some provision of the Code, nonetheless, section 553(a)(1) does not operate to make a prepetition setoff based on that claim subject to avoidance as a preference or fraudulent transfer. [FN142]


“[R]ecoupment is in the nature of a defense and is intended to permit … judgment to be rendered that does justice in view of the one transaction as a whole … allowing the creditor to recoup damages simply allows the debtor precisely what is due when viewing the transaction as a whole.” [FN143] Recoupment is not mentioned in the Code but has been applied in the bankruptcy context.

Bankruptcy courts apply recoupment as an equitable doctrine to permit a creditor to avoid the otherwise inequitable results of applying the limitations of setoff. The recoupment doctrine in bankruptcy is primarily applied to cases involving single contracts that expressly provide for the repayment of advances or overpay-ments, although use of the doctrine does not depend on whether the parties expressly anticipated the problem. [FN144]
Recoupment and setoff are very similar doctrines, but in the bankruptcy context they have some key differences:

(1) Generally, the requirements and limitations of section 553 do not apply to recoupments;

(2) There is no prepetition requirement;

(3) Although the courts are split, the trustee may not need to obtain relief from the automatic stay in order to exercise its right of recoupment; and

(4) Unlike setoff, the obligation in recoupment must arise from the “same transaction.”

Courts have construed the principle of recoupment narrowly so as not to severely disrupt the fundamental bankruptcy tenet that “once a petition is filed, debts that arose before the petition may not be satisfied through postpetition transactions.” [FN145]

In order to limit the doctrine of recoupment, courts require that “the creditor … have a claim against the debtor that arises from the same transaction as the debtor’s claim against the creditor.” [FN146] Courts, however, have failed to precisely define what is a “same transaction.” [FN147] Courts have instead focused “on the facts and equities of each case.” [FN148] Courts generally adopt one of the two following tests: the integrated transaction test or the logical relationship test. It should be noted that “[u]nder either standard … courts evaluate the equities of the case, the main difference between them being the degree of interconnectedness required with respect to the relevant obligations.” [FN149]

The integrated transaction test is the more restrictive approach in determining whether recoupment is justified. *19 This test requires that “both debts … arise out of a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations.” [FN150] Under the integrated transaction test, the same contract does not necessarily mean the same transaction. [FN151] This test is used by the Second, Third, Fifth, Eighth, and Tenth Circuits. [FN152]

The logical relationship test is the more flexible approach in determining whether recoupment is justified. Courts using this test find that “‘[t]ransaction is a word of flexible meaning. It may comprehend a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship.” [FN153] Courts that have applied this standard in the context of a recoupment “have permitted a variety of obligations to be recouped against each other, requiring only that the obligations be sufficiently interconnected so that it would be unjust to insist that one party fulfill its obligation without requiring the same of the other party.” [FN154]

Part Five: Concerns Where the Creditor Is in a Defensive Position

Preferences and Disgorgement Issues

Special considerations arise where a subcontractor bypasses the debtor and receives payment from a third party. The Sixth Circuit has held that where a third party’s payments to a supplier of a debtor arise out of an independent obligation of that third party to the supplier, such payments do not constitute property of the estate and cannot be recovered by the trustee. [FN155] In the case In re Arnold, the trustee for a Chapter 7 contractor filed a complaint against its debtor’s supplier, alleging money that had been paid to the supplier postpetition by the general contractor was property of the estate and should be turned over. The bankruptcy court initially ruled in favor of the trustee, based on the factual finding that the contractor’s debt to the subcontractor arose solely out of the subcontractor’s relationship with the debtor. Noting that such factual finding could only be overturned under the “clearly erroneous” standard, the court of appeals nevertheless reversed the bankruptcy court (and the district court) and noted that, under the facts of the case, the payor had an independent obligation to the sub-subcontractor. In that particular case, the independent obligation was found in the contract between the State of Tennessee and the general contractor, which obligated the contractor to pay subcontractors for materials used on the project supplied by the debtor. Because there was an independent contractual obligation imposed on the general contractor, the court held that funds were never property of the estate.

What else can constitute such an “independent obligation”? All case law referencing the Sixth Circuit precedent has followed Arnold, but no case more thoroughly discusses it than In re Underground Storage Tank Technical Services Group, Inc. [FN156] The case is interesting because it also involved a situation where a trustee sought to avoid payments made by a general contractor to a sub-subcontractor of the debtor’s subcontractor. Both parties relied on Arnold for their arguments. The trustee attempted to distinguish the facts of that case because Arnold deemed the payment to be an independent obligation from the contractor to the sub-subcontractor as a result of an independent contractual obligation that the contractor had with the State of Tennessee. However, the trustee noted, in Underground Storage Tank, there was no independent contractual obligation imposed on the paying contractor. Instead, the “independent obligation” arose by virtue of the fact that the general contractor was the indemnitor on a Miller Act bond, and had the general contractor not made the payment to the sub-subcontractor, the sub-subcontractor could have made a claim on the Miller Act bond. In turn, the surety issuing the Miller Act bond would have had direct indemnity rights against the general contractor. Finding that the Miller Act required the contractor to furnish a payment bond with the surety to protect persons supplying labor and materials for the project, and that the contractor was required to reimburse the surety for payments made to the sub-subcontractor on the bond claim, the court held that the contractor had an independent obligation to pay the sub-subcontractor. The court in Underground Storage Tank, realizing Arnold was inconclusive on whether the independent obligation had to be contractual in nature, went on to predict how the Sixth Circuit would rule if squarely presented with the trustee’s argument:

Characterizing this transaction as amounting to an appropriation by [sub-subcontractor] of [debtor’s] ac-counts receivable against [contractor] is neither more nor less “valid” than the assertion that [sub-subcontractor] simply cashed in on its own account receivable. But since “economic reality” provides no clear signpost, there is no reason to deviate from the course which Arnold suggests. If faced with this issue, then, we predict that the Sixth Circuit would opt for simplicity over technical nuance by ruling that in cases of this type the sole issue is whether the defendant had an independent right to the money received. [FN157]
The court’s prediction as to how the Sixth Circuit would rule appears to have been validated. [FN158]

But what if the payment is made by the debtor itself when the debtor isn’t the owner of the property in question? Two recent decisions discuss this issue in depth. In *20 Liquidation Committee v. Binsky & Snyder Inc., a first-day order permitted the debtor to pay subcontractors to avoid lien filings that would jeopardize any hope of reorganizing. [FN159] Unfortunately, the debtor still was unable to reorganize and ultimately filed a liquidating plan. Avoidance actions were transferred to a liquidating trustee, who sued recipients of these payments as preferences.

The defendants raised two primary defenses. First, the defendants argued that since, under all of the applicable state lien laws pursuant to which they were operating, they held “inchoate” lien rights, they were secured creditors, and therefore transfers to them were not avoidable. The court rejected this argument, saying that since the debtor was not the owner of the property but was rather a general contractor, the defendants were not secured creditors in property of the debtor (this would be a different result had the debtor been the owner of the property). [FN160]

Second, the creditors argued that giving up lien rights was “new value” such as would insulate the payments to them from preference exposure. The court did accept this argument, inasmuch as there was a benefit to the debtor from its not having filed liens. Had it filed liens, the owner of the properties would have been entitled, under its contracts with the debtor, to offset the amount paid by a dollar-for-dollar reduction in the amount that the debtor would have received. However, the court imposed an important requirement on the subcontractor: the subcontractor also must prove that, at the time of the transfer, the owner’s indemnification claim against the debtor was secured by property of the estate (whether by setoff or otherwise). So what does this mean? The court explained, “If the owner still owes the debtor [GC], then its indemnity claim can be setoff and is secured … if there is no debt to setoff, however, then the owner’s claim for indemnification is simply an unsecured debt and there is no ‘new value.”’ The court looked to similar decisions from the Fifth and Ninth Circuits. [FN161]

The case of Lovett v. Homrich Inc. had similar facts, the main difference being that the preference defendant had actually filed a lien and only released that lien after receiving the payment in question. [FN162] The subcontractor raised two defenses. The first defense was that the payment in question was not avoidable because it was “trust funds” of the debtor and therefore not property of the estate. The court responded to this by saying that a subcontractor could only raise the trust fund issue if it could directly trace the proceeds received back to the actual owner of the project because the owner in this case had actually paid the debtor’s lenders, who had released the funds without earmarking them.

The second defense raised by the subcontractor was a “secured creditor” defense that was rejected for the same reason as the court rejected the argument in Jones. However, the subcontractor raised a third defense–that it gave new value by releasing the lien it had filed. Relying on the same logic as used in Jones, and noting that the owner had a right to withhold funds due to the debtor to the extent of lien claims filed, the court noted that “this was, effectively, a lien on debtor’s accounts receivable from [the owner], which was released, dollar for dollar, when the lien was released.” [FN163]


Earmarking is a defense used against preference actions in bankruptcy. In a preference, a transfer may be avoided where it was a transfer of an interest of the debtor in property, to or for the benefit of a creditor, on account of an antecedent debt, made while the debtor was insolvent, made within 90 days of petition date, and enabled the creditor to receive more than it would have in a Chapter 7 liquidation. [FN164]

Essentially, the earmarking doctrine provides that the debtor’s use of borrowed funds to satisfy a preexisting debt is not deemed a transfer of property of the debtor, and, therefore, it is not avoidable as a preference. [FN165] Under the doctrine, if a third party provides funds for the specific purpose of paying a creditor of the debtor, the funds may not be recoverable as a preferential transfer because the funds never become part of the debtor’s estate. [FN166]

Courts uniformly agree that three requirements must be met in order to apply the earmarking doctrine as a defense to a preference action. [FN167] First, there must be an agreement between the new lender and the debtor that the new funds will be used to pay a specified antecedent debt. Second, the performance of the agreement must be made according to its terms. Third, the transaction as a whole (including the transfer in of the new funds and the transfer out to the old creditor) must not result in any diminution of the bankruptcy estate. [FN168]


When a construction project participant files bankruptcy, a distinct set of conditions arises. Immediately upon the bankruptcy filing, the issue of isolating or segregating funds in question from the property of the bankruptcy estate becomes relevant; also, the creditor must determine whether to pursue reclamation rights. As the bankruptcy proceedings progress, jurisdictional issues may become increasingly important. If the assets in question are determined to be property of the estate, new concerns come to the forefront. Such concerns include mechanic’s lien rights and the rights of setoff and recoupment. Later in the progression of the case, the creditor may be in a more defensive position and the preference defense will become the most important issue. In order to adequately protect a client’s interests, attorneys practicing in these areas must be aware of the importance of these issues throughout the bankruptcy case.

[FNa1]. David C. Seitter is a partner of Spencer Fane Britt & Browne LLP, Kansas City, Missouri. Daniel H. Puryear is a member of Smythe Puryear & Robertson, Nashville, Tennessee. David J. Theising is a partner of Harrison & Moberly LLP, Indianapolis, Indiana. The authors wish to thank Heather Morris, a third-year law student at the University of Missouri-Kansas City, for her assistance.

[FN1]. 11 U.S.C. § 503(b)(9) (2009).

[FN2]. BLACK’S LAW DICTIONARY (8th ed. 2004).

[FN3]. 11 U.S.C. § 541 (2009).

[FN4]. 11 U.S.C. § 541(a)(1).

[FN5]. 11 U.S.C. § 362 (2009).

[FN6]. In re Wright, 371 B.R. 472, 478 (Bankr. D. Kan. 2007).

[FN7]. 11 U.S.C. § 362(k).

[FN8]. 11 U.S.C. § 524(a) (2009).

[FN9]. 11 U.S.C. § 524(b).

[FN10]. 11 U.S.C. § 541(a)(1) (2009).

[FN11]. Butner v. United States, 440 U.S. 48, 55 (1979) (“Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”); see also Marrs-Winn Co., Inc v. Giberson Elec., Inc. (In re Marrs-Winn Co., Inc.), 203 B.R. 964, 970 (Bankr. C.D. Ill. 1995).

[FN12]. 5 COLLIER ON BANKRUPTCY § 541.04 (15th ed. 2006) (“[Section 541(a)(1)] is not intended to expand the debtor’s rights against others beyond what rights existed at the commencement of the case …. The trustee can assert no greater rights than the debtor had on the date the case was commenced.”).

[FN13]. In re KAR Dev. Assocs., L.P., 180 B.R 597, 606 (Bankr. D. Kan. 1994).

[FN14]. 11 U.S.C. §§ 365 (2009), 541.

[FN15]. 11 U.S.C. § 365(a).

[FN16]. In re Sun Runner Marine, Inc., 134 B.R. 4, 5 (B.A.P. 9th Cir. 1991).

[FN17]. In re Apache Constr., Inc., 34 B.R. 415 (Bankr. D. Or. 1983); but see In re Wegner Farms Co., 49 B.R. 440, 443 (Bankr. N.D. Iowa 1985).


[FN19]. Wegner Farms Co., 49 B.R. at 442. See also 11 U.S.C. § 362(a)(1) (2009).

[FN20]. In re Pac. Marine Dredging & Constr., 79 B.R. 924 (Bankr. D. Or. 1987).

[FN21]. In re Pangori & Sons, 53 B.R. 711 (Bankr. E.D. Mich. 1985).

[FN22]. 11 U.S.C. § 509(b) (2009).

[FN23]. 11 U.S.C. § 108 (2009).

[FN24]. 11 U.S.C. § 361 (2009).

[FN25]. See In re Englund, 20 B.R. 957, 961 (Bankr. E.D. Mich. 1982).

[FN26]. See, e.g., 11 U.S.C. § 503(b)(9) (2009).

[FN27]. Id.

[FN28]. 293 U.S. 328, 333 (1934).

[FN29]. See In re KAR Dev. Assocs., L.P., 180 B.R 597, 606 (Bankr. D. Kan. 1994).

[FN30]. See Mid-Atl. Supply, Inc. v. Three Rivers Aluminum Co., 790 F.2d 1121, 1129 (4th Cir. 1986); see also In re Railworks Corp, 387 B.R. 156, 166 (Bankr. D. Md. 2008).

[FN31]. Ga. Pac. Corp. v. Sigma Serv. Corp., 712 F.2d 962, 971-72 (La. Ct. App. 1983); see also In re H. & A. Constr. Co., Inc., 65 B.R. 213, 217 (Bankr. D. Mass. 1986).

[FN32]. In re Unicom Computer Corp., 13 F.3d 321, 324-25 (9th Cir. 1994); In re Howard’s Appliance Corp., 874 F.2d 88, 93 (2d Cir. 1989); Vineyard v. McKenzie (In re Quality Holstein Leasing), 752 F.2d 1009, 1012 (5th Cir. 1985).

[FN33]. Official Comm. of Unsecured Creditors of Columbia Gas Transmission Corp. v. Columbia Gas Sys. (In re Columbia Gas Sys., Inc.), 997 F.2d 1039, 1059 (3d Cir. 1993), cert. denied, 510 U.S. 1110 (1994). See also Kamand Constr., Inc. v. Prop. Mgmt. (In re Kamand Constr., Inc.), 298 B.R. 251, 254 (Bankr. M.D. Pa. 2003).

[FN34]. See, e.g., In re Golden Triangle Capital, Inc., 171 B.R 79, 81-83 (9th Cir. BAP 1994).

[FN35]. See also United States v. Durham Lumber Co., 363 U.S. 522, 523-27 (1960) (applying North Carolina law); Keenan Pipe & Supply Co. v. Shields, 241 F.2d 486, 489-91 (9th Cir. 1956); Mickelson v. Aetna Cas. & Sur. Co. (In re J.V. Gleason Co.), 452 F.2d 1219, 1225 (8th Cir. 1971); Bethlehem Steel Corp. v. Tidwell, 66 B.R. 932, 934 (M.D. Ga. 1986).

[FN36]. Golden Triangle, 171 B.R. at 82.

[FN37]. XL/Datacomp v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1452 (6th Cir. 1994) (stating: “Con-structive trusts are anathema to the equities of bankruptcy since they take from the estate, and thus directly from competing creditors, not from the offending debtor”).

[FN38]. Id. at 1451; see also 11 U.S.C. §§ 523(a), 541(d)(2009).

[FN39]. Berger, Shapiro & David, P.A. v. Haeling (In re Foros), 183 B.R. 149, 154 (Bankr. N.D. Ill. 1995).

[FN40]. In re Paul J. Paradise & Assocs., Inc., 249 B.R. 360, 370-71 (Bankr. D. Del. 2000) (internal citations omitted).

[FN41]. See, e.g., Ga. Pac. Corp. v. Sigma Serv. Corp., 712 F.2d 962 (5th Cir. 1983) (joint check agreement that was revocable at will by any party and contained no specific requirements held insufficient to establish a constructive trust).

[FN42]. In re Steelvest, Inc., 112 B.R. 852 (W.D. Ky. 1990); In re One Stop Indus., 179 B.R. 769 (D. Conn. 1988); In re Temp-Way Corp., 80 B.R. 699 (E.D. Pa. 1987); see In re Flooring Concepts, 37 B.R. 957 (Bankr. 9th Cir. 1984); Keenan Pipe & Supply Co. v. Shields, 241 F.2d 486 (9th Cir. 1956).

[FN43]. In re Golden Triangle Capital, Inc., 171 B.R. 79, 83 (9th Cir. BAP 1994) (explicitly stating debtor was a conduit); In re Mastercraft Metals, Inc., 114 B.R. 183, 187 (Bankr. W.D. Mo. 1990) (explicit); Temp-Way Corp., 80 B.R. 699 (implicit); Mid Atl. Supply, Inc. v. Three Rivers Aluminum Co., 790 F.2d 1121 (4th Cir. 1986) (where the joint check in question was issued pursuant to a written agreement and where the amount of the check was admittedly only intended to cover the supplier’s materials (and the debtor had no costs added on), the court imposed a constructive trust on the proceeds despite the failure of the joint check agreement to ever identify a specific res) (implying debtor was a conduit). See also In re Davidson Lumber Sales, Inc., 66 F.3d 1560 (10th Cir. 1995).

[FN44]. In re Anthony P. Buono, 119 B.R. 498 (Bankr. W.D. Pa. 1990) (stating that when a material supplier, after receiving endorsed checks, was to refund debtor any balances owed to debtor, then the parties had an independent interest in the check, thereby making it “property of the estate”).

[FN45]. In re Network 90 Degrees, Inc., 98 B.R. 821 (Bankr. N.D. Ill. 1989) (stating that when a debtor had joint checks routinely forwarded directly to suppliers, that were given power of attorney to sign same for debtor, the court found a constructive trust was warranted).

[FN46]. In re Sun Belt Elec. Constructors, Inc., 56 B.R. 686 (Bankr. N.D. Ga. 1986) (stating that since the funds were not equitably those of the debtor, neither the debtor nor the unsecured creditors of the debtor’s estate would benefit from the proposed rejection).

[FN47]. 11 U.S.C. §§ 503(b)(9), 546(c) (2009); U.C.C. § 2-702 (2008).

[FN48]. Compare Pub. L. No. 109-8, § 1227(a) (2005), with 11 U.S.C. § 546(c) (2009).

[FN49]. 28 U.S.C. § 157(b)(2) (2009).

[FN50]. Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6 (1995) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984)) (internal citations omitted, emphasis in original omitted), (over-ruled on other grounds by Things Remembered, Inc. v. Patrarca, 516 U.S. 124, 134 (1995)).


[FN52]. 28 U.S.C. § 1334(c) (2009).

[FN53]. In re Emerald Acquisition Corp., 170 B.R. 632, 646 (Bankr. N.D. Ind. 1994).

[FN54]. In re Chicago, Milwaukee, St. Paul & Pac. R.R., 6 F.3d 1184 (7th Cir. 1993) (discussing permissive abstention).

[FN55]. 28 U.S.C. § 1441 (2009).

[FN56]. See, e.g., In re Lazar, 237 F.3d 967, 981 (9th Cir. 2001) (stating abstention was inappropriate); Official Plan Comm. of Omniplex Commc’ns Group, LLC v. Lucent Tech., Inc., 344 F. Supp. 2d 1194, 1195 (E.D. Mo. 2004) (granting motion to abstain and remand).

[FN57]. 28 U.S.C. § 1452 (2009).

[FN58]. United States v. W. Pac. R. Co., 352 U.S. 59, 64 (1956).

[FN59]. Reiter v. Cooper, 507 U.S. 258, 268 (1993).

[FN60]. Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30-31 (1st Cir. 1994).

[FN61]. Matthew M. Horowitz & M. Michael Egan, Practical Implications of Bankruptcy on the Parties’ Rights in a Construction Contract, 22 CONSTR. LAW. 2 at 32 (Spring 2002).

[FN62]. Kenny’s Tile & Floor Covering, Inc. v. Curry, 681 S.W.2d 461, 469-70 (Mo. Ct. App. 1984).

[FN63]. See, e.g., II MO. CONSTR. L. § 9.97 (Mo. Bar 2d ed. 2004).

[FN64]. See 11 U.S.C. § 541(a)(1) (2009).

[FN65]. II MO. CONSTR. L., supra note 63, § 9.97.

[FN66]. 11 U.S.C. § 501(c)(1) (2009). See also In re CTS Truss, Inc., 868 F.2d 146, 148-49 (5th Cir. 1989) (collecting equitable subordination cases and providing framework for application of equitable subordination); In re Am. Lumber Co., 5 B.R. 470, 478-79 (Bankr. D. Minn. 1980) (equitably subordinating claim of senior interest holder).

[FN67]. “Perfection” as a term is loosely thrown around; see In re Birdview Satellite Commc’ns, Inc., 90 B.R. 465, 466-70 (Bankr. D. Kan. 1988) (discussing use of the term “perfect” with respect to claims regarding mechanic’s liens).

[FN68]. 11 U.S.C. § 108(c) (2009); see also 11 U.S.C. § 1201 (2009).

[FN69]. 11 U.S.C. § 362(b)(21)(2009).

[FN70]. Kenny’s Tile & Floor Covering, Inc. v. Curry, 681 S.W.2d 461, 468 (Mo. Ct. App. 1984) (discussing per-fecting a lien and § 362 of the Code regarding automatic stays).

[FN71]. In re Kenneth E. & Denise McCord, 219 B.R. 251 (Bankr. E.D. Ark. 1998). But see also In re Premier Hotel Dev. Group, 270 B.R. 234 (Bankr. E.D. Tenn. 2001).

[FN72]. In re Cantrup, 38 B.R. 148, 149-50 (Bankr. D. Colo. 1984) (holding that in Colorado “the mechanics’ lien, when perfected, does relate back to the time of the commencement of work under the contract”); In re Fiorillo & Co., 19 B.R. 21, 22 (Bankr. N.Y. 1982) (discussing relation back of mechanic’s liens under N.Y. law).

[FN73]. See 5 COLLIER ON BANKRUPTCY, supra note 12, § 546.03(2)(c).

[FN74]. 11 U.S.C. § 362(b)(3) (2009). U.S. Code tit. 11, § 547(e)(2)(A) (2009), provides that the transfer is made “at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 30 days after, such time, except as provided in subsection (c)(3)(B).”

[FN75]. 11 U.S.C. § 546(b)(1)(A), (B)(2009).

[FN76]. 11 U.S.C. § 263(c) (2009).

[FN77]. In re KDR Bldg. Specialties, Inc., 76 B.R. 778 (Bankr. S.D. Cal. 1987).

[FN78]. In re Globe Mfg. Corp., 567 F.3d 1291 (11th Cir. 2009).

[FN79]. 11 U.S.C. § 547(b)(4)(A) (2009).

[FN80]. 11 U.S.C. § 547(c)(6).

[FN81]. Horowitz & Egan, supra note 61, at 32-33.

[FN82]. 11 U.S.C. § 546 (2009).

[FN83]. In re Ramsey, 89 B.R. 680, 681-82 (Bankr. S.D. Ohio 1988).

[FN84]. Studley v. Boylston Nat’l Bank, 229 U.S. 523, 528 (1913) (stating that the doctrine “is grounded on the absurdity of making A pay B when B owes A”); see also Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18 (1995) (quoting the language from Studley favorably).

[FN85]. See generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.01; Bohack Corp. v. Borden, Inc., 599 F.2d 1160, 1164 (2d Cir. 1979).

[FN86]. In re B & L Oil Co., 782 F.2d 155, 157 (10th Cir. 1986) (“In bankruptcy, both recoupment and setoff are sometimes invoked as exceptions to the rule that all unsecured creditors of a bankrupt stand on equal footing for satisfaction. Recoupment or setoff sometimes allows particular creditors preference over others.”); see also Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir. 1984) (“Setoff, in effect, elevates an unsecured claim to secured status, to the extent that the debtor has a mutual, pre-petition claim against the creditor.”); CDI Trust v. U.S. Elecs., Inc. (In re Commc’ns Dynamics, Inc.), 382 B.R. 219, 228 (Bankr. D. Del. 2008); Express Freight Lines, Inc. v. Kelly (In re Express Freight Lines, Inc.), 130 B.R. 288, 291 (Bankr. E.D. Wis. 1991) (noting that “Bankruptcy Courts have consistently allowed setoff even though this right is ‘at odds with the fundamental bankruptcy principle of equality of distribution among creditors because it permits a creditor to obtain full satisfaction of a debt by extinguishing an equal amount of the creditor’s obligation to the debtor.’ Courts have allowed this right because without it, it would be unfair to require a creditor to pay in full what is owed to the debtor only to receive a portion, if that, of its claim against the debtor.”) (citation omitted).

[FN87]. See 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.01; In re Pub. Serv. Co. of New Hampshire, 884 F.2d 11, 14 (1st Cir. 1989); Davidovich v. Welton (In re Davidovich), 901 F.2d 1533, 1537 (10th Cir. 1990).

[FN88]. 11 U.S.C. § 101(5) (2009); see generally, Johnson v. Home State Bank, 501 U.S. 78, 83-84 (191); Lemelle v. Universal Mfg. Corp., 18 F.3d 1268, 1275 (5th Cir. 1994); 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.02(1)(a) (“The concept of a ‘claim’ is decidedly broad, and the definition is intended to encompass virtually any type of obligation reducible to some monetary equivalence.”).

[FN89]. Big Bear Super Market v. Princess Baking Corp. (In re Princess Baking Corp.), 5 B.R. 587, 591-92 (Bankr. S.D. Cal. 1980).

[FN90]. U.S. Agric. Stabilization & Conservation Serv. v. Gerth, 991 F.2d 1428, 1433 (8th Cir. 1993).

[FN91]. Grady v. A.H. Robins Co., Inc., 839 F.2d 198, 199 (4th Cir. 1988), cert. dismissed, Joynes v. A.H. Robins Co., 487 U.S. 1260 (1988); see generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.02(1)(b).

[FN92]. 726 F.2d 93 (3d Cir. 1984).

[FN93]. Id.; see also In re Holder, 182 B.R. 770, 776 (Bankr. M.D. Tenn. 1995); Se. Bank, N.A. v. Grant (In re Apex Inter. Mgmt Serv., Inc.), 155 B.R. 591, 594 (Bankr. M.D. Fla. 1993).

[FN94]. Cooper-Jarrett, 726 F.2d at 96.

[FN95]. 11 U.S.C. § 101(12) (2009); Pennsylvania Dep’t of Pub. Welfare v. Davenport, 495 U.S. 553, 558 (1990); Gerth, 991 F.2d at 1433; Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1036 (5th Cir. 1987); Camelback Hosp., Inc. v. Buckenmaier (In re Buckenmaier), 127 B.R. 233, 238 (B.A.P. 9th Cir. 1991). See also U.S. Agric. Stabilization & Conservation Serv., 991 F.2d at 1433; see generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.02(2) (“As a general rule, an obligation that would constitute a proper prepetition claim under section 553 if asserted by a creditor will likewise constitute a proper prepetition debt if asserted by the debtor.”).

[FN96]. Cohen v. Sav. Bldg. & Loan Co. (In re Bevill, Bresler & Schulman Asset Mgmt. Corp.), 896 F.2d 54, 57 (3d Cir. 1990); Olsen-Frankman Livestock Mktg. Serv., Inc. v. Citizens Nat’l Bank of Madelia, 605 F.2d 1082 (8th Cir. 1979); see generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.02(3).

[FN97]. Kitaeff v. Vappi & Co. (In re Bay State York Col, Inc.), 140 B.R. 608, 614 (Bankr. D. Mass. 1992); Schwartz v. C.M.C., Inc. (In re Communicall Cent., Inc.), 106 B.R. 540, 545 (Bankr. N.D. Ill. 1989).

[FN98]. W. Tie & Timber Co. v. Brown, 196 U.S. 502, 509-10 (1905); Newberry Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir. 1996); Davidovich, 901 F.2d at 1537; In re Lund, 136 B.R. 237, 239 (Bankr. D.N.D. 1990); In re OLM Assocs., 98 B.R. 271, 277 (Bankr. N.D. Tex. 1989).

[FN99]. WJM, Inc. v. Mass. Dep’t of Pub. Welfare, 840 F.2d 996, 1011-12 (1st Cir. 1988), abrogated on other grounds, Reopell v. Commw. of Mass., 936 F.2d 12 (1st Cir. 1991); Schwartz, 106 B.R. at 545.

[FN100]. Braniff Airways, 814 F.2d at 1039.

[FN101]. Burton v. United States (In re Selma Apparel Corp.), 155 B.R. 241, 243 (Bankr. S.D. Ala. 1992).

[FN102]. In re United Sciences of Am., Inc., 893 F.2d 720, 723 (5th Cir. 1990); In re Elcona Homes Corp., 863 F.2d 483, 486 (7th Cir. 1988).

[FN103]. See, e.g., Depositors Trust Co. of Augusta v. Frati Enters., Inc., 590 F.2d 377, 379 (1st Cir. 1979); In re Vehm Eng’g Corp., 521 F.2d 186, 191 (9th Cir. 1975).

[FN104]. See, e.g., Inland Steel Co. v. Berger Steel Co. (In re Berger Steel Co.), 327 F.2d 401, 403-04 (7th Cir. 1964). But see Schechter v. Acme Screw Co. (In re Assured Fastener Prods. Corp.), 773 F.2d 105, 106-07 (7th Cir. 1985).

[FN105]. Kitaeff, 140 B.R. at 614.

[FN106]. Id. See generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.02(3)(c) (“As a general rule, the concept of capacity requires that each party owe the other something in his or her own name, and not as a fiduciary. For example, if A in his individual capacity owes $100 to B, but B owes $50 to A in A’s capacity as trustee of a trust, or as a fiduciary or agent for some other party, the obligations are not mutual because they are not owed between the parties acting in the same “capacity.”).

[FN107]. Dakin v. Bayly, 290 U.S. 143, 146 (1933); Cohen, 896 F.2d at 57-58; Fore Improvement Corp. v. Selig, 278 F.2d 143, 145 (2d Cir. 1960). See, generally, Libby v. Hopkins, 104 U.S. 303 (1881).

[FN108]. Allegaert v. Perot, 466 F. Supp 516, 518-19 (S.D.N.Y. 1978).

[FN109]. Kitaeff, 140 B.R. at 614; see also Eckles v. Petco, Inc. (In re Balducci Oil Co., Inc.), 33 B.R. 847, 851 (Bankr. D. Colo. 1983); see generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.02(3)(d).

[FN110]. Braniff Airways, 814 F.2d at 1036; Ecles, 33 B.R. at 850; Virginia Block Co. v. Bushong (In re Virginia Block Co.), 16 B.R 560, 5652 (Bankr.W.D. Va. 1981).

[FN111]. Gray v. Rollo, 85 U.S. 629, 632 (1873); In re Britton, 83 B.R. 914, 918 (Bankr. E.D.N.C. 1988).

[FN112]. In re Chestnut Co., Inc., 39 B.R. 519, 521 (Bankr. D.S.C. 1984).

[FN113]. See generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.02(3)(e); see, e.g., Miller v. Westinghouse Elec. Supply Co., 499 F.2d 342, 347 (5th Cir. 1974).

[FN114]. Newton v. Beneficial Fin. Co. (In re Diplomat Elec., Inc.), 558 F.2d 731, 732 (5th Cir. 1977); Riggs v. Gov’t Employees Fin. Corp., 623 F.2d 68, 74-75 (9th Cir. 1980).

[FN115]. Gulfcoast Work Station Corp. v. Peltz (In re Bridge Info. Sys. Inc.), 314 B.R. 421, 431 (Bankr. E.D. Mo. 2004); In re Alvstad, 223 B.R. 733, 742 (Bankr. D.N.D. 1998); Blanton v. Prudential-Bache Securities, Inc. (In re Blanton), 105 B.R. 321, 337-38 (Bankr. E.D. Va. 1989).

[FN116]. See, e.g., Brunswick Corp. v. Clements, 424 F.2d 673, 676 (6th Cir. 1970), cert. denied, 400 U.S. 1010, 1013 (1971); Lytle v. Andrews, 34 F.2d 252, 255 (8th Cir. 1929).

[FN117]. United States v. Irving Trust Co. (In re Clayton Magazines), 77 F.2d 852, 853 (2d Cir. 1935) (where ap-plicable statute of limitations had run on debt, debt was not valid and setoff could not be taken in bankruptcy).

[FN118]. Citizens Bank of Maryland, 516 U.S. at 18-19 (1995); Nairn v. J.A. Acosta & Co. (In re Rosenbaum Grain Corp.), 103 F.2d 656, 658 (7th Cir. 1939); Town of Hempstead Employees Fed. Credit Union v. Wicks, 215 B.R. 316, 319 (E.D.N.Y. 1997); see generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.03.

[FN119]. Bird v. Carl’s Grocery Co. (In re NWFX), 864 F.2d 593, 595 (8th Cir. 1989); Boston & Maine Corp. v. Chicago Pac. Corp., 785 F.2d 562, 566 (7th Cir. 1986).

[FN120]. Citizens Bank of Maryland, 516 U.S. at 18-19.

[FN121]. Id. at 19.

[FN122]. Gray, 85 U.S. at 632-33 (even though rule of setoff in Pennsylvania did not require mutuality, mutuality is required in bankruptcy and, therefore, setoff would not be permitted).

[FN123]. 11 U.S.C. § 362(a)(7) (2009); First Connecticut Small Bus. Inv. Co. v. Bank of Boston Connecticut (In re First Connecticut Small Bus. Inv. Co.), 118 B.R. 179, 183 (Bankr. D. Conn. 1990); see generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.05.

[FN124]. H.R. REP. NO. 595, at 340-42 (1977); S. REP. NO. 989, at 49-51 (1978). See also 11 U.S.C § 553(a) (2009) (“Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of [setoff]”); see Citizens Bank of Maryland, 516 U.S. at 19; D & B Auto Parts, Inc. v. Freeborn (In re Freeborn), 100 B.R. 474, 474 (Bankr. E.D. Mo. 1989).

[FN125]. Nelson v. First Nat’l Bank & Trust Co. (In re Nelson), 6 B.R. 248, 249 (Bankr. D. Kan. 1980); Griffith v. Sw. Bell Tel. Co. (In re Voight), 24 B.R. 983, 986 (Bankr. N.D. Tex. 1982); In re Lott, 79 B.R. 869, 870-71 (Bankr. W.D. Mo. 1987).

[FN126]. In re Corland Corp., 967 F.2d 1069, 1077 (5th Cir. 1992).

[FN127]. Bohack, 599 F.2d at 1168; Waste Mgmt. of Tenn., Inc. v. Barry Parker’s, Inc. (In re Barry Parker’s, Inc.), 33 B.R. 115, 117 (M.D. Tenn. 1983).

[FN128]. Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 976 (1st Cir. 1997); Constitution Bank v. Tubbs, 68 F.3d 685, 692-93 (3d Cir. 1995); Parker v. Bain, 68 F.3d 1131, 1138 (9th Cir. 1995); Franklin Sav. Ass’n v. Office of Thrift Supervision, 31 F.3d 1020, 1022 (10th Cir. 1994); Rexnord Holdings, inc. v. Bidermann, 21 F.3d 522, 527-28 (2d Cir. 1994); Albany Partners, Ltd. v. Westbrook (In re Albany Partners, Ltd.), 749 F.2d 670, 675 (11th Cir. 1984); Matthews v. Rosene, 739 F.2d 249, 251 (7th Cir. 1984)).

[FN129]. Bronson v. United States, 46 F.3d 1575, 1578-79 (Fed. Cir. 1995); Picco v. Global Marine Drilling Col, 900 F.2d 846, 850 (5th Cir. 1990); Easley v. Pettibone Mich. Corp., 990 F.2d 905, 911 (6th Cir. 1993); In re Williams, 257 B.R. 297, 300-01 (Bankr. W.D. Mo. 2001)).

[FN130]. In re Mason, 79 B.R. 786, 788 (Bankr. N.D. Ill. 1987). See also H.R. REP. NO. 595, at 185 (1977).

[FN131]. Cumberland Glass Mfg. Co. v. De Witt, 237 U.S. 447, 459 (1915); In re Metro. Int’l, Inc., 616 F.2d 83, 85 (3d Cir. 1980); Blanton, 105 B.R. at 337.

[FN132]. See, e.g., Calderone v. Mancino (In re Calderone), 166 B.R. 825, 830 (Bankr. W.D. Pa. 1994); see generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.06.

[FN133]. United States v. Fleet Bank (In re Calore Exp. Co., Inc.), 288 F.3d 22, 39-40 (1st Cir. 2002); Suncrete Corp. v. Glusman (In re Suncrete Corp.), 100 B.R. 102, 103-04 (Bankr. M.D. Fla. 1989); Weems v. United States (In re Custom Ctr., Inc.), 163 B.R. 309, 317 (Bankr. E.D. Tenn. 1994); In re South Park Care Associates, 203 B.R. 445, 447 n.1 (Bankr. W.D. Mo. 1996). See also In re Indus. Assocs., Inc., 155 F. Supp. 866, 870 (E.D. Penn. 1957); In re Ne. Int’l Airways, Inc., 99 B.R. 487, 489 (Bankr. S.D. Fla. 1989).

[FN134]. Tavormina v. ITT Commercial Fin. Corp. (In re Aquasport, Inc.), 115 B.R. 720, 721-22 (Bankr. S.D. Fla. 1990), aff’d, 155 B.R. 245 (D.S.D. Fla. 1992), aff’d without op., 985 F.2d 579 (11th Cir. 1993). See also In re Butler, 61 B.R. 790, 791 (Bankr. S.D. Fla. 1986); Fisher v. Outlet Co. (In re Denby Stores, Inc.), 86 B.R. 768, 777 (Bankr. S.D.N.Y. 1988); Britton, 83 B.R. at 921.

[FN135]. See, e.g., In re United States v. Myers (In re Myers), 362 F.3d 667, 672 (10th Cir. 2004); Express Freight Lines, 130 B.R. at 290.

[FN136]. Davidovich, 901 F.2d at 1537; Turner v. United States (In re G.S. Omni Corp.), 835 F.2d 1317, 1318-19 (10th Cir. 1987).

[FN137]. IRS v. Luongo (In re Luongo), 259 F.3d 323, 332-34 (5th Cir. 2001); Carolco Television Inc. v. Nat’l Broad. Co. (In re De Laurentiis Entm’t Group Inc.), 963 F.2d 1269, 1276-78 (9th Cir. 1992), cert. denied, 506 U.S. 918 (1992); Davidovich, 901 F.2d at 1537; United States v. Munson, 248 B.R. 343, 345-46 (C.D. Ill. 2000); In re Pettibone Corp., 161 B.R. 960, 963-64 (N.D. Ill. 1993); Serv. Decorating Co. v. Travelers Ins. Co. (In re Serv. Decorating Co.), 105 B.R. 859, 862-63 (N.D. Ill. 1989); see generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.07.

[FN138]. Buckenmaier, 127 B.R. at 237-39; In re Bare, 284 B.R. 870, 872-75 (Bankr. N.D. Ill. 2002); Posey v. US. Dep’t of Treasury–I.R.S., 156 B.R. 910, 915 (W.D.N.Y. 1993); Holder, 182 B.R. at 773-74; In re Whitaker, 173 B.R. 359, 362-63 (Bankr. S.D. Ohio 1994); Gribben v. United States, 158 B.R. 920, 925 (Bankr. S.D.N.Y. 1993); Runnels v. IRS (In re Runnels), 134 B.R. 562, 565 (Bankr. E.D. Tex. 1991); Eggemeyer v. IRS (In re Eggemeyer), 75 B.R. 20, 22 (Bankr. S.D. Ill. 1987); In re Conti, 50 B.R. 142, 149 (Bankr. E.D. Va. 1985); Ford v. Darracott (In re Ford), 35 B.R. 277, 278-80 (Bankr. N.D. Ga. 1983); Slaw Constr. Corp. v. Hughes Foulkrod Constr. Co. (In re Slaw Constr. Corp.), 17 B.R. 744, 747-48 (Bankr. E.D. Pa. 1982), overruled on other grounds; Polysat, Inc. v. Union Tak Car Co. (In re Polysat, Inc.), 152 B.R. 886, 893 (Bankr. E.D. Pa. 1993).

[FN139]. United States v. Cont’l Airlines (In re Cont’l Airlines), 134 F.3d 536, 539-42 (3d Cir. 1998); IRS v. Norton, 717 F.2d 767, 772-74 (3d Cir. 1983); Rooster, Inc. v. Roy (In re Rooster, Inc.), 127 B.R. 560, 569-72 (Bankr. E.D. Pa. 1991); Dezarn v. First Farmers Bank (In re Dezarn), 96 B.R. 93, 94-95 (Bankr. E.D. Ky. 1988); Johnson v. Rutherford Hosp. (In re Johnson), 13 B.R. 185, 187-89 (Bankr. M.D. Tenn. 1981).

[FN140]. 11 U.S.C. § 547(b) (2009); Braniff Airways, 814 F.2d at 1034.

[FN141]. 11 U.S.C. §§ 544(b), 548 (2009).

[FN142]. Durham v. SMI Indus. Corp., 882 F.2d 881, 882-83 (4th Cir. 1989); see generally 5 COLLIER ON BANKRUPTCY, supra note 12, § 553.08.

[FN143]. In re Dunning, 269 B.R. 357, 369 (Bankr. N.D. Ohio 2001).

[FN144]. Brown v. Snellen (In re Giesing), 96 B.R. 229, 232 (Bankr. W.D. Mo. 1989).

[FN145]. United States v. Dewey Freight Sys., Inc., 31 F.3d 620, 622 (8th Cir. 1994) (quoting B & L Oil, 782 F.2d at 158).

[FN146]. Id.

[FN147]. Id.

[FN148]. Id.

[FN149]. In re Madigan, 270 B.R. 749, 756 (B.A.P. 9th Cir. 2001).

[FN150]. Dewey Freight Sys. Inc., 31 F.3d at 622 (quoting In re Univ. Med. Ctr., 973 F.2d 1065, 1081 (3d Cir. 1992)).

[FN151]. In re Photo Mech. Servs., Inc., 179 B.R. 604, 613 (Bankr. D. Minn. 1995) (“The fact that a contract exists between the parties does not automatically enable the creditor to avail itself of recoupment.”).

[FN152]. See, e.g., Westinghouse Credit Corp. v. D’urso, 278 F.3d 138, 147 (2d Cir. 2002); Univ. Med. Ctr., 973 F.2d at 1081; In re Gasmark Ltd., 193 F.3d 371, 374-75 (5th Cir. 1999); Dewey Freight Sys. Inc., 31 F.3d at 622; In re Peterson Distrib., Inc., 82 F.3d 956, 961 (10th Cir. 1996).

[FN153]. Newberry, 95 F.3d at 1402 (citing Moore v. New York Cotton Exch., 270 U.S. 593 (1926)).

[FN154]. In re Madigan, 270 B.R. 749, 754 (B.A.P. 9th Cir. 2001).

[FN155]. In re Arnold, 908 F.2d 52 (6th Cir. 1990).

[FN156]. 212 B.R. 564 (Bankr. E.D. Mich. 1997).

[FN157]. Id. at 568 (internal citations omitted).

[FN158]. See In re Gray Elec. Co., 142 F.3d 433 (6th Cir. 1998) (unpublished opinion).

[FN159]. Liquidation Comm. v. Binsky & Snyder Inc. et al. (In re J.A. Jones Inc.), 361 B.R. 94 (Bankr. W.D.N.C. 2007).

[FN160]. Bryant v. JCOR Mech. Inc. (In re Electron Corp.), 336 B.R. 809 (B.A.P. 10th Cir. 2006).

[FN161]. O’Rourke v. Seaboard Sur. Co. (In re Fegert Inc.), 887 F.2d 955 (9th Cir. 1989) (subcontractors’ release of claims against surety bond provided new value to debtor); In re Fuel Oil Supply & Terminaling Inc., 837 F.2d 224 (5th Cir. 1988) (debtor could not recover payments to defendant because of tripartite relationship in which the debtor’s payment obligation was guaranteed by a fully secured letter of credit and the defendant provided new value by re-leasing letters of credit).

[FN162]. Lovett v. Homrich Inc. (In re Philip Services Corp.), 359 B.R. 616 (Bankr. S.D. Tex. 2006).

[FN163]. Id.

[FN164]. 11 U.S.C. § 547 (2009).

[FN165]. See, e.g., Nat’l Bank of Newport v. Nat’l Herkimer County Bank, 225 U.S. 178 (1912); Adams v. Anderson (In re Superior Stamp & Coin Co. Inc.), 223 F.3d 1004 (9th Cir. 2000) (discussing the history of the earmarking doctrine).

[FN166]. See, e.g., Brown v. First Nat’l Bank of Little Rock, 748 F.2d 490 (8th Cir. 1984).

[FN167]. McCuskey v. Nat’l Bank of Waterloo (In re Bohlen Enters. Ltd.), 859 F.2d 561 (8th Cir. 1988); Tidwell v. Hendricks (In re McDowell), 258 B.R. 296 (Bankr. M.D. Ga. 2001).

[FN168]. Id.

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