Could California offset a postpetition bankruptcy debt against a prepetition claim?

Plain-English summary

At a December 14, 1990 Interagency Tax Collection Committee meeting, Board Collections Division employee Tom Childress asked whether postpetition debts could be offset against prepetition bankruptcy claims. The agenda, minutes, other participants, taxpayer, obligations, claims, bankruptcy record, and any proposed transaction are not reproduced.

Bankruptcy Code section 553(a) preserved setoff only for mutual debts arising before the bankruptcy case began. A prepetition debt was owed by or to the debtor, while a postpetition debt was owed by or to the bankruptcy estate.

Because those obligations involved different legal parties and different sides of the bankruptcy filing, Senior Tax Counsel Ronald L. Dick concluded that they lacked the required mutuality and could not be offset against one another. The memorandum contrasted that situation with a cited case allowing two mutual postpetition obligations to be set off. It supplies no application to a named taxpayer, collection action, agency reply, appeal, or later outcome.

The live annotation publishes only the section 553(a), debtor-versus-estate, and no-mutuality conclusion. It omits the committee question, both cases, named staff, and missing proceeding record.

Common questions

Could any postpetition obligations be offset?

The memorandum said two mutual postpetition obligations could potentially be set off; the problem was mixing a debtor's prepetition obligation with an estate's postpetition obligation.

Did the opinion decide a specific taxpayer's setoff?

No. It answered a general question raised at an interagency tax-collection meeting.

Citations and references

• 11 U.S.C. section 553(a) — cited for setoff of mutual debts arising before commencement of the bankruptcy case; complete text, definitions, exceptions, amendments, later history, and current law not supplied
• Boston and Me Corp. v. Chicago Pac. Corp., 785 F.2d 562 (7th Cir. 1986) — cited for postpetition and prepetition balances between two bankrupt railroads not being mutual debts; the case name and citation are preserved as printed, and the opinion, facts beyond that description, exact holding, quotations, and later history are not supplied
• In re Fordson Engineering Corp., 25 BR 506 (ED Mich. 1982) — cited for setoff of two mutual postpetition obligations; the citation is preserved as printed, and the opinion, underlying obligations, exact holding, quotations, and later history are not supplied
• December 14, 1990 Interagency Tax Collection Committee question — agenda, minutes, other participants, taxpayer, obligations, claims, bankruptcy record, and proposed transaction not reproduced
• January 7, 1991 Senior Tax Counsel Ronald L. Dick memorandum to Tom Childress — no taxpayer, amounts, tax periods, debt instruments, claims, petition, schedules, estate record, order, collection action, agency reply, appeal, or later outcome supplied
• Official Annotation 320.0045's section 553(a), debtor-versus-estate, no-mutuality conclusion, and date — omits the committee provenance, both cited cases, named staff, missing records, later outcome, and reliance status and supplies no additional transaction record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/320-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/320-0045.pdf

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
320.0045

To:

Mr. Tom Childress
Collections Division

From:

Ronald L. Dick
Senior Tax Counsel

Subject:

Setoff of Post-petition Debts on Pre-petition Claims

Date:

January 7, 1991

This is in response to the question you raised at the December 14, 1990 meeting of the Interagency Tax Collection Committee as to whether it is permissable to offset post-petition debts on pre-petition claims in bankruptcy. I do not believe that the Bankruptcy Code permits such offsets. The right to setoff applies only to mutual debts that arose prior to the commencement of the bankruptcy case. (11 U.S.C. § 553(a).) In other words, the pre-petition debt is owed by or to the debtor. The post-petition debt is owed by or to the estate. Thus, a pre-petition debt and a post-petition claim lack the mutuality required by section 553(a). See Boston and Me Corp. v. Chicago Pac. Corp., 785 F.2d 562 (7th Cir.) (1986) where postpetition and pre-petition balances between two bankrupt railroads were not “mutual debts” that could be setoff. Although section 553 specifically discusses pre-petition debts, the court in In re Fordson Engineering Corp. 25 BR 506 (ED Mich. 1982) held that two mutual post-petition obligations may be setoff. But, again, the two obligations were mutual. If you have further questions regarding this, feel free to contact me directly.

RLD:sr
cc:

Mr. Robert D. Milam
Mr. Gordon P. Adelman