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Judge Carey Authorizes Debtors to Offset Trade Credits, Vendor Overpayments and Other Amounts Against Administrative or Secured Portions of Creditor Claims

By Charlene D. Davis

On May 5, 2015, Judge Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware (the “Court”) issued an order and memorandum opinion approving a joint motion filed by the Debtors and the official committee of unsecured creditors (the “Committee”) in ADI Liquidation, Inc., et al.  Case No. 14-12092, seeking authority for the Debtors to use set off and recoupment rights to reduce the amount of any allowed secured, administrative (including section 503(b)(9) claims) or general unsecured claim and disallowing post-petition interest on section 503(b)(9) claims. The Debtors and the Committee characterized the relief sought as threshold determinations with regard to 503(b)(9) claims reconciliation and the Court agreed that its decision would not impair a 503(b)(9) claimant’s opportunity for a factual determination of the allowed amount of its 503(b)(9) claim amount and the validity of any setoff or recoupment claims by the Debtors.

In arriving at the decision to allow the Debtors  to offset valid trade credits, vendor overpayments and other amounts against secured, administrative and/or unsecured claims, the Court determined that “applicable case law, the Bankruptcy Code, and equitable considerations” support the conclusion that debtors should be able to apply setoff and recoupment rights to claims at their discretion.

Specifically, the Court relied upon case law interpreting section 558 of the Bankruptcy Code, as preserving for the estate defenses that the debtor would have had absent bankruptcy, to render a prepetition/post-petition distinction irrelevant to a debtor’s setoff or recoupment rights. The Court contrasted the rights preserved for the estate by section 558 with the setoff rights preserved for creditors by section 553 of the Bankruptcy Code, finding that the difference is consistent with the goal of the Code to provide equality of distributions among creditors. The Court also found that, although Bankruptcy Code  recognizes that 503(b)(9) claims deserve priority in payment over general unsecured claims, it does not strip a debtor of its right to assert preserved defenses in determining the allowed amount of a 503(b)(9) claim. In addition, the Court  found that allowing set off by the Debtors would not harm the 503(b)(9) claimants, so as to require adequate protection, since they get the benefit of the extinguishment of their debts to the Debtor dollar for dollar. Although the Court found a presumption that the prior course of dealings, industry standards and contracts  do not constitute a waiver of the Debtor’s equitable remedies, but provided that a claimant, with a good faith basis to so argue that the remedies were waived, would have the right to a hearing to rebut the presumption. Finally the Court found that the claimants had not provided any basis for allowance of post-petition interest in the circumstances of the case.

A copy of the Court’s opinion is available here.

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