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Judge Carey Denies Motions for Stay Relief to Exercise Setoff Rights or to Prohibit Debtors Exercise of Setoff Rights or Require Adequate Protection

By Charlene D. Davis

On May 6, 2015, Judge Carey of the United States Bankruptcy Court for the District of Delaware (the “Court”) issued a decision (the “May 5 Mem. Op.”) further implementing his May 5, 2015 Memorandum Opinion and Order Authorizing the Debtors in ADI Liquidation, Inc. et al. Case no. 14-12092 to exercise their rights to setoff under section 558 of the Bankruptcy Code. In the May 6 Mem. Op., the Court denied motions by Western Family Foods, a creditor of the Debtors, seeking relief from the stay to exercise section 553 rights to set off of prepetition claims or to prohibit the Debtors from exercising rights to Section 558 set off of prepetition and post-petition claims.

The Court described the dispute as a race to determine which party could exercise its setoff rights first. In deciding the stay lift motion, the Court considered whether there was “cause” to grant the relief by balancing the harm to the debtor if the stay were lifted against the harm to the creditor if it were not, finding 1) that there is no basis in the Bankruptcy Code or case law to conclude that a claimant’s setoff rights should trump a debtor’s right to set off and 2) that based on the Bankruptcy Code provisions and policy, the debtor’s set off rights take precedence over those of a creditor. Thus the Court denied the motion to prohibit the Debtors from exercising their setoff rights and denied adequate protection based on the analysis in the May 5 Mem. Op.

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

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