For authority, Bankruptcy Judge Kathryn C. Ferguson of Trenton, N.J., could have cited Bob Dylan, who sang, “For the times, they are a-changin’.”
The debtor had been fired by his employer, allegedly for cause. Before filing for bankruptcy, the debtor had sued the employer for deferred compensation and for breach of an employment contract. The employer asserted a counterclaim for a loan the employer had made to the debtor. Evidently, the debtor would not be entitled to deferred compensation if the termination were for cause.
The debtor removed the suit to bankruptcy court, where the employer filed a motion to modify the automatic stay to permit setoff of allegedly mutual obligations. The debtor argued that caselaw prevented the employer from setting off against exempt assets. Judge Ferguson denied the lift-stay motion on May 18.
Judge Ferguson alluded to the debtor’s contention “that the majority view prohibits setoff in bankruptcy against a debtor’s exempt assets.”
“While that may have been the majority view at some point,” Judge Ferguson said, she evoked Bob Dylan’s 1964 song when she added, “that does not appear to be the current trend.”
Although the Third Circuit has not ruled on the issue, Judge Ferguson said, “[O]ther Circuits . . . have, including the Fourth, Fifth and Ninth, [and] concluded that setoff rights prime a debtor’s right to shield exempt property from the claims of pre-petition creditors.”
To decide how to rule, Judge Ferguson was tasked with resolving the possible conflict between Sections 553(a) and 522(c). The more general of the two, Section 522(c), provides, with exceptions, that “property exempted under this section is not liable during or after the case for any debt of the debtor that arose . . . before the commencement of the case . . . .”
Judge Ferguson found the answer in the “plain language” of Section 553(a), which says, with exceptions not applicable, that the Bankruptcy Code “does not affect any right of a creditor to offset a mutual debt . . . .”
Judge Ferguson rejected the debtor’s contention that Section 522(c) barred setoff against exempt assets. She held, “The undeniably broad language of § 553(a) necessarily includes the property exemption provisions contained in § 522(c) and renders it subordinate to a creditor’s setoff rights.”
The debtor also argued that setoff was barred because the debts were not matured as of the filing date and were not mutual. Under governing Illinois law, Judge Ferguson held that maturity was not a requisite and that the debts were mutual.
The debtor lost on three issues, but the game was not over. As Bob Dylan sang:
The loser now will be later to win
’Cause the times, they are a-changin’.
Indeed, the debtor did win, but perhaps only temporarily. Judge Ferguson sided with the debtor by ruling that the employer did not have an allowed claim “at this juncture.” If the debtor had not been validly terminated, she said that the debt to the employer would have been forgiven, giving the employer no debt subject to setoff.
Judge Ferguson denied the employer’s motion to modify the stay, ruling that wrongful termination “would be more equitably determined” in the context of the debtor’s objection to the employer’s claim and the debtor’s lawsuit for breach of contract.
For authority, Bankruptcy Judge Kathryn C. Ferguson of Trenton, N.J., could have cited Bob Dylan, who sang, “For the times, they are a-changin’.”
The debtor had been fired by his employer, allegedly for cause. Before filing for bankruptcy, the debtor had sued the employer for deferred compensation and for breach of an employment contract. The employer asserted a counterclaim for a loan the employer had made to the debtor. Evidently, the debtor would not be entitled to deferred compensation if the termination were for cause.
The debtor removed the suit to bankruptcy court, where the employer filed a motion to modify the automatic stay to permit setoff of allegedly mutual obligations. The debtor argued that caselaw prevented the employer from setting off against exempt assets. Judge Ferguson denied the lift-stay motion on May 18.