§ 58.12 — Setoffs and Recoupments
Revised: May 24, 2004
The filing of a Chapter 13 case stays the setoff of a prepetition debt owing to the debtor and a prepetition claim against the debtor.1 The stay does not defeat the right of setoff; it does impose a condition that the creditor must seek relief from the stay before exercising setoff.2 For example, if the debtor’s employer is owed money by the debtor, the employer is prohibited by § 362(a)(7) from setting off that claim against the debtor’s postpetition wages without first getting stay relief.3 It has been held that a state agency violated the automatic stay by recovering an overpayment of unemployment benefits by denying the debtor unemployment benefits after the petition without first seeking relief from the stay.4 A prepetition security deposit by a Chapter 13 debtor to a landlord is protected by the automatic stay; setoff against the security deposit after the petition is a violation of the stay.5
Recoupment is different from setoff. Recoupment is not subject to the automatic stay. In a setoff, the debtor owes the creditor money, and the creditor owes the debtor money, but the reciprocal debts did not arise out of the same transaction. Setoff is specifically dealt with in the Bankruptcy Code6 and is subject to the automatic stay. Recoupment was explained by the Second Circuit and contrasted with setoff as follows:
While the Bankruptcy Code does not mention recoupment explicitly, bankruptcy law does recognize the recoupment doctrine. The Supreme Court has stated: “that a bankruptcy defendant can meet a plaintiff-debtor’s claim with a counterclaim arising out of the same transaction” . . . . Reiter v. Cooper, 507 U.S. 258 [113 S. Ct. 1213, 122 L. Ed. 2d 604 (1993)]. . . . While a “setoff” is subject to the automatic stay provision of 11 U.S.C. § 362, a recoupment is not. See Mercy Hosp. of Watertown v. New York State Dep’t of Soc. Servs., 171 B.R. 490, 494 (N.D.N.Y.1994); In re Village Craftsman, Inc., 160 B.R. 740, 746 (Bankr.D.N.J.1993). The automatic stay generally prohibits creditors from obtaining possession of or otherwise burdening any property of a bankrupt debtor without the permission of the bankruptcy court. . . . Recoupment in bankruptcy may occur only within a single contract or transaction or a single set of transactions. . . . [T]he recoupment doctrine is a limited one and should be narrowly construed.7
Recoupment is not always easily distinguished from setoff. For example, there is controversy whether the recovery of prepetition overpayments of unemployment benefits by withholding postpetition benefits is recoupment or setoff.8 It has been held that a utility can apply a debtor’s prepetition deposit against prepetition debt because “the deposit and the debt arose out of the same transaction,” and the utility’s claim against the debtor “is essentially a defense to the debtor’s claim against [the utility]”;9 yet, a landlord violated the stay by setting off a prepetition security deposit against a prepetition claim for rent.10 Chapman v. Charles Schwab & Co. (In re Chapman)11 presents a clear example of recoupment in a Chapter 13 case: in the debtor’s adversary proceeding to recover damages, the defendant counterclaimed for conversion in the course of the same transactions; the bankruptcy court held that the counterclaim “in the nature of a recoupment defense” did not violate the automatic stay.12
Bank accounts, retirement accounts and tax refunds are areas where setoff and recoupment are especially important in Chapter 13 cases. The stay prohibits a bank from setting off against a debtor’s account to recover a prepetition debt. The issue often arises in Chapter 13 cases when a bank or credit union at which the debtor maintains an account and has borrowed money “freezes” the debtor’s account upon notice of the case.
Before the Supreme Court’s decision in Citizens Bank of Maryland v. Strumpf,13 several courts had held that freezing a Chapter 13 debtor’s account violated the stay.14 As explained by the U.S. Court of Appeals for the Eleventh Circuit, when a credit union unilaterally froze a Chapter 13 debtor’s account, it deprived the debtors of control over property of the estate in violation of § 362(a)(3).15 The freeze was an act to enforce a lien against property of the estate in violation of § 362(a)(4)—“a unilateral, extrajudicial determination by the creditor that the setoff right is valid.”16
Rather than unilaterally freezing a Chapter 13 debtor’s account, creditors were advised by the Eleventh Circuit to file
an ex parte motion pursuant to Sections 362(f) or 363(e) and accompany this motion with the funds from the debtor’s account to be paid into the registry of the court. This approach strikes the proper balance between the parties’ interests. The creditor is protected from the risk that funds will be insufficient or unavailable to satisfy a later-determined valid right of setoff. The debtor is protected from the risk that a creditor will unilaterally deny the debtor access to funds in which the creditor does not have a valid right of setoff.17
The Eleventh Circuit’s solution to the “banker’s dilemma” was an awkward and expensive race to the bankruptcy court. Creditors had to act instantaneously to file motions and tender into court the balance in a Chapter 13 debtor’s account to outrun the presentment of checks that would dissipate the setoff. Debtors had every incentive to drain or move their accounts before the petition or immediately after filing and before the bank could react. The reported decisions eventually split on the question whether freezing a debtor’s bank account was a violation of the automatic stay; in 1995, the Supreme Court resolved the split in Strumpf.
In Strumpf, after confirmation of a Chapter 13 plan, the bank moved for relief from the stay to set off a note against $3,500 that was in the debtor’s checking account. Simultaneously, the bank placed an “administrative hold” on the checking account. The U.S. Court of Appeals for the Fourth Circuit found this administrative hold was a setoff in violation of the automatic stay under § 362(a)(7).18
The Supreme Court held that the bank’s administrative freeze was not a setoff. The Court explained that a setoff consists of three steps: “(i) a decision to effectuate a setoff, (ii) some action accomplishing the setoff, and (iii) a recording of the setoff.”19 The bank’s “temporary refusal” to honor checks while it sought stay relief was not a setoff because the bank “did not purport permanently to reduce [the debtor’s] account balance by the amount of the defaulted loan.”20
With respect to other provisions of the automatic stay, the Supreme Court found that the administrative freeze was not an act to obtain possession of property of the estate or to exercise control over property of the estate or to recover a claim against the debtor, based on the following logic:
Respondent’s reliance on [§ 362(a)(3) or (a)(6)] rests on the false premise that petitioner’s administrative hold took something from respondent, or exercised dominion over property that belonged to respondent. That view of things might be arguable if a bank account consisted of money belonging to the depositor and held by the bank. In fact, however, it consists of nothing more or less than a promise to pay, from the bank to the depositor . . . and petitioner’s temporary refusal to pay was neither a taking of possession of respondent’s property nor an exercise of control over it, but merely a refusal to perform its promise.21
Strumpf is good news for banks and credit unions. Upon notice of bankruptcy, if the institution is careful to only temporarily refuse to pay checks while it seeks stay relief, an administrative freeze will not violate the automatic stay.22 The bank or credit union should immediately request relief from the stay. An administrative freeze will evolve into a prohibited setoff if the bank does anything more than temporarily refuse to pay checks.23 Debtor’s counsel will look for evidence of a deeper freeze on the bank’s computer—for example, reduction of a loan balance or reduction of the account balance. Any “recording of the setoff” might forfeit the protection of Strumpf.
The Supreme Court’s observation that a checking account is not “property that belonged to” the debtor is curious, if not misguided.24 Of course, a bank account is incorporeal—it is not money physically owned or controlled by the debtor. However, the promise to pay that the account balance represents has value, can be bought and sold, can be collateral and becomes property of the Chapter 13 estate. A light freezing of that balance has been excepted from the concept of setoff by Strumpf; caution should prevail not to read too much into the suggestion that bank accounts are not property interests for other purposes in Chapter 13 cases.
The Supreme Court in Strumpf declined to answer the question whether the temporary refusal of the bank to pay items presented against the debtor’s account while the bank sought relief from the stay “was otherwise wrongful.”25 Debtors will test the limits of the bank’s right of setoff after Strumpf under state law, by careful analysis of the depository contract and by aggressive application of the general rules of setoff in bankruptcy. For example, to the extent the balance frozen by a bank is postpetition deposits, mutuality will be lacking for setoff against a prepetition debt.26 Banks must be careful not to freeze any postpetition deposit to the account. Because the bank typically learns of the Chapter 13 case days or weeks after the filing, a bank usually cannot safely freeze more than the lowest postpetition balance in the debtor’s account, and never more than the debtor owes the bank.27
Retirement accounts can present setoff and recoupment issues not unlike a bank account, but with a twist for property of the Chapter 13 estate. As explained above, bankruptcy may delay but does not otherwise change setoff rights. Retirement accounts are sometimes set up as pools of money that can be borrowed by debtors before the Chapter 13 petition. The bankruptcy court in In re Herndon28 found that the debtor’s retirement account was ERISA-qualified and was not property of the Chapter 13 estate.29 As a result, the retirement account was not protected by the automatic stay and the fund did not need relief from the stay to offset a loan against the balance in the account:
Because the funds remaining in the Debtor’s retirement account are not included in property of the estate, they are without the protection of the automatic stay and therefore remain subject to the Retirement Fund’s contractual right to offset. . . . [A]n advance from a retirement account does not create a dischargeable debt. . . . [T]he loan transaction in this case is outside the purview of the automatic stay. . . . [T]he automatic stay does not prohibit the Retirement Fund’s offset.30
The IRS is prohibited by the automatic stay from setting off a prepetition tax claim (or other government claim) against a tax refund due the Chapter 13 debtor.31 It is common for Chapter 13 plans to pay the debtor’s prepetition tax liability in full, with postpetition tax refunds to be paid either to the debtor or to the Chapter 13 trustee.32 The IRS’s bankruptcy-case-tracking system is not always up to the task of differentiating whether to apply postpetition tax refunds in satisfaction of the prepetition taxes owed by the debtor. Often the IRS will simply hold the tax refund until the debtor gets mad and seeks sanctions for violation of the automatic stay.33 It has been held that delay by the IRS in processing a debtor’s tax refund does not alone constitute a setoff.34
In some jurisdictions there are local rules or general orders requiring the IRS to handle tax refunds in Chapter 13 cases in a particular way. Local practice may permit the IRS to set off against a tax refund to the extent of unpaid tax liability.35 In other jurisdictions, the IRS must remit all tax refunds to the Chapter 13 trustee. Absent a local rule, the IRS must seek relief from the stay before effecting setoff of a tax refund.
Upon a motion for relief from the stay to set off a tax refund against the debtor’s prepetition tax liability, some courts have held that the IRS is entitled to relief from the stay.36 Other courts more accurately conclude that the debtor is entitled to use the tax refund just like any other property of the Chapter 13 estate, subject to the IRS’s right to adequate protection.37 Several reported cases note that a Chapter 13 debtor’s exemption in a tax refund does not defeat the IRS’s right of setoff, at least to the extent that the tax claim is not dischargeable under § 523(a)(1).38
The Supreme Court’s decision in Strumpf may be read to support the temporary refusal of the IRS to pay a debtor’s refund while it seeks relief from the stay to set off that refund against unpaid taxes.39 But the IRS can expect to face the same limitations suggested in Strumpf—the amount of the refund seized must be no greater than the taxes owed; the length of the freeze must be reasonable; and the IRS must act quickly to seek relief from the stay.40
The stay of the right of setoff in § 362(a)(7) is not permanent. Upon expiration of the stay,41 or relief from the stay, the right of setoff described in § 553 can be exercised by the creditor. The question whether a creditor has a valid right of setoff under § 553 is distinct from the question whether the creditor is entitled to relief from the stay—after the stay is gone, the Chapter 13 debtor can litigate the validity and extent of the setoff asserted by the creditor.42
Also, the right of setoff is discretionary. Even if all the conditions for setoff are present, the bankruptcy court can for equitable reasons refuse relief from the stay to exercise setoff. Asking the bankruptcy court to prohibit setoff is a last resort for Chapter 13 debtors. The reported decisions are not encouraging of the debtor’s success. For example, in In re Lazar,43 the confirmed plan provided for payment in full of prepetition tax claims. After confirmation, the IRS filed a motion for relief from the stay to set off a tax refund against the prepetition claim. The debtors responded that they needed the tax refund to clean out their septic tank, buy a new hot water heater and replace curtains in their home. The bankruptcy court acknowledged that the IRS’s right of setoff was “not mandatory” and that the debtors might demonstrate equitable grounds to deny relief from the stay to exercise setoff. However, the court found the needs argued by the debtors were either already covered by the debtors’ budget or were not “crucial.”44
1 11 U.S.C. § 362(a)(7).
2 11 U.S.C. § 553(a) states: “except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor . . . against a claim of such creditor against the debtor.”
3 See Ohning v. Schneider Nat’l Transcon., Inc., 57 B.R. 714 (Bankr. N.D. Ind. 1986).
4 Ross v. Division of Employment Sec. (In re Ross), 83 B.R. 673 (Bankr. E.D. Mo. 1988) (State of Missouri violated the automatic stay by denying unemployment benefits until benefits denied equals amount of prepetition overpayment. Recovery of an overpayment by denial of benefits is not a common law recoupment, nor is the denial of benefits a legitimate exercise of the state’s police power under § 362(b)(4).). But see In re Adamic, 291 B.R. 175 (Bankr. D. Colo. 2003) (Withholding postpetition unemployment compensation benefits to recover a prepetition overpayment is a recoupment that does not violate automatic stay.); Stratman v. Missouri Div. of Employment Sec. (In re Stratman), 217 B.R. 250 (Bankr. S.D. Ill. 1998) (Recovery of prepetition overpayments of unemployment benefits by withholding postpetition benefits is recoupment, not setoff, and is exempt from stay.).
5 In re Valentine, 125 B.R. 11 (Bankr. S.D. Ohio 1991).
6 See 11 U.S.C. § 553.
7 New York State Elec. & Gas Corp. v. McMahon (In re McMahon), 129 F.3d 93, 96 (2d Cir. 1997).
8 See In re Adamic, 291 B.R. 175, 182–86 (Bankr. D. Colo. 2003) (Withholding postpetition unemployment compensation benefits to recover a prepetition overpayment is a recoupment that does not violate automatic stay. In 1994, Colorado Department of Labor determined that the debtor received an overpayment of unemployment benefits based on false representations. The Department assessed a 50% monetary penalty and imposed a nonmonetary penalty of 40 weeks of future benefits—four weeks for each week in which the debtor falsely claimed benefits. In 1999, the debtor scheduled the Department in the Chapter 13 case and confirmed a plan that included the Department’s prepetition debt. In 2002, during the Chapter 13 case, the debtor lost his job and applied for unemployment benefits. The Department withheld benefits to collect its prepetition debt including penalties and imposed the 40-week denial-of-benefits penalty. “A creditor’s proper exercise of recoupment in bankruptcy is not a violation of the automatic stay. . . . In this Court’s view, the two claims for unemployment compensation in this case are part of the ‘same transaction’ for purposes of recoupment. . . . Once the Department determined in 1994 that it had overpaid benefits and that the Debtor had obtained those overpayments by false representation . . . the state statute allowed it to, ‘in addition to instituting collection procedures, withhold subsequent benefit payments to which the claim is or becomes entitled and apply the amount withheld as an offset against the overpayment.’ . . . [T]he Debtor’s post-petition entitlement to unemployment benefits was intertwined by statute with his pre-petition receipt of overpayments. . . . [T]he Department could not have violated the automatic stay because the post-petition benefits are neither property of the Debtor nor property of the estate. . . . Because the Debtor is not entitled to receive unemployment compensation under state law due to his prior fraud . . . he never ‘acquired’ the post-petition payments and those payments do not constitute ‘earnings for services performed.’ Accordingly, weekly unemployment payments to which the Debtor is not entitled . . . cannot be property of the estate; and the Department’s exercise of its right to withhold the post-petition benefits is not an ‘act to collect, assess, or recover a [prepetition] claim against the debtor.’”); Stratman v. Missouri Div. of Employment Sec. (In re Stratman), 217 B.R. 250, 252 (Bankr. S.D. Ill. 1998) (Recovery of prepetition overpayments of unemployment benefits by withholding postpetition benefits is recoupment, not setoff, and is exempt from stay. “Under the doctrine of recoupment, a defendant can meet a plaintiff’s claim with a countervailing claim that arose out of the same transaction as the Plaintiff’s claim or cause of action, for the purpose of abatement or reduction of such claim. . . . [T]he claims must arise from a single contract or transaction. . . . [T]here must be some type of ‘overpayment’ whether accidentally made or contractually made.”); Ross v. Division of Employment Sec. (In re Ross), 83 B.R. 673 (Bankr. E.D. Mo. 1988) (Recovery of an overpayment of unemployment benefits by denying postpetition benefits is a setoff, not a common law recoupment, and violates the automatic stay.). See also Gullett v. Continental Casualty Co. (In re Gullett), 230 B.R. 321, 328–29 (Bankr. S.D. Tex. 1999) (Workers’ compensation carrier violated stay by deducting prepetition overpayment from postpetition benefits because Texas law was ambiguous with respect to the recoupment rights of a workers’ compensation carrier. “Generally, recoupment of pre-petition overpayments of benefits from post-petition benefits arising from the same transaction does not violate the automatic stay if recoupment is provided for by state law. . . . The reasoning of the courts is that recoupment is not subject to the stay because the debtor has no interest in the funds against which recoupment is allowable and they are not considered property of the estate. . . . Texas law is in conflict as to whether recoupment is allowed from future benefits by an insurance carrier of an erroneous overpayment of worker’s compensation benefits. . . . Given this state of Texas law on recoupment for an erroneous overpayment by the carrier, and the overriding bankruptcy considerations of equal distributions of available funds to creditors in accordance with the Bankruptcy Code, this Court finds that CCC’s actions in reducing debtor’s benefits and in pursuing its court remedies violated the automatic stay.”).
9 New York State Elec. & Gas Corp. v. McMahon (In re McMahon), 129 F.3d 93, 96 (2d Cir. 1997).
10 In re Valentine, 125 B.R. 11 (Bankr. S.D. Ohio 1991).
11 265 B.R. 796 (Bankr. N.D. Ill.), on reconsideration, 269 B.R. 201 (Bankr. N.D. Ill. 2001).
12 265 B.R. at 807.
13 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995).
14 Citizens Bank of Maryland v. Strumpf (In re Strumpf), 37 F.3d 155 (4th Cir. 1994) (Bank violated automatic stay of § 362(a)(7) by placing an administrative hold on a Chapter 13 debtor’s bank account at the same time that it moved for relief from the stay to set off the bank account against a prepetition note.), rev’d, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995); B.F. Goodrich Employees Fed. Credit Union v. Patterson (In re Patterson), 967 F.2d 505 (11th Cir. 1992) (Credit union’s unilateral freezing of debtors’ checking account violated automatic stay provisions of § 362(a)(3), (4), (6), and (7).); Figgers v. Dayton Power & Light Employees Fed. Credit Union (In re Figgers), 121 B.R. 772 (Bankr. S.D. Ohio 1990) (Credit union’s freezing of debtor’s share account after conversion from Chapter 13 to Chapter 7 violated the automatic stay because the credit union failed to perfect security interest in share account under applicable state law and credit union did not first seek relief from the stay. The only portion of the share account that could arguably be subject to any right of setoff is the amount that was in the share account at the date of filing of the original Chapter 13 petition.); Homan v. Kembra Cincinnati Credit Union (In re Homan), 116 B.R. 595 (Bankr. S.D. Ohio 1990) (Postpetition “administrative freeze” of debtor’s bank account is violation of the automatic stay. Creditor claiming pledge, lien, or setoff rights in bank account must seek relief from the stay before it freezes.); In re Sumrall, 56 B.R. 134 (Bankr. M.D. Fla. 1985) (Bank ordered to re-credit debtor’s account when bank violated automatic stay by debiting account after filing of Chapter 13 case. Debtor’s confusing authorization of the bank’s action is not a defense.); In re Rio, 55 B.R. 814 (Bankr. M.D. Ala. 1985) (Compensatory damages are awarded to Chapter 13 debtor for wrongful freezing of account by credit union.).
15 B.F. Goodrich Employees Fed. Credit Union v. Patterson (In re Patterson), 967 F.2d 505, 510 (11th Cir. 1992).
16 967 F.2d at 510.
17 967 F.2d at 511.
18 Citizens Bank of Maryland v. Strumpf (In re Strumpf), 37 F.3d 155, 157–58 (4th Cir. 1994) (“While we understand the dilemma that Citizens and other similarly situated creditors face, we cannot overlook the fact that the Code does not authorize such action, and is quite to the contrary. Setoff is explicitly within the terms of section 362(a)(7) which stays a creditor from exercising its right of setoff unless and until the creditor obtains relief from the stay. . . . [W]e are of opinion that an administrative hold is tantamount to the exercise of a right of setoff and thus violates the automatic stay of § 362(a)(7). . . . Whether the creditor actually offsets the debtor’s account or places a hold on the debtor’s account, both effectively deprive the debtor of the use of the funds pending the outcome of the motion for relief from the stay.”).
19 516 U.S. at 19.
20 516 U.S. at 19.
21 516 U.S. at 21.
22 See Dehn v. Arkansas Fed. Credit Union (In re Dehn), Nos. 4:02-BK-14213E, AP 4:02-AP-1108, 2002 WL 32115833, at *1 (Bankr. E.D. Ark. July 10, 2002) (unpublished) (Citing Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995): “[A]n administrative freeze on a debtor’s account does not constitute a setoff under 11 U.S.C. § 362(a)(7) or otherwise violate the automatic stay.”).
23 See Holden v. United States (In re Holden), 217 B.R. 161, 166 (D. Vt. 1997) (IRS not entitled to freeze debtors’ postpetition $2,050 refund to collect a prepetition debt of $184.92. Plan confirmed on September 19, 1996, providing full payment of $184.92 owed IRS. In February of 1997, IRS froze $2,050 tax refund. IRS did not seek relief from the stay. In March 1997, an IRS employee told the debtor that the IRS would release refund if debtor paid prepetition debt. “Under [Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995)], a temporary freeze on funds in which a creditor has a good faith basis for asserting a right of setoff, and which is promptly followed by a request for relief from the stay, maintains the status quo and therefore may not violate the automatic stay. . . . [T]he IRS did not simply maintain the status quo. It utilized an open-ended ‘administrative freeze’ to coerce an agreement and to secure the payment of a debt without seeking prior approval from the Bankruptcy Court. . . . [T]he result of the freeze imposed on the Holdens’ refund was the collection of a pre-petition claim without first seeking relief from the stay. This action, if pursued by any other entity, would be designated as setoff despite its denomination as temporary freeze.”), on remand, 236 B.R. 156 (Bankr. D. Vt. 1999); Town of Hempstead Employees Fed. Credit Union v. Wicks (In re Wicks), 215 B.R. 316, 319 (E.D.N.Y. 1997) (Credit union’s freezing of savings accounts for more than four months without seeking relief from the stay was a prohibited setoff that violated stay. Debtors had checking and savings accounts at credit union and owed credit union secured and unsecured debts. Debtors were current on all loan payments at petition. Credit union placed “administrative freeze” on savings accounts and refused to release the funds. Four months passed during which the credit union did not seek relief from the stay. Debtors moved for sanctions. “Applying the rules enunciated in [Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995),] . . . the Credit Union’s four-month-long administrative hold constituted an impermissible setoff in violation of the automatic stay. . . . ‘the “administrative hold” was by no means “temporary”: it lasted four [months], during which time the [Credit Union] never sought relief from the automatic stay . . . . Indeed the hold might have continued indefinitely if the [Wicks] had not finally taken action . . . . [T]he [Credit Union’s] more or less permanent retention of [the Wick’s] funds was not a permissible temporary freeze within the scope of Strumpf, but rather constituted forbidden self-help in violation of the automatic bankruptcy stay.’”).
24 See Russell H. Hippe, Jr., Supreme Court Opinion in Strumpf, 11 Norton Bankr. L. Adviser 1 (1995).
25 516 U.S. at 19.
26 See, e.g., Cooper-Jarrett, Inc. v. Central Trans., Inc., 726 F.2d 93 (3d Cir. 1984); Stubbe v. Rua (In re Colonial Mortgage Bankers Corp.), 128 B.R. 21 (D.P.R. 1991), aff’d without opinion, 971 F.2d 744 (1st Cir. 1992); United States v. Ketelson, 104 B.R. 242 (D.S.D. 1988), aff’d, 880 F.2d 990 (8th Cir. 1989); Metco Mining & Minerals, Inc. v. PBS Coals, Inc. (In re Metco Mining & Minerals, Inc.), 171 B.R. 210 (Bankr. W.D. Pa. 1994).
27 See In re Czyzk, 297 B.R. 406, 409–10 (Bankr. D.N.J. 2003) (Citing Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995), freezing of account two months after Chapter 13 petition did not violate automatic stay, but bank could set off only the smallest balance between the petition and the freeze. At the petition on April 5, 2003, the balance in the debtor’s business checking account was $8,904. Bank placed an administrative hold on the account in June 2003, when the balance was $14,000. The lowest postpetition balance was $964 on May 1, 2003. “It is well settled that set off can only apply to funds deposited with a bank prior to the initiation of a bankruptcy proceeding. . . . Any other funds in the account are postpetition deposits . . . . Wachovia may only set off the balance in the debtor’s account that existed at the time of the petition and still exists today. To determine the amount covered by the still existing prepetition obligations, the court must look to the lowest postpetition balance because it ‘is the only prepetition obligation on the account that has not been replaced by postpetition obligations.’”); Agricultural Fed. Credit Union v. Harris (In re Harris), 260 B.R. 753, 756 (Bankr. D. Md. 2001) (Distinguishing Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995), credit union violated automatic stay when account had a zero balance at the petition and credit union froze $17,805 deposited by the debtor one day after the petition. “[T]here existed no mutuality of debt because the debt owed by AFCU to Debtor—i.e., the payment of funds on deposit upon demand—arose after the commencement of the case. Since AFCU had no right to set off, it had no right to place an administrative hold on the account.”); In re Orr, 234 B.R. 249, 252, 253–55 (Bankr. N.D.N.Y. 1999) (Credit union violated stay by freezing more money than it was entitled to and by waiting two months to ask for relief from the stay. Credit union had an unsecured personal loan of $1,496. At the petition on November 4, there was $790.22 in the debtor’s accounts. On November 7, there was $147.93 remaining as a result of withdrawals by the debtor. On November 9 and November 24, the debtor deposited payroll checks totaling $878.94. On November 25, the credit union received notice of bankruptcy and froze $790.22, the petition date balance, consistent with credit union policy. “While Code § 363(c)(2) requires that a debtor obtain the consent of any entity that has an interest in the cash collateral, . . . those requirements are applicable only with respect to transactions involving the operation of a business of the debtor as set forth in Code § 363(c)(1). . . . [T]here has been no suggestion that the Debtor is operating a business. . . . As of November 4, 1998, SEFCU had a right to set off its claim to the extent of monies on deposit in the Debtor’s Accounts to which the Debtor had a claim, namely $790.22, with the balance of its claim being unsecured. During the alleged three weeks prior to receiving notice of the Debtor’s filing, SEFCU voluntarily released the funds in the Debtor’s checking account, thereby waiving whatever setoff rights it may have had to the full amount of the monies on deposit on November 4, 1998. . . . On November 25, 1998, when SEFCU transferred the monies from the Debtor’s checking account to his savings account, it was entitled to impose an administrative freeze with respect to only $175.35, all that remained of the date-of-filing balance in the Accounts because all other monies on deposit at that time constituted postpetition wages to which it had no entitlement. . . . [T]hat SEFCU denied the Debtor access to any monies in excess of $175.35 was a wilful violation of the automatic stay. . . . [T]hat SEFCU delayed almost two months after it imposed the administrative freeze before seeking Court authorization to set off the $175.35 is also a basis for the Court concluding that SEFCU was in further violation of the automatic stay. . . . [T]he two month long administrative freeze, in the view of this Court, was more than a temporary refusal to pay a debt and therefore, violated the automatic stay. . . . [T]he Debtor is entitled to be compensated for actual damages, as well as for costs and attorney’s fees incurred in connection with this motion.”); See also Holden v. United States (In re Holden), 217 B.R. 161, 166 (D. Vt. 1997) (IRS not entitled to freeze debtors’ postpetition $2,050 refund to collect a prepetition debt of $184.92. “[O]n its face, the IRS’s withholding of $2050 to ostensibly secure collection of $184 was unfair and apparently not in good faith.”), on remand, 236 B.R. 156 (Bankr. D. Vt. 1999).
28 289 B.R. 629 (Bankr. E.D. Mich. 2003).
29 See § 47.3 [ Pension Benefits ] § 46.7 Pension Benefits.
30 289 B.R. at 632–33.
31 11 U.S.C. § 362(a)(7). See, e.g., In re Shortt, 277 B.R. 683 (Bankr. N.D. Tex. 2002) (IRS violated the automatic stay by exercising setoff of refund against debt the debtor owed to Army and Air Force Exchange Service; because the debtor owed AAFES more than the amount of the tax refund, the debtor could show no prejudice and AAFES was granted nunc pro tunc relief from the stay to validate the setoff.); Brown v. United States (In re Brown), 159 B.R. 1014 (Bankr. S.D. Ga. 1993) (IRS violated automatic stay by seizing and keeping debtor’s tax refunds during the pendency of Chapter 13 case in which the confirmed plan paid the IRS claim in full.). See § 164.1 [ Projected (Disposable) Income ] § 91.2 Projected (Disposable) Income for discussion of tax refunds as “disposable income” at confirmation. See § 236.1 [ Tax Refunds ] § 122.1 Tax Refunds for discussion of the effect of confirmation on entitlement to tax refunds.
32 See § 292.1 [ Taxes ] § 136.2 Taxes before BAPCPA.
33 See § 75.1 [ Examples of Stay Violations, and Not ] § 62.1 Examples of Stay Violations, and Not.
34 In re Price, 134 B.R. 313 (Bankr. N.D. Ill. 1991).
35 See, e.g., In re Dominguez, 67 B.R. 526 (Bankr. N.D. Ohio 1986) (General order permitting IRS to set off tax refunds against tax liability permits IRS to exercise prepetition setoff right notwithstanding the automatic stay.). Accord Ferguson v. IRS, 83 B.R. 676 (Bankr. E.D. Mo. 1988). See also In re Martinez, 258 B.R. 364 (Bankr. W.D. Tex. 2000) (Local bankruptcy rule that allows the IRS to apply a tax refund against priority tax claims without violating the automatic stay does not confer substantive rights upon the IRS or upon debtors. IRS’s right to set off prepetition tax refund against prepetition tax liability is not upset by debtors’ claim that the tax refund is exempt property.).
36 Womack v. United States (In re Womack), 188 B.R. 259 (Bankr. E.D. Ark. 1995) (IRS is entitled to stay relief after confirmation to set off prepetition tax liability against prepetition tax refund. Setoff under § 553 is not defeated by confirmation under § 1327, notwithstanding confirmed plan that provides for full payment of IRS’s prepetition claim.); In re Lawson, 187 B.R. 6 (Bankr. D. Idaho 1995) (The IRS’s right to set off a refund for a prepetition tax year against taxes due for a prepetition year is cause for relief from the stay. The debtor cannot condition stay relief that the IRS apply its offset to its priority claim rather than to its nonpriority claim.); In re Olson, 175 B.R. 30 (Bankr. D. Neb. 1994) (IRS is entitled to relief from the stay after confirmation to set off debtors’ tax refund against prepetition taxes where debtor is not able to provide adequate protection for the IRS’s interest in the tax refund.); In re Whitaker, 173 B.R. 359 (Bankr. S.D. Ohio 1994) (IRS is entitled to relief from the stay for cause to set off a prepetition tax refund against prepetition tax obligations. Confirmation of a plan that would pay the IRS’s claim in full does not change this outcome.); In re Orlinski, 140 B.R. 600 (Bankr. S.D. Ga. 1991) (IRS is entitled to relief from the stay to exercise its right of setoff under § 553(a) notwithstanding confirmation of Chapter 13 plan calling for full payment of debtor’s prepetition tax liability. Debtor had liability for 1987 and 1988. Debtor was due a tax refund for 1990. Chapter 13 was filed in 1991. Prepetition tax liability and prepetition tax refund were mutual debts, and setoff did not fall within any exception described in § 553(a). “Under § 553(a), a valid prepetition right of setoff continues to exist notwithstanding § 1327(a), subject only to the provisions of §§ 362, 363 and the rest of § 553. . . . The IRS’s right of setoff, preserved by § 553(a), is ‘cause’ for relief from the stay to permit the setoff.”).
37 In re Stienes, 285 B.R. 360, 362–63 (Bankr. D.N.J. 2002) (IRS is entitled to stay relief to exercise statutory right of setoff because proposed plan is not adequate protection for immediate use of the refund. “The IRS has an express statutory right of setoff under 26 U.S.C. § 6402(a) . . . . The IRS has a claim against the debtor for unpaid taxes that arose before the commencement of the case. The 2001 refund to the debtors was payable to them as of December 31, 2001, prior to the debtors’ bankruptcy filing. . . . The burden of proof to show adequate protection falls on the debtor. . . . Given the intended immediate dissipation of the funds by the debtors, I conclude that the debtors have failed to meet their burden. . . . [T]here is no equitable basis to warrant the denial or further delay of the setoff of the debtors’ tax refund against the pre-petition debt due to the IRS.”); In re Kirkpatrick, 214 B.R. 314, 315–16 (Bankr. S.D. Ohio 1997) (IRS’s setoff in postconfirmation tax refund is subject to stay, and IRS has not shown cause for relief from the stay where confirmed plan will pay IRS in full; however, debtor not entitled to tax refund unless debtor can provide adequate protection of IRS’s possession of the refund. “Section 553(a) . . . recognizes . . . rights of setoff . . . . IRS has such rights. Any such rights, however, are subject to the automatic stay . . . . Setoff rights are further subject to the debtor’s right to use property of the estate as provided by § 363 . . . so long as adequate protection is provided to the creditor . . . . The debtor appears to be current in her plan payments . . . confirmation has foreclosed any right of the creditor to insist upon another means of payment such as application of the refund . . . . Despite the fact that IRS cannot set off the refund . . . IRS is not required to surrender its collateral (the refund) to the debtor until it has been paid an equivalent amount by the trustee.”); In re Johnson, 136 B.R. 306 (Bankr. M.D. Ga. 1991) (IRS is not necessarily entitled to set off prepetition refund against prepetition tax liability. Although the three requirements for a right of setoff are present, setoff is permissive, not mandatory. When debtor’s confirmed Chapter 13 plan provides for payment in full of the prepetition tax claim, debtor may be entitled to be paid the refund if the debtor can provide adequate protection to the IRS.). Accord In re Olson, 175 B.R. 30, 33 (Bankr. D. Neb. 1994) (“By establishing its right of setoff, the IRS has made a prima facie showing of ‘cause’ for relief from stay. . . . The debtors did not submit any evidence at the hearing that they could provide the IRS with additional adequate protection of the collateral. . . . If the debtors are going to use the $299 for ordinary living expenses, the debtors must offer new collateral or make cash payments to the IRS equal to the diminution in the value of the collateral as the debtors spend the money. The debtors’ argument that the plan payments will pay the IRS’s claim in full and therefore constitutes adequate protection of the IRS’s setoff right is without merit.”). See § 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation.
38 See, e.g., In re Martinez, 258 B.R. 364 (Bankr. W.D. Tex. 2000) (IRS’s right to set off prepetition tax refund against prepetition tax liability is not upset by debtors’ claim that the tax refund is exempt property.); In re Pace, 257 B.R. 918 (Bankr. W.D. Mo. 2000) (On the IRS’s postconfirmation motion for relief from the stay to set off a prepetition tax refund against prepetition tax claims, the IRS’s right of setoff is limited by the debtors’ exemption claim under § 522(c): IRS can set off the tax refund against the priority portion of its claim but cannot set off the refund against its general unsecured tax claim. IRS cannot have a secured claim under § 506(a) because its setoff right under § 553 is trumped by the debtors’ exemption under § 522(c).). See also §§ 236.1 [ Tax Refunds ] § 122.1 Tax Refunds and 292.1 [ Taxes ] § 136.2 Taxes before BAPCPA.
39 See In re Stienes, 285 B.R. 360, 363 (Bankr. D.N.J. 2002) (Citing Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 166 S. Ct. 286, 133 L. Ed. 2d 258 (1995), IRS can administratively freeze prepetition refund on account of prepetition taxes; because proposed plan is not adequate protection for immediate use of the refund, IRS is also entitled to stay relief to exercise its statutory right of setoff. “The administrative freeze on the refund was validated by the Supreme Court in Strumpf.”); Stewart v. Army & Air Force Exch. Serv. (In re Stewart), 253 B.R. 51, 53 (Bankr. E.D. Ark. 2000) (IRS did not violate the automatic stay by withholding Chapter 13 debtors’ tax refund on account of a debt owing to the United States because, citing Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995), “it is well settled that a creditor may, without violating the automatic stay, hold funds pending timely motion for relief from stay or other proceeding for a determination of a right to setoff.”); In re Warwick, 179 B.R. 582, 584–86 (Bankr. W.D. Ark. 1995) (United States did not violate the automatic stay by retaining a tax refund. In a Chapter 13 case filed in April of 1994, IRS filed a proof of claim for taxes for 1984, 1985, and 1986. The United States held a tax refund for 1993. The confirmed plan called for full payment of taxes. Applying the “unequivocal language of section 553 . . . confirmation does not alter a creditor’s right to setoff.” Distinguishing the Fourth Circuit’s opinion in Citizens Bank of Maryland v. Strumpf (In re Strumpf), 37 F.3d 155 (4th Cir. 1994), “despite the importance of the automatic stay, a creditor is not required to turnover property of the estate with regard to which a right of setoff exists. . . . Since the Bankruptcy Code preserves the right to hold funds pending determination of the right to exercise setoff, a mere freeze under these facts is not a violation of section 362(a)(3).”). Accord In re Tillery, 179 B.R. 576 (Bankr. W.D. Ark. 1995).
40 See Holden v. United States (In re Holden), 217 B.R. 161, 166 (D. Vt. 1997) (IRS not entitled to freeze debtors’ postpetition $2,050 refund to collect a prepetition debt of $184.92. Plan confirmed on September 19, 1996, providing full payment of $184.92 owed IRS. In February of 1997, IRS froze $2,050 tax refund. IRS did not seek relief from the stay. In March 1997, an IRS employee told the debtor that the IRS would release refund if debtor paid prepetition debt. “Under [Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995)], a temporary freeze on funds in which a creditor has a good faith basis for asserting a right of setoff, and which is promptly followed by a request for relief from the stay, maintains the status quo and therefore may not violate the automatic stay. . . . [T]he IRS did not simply maintain the status quo. It utilized an open-ended ‘administrative freeze’ to coerce an agreement and to secure the payment of a debt without seeking prior approval from the Bankruptcy Court. Moreover, on its face, the IRS’s withholding of $2050 to ostensibly secure collection of $184 was unfair and apparently not in good faith. . . . [T]he result of the freeze imposed on the Holdens’ refund was the collection of a pre-petition claim without first seeking relief from the stay. This action, if pursued by any other entity, would be designated as setoff despite its denomination as temporary freeze.”), on remand, 236 B.R. 156, 164–65 & n.12 (Bankr. D. Vt. 1999) (Postconfirmation “V-freeze” by IRS violated the stay and is not protected by Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995) because the IRS did not have a right to setoff prepetition claim against a tax refund for a postpetition year and the IRS’s freeze was indefinite, without notice and bore no relationship to the amount of its prepetition claim. Chapter 13 petition filed on May 23, 1996. IRS scheduled as priority creditor for 1992 taxes in the amount of $193. Confirmed plan provided for full payment. In February of 1997, IRS froze $2,007 refund due to the debtors for tax year 1996. Unlike bank account in Strumpf, “[t]here is no question that a tax refund or a right thereto is property of the estate.” IRS conceded that it had no right of setoff. “[T]here is no question that the V-freeze, which indefinitely delayed Debtors’ receipt of their refund, was an exercise of control over estate property. . . . IRS violated § 362(a)(3) when it froze Debtors’ tax refund. Strumpf simply does not apply to the facts of this case.” In a footnote, “Unlike the bank’s temporary freeze in Strumpf, the V-freeze here was instituted on Debtors’ refund without notifying debtor and lasted for an indefinite period.”).
42 See, e.g., In re Buckner, 165 B.R. 942 (D. Kan. 1994) (Applying In re Matthieson, 63 B.R. 56 (D. Minn. 1986), United States is entitled to set off a debtor’s entitlement under the Conservation Reserve Program (CRP) against prepetition defaults on a loan from the Farmers Home Administration. The government’s obligations to the debtor under the CRP agreement arose prepetition, notwithstanding that the debtor had to assume an executory contract after the filing of the Chapter 13 case in order to continue to be entitled to receive CRP payments.), appeal dismissed on jurisdictional grounds, 66 F.3d 263 (10th Cir. 1995); In re Thacker, No. 01-34518-T, 2002 WL 1803726, *1–*2 (Bankr. E.D. Va. Apr. 9, 2002) (unpublished) (Debtors’ attorney cannot set off unpaid fees from prior Chapter 13 case against refund from trustee in prior case because attorney failed to prove a contractual lien sufficient to support setoff. Fee contract stated that the debtors “‘grant to Charles H. Krumbein a limited power of attorney to endorse checks from the Standing Chapter 13 Trustee that may be issued to Charles H. Krumbein and myself to deposit them into his escrow account, and to deduct any remaining agreed fees outstanding.’” Bankruptcy court held “the language . . . [was] insufficient to grant him a contractual lien on the funds, Krumbein is not entitled to setoff the funds.”); In re Lovato, 203 B.R. 747 (Bankr. D. Wyo. 1996) (IRS does not have a setoff right in postpetition tax refunds because its prepetition debt was dischargeable in the Chapter 13 case and the confirmed plan provided for the debt by surrender of collateral. Freezing of postpetition tax refunds violated discharge injunction.).
43 219 B.R. 212 (Bankr. N.D. Ohio 1998).
44 See also In re Sedlock, 219 B.R. 207 (Bankr. N.D. Ohio 1998) (Relief from stay granted to IRS to set off tax refund. Setoff is discretionary, but debtors failed to demonstrate any equitable ground for denial. Late filing of tax returns created the problem.).