The Debtors filed an adversary proceeding pursuant to 11 U.S.C. §§ 542(a) and 547(b) seeking to recover a federal tax refund the United States Department of the Treasury setoff prepetition within 90 days of their petition date in partial satisfaction of a foreclosure deficiency that the Debtors owed to HUD. HUD contends that the setoff is not recoverable under either section, nor is it recoverable under 11 U.S.C. § 553, the provision of the Bankruptcy Code governing setoffs. The Court held that the validity of the setoff had not been called into question by any allegation of the Complaint and a cause of action to recover it is not available under Section 547(b). The Court also held that Section 553(b)(1) does not bar the creation of an insufficiency during the 90 day prepetition period, but permits the trustee to recover the setoff amount only if the insufficiency is less at the time of set off than when it arose. In the instant case, there was no reduction in the insufficiency, therefore section 553(b) does not allow recovery by the trustee. As HUD did not improve its position within 90 days preceding the filing of the petition, the Court granted HUD’s motion for summary judgment and dismissed the adversary proceeding.
Wednesday, December 27, 2017
Burden of Proof