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Court Permits Creditor to Set Off Administrative Expense against Preferential Liability

The United States Bankruptcy Court for the District of Delaware recently permitted a creditor to set off its allowed post-petition administrative expense claim against its preferential liability. In Official Committee of Unsecured Creditors of Quantum Foods, LLC v. Tyson Foods, Inc., No. 15-50254 (Bankr. D. Del. July 25, 2016), the Official Committee of Unsecured Creditors of Quantum Foods, LLC, after being granted derivative standing, filed suit against Tyson Foods, Inc. and Tyson Fresh Meats, Inc. seeking to avoid and recover preferential and fraudulent transfers totaling $13,747,933. In response, Tyson asserted, among other defenses, a right to set off a previously-allowed post-petition administrative expense claim in the amount of $2,603,841.09 against its preferential liability. The Committee subsequently filed a motion for judgment on the pleadings with respect to Tyson’s assertion of a setoff right. Section 553(a) of 11 U.S.C. preserves the “right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case . . . against a claim of such creditor against the debtor that arose before the commencement of the case.” Although the Code seemingly only preserves the right of a creditor to setoff mutual prepetition obligations, “[t]he judicial consensus is that setoff is available in bankruptcy when the opposing obligations arise on the same side of the bankruptcy petition date.” Thus, a creditor may set off a debt owing to and from the debtor if the debts both arose either pre-petition or post-petition. In this instance, the court held, the administrative expense clearly arose post-petition. Moreover, even though a preference claim concerns pre-petition facts, the court held, a preference claim “necessarily arises only post-petition.” Accordingly, the court denied the Committee’s motion.

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