Waiver or Estoppel: The right to set-off is a privilege vested in the creditor with a claim against the debtors. If it is not timely and properly exercised, it is waived. In re Mauch Chunk Brewing Co., 131 F.2d 48 (3rd Cir. 1942). Or if the creditor's conduct is such as to mislead other parties to their detriment, the creditor may be estopped from exercising the right.
These facts are significant because the voluntary turnover to the trustee of the property subject to a creditor's right of setoff generally precludes any subsequent claim of setoff by the creditor. See Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 20, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) (noting that requiring a creditor immediately to turnover funds on account "would divest the creditor of the very thing that supports the right of setoff"); In re Mauch Chunk Brewing Co., 131 F.2d 48, 49 (3d Cir. 1942) (finding that when trustee withdrew funds from account with bank's knowledge of bankruptcy filing, bank's acquiescence was "tantamount to renunciation of its privilege of setoff"). If BOTW loses this preference action, it might be able revive its right of setoff given "court[s] may remedy the effect of an inadvertent, involuntary or improper dissipation of the creditor's interest." Collier ¶ 553.07; see also In re Archer, 34 B.R. 28, 31 (Bankr. N.D. Tex. 1983) (finding where bank had mistakenly turned over property it did not intentionally waive its right of setoff).
For example, the voluntary payment by the creditor of its debt to the debtor, without any reservation of a right of setoff, waives that right. In re Mauch Chunk Brewing Co., 131 F.2d 48 (3d Cir. 1942) (so holding with regard to a bank's payment of an account to a trustee in bankruptcy). This circuit has held that payment in obedience to a court's judgment, which is not voluntary, is therefore not waiver, even though the creditor had the opportunity to seek a stay of the judgment and chose not to do so. Pub. Serv. Co. of N.H. v. N.H. Elec. Coop., Inc., 884 F.2d 11, 13 (1st Cir. 1989).
11 U.S.C.A. §§ 501 et seq. See In re Hotel Martin Co. of Utica, 2 Cir., 1936, 83 F.2d 231; and In re Mauch Chunk Brewing Co., 3 Cir., 1942, 131 F.2d 48, 143 A.L.R. 451. We think the rule is the same in Chapter XI proceedings.
See also Lewith v. Irving Trust Co., 2 Cir., 67 F.2d 855, 856; In re Meade Tool Die Co., 6 Cir., 164 F.2d 228, 230-231; In re Prindible, 3 Cir., 115 F.2d 21, 23; Hartford Accident Indemnity Co. v. Coggin, 4 Cir., 78 F.2d 471, 477; Union National Bank v. McKey, 7 Cir., 102 F. 662; In re Myers, D.C.Ind., 99 F. 691; cf. Hutchinson v. Otis, 190 U.S. 552, 555, 23 S.Ct. 778, 47 L.Ed. 1179; U.S. National Bank v. Chase National Bank, 331 U.S. 28, 35-36, 67 S.Ct. 1041, 91 L. Ed. 1320. In so far as In re Mauch Chunk Brewing Co., 3 Cir., 131 F.2d 48, 143 A.L.R. 451, may be considered contra, we disagree with it. To the effect that waiver is the "intentional relinquishment of a known right," see Lehigh Valley R. Co. v. Providence-Washington Insurance Co., 2 Cir., 172 F. 364, 365; Clark v. West, 193 N.Y. 349, 360, 86 N.E. 1.
Furthermore, the United States Court of Appeals for the Third Circuit has stated "it is questionable [in a reorganization proceeding] whether a bank can set off a debtor's unmatured obligation against its deposit." In re Mauch Chunk Brewing Co., 3 Cir., 131 F.2d 48, 49, 143 A.L.R. 451. No consideration has been given in any reported case that I have been able to find, which decides the question as to the absolute right of set-off in a reorganization proceeding where the note is matured and the debtor is solvent.
In its discussion the Court noted that the "right to set-off is a privilege vested in the creditor with a claim against the debtors. If it is not timely and properly exercised, it is waived." Id. At 919 (citing In re Mauch Chunk Brewing Co., 131 F.2d 48 (3rd Cir. 1942). The Court emphasized the importance of creditors asserting their right to setoff in a timely and accurate manner "so as to permit the debtor to timely file a plan and other creditors to decide whether to object to the plan."
denied 525 U.S. 929, 119 S.Ct. 336, 142 L.Ed. 277 (1998); In re Bevill, Bresler Schulman, 896 F.2d at 58-59 (denying bank's right to setoff against coupon interest on bonds held by bank where bank was merely a trustee for the debtor and there was no mutual debt and claim between creditor and the debtor); Lee v. Schweiker, 739 F.2d 870, 876 n. 10 (3d Cir. 1984) (holding that a post-bankruptcy setoff is substantively barred by § 553); Cooper-Jarrett, Inc. v. Central Transport, Inc., 726 F.2d 93, 96-97 (3d Cir. 1984) (holding that there was no right to setoff the debt which creditor owed debtor under a post-petition settlement agreement which resolved a pre-petition claim against the debtor); United States v. Norton, 717 F.2d 767, 774 (3d Cir. 1983) (bankruptcy court clearly acted within its powers in staying IRS from setting-off chapter 13 debtors' prepetition tax liability against post-petition tax refund where IRS failed to object to debtors' chapter 13 plan prior to confirmation); In re Mauch Chunk Brewing Co., 131 F.2d 48, 50 (3d Cir. 1942) (holding that bank relinquished whatever right to setoff it may have had when the bank manifestly and without reservation did all it possibly could have done to transfer debtor's account balances to the bankruptcy trustee); Lessig Constr., Inc. v. Schnabel Assocs., Inc. (In re Lessig Constr. Inc.), 67 B.R. 436, 441 (Bankr. E.D.Pa. 1986) ("Our Court of Appeals has, consistently . . . restricted efforts by creditors, even governmental creditors, to utilize setoff."); accord In re Public Serv. Company, 884 F.2d at 13 ("[T]he circle of creditors entitled to exercise setoff rights in bankruptcy is tightly circumscribed."). Williams' predicament is more like that of the creditor in Metro.
Other cases cited by the Trustee, NBA and Evergreen can be distinguished on the same basis. See, e.g., Cumberland Glass Manufacturing v. De Witt and Co., 237 U.S. 447, 456, 35 S.Ct. 636, 639, 59 L.Ed. 1042 (1915) (Creditor took no action until after payment); In re Mauch Chunk Brewing Co., 131 F.2d 48, 49 (3d. Cir. 1942) (Creditor did not assert its right before releasing the fund); In re Royal Crown Bottling Company of Boaz, Inc., 29 B.R. 52, 53 (N.D.Ala. 1981) (Bank did not know of or did not assert setoff right before it paid the funds to trustee); In re Cloverleaf Farmer's Co-Op., 114 B.R. 1010, 1018 (Bankr.D.S.D. 1990) (Funds had already been disbursed before setoff right was asserted); In re Wilson, 49 B.R. 19 (Bankr. N.D.Tex. 1985) (Facts not clear that Small Business Administration asserted right of setoff in bankruptcy before IRS paid tax refund to trustee). In all of these cases, the so-called "mistake" was the creditors' payment of the funds against which a setoff could be made without recognizing or asserting the right of setoff.
Id. at 54. See also, In re Mauch Chunk Brewing Co., 131 F.2d 48, 49 (3rd Cir. 1942) (where bankruptcy trustee withdraws funds from account at bank with bank's knowledge of bankruptcy filing, bank's action "tantamount to renunciation of its privilege of setoff." Setoff "is a privilege which the creditor may or may not claim. If it is not asserted, it is lost."); Crispell v. Landmark Bank (In re Crispell), 73 B.R. 375, 380-81 (Bankr.E.D.Mo. 1987) ("The Bank . . . by voluntarily releasing funds in the checking account to the Debtor. . . . waived whatever setoff rights it may have had.