4 Collier on Bankruptcy, ¶ 553.04[2] (15th ed. 1988); see also In re Rinehart, 76 B.R. 746, 750 (Bankr.D.S.D. 1987). This requirement is to be strictly construed.

Luther is inapplicable to the instant case for several reasons, including that it involved a priority dispute under Section 64(a)(5) of the Bankruptcy Act (ancestor of Bankruptcy Code Section 507(a)); it arose in a liquidation of assets, and not reorganization, setting; it only addressed the question of whether the Commodity Credit Corporation is a separate legal entity from the United States and whether the IRS payment was considered owed to the debtor when no payments were due and owing on the filing date; and it relied on Cherry Cotton Mills, which did not arise in a bankruptcy setting. In re Rinehart, 76 B.R. 746, 751-52 (Bankr. D.S.D. 1987), affd, 88 B.R. 1014 (D.S.D. 1988), aff'd in part, rev'd in part, 887 F.2d 165 (8th Cir. 1989); see also Matter of Mehrhoff, 88 B.R. 922, 930 (Bankr.S.D.Iowa 1988) ("[ Luther arose] under section 64(a)(5) of the Bankruptcy Act which is the predecessor of 11 U.S.C. § 507 (a) . . . . [N]either section 64(a) nor section 507 entails the 'mutuality' consideration found in the offset sections." (internal citation omitted)).

The facts of the case giving rise to this appeal are set out with particularity in the opinion of the Bankruptcy Court. See In re Rinehart, 76 B.R. 746, 747-48 (Bankr.D.S.D. 1987). The facts relevant to the appeal are as follows.

Applicable case law suggests that the debts must be in the same right and must be between the same parties standing in the same capacity. See In re Rinehart, 76 B.R. 746, 750 (Bankr.D.S.D. 1987) and citations therein. 11 U.S.C. § 101(9) defines a "creditor" as an "entity" meeting certain characteristics.

See In re Mehrhoff; 88 B.R. 922 (Bankr.S.D.Iowa 1988), on remand, 104 B.R. 125, 125 (1989) (remand decision after district court concluded there was mutuality between SBA and ASCS); In re Butz, 86 B.R. 595 (Bankr.S.D.Iowa 1988), rev'd, 154 B.R. 541, 544 (S.D.Iowa 1989) ("This court concludes, contrary to the bankruptcy court's ruling, that federal agencies are not separate legal entities within the meaning of section 553(a)."); In re Rinehart, 76 B.R. 746 (Bankr.D.S.D. 1987), aff'd on other grounds, 88 B.R. 1014 (D.S.D. 1988), aff'd in part, rev'd in part, 887 F.2d 165 (8th Cir. 1989). In Rinehart, the district court made clear on appeal that "in deciding whether federal agencies stand in the same capacity for section 553 offsets, there is no authority for distinguishing between the capacity of parties in relation to each other outside of bankruptcy and that capacity following the filing of a bankruptcy petition."

In Rinehart, the SBA obtained approval from the ASCS to offset ASCS amounts owed to the SBA borrower against its claim before the borrower filed a Chapter 11 reorganization petition. In re Rinehart, 76 B.R. 746, 748 (Bankr.D.S.D. 1987), aff'd in part, rev'd in part, 88 B.R. 1014 (D.S.D. 1988), aff'd in part, rev'd in part, 887 F.2d 165 (8th Cir. 1989). After the Chapter 11 case commenced, the ASCS offset occurred before the SBA sought relief from the stay to effect the previously approved offset.

III. Discussion In the ruling on appeal, the district court points out that the undersigned relied in part on In re Rinehart, 76 B.R. 746 (Bankr.D.S.D. 1987) in reaching the lack of mutual capacity finding. The district court found the reasoning of the U.S District Court for South Dakota in U.S. Through Small Business Admin. v. Rinehart, 88 B.R. 1014 (D.S.D. 1988), which reached the opposite conclusion, more persuasive.

As stated above, § 553 does not create a federal right of setoff but preserves existing rights of setoff under Federal or State law. In re Wilde, 85 B.R. 147, 149 (Bankr.D.N.M. 1988); In re Rinehart, 76 B.R. 746, 749 (Bankr.D.S.D. 1987). Setoff issues in bankruptcy are therefore usually determined under the law of the state where the operative facts took place.

The debt and the claim are mutual obligations. In re Reinhart, 76 B.R. 746, 749 (Bankr.D.S.D. 1987); In re Brooks Farms, 70 B.R. 368, 371 (Bankr.E.D.Wis. 1987). In the present case the parties appear to have assumed that both Salyapongse's claim against the estate and the debt he is alleged to owe the estate arose prepetition.

Thus, prior to exercising any right of setoff, a creditor must obtain relief from stay, or an order allowing setoff, from the Bankruptcy Court. See, United States v. Reynolds, 764 F.2d 1004, 1006 (4th Cir. 1985); United States v. Norton, 717 F.2d 767, 773 (3d Cir. 1983); In re Britton, 83 B.R. 914, 919 (Bankr.E.D.N.C. 1988); In re Ketelsen, 78 B.R. 573, 574 (Bankr.D.S.D. 1987); In re Rinehart, 76 B.R. 746, 755 (Bankr.D.S.D. 1987); Matter of Woloschak Farms, 74 B.R. 261, 264 (Bankr.N.D.Ohio 1987); In re Wall, 60 B.R. 512, 515 (Bankr.W.D.Ky. 1986); In re American Cent. Airlines, Inc., 60 B.R. 587, 590 (Bankr.N.D. Iowa 1986); In re Ohning, 57 B.R. 714, 716 (Bankr.N.D.Ind. 1986); In re Wildcat Const. Co., Inc., 57 B.R. 981, 983 (Bankr.D.Vt. 1986); In re Peabody, 51 B.R. 157, 159 (Bankr.D.Me. 1985); In re Conti, 50 B.R. 142, 149 (Bankr.E.D.Va. 1985); In re Garcia, 23 B.R. 266, 267 (N.D.Ill. 1982); In re Hill, 19 B.R. 375, 379 (Bankr.N.D.Tex. 1982); see also, H.R. REP. No. 95-595, 95th Cong., 1st Sess. 377 (1977); S.REP. No. 95-989, 95th Cong. 2d Sess. 91-92 (1978), U.S. Code Cong. Admin. News 1978, pp. 5787, 5877-5878, 6333.