- Bankruptcy Court Reversed for Refusing to Allow Secured Creditor to Setoff Her Secured Claim Against Adverse Judgment
- November 7, 2013 | Authors: Elizabeth J. Austin; Irve J. Goldman; Jessica Grossarth; Jonathan A. Kaplan
- Law Firms: Pullman & Comley, LLC - Bridgeport Office ; Pullman & Comley, LLC - Hartford Office
In this case, the secured creditor, Sally Ogden (“Ogden”), suffered an adverse judgment in the amount of $226,000 in an adversary proceeding commenced by the trustee of Bolin & Co, L.L.C. (“Bolin”). After judgment, Ogden sought to setoff her liability on the judgment with a secured claim she held against the Bolin estate in the amount of $270,000.
In Ogden v. Chorches (In re Bolin & Co., L.L.C.), 2013 WL 2302078 (May 28, 2013), the Second Circuit ruled that the bankruptcy court abused its discretion in failing to recognize the setoff on the erroneous ground that the trustee’s judgment against Ogden arose post-petition and therefore could not be the subject of setoff under §553(a) since Ogden’s secured claim arose pre-petition. For setoff to apply under §533(a), both debts must arise pre-petition. The Second Circuit reasoned that the judgment against Ogden, while entered post-petition, was based on pre-petition acts and therefore should be considered a pre-petition claim that simply had not been reduced to judgment.
The bankruptcy court further erred, ruled the Second Circuit, in holding that Ogden’s and Bolin’s debts were not “mutual” because Ogden’s claim was secured and the Bolin trustee’s claim was unsecured. According to the Second Circuit, §533 allows for setoff of both secured and unsecured claims, and its mutuality requirement does not demand that debts arise from the same transaction.