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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
In Re:
) Chapter 11
)
RELIANCE ACCEPTANCE GROUP,
) Case No. 98-288 (PJW)
INC., et al.,
)) Jointly Administered
Debtors.
)
_______________________________ ))
CLARENCE WILLIAMS,
))
Plaintiff,
))
vs.
) Adv. Proc. No. A-98-310
)
RELIANCE ACCEPTANCE CORPORATION,))
Defendant.
)
MEMORANDUM OPINION
Laura Davis Jones
Francis A. Monaco, Jr.
Pachulski, Stang, Ziehl,
Joseph J. Bodnar
Young & Jones
Walsh, Monzack and Monaco, P.A.
Suite 1600
1201 Orange Street, Suite 400
919 North Market Street
Wilmington, DE 19801
P.O. Box 8705
Wilmington, DE 19899-8705
Albert E. Fowerbaugh, Jr.
Lord, Bissell & Brook
Robert S. Brady
115 South LaSalle Street
Edwin J. Harron
Suite 3100
Young, Conaway, Stargatt &
Chicago, Illinois 60603
Taylor, LLP
11th Floor, Rodney Square North
Counsel for Interstate Indemnity
P.O. Box 391
Company
Wilmington, DE 19899-0391
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James H. M. Sprayregen
Robert D. Goldberg
Steven C. Florsheim
Biggs and Battaglia
Adam P. Merrill
1800 Mellon Bank Center
J. Chad Mitchell
P.O. Box 1489
Kirkland & Ellis
Wilmington, DE 19899
200 E. Randolph Drive
Chicago, Illinois 60601
Lawrence E. Abernathy
Lawrence E. Abernathy, P.A.
Co-Counsel to the Debtors
P.O. Box 4177
and Debtors in Possession
Laurel, Mississippi 39441
Ronald S. Goldser
J. Gordon Rudd, Jr.
Zimmerman Reed, P.L.L.P.
901 North Third Street
Minneapolis, Minnesota 55401
Counsel for Plaintiff
Date: December 6, 2000
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WALSH, J.
Before the Court is the motion of Reliance Acceptance
Corporation ("Reliance") to stay or dismiss this adversary
proceeding (Doc. # 28) and the request (Doc. # 32) by Interstate
Indemnity Company ("Interstate") to stay a related lawsuit
previously consolidated with the adversary proceeding (the
"Consolidated Suit"). For the reasons set forth below, I grant
Reliance's motion to dismiss the adversary proceeding. I also
order the Consolidated Suit stayed.
BACKGROUND
At issue is whether the plaintiff, Clarence Williams
("Williams"), may continue to assert a right of setoff against
Reliance after having paid his indebtedness to Reliance in full.
The relevant facts are not in dispute.
Williams is the plaintiff in two legal actions against
Reliance. His first action is the Consolidated Suit against
Reliance and Interstate, which he originally filed as a state court
action in Tennessee. Williams' second suit is this adversary
proceeding. Interstate removed and transferred the Tennessee
action to this District and on June 22, 1999, the District Court
ordered it consolidated with this adversary proceeding.
Williams filed both actions on behalf of himself and
"others similarly situated," but has not yet obtained class
certification in either suit. Williams also filed a class proof of
claim in Reliance's bankruptcy case. Claim No. 1911. The proof of
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claim is described as secured based on "setoff rights with respect
to unpaid loan balances of those class members who have not paid
their loans in full." Claim No. 1911 at § 5.
In his suits, Williams essentially alleges that Reliance
force-placed unauthorized and excessive collateral protection
insurance on automobiles and other personalty purchased by
consumers and financed by Reliance. Interstate allegedly issued
the contested policies. Williams himself purchased a 1994 Dodge
which he financed by an installment loan contract subsequently
assigned to Reliance. Williams claims that Reliance, through
Interstate, force-placed automobile insurance on his car in
violation of, and beyond the scope of, that permitted under his
loan agreement. Based on these allegations, Williams asserts a
number of class action claims against Reliance and Interstate
including breach of contract, lack of good faith and fair dealing,
negligence, and common law fraud and deceptive trade practices. In
his adversary proceeding complaint Williams also asserts a right of
setoff against Reliance based on Williams' then outstanding loan
balance to Reliance.
Reliance and related entities filed for chapter 11 relief
on February 9, 1998. Williams filed this adversary proceeding
complaint on June 18, 1998. On July 2, 1998, I entered an order
confirming the debtors' Fourth Amended Joint Plan of Reorganization
(the "Plan"). Article VI of the Plan sets forth a process for
treatment of disputed, contingent and unliquidated claims against
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Reliance, including pre-petition legal actions. Plan, Doc. # 264,
art. VI. The Plan otherwise permanently enjoins all legal actions
against Reliance that are based on previously accrued causes of
action. Id., art. IV, ¶ J at p. 38.
At the Plan confirmation hearing, Williams objected to
confirmation on grounds that it would preclude his ability to
setoff his claim against his outstanding indebtedness to Reliance.
Williams did not otherwise object to the Plan, or its proposed
treatment of pending litigation claims against Reliance. To
resolve Williams' objection, the parties stipulated on the record
that the Plan would not "impair any setoff rights of the Williams'
class action group as a result of the confirmation of the plan of
reorganization." A-98-310 Hearing Transcript, dated June 30, 1998,
at p. 38, ll 21-23. The parties agreed that Williams could
prosecute the adversary proceeding to establish his setoff rights,
but no further. His other claims would be resolved pursuant to
Article VI of the confirmed Plan.
In connection with the adversary proceeding, Reliance
deposed Williams on July 8, 1999. At his deposition, Williams
testified that in May 1999, he purchased a new automobile to
replace the 1994 Dodge financed by Reliance. According to
Williams, as part of the purchase transaction, an unrelated lender,
Community Bank, and the new car dealer, Action Nissan, paid off
Williams' outstanding loan to Reliance. Williams testified that
both he and Action Nissan called to obtain a payoff figure on the
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1994 Dodge. He testified that his balance with Reliance is now
zero.
On discovering that Williams no longer owed it money,
Reliance filed the present motion to stay or dismiss the adversary
proceeding. According to Reliance, Williams cannot have a right
of setoff in the absence of a mutual obligation, i.e., both a claim
against, and a debt owed to, Reliance. Accordingly, it asks to
dismiss the adversary proceeding because Williams is now relegated
to pursing his claims under the process established by Article VI
of the Plan.
Williams does not contest the procedural posture of this
proceeding but denies that paying off his loan altered or modified
his ability to assert a setoff. He argues that a right of setoff
is established at the time the debtor files bankruptcy and is not
affected by a subsequent transfer of funds. Furthermore, Williams
claims that a setoff right may only be resolved in one of two ways,
either by adjudication of his claims against Reliance or by an
intentional waiver. Williams submits that he lacked the required
intent for waiver because he did not mean to extinguish his setoff
right when he bought his new car.
Interstate supports Reliance's motion and requests that
I also stay the Consolidated Suit until Reliance commences the
claim resolution process set forth in the Plan. According to
Interstate, the resolution of Williams' proof of claim in the
bankruptcy process involves the same issues as those implicated in
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1
Unless otherwise indicated, all references to " §___ "
are to a section of the Bankruptcy Code, 11 U.S.C. §
101 et seq.
the prosecution of the Consolidated Suit against Interstate.
Interstate argues that absent a stay, Reliance will be adversely
impacted by discovery in the Consolidated Suit and will incur
significant costs. Furthermore, maintaining two separate actions
may subject the parties to conflicting rulings. Williams has not
filed an objection to Interstate's request.
DISCUSSION
Setoff under 11 U.S.C. § 553.
Setoff in bankruptcy is governed by § 553(a)
1
which
states:
Except as otherwise provided in this section
and in sections 362 and 363 of this title,
this title does not affect any right of a
creditor to offset a mutual debt owing by such
creditor to the debtor that arose before the
commencement of the case under this title
against a claim of such creditor against the
debtor that arose before the commencement of
the case...
11 U.S.C. § 553(a).
As is apparent from the statute, a prerequisite of a
setoff is the existence of a mutual debt and claim between the
creditor and the debtor. Cohen v. The Sav. Bldg. & Loan Co. (In re
Bevill, Bresler & Schulman Asset Mgmt. Corp.), 896 F.2d 54, 57 (3d
Cir. 1990); Public Serv. Co. of New Hampshire v. New Hampshire
Electric Coop., Inc. (In re Public Serv. Co. of New Hampshire), 884
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F.2d. 11, 14 (1st Cir. 1989)("setoff may flourish in bankruptcy
proceedings only where mutuality of obligation exists."). Thus,
courts have held that a setoff cannot exist when the creditor pays
the debt because "[o]nce a debt is paid it is no longer owed, and
therefore the required mutual debts do not exist." United States v.
Morris (In re McCormick), 1993 WL 246001, at *2 (D.Kan. 1993);
Nat'l Bank of Boaz v. Royal Crown Bottling Co. of Boaz, Inc. (In re
Royal Crown Bottling Co. of Boaz, Inc.), 29 B.R. 52, 54 (Bankr.
N.D.Ala. 1981) (any right of setoff "was a right which could be
exercised only before [payment of the] sum to the trustee, which is
another way of saying that this payment by [the bank] extinguished
any such right which it might have had."); accord In re Cloverleaf
Farmer's Cooperative, 114 B.R. 1010, 1018 (Bankr. D. S.D. 1990)("An
offset cannot occur unless funds to be set off are in existence in
a location where the creditor may effect setoff.").
Based on this analysis, it seems clear to me that
Williams lost his right to assert a setoff when he voluntarily paid
his loan to Reliance in full. By paying his indebtedness Williams
extinguished his liability to Reliance and thereby destroyed a
required element of his cause of action, i.e., a mutual claim or
obligation.
Williams acted voluntarily and under no compulsion or
duress. His case is therefore distinguishable from those in which
a creditor transfers money pursuant to a bankruptcy court order or
at a bankruptcy trustee's request. In those cases, a creditor's
right to assert setoff may survive because there is no intent to
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extinguish the underlying liability which gives rise to the
requisite mutuality of obligation. See, e.g., In re Public Serv.
Co., 884 F.2d at 13 (payment of indebtedness pursuant to bankruptcy
court judgment does not render the creditor ineligible to seek
setoff where creditor otherwise asserted and maintained its
rights).
Williams' argument that he did not knowingly extinguish
his setoff and that he thus lacked the requisite intent to waive
the right is of no avail. Williams' payment to Reliance is not a
waiver, but rather, negates a required element of § 553(a). In the
absence of a mutual obligation, there is no ability and accordingly
no right to assert a setoff.
Even if I were to accept Williams' argument that a right
of setoff is created at the outset of the bankruptcy case which
somehow survives payment of the underlying debt, I find Williams is
not entitled to relief here because his subsequent conduct
constitutes a waiver of any such right. The law is well-settled
that setoff is a privilege which a creditor can waive and lose.
See, e.g., In re Metro. Int'l, Inc., 616 F.2d 83, 85 (3d Cir.
1980). A waiver is generally defined as "an intentional
relinquishment or abandonment of a known right or privilege."
United States v. Killen (In re Killen), 249 B.R. 585, 587 (Bankr.
D.Conn. 2000) quoting Johnson v. Zerbst, 304 U.S. 458, 464, 58
S.Ct. 1019 (1938). A waiver may also be found where the creditor's
conduct is inconsistent with a claim of setoff. See, e.g., In re
Metro. Int'l, 616 F.2d at 85-86; In re Holder, 182 B.R. 770, 776
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(Bankr. M.D.Tenn. 1995).
Williams relies on Scherling v. Chase Manhattan Bank,
N.A. (In re Tilston Roberts Corp.), 75 B.R. 76 (S.D.N.Y. 1987) for
the proposition that ignorance of the law negates the requisite
intent for waiver. In Tilston Roberts, the bankruptcy court
refused to find a waiver based on a creditor's mistaken belief that
it had no right of setoff. The creditor, a bank, had agreed to
turn over $252,887 to the chapter 7 trustee which the debtor had on
deposit at the bank. The bank believed that the debtor had no
other loans or obligations owed to the bank. Unbeknownst to the
bank, however, the debtor had a second account at the bank which
was overdrawn by $133,126. The bank discovered the overdrawn
account after it authorized transfer of the debtor's deposit but
before it had transferred the funds. The bank immediately asserted
its right of setoff and put a hold on the $252,887. The trustee
then moved the bankruptcy court for an order directing the bank to
disgorge the funds on the theory that the bank waived its right to
a setoff at the time the Bank authorized the transfer. Tilston
Roberts, 75 B.R. at 77-78.
The bankruptcy court refused to find a waiver and the
district court affirmed. The district court first noted that the
"Second Circuit has repeatedly favored the allowance of setoffs."
Id. at 79. It then affirmed the bankruptcy judge's finding that
the bank could not have intended to waive that of which it had no
knowledge, i.e., a right of setoff based on the existence of the
debtor's second, overdrawn account. Id.
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2
I also note that contrary to the Second Circuit, the
Third Circuit has consistently restricted efforts by
creditors to apply setoff in bankruptcy. See, e.g.,
United States v. Continental Airlines (In re Continental
Airlines), 134 F.3d 536, 542 (3d Cir. 1998) (holding that
the "right of a creditor to setoff in a bankruptcy
reorganization proceeding must be duly exercised in the
bankruptcy court before the plan of reorganization is
confirmed; the failure to do so extinguishes the claim.")
cert. 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.").
The facts of Tilston Roberts do not support Williams'
argument.
2
The court there found that the bank lacked an intent to
waive based on the bank's ignorance of the existence of a mutual
obligation, i.e., the bank initially failed to assert a setoff
based on a mistake of fact. Williams' case would be more analogous
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to Tilston Roberts had Williams, for example, intended to pay off
a debt to another creditor and by mistake, made out the check to
Reliance instead of the other creditor, thereby paying off Reliance
without intending to do so. But Williams does not dispute that he
intended to extinguish his liability to Reliance by having
Community Bank and Action Nissan pay off the Reliance loan in full.
There is no mistake of fact.
Williams' predicament is more like that of the creditor
in Metro. Int'l,
supra
. In that case the Third Circuit held that
a creditor's reliance on erroneous legal advice does not negate its
intent to waive setoff. See Metro Int'l, 616 F.2d at 86. According
to the court:
[The bank's] contention that the waiver was
not valid because it lacked the requisite
intent is untenable. The [bank] can take no
solace in the fact that it acted based upon a
miscomprehension of the law. When the [bank]
expressed its position regarding the alleged
right of setoff, it did so fully cognizant of
the action it was taking. The fact that it
may have been misinformed regarding the
current state of the law does not negate the
intent it possessed at the time of its action.
Indeed, intent is evidenced by clear actions
or language which is indicative of the actor's
resolve. It is distinguishable from motive.
In this case, though the [bank] was motivated
by a misunderstanding of the law, it cannot be
disputed that it fully intended to waive its
right of setoff.
Id.
It seems to me that the reasoning of Metro. Int'l is
applicable here. Williams does not dispute he intended Community
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Bank to pay off his existing loan to Reliance to secure the
purchase of a new car. In fact, Williams himself made calls to
obtain the loan pay-off amount. His ignorance of the legal effect
of such pay-off on his rights under § 553 does not negate his
intent. It is sufficient that Williams intended the actions which
constitute the waiver.
I note in closing that Williams is not precluded from
pursuing his other claims against Reliance. However, Williams must
do so pursuant to the process established in Reliance's confirmed
Plan.
The Request to Stay the Consolidated Suit
.
Interstate requests a temporary stay of the Consolidated
Suit until Reliance initiates the Plan's claim resolution process.
Interstate maintains that permitting prosecution of the
Consolidated Action will undermine the benefits of the claim
resolution process because Williams' complaint against Interstate
will inevitably require the substantial involvement of Reliance.
Williams has not opposed Interstate's request.
I have the authority to stay a lawsuit "against non-
debtors where an identity of interest exists between the debtor and
non-debtor defendants such that the debtor is the real party
defendant and the litigation will directly affect the debtor and,
more particularly, the debtor's assets or its ability to pursue a
successful plan of reorganization." Rickel Home Ctr. Inc. v. Baffa
(In re Rickel Home Ctr., Inc.), 199 B.R. 498, 500 (Bankr. D.Del.
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1996) citing In re Continental Airlines, 177 B.R. 475 (D.Del.
1993).
I hold that the Consolidated Suit falls within this
standard and that a stay of the action is warranted. Williams'
claims against Interstate are based on Interstate's alleged
improper conduct engaged in with Reliance. The discovery in the
litigation will therefore directly implicate Reliance and interfere
with its ability to conclude the consummation of its Plan. It will
also generate duplicate proceedings when Reliance addresses the
same issues under the Plan's claim resolution process. I will
therefore stay prosecution of the Consolidated Suit until Reliance
initiates the claim resolution process against Williams' proof of
claim.
CONCLUSION
For the reasons stated above, Reliance's motion (Doc. #
28) to dismiss this adversary proceeding is granted. Williams
extinguished his right to assert a setoff against Reliance when
Williams voluntarily paid in full his debt to Reliance as part of
a non-bankruptcy, third-party transaction. The dismissal is
without prejudice to Williams to pursue his remaining allegations
against Reliance under the terms of Reliance's confirmed Plan.
Interstate's request (Doc. # 32) to stay the Consolidated Suit is
also granted. All proceedings in the Consolidated Suit against
Interstate are stayed until Reliance commences the claims
resolution process against Williams' proof of claim.
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
In Re:
) Chapter 11
)
RELIANCE ACCEPTANCE GROUP,
) Case No. 98-288 (PJW)
INC., et al.,
)) Jointly Administered
Debtors.
)
_______________________________ ))
CLARENCE WILLIAMS,
))
Plaintiff,
))
vs.
) Adv. Proc. No. A-98-310
)
RELIANCE ACCEPTANCE CORPORATION,))
Defendant.
)
ORDER
For the reasons set forth in the Court's Memorandum Opinion of
this date, the motion (Doc. # 28) of Reliance Acceptance
Corporation ("Reliance") to stay or dismiss this adversary
proceeding is GRANTED and this adversary proceeding is hereby
DISMISSED. The request (Doc. # 32) of Interstate Indemnity Company
("Interstate") to stay the proceedings in action captioned Clarence
Williams v. Reliance Acceptance Corp. and Interstate Indemnity
Company (the "Consolidated Suit") which has been consolidated with
this adversary proceeding is GRANTED. All proceedings in the
Consolidated Suit against Interstate are stayed until Reliance
commences the claims resolution process against Clarence Williams'
proof of claim.
______________________
Peter J. Walsh
Bankruptcy Court Judge
Date: December 6, 2000
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