11 U.S.C. § 553 — Setoff

Page 182 TITLE 11—BANKRUPTCY § 553 the security agreement and provisions of applicable law, except to the extent that where the estate ac- quires the proceeds at the expense of other creditors holding unsecured claims, the expenditure resulted in an improvement in the position of the secured party. The exception covers the situation where raw mate- rials, for example, are converted into inventory, or in- ventory into accounts, at some expense to the estate, thus depleting the fund available for general unsecured creditors, but is limited to the benefit inuring to the secured party thereby. Situations in which the estate incurs expense in simply protecting collateral are gov- erned by 11 U.S.C. 506(c). In ordinary circumstances, the risk of loss in continued operations will remain with the estate. HOUSE REPORT NO. 95–595 Under the Uniform Commercial Code, Article 9, credi- tors may take security interests in after-acquired prop- erty. This section governs the effect of such a prepetition security interest in postpetition property. It applies to all security interests as defined in section 101 of the bankruptcy code, not only to U.C.C. security interests. As a general rule, if a security agreement is entered into before the case, then property that the estate ac- quires is not subject to the security interest created by the security agreement. Subsection (b) provides the only exception. If the security agreement extends to proceeds, product, offspring, rents, or profits of prop- erty that the debtor had before the commencement of the case, then the proceeds, etc., continue to be subject to the security interest, except to the extent that the estate acquired the proceeds to the prejudice of other creditors holding unsecured claims. ‘‘Extends to’’ as used here would include an automatically arising secu- rity interest in proceeds, as permitted under the 1972 version of the Uniform Commercial Code, as well as an interest in proceeds specifically designated, as required under the 1962 Code or similar statutes covering prop- erty not covered by the Code. ‘‘Prejudice’’ is not in- tended to be a broad term here, but is designed to cover the situation where the estate expends funds that re- sult in an increase in the value of collateral. The excep- tion is to cover the situation where raw materials, for example, are converted into inventory, or inventory into accounts, at some expense to the estate, thus de- pleting the fund available for general unsecured credi- tors. The term ‘‘proceeds’’ is not limited to the tech- nical definition of that term in the U.C.C., but covers any property into which property subject to the secu- rity interest is converted. Editorial Notes AMENDMENTS 2005—Subsec. (b)(1). Pub. L. 109–8 substituted ‘‘prod- ucts’’ for ‘‘product’’ in two places. 1994—Subsec. (b). Pub. L. 103–394 designated existing provisions as par. (1), struck out ‘‘rents,’’ after ‘‘off- spring,’’ in two places, and added par. (2). 1984—Subsec. (b). Pub. L. 98–353 inserted ‘‘522,’’ after ‘‘506(c),’’, substituted ‘‘an entity entered’’ for ‘‘a se- cured party enter’’, and substituted ‘‘except to any ex- tent’’ for ‘‘except to the extent’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–8 effective 180 days after Apr. 20, 2005, and not applicable with respect to cases commenced under this title before such effective date, except as otherwise provided, see section 1501 of Pub. L. 109–8, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1994 AMENDMENT Amendment by Pub. L. 103–394 effective Oct. 22, 1994, and not applicable with respect to cases commenced under this title before Oct. 22, 1994, see section 702 of Pub. L. 103–394, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–353 effective with respect to cases filed 90 days after July 10, 1984, see section 552(a) of Pub. L. 98–353, set out as a note under section 101 of this title. § 553. Setoff (a) Except as otherwise provided in this sec- tion 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 be- fore the commencement of the case, except to the extent that— (1) the claim of such creditor against the debtor is disallowed; (2) such claim was transferred, by an entity other than the debtor, to such creditor— (A) after the commencement of the case; or (B)(i) after 90 days before the date of the filing of the petition; and (ii) while the debtor was insolvent (except for a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, or 561); or (3) the debt owed to the debtor by such cred- itor was incurred by such creditor— (A) after 90 days before the date of the fil- ing of the petition; (B) while the debtor was insolvent; and (C) for the purpose of obtaining a right of setoff against the debtor (except for a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, or 561). (b)(1) Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, 561, 365(h), 546(h), or 365(i)(2) of this title, if a creditor offsets a mu- tual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insuffi- ciency on the date of such setoff is less than the insufficiency on the later of— (A) 90 days before the date of the filing of the petition; and (B) the first date during the 90 days imme- diately preceding the date of the filing of the petition on which there is an insufficiency. (2) In this subsection, ‘‘insufficiency’’ means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debt- or by the holder of such claim. (c) For the purposes of this section, the debtor is presumed to have been insolvent on and dur- ing the 90 days immediately preceding the date of the filing of the petition. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2602; Pub. L. 98–353, title III, §§ 395, 467, July 10, 1984, 98 Stat. 365, 380; Pub. L. 101–311, title I, § 105, June 25, 1990, 104 Stat. 268; Pub. L. 103–394, title II, Page 183 TITLE 11—BANKRUPTCY § 554 §§ 205(b), 222(b), title V, § 501(d)(19), Oct. 22, 1994, 108 Stat. 4123, 4129, 4146; Pub. L. 109–8, title IX, § 907(n), Apr. 20, 2005, 119 Stat. 181.) HISTORICAL AND REVISION NOTES LEGISLATIVE STATEMENTS Section 553 of the House amendment is derived from a similar provision contained in the Senate amend- ment, but is modified to clarify application of a two- point test with respect to setoffs. SENATE REPORT NO. 95–989 This section preserves, with some changes, the right of setoff in bankruptcy cases now found in section 68 of the Bankruptcy Act [section 108 of former title 11]. One exception to the right is the automatic stay, discussed in connection with proposed 11 U.S.C. 362. Another is the right of the trustee to use property under section 363 that is subject to a right of setoff. The section states that the right of setoff is unaf- fected by the bankruptcy code except to the extent that the creditor’s claim is disallowed, the creditor ac- quired (other than from the debtor) the claim during the 90 days preceding the case while the debtor was in- solvent, the debt being offset was incurred for the pur- pose of obtaining a right of setoff, while the debtor was insolvent and during the 90-day prebankruptcy period, or the creditor improved his position in the 90-day pe- riod (similar to the improvement in position test found in the preference section 547(c)(5)). Only the last excep- tion is an addition to current law. As under section 547(f), the debtor is presumed to have been insolvent during the 90 days before the case. Editorial Notes AMENDMENTS 2005—Subsec. (a)(2)(B)(ii). Pub. L. 109–8, § 907(n)(1), in- serted ‘‘(except for a setoff of a kind described in sec- tion 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, or 561)’’ before semicolon. Subsec. (a)(3)(C). Pub. L. 109–8, § 907(n)(2), inserted ‘‘(except for a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, or 561)’’ before period. Subsec. (b)(1). Pub. L. 109–8, § 907(n)(3), substituted ‘‘362(b)(17), 362(b)(27), 555, 556, 559, 560, 561,’’ for ‘‘362(b)(14),’’ in introductory provisions. 1994—Subsec. (a)(1). Pub. L. 103–394, § 501(d)(19)(A), struck out before semicolon at end ‘‘other than under section 502(b)(3) of this title’’. Subsec. (b)(1). Pub. L. 103–394, § 501(d)(19)(B), sub- stituted ‘‘section 362(b)(14),’’ for ‘‘section 362(b)(14),,’’. Pub. L. 103–394, § 222(b), which directed the amend- ment of section 553(b)(1) by inserting ‘‘546(h),’’ after ‘‘365(h),’’ was executed by making the insertion in sec- tion 553(b)(1) of this title to reflect the probable intent of Congress. Pub. L. 103–394, § 205(b), substituted ‘‘365(h)’’ for ‘‘365(h)(2)’’. 1990—Subsec. (b)(1). Pub. L. 101–311 substituted ‘‘362(b)(7), 362(b)(14),’’ for ‘‘362(b)(7),’’. 1984—Subsec. (b)(1). Pub. L. 98–353 inserted ‘‘, 362(b)(7),’’ after ‘‘362(b)(6)’’, and substituted ‘‘, 365(h)(2), or 365(i)(2)’’ for ‘‘or 365(h)(1)’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–8 effective 180 days after Apr. 20, 2005, and not applicable with respect to cases commenced under this title before such effective date, except as otherwise provided, see section 1501 of Pub. L. 109–8, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1994 AMENDMENT Amendment by Pub. L. 103–394 effective Oct. 22, 1994, and not applicable with respect to cases commenced under this title before Oct. 22, 1994, see section 702 of Pub. L. 103–394, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–353 effective with respect to cases filed 90 days after July 10, 1984, see section 552(a) of Pub. L. 98–353, set out as a note under section 101 of this title. § 554. Abandonment of property of the estate (a) After notice and a hearing, the trustee may abandon any property of the estate that is bur- densome to the estate or that is of inconsequen- tial value and benefit to the estate. (b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of in- consequential value and benefit to the estate. (c) Unless the court orders otherwise, any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title. (d) Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2603; Pub. L. 98–353, title III, § 468, July 10, 1984, 98 Stat. 380; Pub. L. 99–554, title II, § 283(p), Oct. 27, 1986, 100 Stat. 3118; Pub. L. 111–327, § 2(a)(23), Dec. 22, 2010, 124 Stat. 3560.) HISTORICAL AND REVISION NOTES LEGISLATIVE STATEMENTS Section 554(b) is new and permits a party in interest to request the court to order the trustee to abandon property of the estate that is burdensome to the estate or that is of inconsequential value to the estate. SENATE REPORT NO. 95–989 Under this section the court may authorize the trust- ee to abandon any property of the estate that is bur- densome to the estate or that is of inconsequential value to the estate. Abandonment may be to any party with a possessory interest in the property abandoned. In order to aid administration of the case, subsection (b) deems the court to have authorized abandonment of any property that is scheduled under section 521(1) and that is not administered before the case is closed. That property is deemed abandoned to the debtor. Sub- section (c) specifies that if property is neither aban- doned nor administered it remains property of the es- tate. Editorial Notes AMENDMENTS 2010—Subsec. (c). Pub. L. 111–327 substituted ‘‘521(a)(1)’’ for ‘‘521(1)’’. 1986—Subsec. (c). Pub. L. 99–554 substituted ‘‘521(1)’’ for ‘‘521(a)(1)’’. 1984—Subsecs. (a), (b). Pub. L. 98–353, § 468(a), inserted ‘‘and benefit’’ after ‘‘value’’. Subsec. (c). Pub. L. 98–353, § 468(b), amended subsec. (c) generally. Prior to amendment, subsec. (c) read as follows: ‘‘Unless the court orders otherwise, any prop- erty that is scheduled under section 521(1) of this title and that is not administered before a case is closed under section 350 of this title is deemed abandoned.’’ Subsec. (d). Pub. L. 98–353, § 468(c), struck out ‘‘sec- tion (a) or (b) of’’ after ‘‘not abandoned under’’.