In the bankruptcy case of ADI Liquidation, Inc. (f/k/a AWI Delaware, Inc.), Bankr. No. 14-12092 (KJC), the Court considered a motion by creditor Western Family Foods, Inc. (“WFFI”) for relief from the automatic stay to exercise its setoff rights against its general unsecured claim against ADI Liquidation, Inc., et al. (the “Debtors”).  Meanwhile, the Debtors asserted that they also hold certain setoff rights, and have asked for Court approval of the exercise of their setoff rights against claimants who, like WFFI, have asserted administrative priority claims under Bankruptcy Code § 503(b)(9).

In the opinion, the Court found that WFFI requested that its setoff rights trump those of the Debtors.  In denying this request, Judge Carey provided that “there is no basis in the Bankruptcy Code or applicable case law to conclude that a claimant’s setoff rights should trump a debtor’s setoff rights.” Citing In re Circuit City Stores, Inc., 2009 WL 4755253, *4 (Bankr. E.D. Va. Dec. 3, 2009), the Court provided:

The Court, in evaluating setoff, should favor an application that is most likely to result in equal distributions to the Debtors’ creditors as a whole. See In re Colonial Realty Co., 229 B.R. 567, 575 (Bankr. D.Conn. 1999) (holding that the right to setoff is not absolute and must be balanced against the debtor’s duty to maximize assets of the bankruptcy estate and equitable treatment of other creditors.)

At bottom, the Court reiterated that the Bankruptcy Code does not treat a debtor’s and creditor’s right to setoff equally.