Tyson Foods Allowed to Assert Setoff Against Preference Claims

A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in...

By Daniel Gill

Aug. 3 — Tyson Foods, Inc. may seek to offset money it may owe to the bankruptcy estate of Quantum Foods, LLC with a debt the bankrupt estate owes Tyson for meat products supplied to the debtor after the bankruptcy case was filed ( Official Comm. of Unsecured Creditors of Quantum Foods, LLC v. Tyson Foods, Inc. (In re Quantum Foods, LLC), 2016 BL 247231, Bankr. D. Del., No. 14-10318, Adv. No. 15-50254 (KJC), 7/25/16 ).

Judge Kevin J. Carey of the U.S. Bankruptcy Court for the District of Delaware on July 25 considered the question for the first time and denied the plaintiff's motion for a judgment that Tyson Foods couldn't assert a setoff claim against a possible judgment to avoid a preferential transfer occurring before the bankruptcy case.

Quantum Foods filed for Chapter 11 protection on Feb. 18, 2014. Chapter 11 allows companies (or individuals) to enjoy protections from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court.

After the bankruptcy case was filed, Tyson Foods supplied meat products to the debtor, and on July 15, 2014, the bankruptcy court entered an order awarding Tyson an administrative expense claim for those products, in an amount greater than $2.6 million. In bankruptcy, post-petition administrative expense claims are paid ahead of debts that accrued before the bankruptcy was filed, or “pre-petition.”

On the other side of the ledger, in March 2015 the Official Committee of Unsecured Creditors appointed in the case filed a complaint against Tyson to avoid and recover “preferential transfers” of more than $13.7 million made by the debtor to Tyson before the bankruptcy case was filed. Bankruptcy Code Section 547 allows a representative of the bankruptcy estate to sue to recover money paid to a creditor during a defined period before the bankruptcy case (generally 90 days, unless the recipient is an insider of the debtor). The law is designed to prevent an insolvent debtor from preferring one creditor over another and to facilitate a dispersal of estate assets to like creditors on an equal and fair footing.

Tyson filed counterclaims against the debtor and asserted it held a right to setoff any potential indebtedness by its post-petition administrative claim, the court said.

Disguised Defense?

The plaintiff committee and the debtor argued that the setoff claim should be considered a “disguised” new-value defense. Bankruptcy Code Section 547(c)(4) provides that a pre-petition payment to a creditor is not an avoidable preference if the creditor gives “new value” to the debtor after the subject transfer.

The court rejected the new value argument, because the defense “necessarily involves pre-petition activity,” and here the administrative claim was authorized post-petition, for product delivered post-petition, the court said.

Addressing the setoff question, the court noted that the Bankruptcy Code section allowing for setoff, 11 U.S.C. §553, expressly relates to obligations arising before the bankruptcy case is commenced, so that section wouldn't apply to the case.

“The judicial consensus is that ‘setoff is only available in bankruptcy when the opposing obligations arise on the same side of the ... bankruptcy petition date,'” the court said. The court concluded that the preference action, necessarily filed after the bankruptcy case, and the administrative expense claim were both post-petition obligations, and therefore Tyson Foods wouldn't be denied the opportunity to assert that it be allowed to setoff its administrative claim against a possible judgment to avoid the alleged preferential transfers.

The creditors committee was represented by Devon J. Eggert and Elizabeth L. Janczak, Freeborn & Peters LLP, Chicago; and Michael J. Joyce, Kevin S. Mann and Christopher P. Simon, Cross & Simon, LLC, Wilmington, Del.

Tyson Foods (and related entity defendants) were represented by Matthew P. Austria, Werb & Sullivan, Wilmington, Del.; and Michael D. Fielding, Husch Blackwell LLP, Kansas City, Mo.

(Correction: This version corrects an error in the amount sought in the complaint.)

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.