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* CDI Trust v. U.S. Electronics, Inc. (In re Commc'n Dynamics, Inc.), 382 B.R. 219 (Bankr. D. Del. Feb. 2008) (Walrath, J.)
Damages from the debtor's post-petition rejection of a contract could be setoff against prepetition debts owed to the debtor. The plaintiff trust was created under the terms of the confirmed plan and assigned the rights to collect unpaid amounts of two pre-petition notes for the benefit of unsecured creditors. The promissory notes at issue were initially executed by the defendant in favor of the debtors under the terms of a pre-petition asset purchase agreement. While the defendant still owed some $4 million on the notes, it claimed the right to setoff its "rejection damages" from the debtor's post-petition rejection of a pre-petition distribution agreement between the defendant and the debtors (of which the debtors were in material default as of the petition date). The trust commenced this adversary proceeding to recover the amounts due on the notes and (for the purposes of this opinion) moved for summary judgment and a declaration that the defendant had no right to setoff or to recoup its rejection damages against the amounts due under the promissory notes.
The court first noted that a right of setoff would be independent from any contractual rights and remedies. In this particular case, the asset purchase and distribution agreements did not expressly waive the defendant's setoff rights. Furthermore, principles of equity alone did not mandate that the defendant should give up its setoff rights simply because the plan would otherwise be a bad deal for unsecured creditors.32 All other factors indicated that the defendant may have a right of setoff or recoupment. The debtors' right to payment on the notes accrued pre-petition, and, contrary to the trust's misplaced reliance on Delta Air Lines,33 the court concluded that the defendant's rejection damages accrued pre-petition, as a matter of law. Because both rights accrued pre-petition, the defendant could potentially setoff its rejection damages against pre-petition debts owed to the debtors, as long as the debts were mutual. Mutuality of the debts, however, was a matter to be decided after a trial on the merits. Accordingly, the court denied the trust's motion for summary judgment.
* In re Touch America Holdings, Inc., 381 B.R. 95 (Bankr. D. Del. Jan. 2008) (Carey, J.) Just how broad is the scope of subordination under section 510(b)? Follow the trail: A group of former ERISA plan participants commenced an ERISA class action against former officers and directors of the debtors, asserting claims for breaches of fiduciary duties. The underlying allegations in that action were that the former officers and directors continued to use failing company stock to match employees' plan contributions and restricted the employees' ability to transfer the company's stock, but that the officers and directors knew the company's stock posed a high-risk of investment. The former directors and officers filed proofs of claims in the bankruptcy case seeking reimbursement, indemnification, and contribution to the extent they were held liable in the ERISA litigation. The liquidating chapter 11 plan trustee moved to
32 The court noted that the committee had a voice in the confirmation process and failed to raise that issue before confirmation.
33
In In re Delta Air Lines, Inc., 341 B.R. 439, 448 (Bankr. S.D.N.Y. 2006), the bankruptcy court held that damages arising from a post-petition rejection of a contract could not be setoff against pre-petition obligations owed to the debtor. This court disagreed.
