This matter is before the Court on the Motion by creditor United States of America, Farmers Home Administration ("FmHA") for Relief from Stay, filed herein on April 2, 1993. The trustee was given notice of this Motion and has apparently chosen to assert no claim to the sum in question herein. The Court conducted a hearing on this matter on May 13, 1993, at which time the parties were given a briefing schedule and the matter was taken under advisement. To date neither party has filed a brief.

The Motion for Relief requests modification of the automatic stay to permit FmHA to setoff the debtors' tax refund claim for the tax year 1992 against FmHA's prepetition claims against the debtors. Setoff is provided for by 11 U.S.C. '553, which states in pertinent part: "...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, ...".

The language makes it clear that the debts must be mutual and the claims relevant to them must have arisen before the commencement of the case, i.e., the filing of the petition. In the case at bar, the debtors filed their petition on February 19, 1993. Schedule D, Creditors Holding Secured Claims, lists a claim by the United States of $70,537.84, secured by a lien on the debtors' real estate. This constitutes the claim of FmHA. This claim was incurred on December 5, 1979; clearly it is prepetition.

The debtors' claim against the United States is for a tax refund for the tax year ending December 31, 1992. As stated by the court in In re Runnels, 134 B.R. 562 (Bkrtcy.E.D.Tex. 1991), a case in which the debtors' claim was for a tax refund for the tax year ending December 31, 1989:

In the opinion of this Court, December 31, 1989, is the appropriate time at which Debtors became entitled to their tax refund. ... The Court is in accord with the explanation advanced by the IRS that on December 31, 1989, all of the events necessary to establish Debtors' tax liability, vel non have already occurred. At that point, Debtors' tax liability, vel non for 1989 was fixed albeit unliquidated. ... Therefore, since Debtors' right to receive their 1989 tax refund from the IRS was established on December 31, 1989, it is clearly a prepetition debt. (Cites omitted.)

At 564. This Court agrees with the Runnels court's reasoning that the significant date is December 31 of the tax year in question, and not April 15 of the following year, as the debtors have apparently argued. In this instance, the debtors' claim against the United States for a tax refund arose on December 31, 1992, before they filed their petition.

Finally, the requirement of mutuality has been met, notwithstanding the fact that the debtors owe a debt to one agency of the United States government and are owed a debt by another. Bankruptcy courts have generally found mutuality in situations involving the Internal Revenue Service and various other federal government entities, including FmHA. See In re Stall, 125 B.R. 754 (Bkrtcy.S.D.Ohio 1991) and Matter of Hazleton, 85 B.R. 400 (Bkrtcy.E.D.Mich. 1988), reversed by the district court for failure of the appellee to file a brief, 97 B.R. 111. As stated by the court in United States v. Tafoya, 803 F.2d 140, 141 (5th Cir. 1986), there is a right of setoff "inherent in the United States Government".

The Court's analysis does not end here, however. If a prepetition setoff had occurred in this matter, the Court would have been bound to apply '553(b). Under that section, if FmHA had set off the debtors' tax refund at the time it accrued, it would have improperly improved its position within the 90 day preference period. However, as pointed out in In re Rooster, 127 B.R. 560 (Bkrtcy.E.D.Pa. 1991), "[c]ourts are divided whether a creditor may be permitted a postpetition setoff when the result would be the same as if a prepetition setoff had occurred--i.e., an improvement of position." At page 571.

The Rooster court concludes that improvement of position may be considered in deciding whether postpetition setoff should be allowed. The court states:

Since setoff is permissive and not mandatory, since it is based upon equitable principles, and since any policy implicit in the Bankruptcy Code of encouraging creditors not to precipitate a debtor's decline by exercising setoff rights prepetition may be supported by recognizing the improvement of position issue as but one factor in the relief from stay matrix, a broad consideration of factors including those defined by section 553(b)(1) is warranted. ... Indeed, the recognition that postpetition setoff is different from prepetition setoff in that the former alone is properly completed after court review suggests that such review can consider more than just the issues posed by section 553(a)--e.g., mutuality of the debts. (Cites omitted.)

At page 572. Other courts have recognized this approach. See Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1041 n. 13 (5th Cir. 1987), and In re Aquasport, 115 B.R. 720, 722-723 (Bkrtcy.S.D.Fla. 1990). This Court agrees that it is appropriate to apply the improvement of position test by consideration of the factors defined in '553(b)(1).

The pertinent language of '553(b)(1) reads as follows:

...if a creditor offsets a mutual 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 than any insufficiency on the date of such setoff is less than the insufficiency 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 immediately preceding the date of the filing of the petition on which there is an insufficiency.

An insufficiency is the amount by which a creditor's claim exceeds a mutual debt owing to the debtor from the same creditor. As set out in In re Hankerson, 133 B.R. 711 (Bkrtcy.E.D.Pa. 1991), reversed on other grounds, '553(b) "...provides that the extent of a creditor's non-allowable improvement is measured only by any change, favorable to the creditor, of any 'insufficiency'. ... [T]he trustee may only recover amounts where the 'setoff insufficiency' is exceeded by the 'beginning insufficiency'." At page 715. In this case, the debtors owed FmHA $70,537.84 90 days before they filed their petition. The I.R.S. became indebted to them in the amount of $1089.00 on December 31, 1992. The beginning insufficiency would be the entire FmHA loan obligation amount of $70,537.84, as no obligation was owed to the debtors by the I.R.S. on the 90th prepetition day.

During the 90-day prepetition period, a debt arose owing from the I.R.S. to the debtors of $1089.00. Therefore the setoff insufficiency would be $68,448.84 ($70,537.84-$1089.00). Since the setoff insufficiency would be exceeded by the beginning insufficiency by $1089.00, that amount would be recoverable by the debtors if it had been set off. In consideration of the foregoing it is therefore the opinion of this Court that FmHA's Motion for Relief from Stay should be overruled. An order in

conformity with this opinion will be entered separately.



By the Court -






Copies to:


David E. Middleton, Esq.

L. Lee Tobbe, Esq.