GOVERNMENT NOT ENTITLED TO RELIEF FROM AUTOMATIC STAY.

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

GERTNER, D.J.:

MEMORANDUM AND ORDER

October 31, 2000

[1] Appellant, United States of America ("government"), seeks relief from the August 21, 1996, order ¹ of the Bankruptcy Court denying its Motion for Relief from the Automatic Stay to Effect Setoff of Pre- and Post-petition Claims, or, in the Alternative, for Adequate Protection (hereinafter "setoff motion"). ² In the setoff motion, the government requested that the automatic stay imposed by the bankruptcy court be lifted to allow it to setoff tax liability incurred by Calore Express Company, Inc. ("debtor") against monies owed debtor by the General Services Administration ("GSA"). The motion was opposed both by the debtor and by Appellee, Fleet National Bank ("bank"), debtor's primary lender. The bankruptcy court rejected the request on two alternative grounds: 1) the government waived its right to assert both its pre- and post-petition setoff claims; and, 2) even if the setoff claims were not waived, the bank's security interest in debtor's accounts receivable trumped the government's setoff rights under Article 9-312 of the Uniform Commercial Code ("U.C.C.").

[2] The government challenges the decision, claiming that: 1) the bankruptcy court lacked jurisdiction over its post-petition setoff claims, as such claims are not subject to the automatic stay provisions of the bankruptcy code; 2) the court also lacked jurisdiction over the post-petition setoff claims because, at the time the setoff motion was filed, the accounts receivable against which these setoffs were to be asserted were no longer part of the bankruptcy estate; 3) the bank's security interest in debtor's accounts receivable did not trump the government's setoff claims, either under the U.C.C. or under federal law; 4) the facts cited by the bankruptcy court do not support its conclusion that the government waived its setoff rights; and finally, 5) fact intensive determinations, such as the waiver analysis set forth by the bankruptcy court, must be made after an evidentiary hearing rather than a summary proceeding such as a lift-stay hearing. ³ The government requests that I vacate the August 21, 1996, order and direct the bankruptcy court to order the bank to disgorge the amounts which the government claims were wrongfully paid to it, as the holder of debtor's accounts receivable. Because the bankruptcy court wrongfully denied its setoff claims, the government claims that it was forced to pay, at least in part, debts which it did not owe. Thus, the government argues that the bank should be required to return payment: made after its motion was denied, up to the amount which would have been setoff had the motion been allowed: $25,000 (the requested pre-petition setoff debt owed by GSA to debtor and $239,581.83 (the requested post-petition setoff debt.) Alternatively, the government requests a remand for an evidentiary hearing so that it may contest the facts supporting the bankruptcy court's waiver findings.

[3] As I find that the bankruptcy court had jurisdiction to rule on the government's pre- and post-petition setoff claims and that its determination that the government waived its right to assert these claims was not clearly erroneous, I do not reach the remaining issues. Furthermore, as the underlying facts upon which the court based its waiver analysis are not contested (although their significance is disputed), I find that there is no need to remand this case for an evidentiary hearing. Accordingly, the bankruptcy court's order denying the setoff motion is affirmed and the government's appeal is DENIED.

I. BACKGROUND

[4] The underlying facts giving rise to this appeal are not disputed.

[5] On May 11, 1995, debtor, a shipping company, filed a voluntary Chapter 11 petition for bankruptcy. Shortly thereafter, the debtor filed a motion seeking permission to borrow from Shawmut Bank ⁴ so that it could continue to operate as a debtor-in-possession throughout the reorganization. This motion was granted provisionally on May 17, 1995 and by final order on June 27, 1995. The court's order allowed the debtor to borrow an amount up to eighty percent of its outstanding qualified accounts receivable, with a cap of $3,000,000, and up to twenty percent of its pre-petition and post- petition receivables, with a cap of $800,000. In return, debtor granted the bank a senior lien, a super priority claim over all administrative expenses, and a security interest in all of debtor's post-petition assets, including accounts receivable. ⁵ At this juncture, neither of the government agencies involved in this appeal -- the Internal Revenue Service ("IRS"), to whom debtor owed payroll taxes, or the GSA, with whom debtor had an ongoing ⁶ contract for shipping services -- had filed claims or been scheduled as a creditor or debtor. Neither agency was served with the initial borrowing motion or the court's order authorizing this borrowing, although these documents did reach the United States Attorney and the Attorney General's Office as they were served on another government creditor, the Small Business Administration.

[6] Throughout the summer and fall of 1995, the bankruptcy court monitored debtor's borrowing and conditioned its continuance on debtor's payment of post-petition payroll taxes. Indeed, between May 17, 1995, and June 30, 1996, the court held eleven hearings on the subject of further borrowing under the Order.

[7] On November 13, 1995, pursuant to the court's order, debtor filed a statement acknowledging that it owed post-petition taxes, namely $105,518.06 in state and federal taxes for the months of September and October, 1995. Shortly thereafter, the IRS filed a series of claims detailing debtor's tax liability. On November 20, 1995, the IRS filed its first administrative claim, seeking $480,482.52 in post-petition payroll taxes, $104,839.39 of which had accrued as of June 30, 1995, the remainder being debtor's estimated tax liability for the rest of 1995. No setoff was requested. On December 5, 1995, the IRS filed a second administrative claim seeking $208,850.27 in unpaid payroll taxes for the period of June 30, 1995 through December 31, 1995. Again, the IRS claim made no mention of setoff.

[8] On December 7, 1995, the IRS submitted its first proof of claim for unpaid pre-petition taxes in the amount of $146,609.36. The claim included the following: "[t]he amount of all payments on this claim has been credited and deducted for the purpose of making this proof of claim. In filing this claim, claimant has deducted all amounts that claimant owes debtor." On January 25, 1996, the IRS filed a second proof of claim, seeking $3,105,612.90 in pre-petition taxes. This proof of claim contained an amendment to the first stating that most of the amount claimed was secured by tax liens from April and May of 1995 against CFS Air Cargo, another shipping company which the IRS alleged was the "alter ego" of the debtor. In this amendment, the IRS also represented that: "[t]his claim is not subject to any setoff or counterclaim." During the same time period, December of 1995 to January of 1996, debtor submitted its first disclosure statement and proposal for reorganization. The IRS filed no objections, nor did it appear at the hearing. The GSA, which submitted its first filing on February 1, 1996, a pre-petition claim for overcharges of $6,734.24, also made no objection to debtor's disclosure statement, but did note -- for the first time -- that any receivables due to the debtor would be subject to setoff claims of the United States.

[9] The court ultimately approved a third amended disclosure statement, which in March of 1996 included debtor's assessment of its November and December 1995 tax liability as totaling $129,243.79. On February 23, 1996, debtor filed an objection to the IRS' pre-petition tax claims.

[10] In early March of 1996, Henry Riordan ("Riordan"), an attorney with the Tax Division of the United States Department of Justice, entered an appearance for the IRS. While the IRS made no objections to debtor's third amended disclosure statement, on April 1, 1996, it did file a response to debtor's objections to the pre- petition tax claims, as well as its objections to debtor's third amended reorganization plan. This filing was accompanied by an administrative claim seeking $241,416.00 in post-petition taxes. It also included the following statement: "the Bankruptcy Code specifically preserves the United States' right to offset any pre- petition claims of the United States against any pre-petition claims of Debtor" and specifically that "the United States Department of Defense owes . . . debtor $25,000 which is subject to offset." No mention was made of offsets of post-petition debts and obligations.

[11] In early April of 1996, the bankruptcy court established an expedited trial schedule to resolve the disputes between the IRS and the debtor as to the amount of pre-petition taxes owed and to determine the impact of debtor's tax liability upon the reorganization plan. On April 24, 1996, the IRS and debtor filed a Joint Pre-trial Memorandum and Joint Motion to Continue, stipulating that "the creditor United States is the holder of an unsecured priority tax claim in the amount of approximately $1,685,886.74." Debtor admitted that it was unable to pay its own tax liability and that it was liable for some of CFS Air Cargo's tax debt. Debtor also proposed withdrawing its reorganization plan and selling substantially all of its assets pursuant to 11 U.S.C. section 363.7 Significantly, the joint motion made no mention of setoff rights. Upon receipt of the joint motion, the bankruptcy court cancelled both the hearing on debtor's objections to the IRS tax claims and the confirmation hearing on debtor's reorganization plan. Debtor and the bank agreed to continue the borrowing arrangement temporarily until May 6, 1996, a stipulation which the court approved on April 27, 1996. Subsequently, several further extensions were approved by the court. Notices of these extensions were served on Riordan, apparently without objection from the IRS.

[12] On May 31, 1996, debtor filed a motion to sell its assets pursuant to 11 U.S.C. section 363(b) and 365. At the hearing on June 10, 1996, attended by Riordan, the court denied debtor's motion because the proposed sale altered creditors' rights outside of the reorganization plan, failed to provide for payment of IRS administrative and priority claims, and provided for payment of junior claims before IRS priority claims. At the same hearing, debtor and the bank requested an extension of borrowing arrangement until June 17, 1996, an agreement which the court approved. Again, the IRS did not object.

[13] On June 12, 1996, the IRS filed an administrative claim seeking payment of $239,581.83, plus interest and penalties, in post- petition payroll taxes for June 30, 1995 through December 31, 1995. The claim made no mention of setoffs. Nor was the issue raised on June 17, 1996, when the court held a hearing on, and shortly thereafter granted, the bank's Emergency Motion for Relief from the Automatic Stay to Permit Collection or Sale of Accounts Receivable and Liquidation of Tangible Collateral.

[14] At the same time, on June 13, 1996, Mr. Riordan wrote a letter to the Chief of the Collection Branch of GSA, directing it to freeze all payments to debtor, noting that the tax division would seek the bankruptcy court's permission to "effectuate an offset." Neither debtor nor the bank received notice that these actions were being contemplated; neither was able to voice its objections until later in the month when debtor found out that GSA payments were being frozen.

[15] On June 30, 1996, debtor filed an emergency motion for a hearing, claiming that the government's actions violated the automatic stay. The July 2, 1996, hearing was conducted by Judge Hillman, as Judge Feeney was unavailable. Judge Hillman found that the government's actions violated the automatic stay and ordered that the frozen GSA payments be released. ⁸ Judge Hillman suggested that the appropriate means of effecting the desired setoffs would be to file a motion for relief from the automatic stay, which the government did on July 15, 1996. ⁹ A lift stay hearing was held by Judge Feeney on July 30, 1996. ¹⁰ At its conclusion the court ordered the government to file a statement of its liens against the debtor and ordered the bank to file a statement with respect to its private sale of its collateral. The government did so, detailing its tax liens against CFS Air Cargo, an alleged alter-ego of the debtor. The bank's statement indicated that it had received two $950,000 promissory notes as a result of the foreclosure sale, and that debtor owed the bank $2,925,986.05, plus interest in the amount of $404,477.68, plus $75,000 in attorneys fees, as of August 1, 1996. The government's setoff motion was denied on August 21, 1996, at which point the instant appeal was filed.

II. DISCUSSION

A. STANDARD OF REVIEW

[16] The United States District Court has appellate jurisdiction over this matter pursuant to 28 U.S.C. section 158. The bankruptcy court's findings of fact are reviewed under the clearly erroneous standard. In re The Bible Speaks, 869 F.2d 628, 629 (1st Cir. 1989) . Its legal conclusions are, on the other hand, subject to de novo review. In Re Cousins, 209 F.3d 38, 40 1st Cir. 2000).

B. JURISDICTIONAL ISSUES

[17] Rooted in the common law, the setoff mechanism allows entities that owe each other money to apply their mutual debts against each other. See Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18 (1995). The bankruptcy code does not create any new substantive law on setoffs, but incorporates the common law right, imposing a few restrictions upon its exercise. See Darr v. Muratore, 8 F.3d 854, 860 (1st Cir. 1993).

[18] The government claims that the bankruptcy court did not have jurisdiction to rule on its right to setoff post-petition debts against post-petition obligations for two reasons: 1) the automatic stay provisions of the bankruptcy code only govern the setoff of pre- petition debts against pre-petition obligations; or 2) the accounts receivable against which the government sought to exercise its setoff rights were no longer part of the bankruptcy estate.

1. IMPACT OF AUTOMATIC STAY ON SETOFF RIGHTS

[19] While the parties to a bankruptcy proceeding retain their common law setoff rights, they are precluded from implementing these rights while the automatic stay is in place. See Citizens Bank of Maryland v. Strumpf, 516 U.S. at 20. ¹¹ The right to setoff debts during the course of a bankruptcy proceeding is further limited by the requirement that the debts be mutual. See Darr v. Muratore, 8 F.3d at 860. Mutual debts must be held in the same "right," ¹² between the same parties, standing in the same capacity. Id. ¹³ 11 U.S.C. section 362(a)(7) prohibits "the setoff of any debt owing to debtor that arose before the commencement of the case under this title against any claim against the debtor." (Emphasis supplied.) Because the automatic stay provisions of the bankruptcy code only explicitly address the right to setoff pre-petition debts, the government argues that the right to setoff mutual post-petition debts is not subject to the stay at all. See also 11 U.S.C. section 553(a). Accordingly, it concludes that the bankruptcy court lacked jurisdiction to rule on its post-petition setoff rights at the July 30, 1996, lift stay hearing. ¹⁴

[20] As noted by the government, section 362(a)(7), the only section of the code's automatic stay provisions which explicitly prohibits setoffs is limited to setoffs of debts which arose pre- petition. ¹⁵ In contrast, 11 U.S.C. section 362(a)(3) speaks more generally. It precludes creditors from taking "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." The government claims section 362(a)(3) cannot be read as prohibiting post-petition setoffs else section 362(a)(7) would be rendered superfluous. In any case, the government claims Citizens Bank of Maryland v. Strumpf makes it clear that this section does not prohibit setoffs.

[21] The government's reading of Strumpf is too broad while its reading of section 362(a)(3) too narrow. In Strumpf, the Court found that the bank did not violate the automatic stay, either under section 362(a)(3) or section 362(a)(7), by placing an "administrative hold" on the debtor's bank account pending its motion to lift the stay in order to setoff a portion of the assets in debtor's account against a pre-petition loan default. Citizen's Bank of Maryland v. Strumpf, 516 U.S. at 20-21. It did not violate section 362(a)(7), because the bank's temporary refusal to pay did not amount to a setoff as debtor's account balance had not been permanently reduced. Id at 19. Similarly, the freeze on debtor's account did not violate section 362(a)(3) because the bank did not actually take something from the debtor but rather temporarily refused to perform its promise to pay debtor. Id. at 21. The implication is that if the bank had permanently deprived the debtor of funds, both section s would have been violated. Plainly, the language of Strumpf and the language of the statute suggest that certain acts may violate more than one section of the automatic stay statute.

[22] Each section of the automatic stay statute addresses a particular type of action which might arise in the course of a bankruptcy proceeding and which could negatively impact both the debtor's attempt to make a fresh start and the court's efforts to regulate the estate's property. While the subsection s of section 362(a) may be slightly duplicative, no section is superfluous. It stays a broad range of acts, roughly divided between subsection s which pertain to claims against the debtor, arising pre-petition, ¹⁶ and all other actions which would affect the property of the estate.17 Almost any attempt to actually enforce a claim, whether it arose pre-petition or post-petition, could be considered an "act to obtain possession of property of the estate or of property from the estate or to exercise control over the property of the estate" 18 if it were pursued after the petition was filed and the debtor's property became property of the estate.

[23] Furthermore, the legislative history, underlying purposes of Chapter 11 reorganizations, and the existing case law all suggest that setoffs of post-petition debts be subject to the same limitations as setoffs of pre-petition debts, despite the statute's silence on the subject. The automatic stay, while applicable to all bankruptcy proceedings, is especially crucial to the success of Chapter 11 reorganization plans as it serves to protect the cash flow of the struggling business. See In re Rush-Hampton Indus., 98 F.3d 614, 616 (11th Cir. 1996). Indeed, setoffs are specially addressed in the context of a reorganization case as they interrupt the conduct of business and may have detrimental effects on the attempted reorganization. See In re Princess Baking Corp., 5 B.R. 587, 590 (S.D.Cal. 1980) (citing House report at 183, U.S. Code Cong. & Admin. News 1978 at 6144.) It stands to reason that post-petition setoffs would also impact the debtor's cash flow, and thus that the bankruptcy court would have an interest in monitoring such practices. Indeed, the statutory notes accompanying the 1978 revisions to the bankruptcy code's automatic stay provisions, in referring to "[p]aragraph (7) [of subsection (a)]," makes no distinction between pre-petition and post-petition setoffs. House Report No. 95-595, 95th Congress 1st Session, 186 (1977).

[24] The government is unable to cite any case law to the contrary. Indeed, the small body of case law dealing with such setoffs treats them as being subject to the same limitations as pre- petition setoffs. In re Rush-Hampton Indus., 98 F.3d at 616 (IRS should have moved to lift stay before setting off post-petition interest on underpayment of taxes); In re Jag, Inc., 7 B.R. 624, 627 (D.Mass. 1980) (post-petition setoffs subject to same limitations as pre-petition setoffs). Accordingly, I find that the automatic stay governs such setoffs and that the bankruptcy court had jurisdiction to rule on them at the lift stay hearing.

2. JURISDICTION OVER CORE PROCEEDINGS

[25] On June 17, 1996, the bank was granted relief from the automatic stay to collect and sell debtor's accounts, as well as other assets. The government argues that at the time of the hearing on its setoff motion, debtor's accounts were no longer part of the bankruptcy estate. The bankruptcy court no longer had jurisdiction to rule on the priority of its claims relative to that of the bank.

[26] The bankruptcy court's jurisdiction is predicated upon the possession of property. Once property is transferred out of the estate, the jurisdiction of the bankruptcy court over the property is generally said to terminate. In re Service Decorating Co., 105 B.R. 859, 861 (N.D.Ill. 1989). However, whether a post-transfer dispute over former estate property is collateral to, or intricately bound up with the bankruptcy administration is a fact-specific inquiry. Id.

[27] 28 U.S.C. section 157(b)(1) grants the bankruptcy court jurisdiction over all "core proceedings" arising under Title 11. While the statute enumerates a variety of core proceedings, it notes that the list is not comprehensive. The court has jurisdiction over both "motions to terminate, annul, or modify the automatic stay" and "other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship . . . ." 28 U.S.C. section 157(b)(2)(G) & (O). The proceeding at issue fits the latter.

[28] The bank's lift stay motion was granted due to debtor's lack of equity in its assets and inability to provide the bank with adequate protection for the three million dollar debt owed to the bank. At the June 17, 1996, lift stay hearing, the bank's borrowing arrangement with the debtor was extended for another month. When the government filed its setoff motion on July 15, 1996, the collection and liquidation process had just gotten under way. The government's setoff claims stood to have a significant impact on the relief accorded to the bank. At this point, the bankruptcy proceedings were still in flux, as the court had determined that a reorganization was improbable but had not determined what path the proceedings would take. And, the government was still a creditor. The proposed setoffs would certainly impact its relationship with the debtor, and debtor's relationship with the remaining creditors.

[29] On this record, where the government sought to setoff debts subject to the automatic stay and where the proposed setoffs against debtor's accounts receivable would have a significant impact on a recent bankruptcy court decision regarding the administration of the estate, I cannot find that the court erred in assuming jurisdiction over the government's setoff motion.

C. WAIVER ANALYSIS

[30] The allowance or disallowance of setoff rests within the sound discretion of the bankruptcy court. In re Bay State York Co., Inc., 140 B.R. 608, 614 (D.Mass. 1992). Such equitable decisions are reviewed for abuse of discretion. In re Larbar Corporation, 177 F.3d 439, 446 (6th Cir. 1999).

[31] Generally, setoff is a favored remedy. Id However, setoff rights may be waived if they are not asserted in a timely fashion or when a creditor's representations regarding its intent to setoff induce detrimental reliance on the part of another party. See, In re Lykes Bros. Steamship Co., Inc, 217 B.R. 304, 312 (M.D.F. 1997); In re the Custom Center, Inc., 163 B.R. 309, 317 (E.D.Tenn. 1994); In re Gehrke, 158 B.R. 465, 469 (N.D.Ia. 1993); In re Apex Internat'l Mgmt. Services, Inc., 155 B.R. 591, 595 (M.D.F. 1993).

[32] In the instant case, the court based its determination that the government waived its right to assert its setoff claims by:

     1) failing to object to the numerous requests for orders

[33] While the government does not dispute that it failed to assert its setoff rights in all of the instances cited, it argues that it had neither the ability nor the obligation to do so, and that the bankruptcy has misconstrued its inaction as waiving its right to assert the setoff claims. Specifically, the government argues that: 1) it was not properly served with the initial borrowing orders; 2) it did not understand the subsequent orders as impacting its setoff rights; 3) it was unaware that debtor and GSA had an ongoing business relationship; 4) it was not legally required to state its setoff claims in any of its filings; and, 5) the court had notice of its intent to setoff pre-petition debts in the form of GSA's claim on February 1, 1996 and the IRS's objections to debtor's Third Amended plan on April 1, 1996.

[34] The government may be correct in asserting that it was acting in good faith with respect to each of the acts or omissions cited by the bankruptcy court, in that it did not realize that these acts or omissions would result in a finding that it had waived its right to assert its setoff claims. However, the court's waiver inquiry focuses not on whether the government was required to assert its setoff rights at a particular time or in a particular form but more generally on whether they were asserted in a timely fashion. Thus, some courts have held that failure to assert a right to setoff in a proof of claim waives the right, even though no statute requires that setoff claims be asserted in this form. See In re Britton, 83 B.R. 914, 919-21 (Bankr. E.D.N.C. 1988). In the instant case, the court's determination that the government waived its setoff rights was a fair one.

[35] However, the court's position is even stronger. It relied not only on instances where it felt that the government should have known that the opportunity for setoff existed and failed to act, but also on occasions where the government clearly knew that it intended to setoff both pre-petition and post-petition debts but failed to assert these claims. The government's June 13, 1996, directive to the GSA to freeze payments to debtor indicates that the government intended to setoff post-petition debts at least since early June. Moreover, it knew during that month that the stay was lifted to allow the bank to collect on the same accounts receivable against which the government intended to assert setoff claims. Nevertheless, it did not assert its right to setoff for over a month. On this record, I find that the court's denial of the setoff motion does not amount to an abuse of discretion.

[36] Nor was the court's determination that the bank relied to its detriment on the government's representations regarding its setoff claims clearly erroneous. The government not only failed to assert its setoff claims in a timely fashion but also indicated, in its January 25, 1996, proof of claim for over three million dollars in unpaid pre-petition taxes, that the claim was not subject to setoff. Even if this statement was made in good faith at the time because the government had not yet discovered that debtor and GSA had an ongoing business relationship, it was the only indicator the bank had regarding the government's intentions. It is certainly plausible that the this statement, in combination with the government's silence regarding post-petition setoffs, led the bank to believe that no setoffs were planned and further, that this belief factored into the bank's assessment of the value of its security interest in debtor's accounts receivable. Although the government argues that the debt to the bank did not increase significantly over this period of time and that there is no concrete evidence that the bank acted in reliance on the government's failure to assert a setoff claim, I cannot conclude that the court's finding that bank relied to its detriment on the government's representations and omissions regarding its intent to setoff -- a factual finding -- was clearly erroneous.

[37] Finally, the government argues that the court's waiver determination cannot be upheld as the court did not demonstrate that it voluntarily waived its right to assert setoff claims. Generally, a right cannot be waived involuntarily. See In re Pub. Serv. Co. of New Hampshire, 884 F.2d 11, 13 (1st Cir. 1989). The government argues that the acts and omissions cited by the court do not amount to a waiver of its right to assert its setoff claims because it clearly did not intend to waive any rights through its conduct.

[38] In In re Public Service Company of New Hampshire, the First Circuit found that the fact that a creditor paid a debt which it wished to setoff when ordered to do so by the bankruptcy court did not constitute a waiver of its setoff rights because the payment was not voluntary. Id Because the creditor had seasonably and consistently asserted its right to setoff, the claim was preserved. Id In the case at bar, however, the government was under no compulsion to act as it did and in any case, its setoff rights were not seasonably and consistently asserted. This was particularly so during the month of June 1996 when it had all the facts and still failed to act. See In re Metropolitan International, Inc., 616 F.2d 83, 86 (3rd Cir. 1980). Furthermore, the court based its finding of waiver in part on a finding that the bank relied on the government's representations. This finding alone is enough to sustain its decision, whether the government intended to waive its setoff rights through its inaction or not. See In re Brockton Shoe Mfg., 8 F.Supp. 959, 961 (D.Mass. 1934). Given these facts, I cannot conclude that the court's denial of the setoff motion amounts to an abuse of discretion.

D. RIGHT TO AN EVIDENTIARY HEARING

[39] Finally, the government argues that even if the bankruptcy court had jurisdiction over its setoff claims, and even if its right to assert these claims was waivable, the bankruptcy court should not have made the factual findings necessary to its waiver determination in the course of a lift stay hearing.

[40] Massachusetts local bankruptcy rule 27(F) provides that lift stay hearings are consolidated with final non-evidentiary hearings unless the court arranges for a further evidentiary hearing to take place. The government argues that because the bankruptcy court never indicated that its lift stay hearing would be evidentiary in nature, nor was there a subsequent opportunity for an evidentiary hearing, this case should be remanded for such a hearing as the court's factual findings on waiver exceeded the scope of a lift stay hearing.

[41] Although lift stay hearings are summary in nature and limited in scope, no purpose would be served by a remand at this juncture. All of the facts upon which the court based its waiver analysis are uncontested and the parties have been afforded an opportunity for an adversary hearing on the waiver issues in this Court. As an evidentiary hearing would serve no meaningful purpose, the government's request for a remand is denied.

III. CONCLUSION

[42] For the reasons discussed above, the bankruptcy court's order is affirmed and the government's appeal is DENIED.

[43] SO ORDERED.

Dated: October 31, 2000

² This appeal was originally before Judge Stearns but was reassigned after his recusal order of December 27, 1999 [docket entry #27].

³ 11 U.S.C. section 362(d) provides that the bankruptcy court shall grant relief from the automatic stay provisions of subsection (a) "[o]n the request of a party in interest and after notice and a hearing" if the party requesting that the stay be lifted demonstrates cause for such relief. Such motions for relief are similar to requests for preliminary injunctions and do not involve a full adjudication of the merits of the claims or defenses of the parties. See Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 31 (1st Cir. 1994). Rather, they are limited to a determination of whether the party requesting that the stay be lifted has a colorable claim to the property of the estate. Id.

⁴ Now Fleet National Bank ("bank").

⁵ This arrangement allowed debtor to continue receiving cash payments due on its accounts while the bank's interest in debtor's accounts receivable would "roll-over" to future accounts receivable.

⁶ Debtor continued to provide GSA with services for which it received payments post-petition.

⁷ This section defines the rights and powers of the trustee to use, sell or lease estate property in both liquidation cases and reorganization cases.

⁸ In the decision currently on appeal, Judge Feeney notes that Judge Hillman "ruled that, at the June 17, 1996 hearing on the bank's lift-stay motion before this Court, Attorney Riordan had violated his ethical obligations to the parties . . . ." In re Calore Express Company, Inc., 199 B.R. 424, 430 (D.Mass. 1996). However, neither Judge Feeney's ruling, nor the ruling of this court, hinges on the propriety of Riordan's conduct. Accordingly, I make no finding on this issue. I note that the orders issued by Judge Feeney and Judge Hillman in response to a writ of mandamus issued by the First Circuit make it clear that neither Judge intended to find Riordan guilty of professional misconduct. See, In re Calore Express Company, Inc., 228 B.R. 338 (D.Mass. 1998).

⁹ The government sought to setoff a portion of the $25,000 pre-petition debt due to debtor from GSA against the $6,143.22 pre- petition overcharge due GSA from debtor, and the remainder of its $25,000 pre-petition debt against the $3,105,612.90 in pre-petition taxes owed by debtor to the IRS. It also sought to setoff $239,581.83 in post-petition taxes owed by debtor against future payments due from GSA to debtor.

¹⁰ As noted above, lift stay hearings are summary proceedings which do not involve the presentation of witnesses or other evidence. At this hearing, the government clarified that it had complied with Judge Hillman's order to release the frozen assets, and only sought to exercise its setoff rights prospectively. Both the debtor and the bank objected to the government's setoff request. The court raised the issue of whether either the government's conduct or the superpriority granted to the bank in the borrowing orders defeated the government's setoff rights.

¹¹ However, a creditor may move to have the stay lifted in order to effect a setoff. See 11 U.S.C. section 362(d).

¹² The requirement that obligations be owed in the same "right" enforce the rule that joint obligations are not subject to setoff against separate debts in bankruptcy. Lawrence P. King et. al., 5 Collier on Bankruptcy, section 553.031[3] [i] (15th ed. 1992).

¹³ In the instant case, the bankruptcy court never decided whether the debts between debtor, the IRS and GSA were mutual, as it determined that the government had waived its right to setoff even if mutuality was established. On appeal, the bank offers lack of mutuality as an alternate ground for denial of the setoff motion, arguing that because debtor owed the IRS money, but was owed money by the GSA, the debts are not between the same parties and cannot be setoff against each other. Courts are divided as to whether the United States should be considered a single entity for setoff purposes, allowing setoffs such as the one at issue where a debt is owed to one agency while an obligation is owed by another. As I conclude that the bankruptcy court's determination that the government waived its setoff rights was not clearly erroneous, I do not reach the issue of whether mutuality was established.

¹⁴ Although the government did invoke the jurisdiction of the bankruptcy court by seeking its permission to setoff post-petition as well as pre-petition debts, I accept its explanation that the setoff motion was necessitated by Judge Hillman's finding that its independent efforts at setoff violated the automatic stay. Therefore, I find that the government has not, through its actions, waived the argument that the bankruptcy court lacked jurisdiction over post- petition setoffs.

¹⁵ The bank notes that the plain language of section 553 is similarly limited and could be read as solely preserving the right to setoff pre-petition debts and obligations, implying that no right of setoff exists post-petition. While the government characterizes this reading of the statute as "ridiculous", it has been adopted by a number of courts. See In re Sherry & O'Leary, Inc., 148 B.R. 248, 253 (Bankr. W.D. Pa. 1992). However, the bank does not press this argument and most courts have treated this section as preserving the right to setoff of mutual post-petition debts. See In re Davidson Lumber Sales, 66 F.3d 1560 1569 (10th Cir. 1995); In re Mohawk Indus., 82 B.R. 174, 178-9 (Bankr. D.Mass. 1987); In re Fordson Eng'g. Corp., 25 B.R. 506, 511 (Bankr. E.D.Mich. 1982); In re Shoppers Paradise, Inc., 8 B.R. 271, 277-80 (Bankr. S.D.N.Y. 1980). As I see no reason why the right to setoff pre-petition debts should be preserved while the right to setoff post-petition setoffs should be denied, I conclude that such setoff rights are preserved under section 553, subject to the limitations imposed by section 362.

¹⁶ 11 U.S.C. section 362(a)(1), (2), (6) & (7).

¹⁷ See Lawrence P. King et. al., 3 Collier on Bankruptcy, section 362.03[1] (15th ed. 1992).

¹⁸ 11 U.S.C. section 362(a)(3).