Case No. 01-1430 (JBR), Jointly AdministeredUnited States Bankruptcy Court, D. Delaware
November 14, 2003
Sheldon K. Rennie, Michael G. Menkowitz, Fox Rothschild LLP, Wilmington, Delaware, for Christine C. Shubert
Richard G. Smoley, Nicholas J. Cermona, Kaye Scholer LLP, New York, for Christine C. Shubert
William F. Taylor, Jr. Katharine L. Mayer, McCarter English LLP, Wilmington, Delaware, for BEA Systems, Inc.
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MEMORANDUM OPINION
JOEL B. ROSENTHAL, Bankruptcy Judge
FACTS
Before the Court is BEA Systems, Inc.’s (“BEA”) Motion For Relief From Stay and to Allow Exercise of Setoff Rights (Doc. #3878) and the Trustee’s[1] Demand for Turnover of Estate Property Pursuant to 11 U.S.C. § 105, 541, 542 and 543 (Doc. #3937). After briefing by the parties and oral argument, and for the reasons set forth below, BEA’s Motion is DENIED and the Trustee’s Demand for Turnover of Estate Property is GRANTED.
Since the parties agreed that no factual dispute exists (no evidentiary hearing was requested or held), the Court briefly states the facts as follows. Prepetition, Winstar Communications, Inc. (the “Debtors” or “Winstar”) and BEA entered into a three-year Software License Agreement to provide Winstar with certain software, support and maintenance services.
On or about November 5, 1999 (the “November 1999 Sale”), BEA sold software, and provided support and maintenance for the software to Winstar in the amount of $8,575,000. In connection with the sale, Winstar paid sales taxes in the amount of $350,437.50 to BEA as agent for the Commonwealth of Virginia. See Va. Code Ann. § 58.1-625. Subsequent to Winstar’s filing for bankruptcy protection, Winstar advised BEA of Winstar’s tax exemption[2] and BEA filed an amended tax return with the State of Virginia seeking a refund of the sales tax paid in connection with the November 1999 Sale. The State of Virginia refunded BEA the sales tax and accrued interest for a total of $437,963.26.
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The Debtors filed for protection under Chapter 11 of the Bankruptcy Code on April 18, 2001. The Debtors’ Chapter 11 was converted to a liquidation case under Chapter 7 of the Bankruptcy Code in January of 2002. BE A filed a proof of claim for its prepetition unsecured claim in the amount of $1,740,037.50 for unpaid software and services.
DISCUSSION
The Bankruptcy Code does not create the right to set off but provides for the exercise of a right to setoff by giving the creditor, who has a right to setoff, a secured status. See In re Delta EnergyResources, 67 B.R. 8, 10 (Bankr.W.D.La. 1986). Section 553 provides in pertinent part:
Except as otherwise provided in this section and in sections 362 and 363 of this title, 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 . . .
11 U.S.C. § 553.
In order for a creditor to establish its rights under § 553, the creditor must show the following:
1) a debt owed by the creditor to the debtor which arose prior to the commencement of the bankruptcy case;
2) a claim of the creditor against the debtor which arose prior to the commence of the bankruptcy case; and
3) the debt and claim must be mutual obligations.
Michigan Consol. Gas Co. v. Fred Sanders Co. (In re FredSanders), 33 B.R. 310, 311 (Bankr.E.D.Mich. 1983), quoting,Waldschmidt v. Columbia Gulf Transmission Co. (In re Fulghum ConstructionCorp.), 23 B.R. 147, 151 (Bankr.M.D.Tenn. 1982). Moreover, for the debt and the claim to be a mutual obligation it “must be in the same right and
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between the same parties, standing in the same capacity.”Id. at 312, quoting, Collier on Bankruptcy ¶ 553 at 553-22 (15th ed. 1983).
Here, there is no mutuality of obligations. BEA has a claim against the Debtors for software and services rendered from October 30, 2000 through October 29, 2001, and consulting services rendered from October 2000 through March 2001. However, the tax refund claim is from the November 1999 Sale. More specifically, BEA collected and remitted the taxes from the November 1999 Sale in its capacity as agent for the Commonwealth of Virginia. The Virginia Statute on tax collocation provides in part that “[a]ll sums collected by a dealer . . . shall be deemed to be held in trust for the Commonwealth.” Va. Code Ann. § 58.1-625. Having realized that Winstar was exempt from paying taxes on the November 1999 Sale, Winstar advised BEA of the exemption and BEA filed an amended tax return with the Commonwealth of Virginia. Thereafter, the State of Virginia refunded the sales tax with interest in the amount of $437,963.26 to BEA. Thus, BEA received the refund in an agency capacity and not individually. Because BEA received and holds the tax refund as agent for the Commonwealth of Virginia, BEA is directed to turnover the refund in the amount of $437,963.26, plus all interest accrued thereon that BEA is presently holding, as it constitutes property of the Debtors’ estates.
Having determined that no mutuality exists, the Court will not address the issues as to whether the tax refund is a prepetition or a postpetition claim.
Moreover, the Court is not making a determination that BEA’s failure to assert its right to setoff on in its proof of claim constitutes a waiver of its right to setoff, since at the time the proof of claim was filed BEA was unaware they had a setoff claim.
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CONCLUSION
For the foregoing reasons, the Court denies BEA’s Motion for Relief From Stay and to Allow Exercise of Setoff Rights, and grants Winstar’s request for an Order Compelling Turnover of Estate Property Pursuant to 11 U.S.C. § 105, 541, 542 and 543.
A separate order will be issued.
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