## Facts

- Braniff Airways filed a Chapter 11 petition on May 13, 1983.
- Before bankruptcy, Braniff and Exxon had (1) a jet-fuel prepayment arrangement and (2) an open-account relationship for other petroleum products.
- On May 11, 1983, Braniff prepaid Exxon $530,000 for jet fuel to be delivered during the week beginning May 12.
- By the petition date, Braniff had used $96,252.11 in fuel, leaving an unused prepayment balance of $434,972.20 that Exxon owed to Braniff as a refund.
- As of the petition date, Exxon held prepetition claims against Braniff totaling about $1,824.
- A turnover order required Exxon to remit the unused prepayment balance, while permitting a setoff of Exxon’s $1,824 claim, with the remainder payable to Braniff.
- Within 90 days before the petition, Braniff paid Exxon $145,745.30 on the open account; the parties agreed $80,752.80 was protected as ordinary course, leaving $64,992.50 alleged to be avoidable preferences under § 547.
- Braniff sought to recover the alleged preferences and to prevent Exxon from offsetting them against the jet-fuel prepayment refund; the district court denied setoff on the ground that Exxon’s refund obligation was postpetition.

## Issues

1. Whether Exxon’s obligation to refund the unused portion of Braniff’s jet-fuel prepayment was a mutual, prepetition debt permitting setoff under 11 U.S.C. § 553(a).
2. If setoff was permitted under § 553(a), whether the setoff was recoverable under 11 U.S.C. § 553(b) as an impermissible improvement of Exxon’s position within the 90-day prepetition period.

## Decision

- The Fifth Circuit reversed the district court.
- The court held Exxon had a setoff right under § 553(a) because the refund obligation and Exxon’s claims were mutual prepetition debts.
- The court held that any setoff could be subject to recovery under § 553(b) to the extent it improved Exxon’s position during the 90-day prepetition period.
- Because the record was insufficient to apply the § 553(b) insufficiency comparison, the court remanded for further proceedings.

## Legal Principles

- Section 553(a) preserves a creditor’s nonbankruptcy setoff rights when the obligations are mutual debts arising prepetition, subject to Bankruptcy Code limitations.
- A refund obligation created by an unused portion of a prepetition prepayment is a prepetition contract debt; a later turnover order recognizes the obligation but does not create it.
- Mutuality under § 553(a) requires debts between the same parties in the same capacity; a routine commercial prepayment does not create a trust or fiduciary relationship that defeats mutuality.
- Even when setoff is available under § 553(a), § 553(b) may allow the estate to recover the amount by which a prepetition setoff reduced the creditor’s “insufficiency” compared to the creditor’s position 90 days before the petition.
- Application of § 553(b) is fact-dependent and requires sufficient evidence to compare the creditor’s net position at the relevant dates.

## Conclusion

The Fifth Circuit held that Exxon’s duty to refund Braniff’s unused jet-fuel prepayment was a mutual prepetition debt permitting setoff under § 553(a), but remanded to determine whether the setoff was recoverable under § 553(b) as an improvement of Exxon’s position within the 90-day prepetition period.


Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030 (5th Cir. 1987)