## Facts

- Wild Bills, Inc. (the debtor) filed a Chapter 11 petition on April 23, 1990; the case later converted to Chapter 7 on May 12, 1992.
- Union Trust Company (the bank) was Wild Bills’s depository bank and a major prepetition lender; Wild Bills kept deposit accounts at Union Trust and also owed Union Trust substantial loan debt.
- The mutual relationship created reciprocal obligations: Union Trust owed Wild Bills the deposit balances, and Wild Bills owed Union Trust on its loans (including a term loan originally in the principal amount of $510,000, carried by the bank as “Loan No. 83,” among other obligations).
- Ninety days before the bankruptcy filing, Wild Bills’s loan debt to Union Trust exceeded the funds on deposit by $1,083,431 (the bank’s “insufficiency” for § 553(b) purposes).
- Two days later (88 days before the filing), Wild Bills withdrew funds from its Union Trust account, increasing the insufficiency to $1,094,674.
- During the preference period, funds continued to flow through Wild Bills’s Union Trust accounts, and Union Trust applied account balances against Wild Bills’s loan obligations.
- On January 25 (within 90 days before the petition date), Union Trust declared the loans in default and exercised its setoff rights against the deposit accounts.
- After conversion to Chapter 7, the Chapter 7 trustee, Richard Belford, filed an adversary complaint against Union Trust (and also named Brian Goldwitz and David Goldwitz) seeking to avoid and recover alleged preferential transfers and to recover $101,020.84 as an alleged “improvement in position” attributable to the bank’s setoff activity under 11 U.S.C. § 553(b).

## Issues

1. Whether the bank’s application of the debtor’s deposit balances to the debtor’s loan obligations during the 90-day period constituted avoidable preference transfers under 11 U.S.C. § 547(b), given the bank’s asserted setoff rights.
2. Whether the trustee proved a recoverable “improvement in position” under 11 U.S.C. § 553(b) by showing that Union Trust’s “insufficiency” decreased between the benchmark date (90 days before filing) and the date of setoff, and, if so, in what amount.

## Decision

- The court entered judgment for the defendants and denied the trustee’s request to recover $101,020.84.
- The court treated the challenged applications of deposits as the exercise of a setoff right governed by § 553, rather than as ordinary preference “transfers” analyzed solely under § 547.
- Applying § 553(b)’s arithmetic comparison of “insufficiency,” the court concluded the trustee did not establish a recoverable reduction in insufficiency in the amount claimed.
- Because the trustee did not prove a recoverable improvement in Union Trust’s position within the meaning of § 553(b), the estate could not recapture the setoff.

## Legal Principles

- Section 553(a) generally preserves a creditor’s nonbankruptcy right of setoff in bankruptcy, subject to specified Bankruptcy Code limits.
- A bank’s right to offset a depositor’s account balance against the depositor’s matured loan debt is a classic example of mutual debts that can qualify for setoff (subject to bankruptcy restrictions).
- Section 553(b) authorizes the estate to recover only the amount of any improvement in the setoff creditor’s position during the 90-day prepetition period, measured by comparing “insufficiency” at two points in time.
- “Insufficiency” under § 553(b)(2) is the amount by which the creditor’s claim against the debtor exceeds the mutual debt owing from the creditor to the debtor (here, the loan balance minus the deposit balances).
- The trustee bears the burden to prove the statutory decrease in insufficiency (and the recoverable amount) on the relevant dates; if the record does not support the claimed decrease, recovery is denied.
- Where a creditor validly exercises setoff rights, challenges to the effect of that setoff in the preference period are addressed through § 553(b)’s improvement-in-position framework, not by applying § 547 in a way that would negate § 553’s preservation of setoff.

## Conclusion

In *In re Wild Bills, Inc.*, the bankruptcy court held that Union Trust’s prepetition application of the debtor’s deposit balances to its loan debt was protected as a setoff governed by § 553, and the Chapter 7 trustee could not recover $101,020.84 because the trustee did not prove a recoverable reduction in the bank’s “insufficiency” during the 90-day prepetition period as required by § 553(b).


In re Wild Bills, Inc., 206 B.R. 8 (1997)