In the United States Bankruptcy Court

for the Northern District of Iowa


DENNIS RINDSIG NYGAARD and
NANCY LYDIA NYGAARD
Bankruptcy No. L-91-00895C
Debtor(s). Chapter 7

JAMES NYGAARD et al Adversary No. L-91-0114C
Plaintiff(s)
vs.
DENNIS RINDSIG NYGAARD
et al
Defendant(s)

Ruling Re: Motion for Summary Judgment


The matter before the Court is the motion of plaintiffs, James Nygaard, David Nygaard, and James Hart (acting as conservator for Louise Nygaard) ("the plaintiffs") seeking summary judgment on their complaint which seeks setoff under 11 U.S.C. § 553 and a determination of secured status under 11 U.S.C. § 506(b).(1)

The defendant, debtor, Dennis R. Nygaard ("the defendant") opposes the motion for summary judgment only on the ground that plaintiffs' complaint cannot be granted as a matter of law. The parties have agreed that this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K) & (0) The following opinion granting plaintiff's motion for summary judgment constitutes this Court's findings of fact, conclusions of law, and order pursuant to Fed.R.Bankr.P. 7052.

Background

The facts are not in dispute. In 1982, the defendant asked his father, Norman Nygaard, to give a continuing guarantee to the Emmett County State Bank of Estherville, Iowa, which would enable the defendant to continue his farming operation. Norman Nygaard agreed. On May 15, 1984, Norman Nygaard paid the Emmett County State Bank $24,566.67 pursuant to the guarantee for amounts the defendant owed the Bank. On July 30, 1985, Norman Nygaard died and his estate was probated in the Iowa District Court for Emmett County.

A Temporary Administrator was appointed to investigate any potential claim the estate might have against the defendant. On March 25, 1987, the Temporary Administrator filed his report with the Probate Court. He found that the defendant owed the estate $24,566.67 plus interest at 5% per annum, running from May 15, 1984, to the present. The debt resulted from Norman Nygaard's payment on the guarantee he provided for the defendant.

After notice and a hearing, the Iowa District Court entered an order and decree on November 30, 1987, approving the Temporary Administrator's findings, conclusions, and recommendations. The November 30, 1987 order specifically approved the Temporary Administrator's finding that the probate estate should be able to setoff the $24,566.67 claim against any distribution the defendant was to receive under Norman Nygaard's will. The Iowa District Court instructed the executors of the will to execute a setoff under those terms.

Under Norman Nygaard's will, dated October 31, 1979, and codicil, dated May 21, 1984, he devised and bequeathed a life estate to his wife, Louise G. Nygaard. She was granted the life estate with the authority to use the principal for medical expenses. On August 8, 1985, attorney James Hart was appointed as conservator for Louise Nygaard. Under the final report on the Norman Nygaard estate, and the order approving that final report, James Hart, as conservator for Louise Nygaard, received $115,092.68 with directions to segregate those funds to pay Louise Nygaard during her lifetime with the remaining principal to be paid in equal shares to the defendant, Dennis Nygaard, and to plaintiffs, James and David Nygaard, as remaindermen upon the death of Louise Nygaard. The final report and order approving the final report reiterated that any share of the defendant in the distribution of Norman Nygaard's will would be setoff against the $24,566.67 debt the defendant owed the probate estate. Under the will and codicil, the defendant's maximum share of the estate is 1/3 of $115,092.68, or $38,364.23.

The particular provision of the codicil, Item I, which is relevant here reads:

B. The remainder after said life estate, I give, devise and bequeath equally unto my sons, David Craig Nygaard, James D. Nygaard and Dennis R. Nygaard. If any of my said sons does not survive to the termination of the life estate herein created for my wife, but is survived by a child or children, then the share of such deceased child shall go to his surviving child or children. If any of my said children do not survive to the termination of said life estate and is not survived by a child or children, then the share of such deceased child shall lapse and his share shall go to the other beneficiaries named in this item. The remainder interest herein devised shall be deemed to be vested remainder subject to divestment in the event any of my said children dies before termination of the life estate not survived by a child or children.

Hence, in order to receive his share of the probate estate, the defendant is required to survive the life tenant, Louise Nygaard.

Discussion and Conclusions of Law

Since the parties agree there is no genuine issue of material fact, the only question here is whether the plaintiffs are entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c).

The plaintiffs argue that they are entitled to a setoff in the defendant's bankruptcy case. In particular, they contend that this Court should honor the Iowa District Court ruling on the setoff and, pursuant to § 553, find that they are entitled to a setoff in the bankruptcy. Moreover, they ask the Court to grant them secured status under § 506(a)(2) until the setoff can be executed in accordance with the terms of the Iowa District Court ruling. The defendant argues that a setoff is not available to the plaintiffs in this bankruptcy because the setoff they seek does not qualify under the requirements of § 553. Specifically, the defendant argues that the debt the probate estate owes the debtor is inchoate, and that inchoate debts may not be setoff in bankruptcy because the § 553 mutuality requirement cannot be satisfied.

The provision governing this dispute is § 553(a) which provides, in relevant 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. . . .

This section does not create a new right of setoff, rather "[i]t merely preserves any right of setoff accorded by state law." Alexander & Jones v. Soyran Bank (In re Nat Warren Constructing Co. , Inc.), 905 F.2d 716, 718 (4th Cir. 1990) (quoting Dunham v. SMI Indus. Com., 882 F.2d 881, 883 (4th Cir. 1989 )).(3) The section essentially places three limitations on the state setoff right:

1. A debt exists from the creditor to the debtor and that debt arose prior to the commencement of the bankruptcy case.

2. The creditor has a claim against the debtor which arose prior to the commencement of the bankruptcy case.

3. The debt and the claim are mutual obligations.

In re Allen, 135 B.R. 856, 860 (Bankr. N.D. Iowa 1992); Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1035 (5th Cir. 1987) (quoting In re Nickerson & Nickerson, Inc., 62 B.R. 83, 85 (Bankr. D. Neb. 1986)); see also In re Lundell Farms, 86 B.R. 582, 584 (Bankr. W.D. Wis. 1988) (listing the same necessary elements).

The plaintiffs have established their right to a setoff under state law. That is really not in dispute. The Iowa District Court has entered two orders specifically recognizing the right of the probate estate to setoff any distribution to the debtor against the debt which the debtor owes the estate. This Court will not reopen the question of whether the state law provides a right to setoff. Moreover, the Court believes the doctrine of issue preclusion prevents this Court from doing so. The only question which this Court may address here is whether the limits Congress placed on setoffs otherwise available under state law would prevent the setoff in this case.

Essentially, these limits are timing and mutuality. Amelbeck Hosp., Inc. v. Buckenmaier (In re Buckenmaier), 127 B.R. 233, 236 (9th Cir. B.A.P. 1991). The defendant argues that mutuality is lacking in this case and, therefore, setoff should be denied. The defendant contends that he has an inchoate future interest which cannot be deemed to be mutual to any other debts, including the debt he owes Norman Nygaard's probate estate.

Mutuality for the purpose of § 553 means "both obligations be held by the same parties, in the same right or capacity. . ." In re Express Freight Lines, Inc., 130 B.R. 288, 291 (Bankr. E.D. Wis. 1991) (quoting In re Denby Stores, Inc., 86 B.R. 768, 777 (Bankr. S.D.N.Y. 1988)) (other citations omitted). Similarly, the Fifth Circuit has noted that mutuality exists under § 553 when each party "owns his claim in his own right severally, with his right to collect in his own name against the debtor in his own right and severally." Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1037 (5th Cir. 1987) (citations omitted). Essentially, "something must" be "owed" by both sides. Buckenmaier, 127 B.R. at 238 (quoting 4 COLLIER ON BANKRUPTCY §§ 553.04, 553.18 (15th Ed. 1990)).

The Court concludes the mutuality requirement is satisfied in this case. The defendant owes the Norman Nygaard probate estate $24,566.67. The Norman Nygaard probate estate owes a contingent debt to the defendant of one-third of the remaining estate. Simply, the parties owe each other the mutual debts. Iowa case law specifically notes that mutuality is not effected by the fact that one of the debts is not due at the time setoff is requested. Goeman v. Live Stock Nat. Bank, 238 Iowa 1088, 29 N.W.2d 528 (1947) .

Here, defendant essentially argues that due to the inchoate nature of the future interest, there is no "debt" which the probate estate currently owes to the debtor. Hence, if no debt is "owed" then mutuality is lacking. See Buckenmaier, 127 B.R. at 238. The case of In re Lott, 79 B.R. 869 (Bankr. W.D. Mo. 1987) undermines the defendants' argument. The Lott court concluded that a future interest in property is a "debt owing by a creditor to the debtor" within the meaning of § 553 and, therefore, is subject to setoff. Id. at 872-73. The parties agree that Lott addressed a similar set of facts. The defendant contends, however, that the Lott court's conclusion is not supported by authority or reason. This Court disagrees.

The plain language of the Bankruptcy Code and case law support the rationale in Lott. Section 553(a) requires that a mutual debt be owing from the creditor to the debtor which arose before the commencement of the debtor's bankruptcy case. Debt is defined in § 101(12) as "liability on a claim." The Bankruptcy Code defines "claim" at § 101(5)(A) as "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." (emphasis added). The U.S. Supreme Court observed that the definition of "debt" and "claim" under the Bankruptcy Code are coextensive. Pennsylvania Dept. of Public Welfare v. Davenport, __ U.S. _, 110 S. Ct. 2126, 2128 (1990). Hence, this Court concludes that under Bankruptcy Code definitions the § 553(a) requirement of a debt owed from a creditor to the debtor includes a contingent, unmatured, or unfixed debt.

The Buckenmaier court, addressing a very similar argument, reached a similar conclusion on nearly identical reasoning. The Buckenmaier court found that in spite of the fact the "claims may never come into being" and are subject to "multiple contingencies," mutuality exists nonetheless. 127 B.R. at 239. The court reasoned that the Bankruptcy Code's "expansive definitions of the terms 'claim' and 'debt' protects the right of a creditor to assert a setoff despite the lack of certainty that the claim will actually accrue." 127 B.R. at 239.

Here, Norman Nygaard's will and codicil characterize the remainder interest left to the defendant, Dennis Nygaard, as being "vested subject to divestment." The condition of divestment being Dennis Nygaard failing to survive the life tenant, Louise Nygaard. The plaintiffs have consistently referred to this remainder interest as being "vested." The affidavit plaintiffs offer in support of this summary judgment motion refers to the interest as "vested". The defendant has not opposed the characterization of his remainder interest as "vested", nor has he expressly argued that the interest is more appropriately characterized as a contingent remainder.

The defendant has argued, however, that his interest is inchoate and implicitly that it is a contingent remainder. There is some support for that position in Iowa case law. In Matter of Estate of Ruhland, 452 N.W.2d 417, 418-19 (Iowa 1990), the Iowa Supreme Court quoted authority stating that characterizing a remainder interest under the will as "vested" does not control whether the remainder is vested or contingent if the elements of "vesting" are not satisfied. The Ruhland court went on to find that an interest is contingent if the instrument imposed a condition of survival to acquire the interest. Id. 419-20.

Here, the will and codicil of Norman Nygaard make the defendant's survival a condition of his obtaining an interest in 1/3 of the remainder of the life estate. The will and codicil also provide an alternative devise of the property in case the defendant does not survive the life tenant, Louise Nygaard. The Ruhland court noted that an alternative devise is an additional factor indicating that the instrument imposed a condition of survival and, therefore, was a contingent remainder interest. Id. at 421.

However, even if this Court assumes arguendo that the interest of Dennis Nygaard is a contingent remainder, that assumption will not help the defendant defeat the plaintiffs' § 553 setoff request. Contingent remainders still are recognized interests in property. Cox v. Cox, 357 N.W.2d 304, 306 (Iowa 1984) (recognizing that contingent remainder was sufficient interest in property to allow holder of contingent remainder to an accounting); Skelton v. Cross, 222 Iowa 262, 271-72, 268 N.W. 499, 504-05 (1936) (contingent remainder enough of interest in property that holder of contingent remainder could bring an action to quiet title); Ward v. Meredith-, 186 Iowa 1108, 1116, 173 N.W. 246, 249 (1919) (contingent remainder holder could take action to protect its interest in property even though not yet vested, and may never be).

Here, the contingent remainder interest arose prepetition, at the time Norman Nygaard died and his will took effect. Likewise, the debt on the contingent remainder became owing prepetition. As the Court has previously pointed out, a debt owing can be a contingent debt. Here, the contingent remainder is (for the defendant) at best a contingent debt of the estate. Since a contingent debt is a "debt" under the Bankruptcy Code, the Court concludes that the debt here satisfies the § 553 requirements for setoff. As the Buckenmaier court observed, "the Bankruptcy Code's expansive definitions of the terms 'claim' and 'debt,' protects the right of a creditor to assert a setoff despite the lack of certainty that the claim [or debt] will actually accrue." 127 B.R. at 239.

Moreover, other courts, likewise, have rejected the defendant's argument that an inchoate interest cannot serve as the basis for setoff. A number of cases, for example, have found that a debtor's inchoate right to a tax refund from the IRS can be subject to setoff against an IRS claim under § 553(a). See, e.g., In re Rozel Industries, 120 B.R. 944, 950-51 (Bankr. N.D. Ill. 1990) (citing In re Mason, 79 B.R. 786 (Bankr. N.D. Ill. 1987); In re Eggemever, 75 B.R. 20 (Bankr. S.D. Ill. 1987); and In re Wilson, 29 B.R. 54 (Bankr. W.D. Ark. 1982)). The Wilson case is the leading case on this issue. The Wilson court reasoned that the tax return would be property of the debtor's estate under the broad definition of § 541. 29 B.R. at 57. The case then observed:

[g]iven the fact that the, albeit inchoate, right to a tax refund was 'property of the estate' at the time of the filing of the debtors' petition herein, it would be anomalous to now hold that it concurrently lacked sufficient specificity and mutuality to permit an offset . . . under 11 U.S.C. § 553. Id.

Id. at 57-58.

That reasoning also applies equally in this case. Most bankruptcy cases have found that future interests (and in particular, contingent remainders) are property of the bankruptcy estate in spite of their inchoate nature. See, e.g., In re Hablit, 89 B.R. 756, 757 (Bankr. C.D. Ill. 1986) (contingent remainder); Mann v. Kreiss (In re Kreiss), 72 B.R. 933, 939 (Bankr. E.D.N.Y. 1987) (contingent remainder); In re Reynolds, 50 B.R. 20, 21 (Bankr. C.D. Ill. 1985) (contingent remainder); Official Comm. Unsecured Creditors v. PSS Steamship Co. (In re Prudential Lines, Inc.), 107 B.R. 832, 838 (Bankr. S.D.N.Y. 1989) ("contingent and future interests of a debtor are estate property"); In re Landis, 41 F.2d 700 (7th Cir. 1930) (contingent remainder); see also H.R. Rep. No. 595, 95th Cong. 1st Sess. 175-76 (1977) reprinted in U.S.C.C.A.N. 1978, pp. 5787, 6136 (stating that "contingent interests and future interests, whether or not transferable by the debtor" are property of the estate). But cf. In re Hicks, 22 B.R. 243, 245 (Bankr. N.D. Ga. 1982) (contingent remainder not property of estate under § 541(a)(5)). Following the Wilson court's reasoning, if a contingent remainder is a definite enough interest to constitute property of the estate under the broad definition of § 541, then it would be anomalous to find that a contingent remainder is not definite enough to constitute a § 553 "debt" given the broad definitions provided in § 101. Hence, this Court concludes that the contingent remainder constitutes a "contingent debt" under § 553(a), which is "owed" to the debtor prepetition and is subject to setoff.

In summary, this Court concludes that the debt owed to the estate of Norman Nygaard may be set off against the debtors' remainder interest in the property bequeathed to Louis G. Nygaard, as life tenant, with remainder interest to Dennis Nygaard, James Nygaard, and David Nygaard. Accordingly, plaintiffs' motion for summary judgment should be granted.

ORDER

IT IS THEREFORE ORDERED plaintiffs' motion for summary judgment is granted. Pursuant to the decree entered by the Iowa District Court in the Norman Nygaard probate estate proceedings, the debt owing by the debtor, Dennis Nygaard, to the Norman Nygaard estate may be setoff against the debtor's remainder interest in the property bequeathed to Louise Nygaard, as life tenant, with remainder interest to Dennis Nygaard, James Nygaard, and David Nygaard.

DONE AND ORDERED this 22nd day of April, 1992.

Michael J. Melloy
Chief Bankruptcy Judge


1. All statutory references are to Title 11 of the United States Code ("the Bankruptcy Code") unless otherwise indicated.

2. Section 506(a) provides, in relevant part, that "[a]n allowed claim of a creditor . . . that is subject to setoff under section 553 . . . is a secured claim . . . to the extent of the amount subject to setoff . . ."

3. This section also recognizes and preserves setoffs specifically provided for under Federal law. See Allen, 135 B.R. 856, 860-871 (allowing set-off in bankruptcy which was specifically provided for under federal regulations).