In compliance with the Miller Act, which was passed to protect subcontractors and suppliers on federal construction projects, the debtor posted performance and payment bonds from the surety. In exchange, the surety required the debtor to sign a General Indemnity Agreement (the “indemnity agreement”), which “irrevocably assigned, transferred, and conveyed” to the surety “all the [d]ebtor’s rights in, arising from, or related to [the] [b]onds.” The debtor then obtained two loans from the creditor, with the majority of the debtor’s assets serving as collateral. The creditor obtained a perfected security interest in the debtor’s two deposit accounts, both maintained by the creditor. To account for the overlapping interests in the debtor’s assets, the surety and the creditor executed an Intercreditor Collateral Agreement (the “collateral agreement”). The collateral agreement established the respective rights and priorities of the two parties regarding the debtor’s assets. The debtor filed for Chapter 7 bankruptcy, and the creditor subsequently froze the debtor’s deposit accounts. The creditor filed a motion for relief from the automatic stay in order to collect the amounts in the debtor’s deposit accounts based on its setoff rights under the terms of the account agreements and the loan agreements. The surety objected on the grounds that the indemnity agreement and collateral agreement assigned the rights to the funds to the surety. The bankruptcy court granted the creditor’s motion for relief from the stay.
In Hartford Accident & Indem. Co. v. Cap. Credit Union (In Re Pro-Mark Servs.), 673 B.R. 565 (B.A.P. 8th Cir. 2025), the court reversed the bankruptcy court's judgment and remanded for further proceedings. A party “may obtain relief from the automatic stay to exercise its rights of setoff for ‘cause.’” 11 U.S.C. § 362(d)(1). “Generally, a creditor makes a prima facie showing of ‘cause’ by establishing a right of setoff.” In re Ealy, 392 B.R. 408 (Bankr. E.D. Ark. 2008). The court explained that there are four elements necessary for a creditor to establish the existence of a right of setoff: “(1) a debt exists from the creditor to the debtor that arose prepetition; (2) the creditor has a claim against the debtor which arose prepetition; (3) the debt and the claim are mutual obligations; and (4) the creditor has a right to set off the debt under applicable non-bankruptcy law.” United States v. Krause (In re Krause), 261 B.R. 218, 222 (B.A.P. 8th Cir. 2001). In deciding the fourth element, the court ruled that the bankruptcy court erred in deciding the parties’ positions primarily based on the indemnity agreement and state UCC law. The court held that the terms of the collateral agreement governed the priority of the parties because they contractually agreed to vary from applicable UCC provisions. The court remanded the matter to the bankruptcy court to decide the issue on the merits, based on the agreed-upon definitions, rights, and parties' positions under the collateral agreement.
By Taylor O’Brien [email protected]
Edited By Charlie Cole [email protected]
Edited By Kristin Meurer [email protected]
Edited By Hayden Mariott [email protected]