TSLC I, Inc.

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Case 8:04-bk-24134-MGW Doc 1054 Filed 11/01/05 Pageiof8

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION

In res:
TSLC I, Inc., Case No. 8:04-bk-24134-MGW
Chapter 11
Debtor(s). Jointly Administered
/
Memorandum Decision Approving Administrative
Expense Claim of Avondale Mills, Inc.
Avondale Mills, Inc. (“Avondale”) was one of four critical

vendors paid in this case by the debtor, Tropical Sportswear
Int’l Corporation (“Debtor”). Pursuant to the order approving
the payment of the four critical vendors (“Critical Vendors
Order”) (Doc. No. 164), Avondale was paid 77.5 percent of its
pre-petition claim as preliminarily calculated by the Debtor and
Avondale subject to the “ultimate” allowance of the unsecured
claim. That is, if the amount preliminarily paid under the
Critical Vendors Order exceeds the ultimate allowed claim, then
Avondale must disgorge any amount it was paid that was in excess
of 77.5 percent of its allowed claim.

Subsequent to the petition date, Avondale shipped
additional goods to the Debtor on credit. The Debtor has
asserted a right of setoff against the amounts owed for these
post-petition deliveries based upon Avondale’s delivery of

defective goods pre-petition. Because this right of setoff

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

Case 8:04-bk-24134-MGW Doc 1054 Filed 11/01/05 Page 2of8

should have been asserted with respect to the resolution of
Avondale’s pre-petition claim, the Debtor may not now assert
this right of setoff against post-petition amounts owed to
Avondale. Rather, the setoff may only be asserted to reduce the
amount of the pre-petition claim with the result that to the
extent that Avondale received more than 77.5 percent of its pre-
petition claim under the Critical Vendors Order, Avondale must
disgorge such excess. The amount owed to Avondale for its post-
petition deliveries shall be allowed as an administrative
expense of this chapter 11 case.

Procedural and Factual Background

On December 16, 2004, the Debtor and certain subsidiaries
each filed a voluntary petition for relief under chapter 11 of
the Bankruptcy Code. The Court has jurisdiction over this
matter pursuant to 28 U.S.C. section 1334. This is a core
proceeding pursuant to 28 U.S.C. section 157(b) (2).

This matter came before the Court at a final evidentiary
hearing held on August 2, 2005, upon Avondale’s application for
payment of an administrative claim based on Debtor's post-
petition setoff ("Application"). The Application seeks entry of
an order under section 503 of the Bankruptcy Code for allowance
of an administrative claim due to an allegedly improper setoff

by the Debtor.

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Prior to the filing of these bankruptcy cases, the Debtor
conducted business with a variety of vendors, including
Avondale. As of the petition date, the Debtor owed Avondale
$1,472,355.49.

On the Petition Date, the Debtor filed a motion to pay
Avondale’s and other vendors’ pre-petition claims as critical
vendors. The Official Committee of Unsecured Creditors
(“Creditors’ Committee”) filed an objection to that motion.
The Creditor’s Committee, Avondale, certain other critical
vendors, and the Debtor subsequently came to an agreement to
resolve the critical vendors’ motion and the Committee
objection. The Court approved that agreement in its Critical
Vendors Order entered on January 28, 2005.

Pursuant to the Critical Vendors Order, the Debtor is to
pay Avondale and other critical vendors 77.5 percent of their
pre-petition accounts receivable and 100 percent of any valid
reclamation claims. A provision of the Critical Vendors Order
-- relevant in this matter -- states as follows:

In the event that the amount paid to any of the

Critical Vendors pursuant to this Order exceeds 77.5

percent of the ultimate allowed unsecured claim of the

Critical Vendor(s), then the overpayment may be cured

through disgorgement by the overpaid Critical Vendor

er set off by the estate of the overpayment amount

against any amount the Debtors owe to the Critical
Vendor(s) for post-petition obligations.

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After the Petition Date, Avondale delivered additional
goods to the Debtor. The Debtor then informed Avondale that
certain pre-petition shipments were defective and sought
deductions of $38,412.62. Instead of offsetting these charges
against Avondale’s pre-petition shipments, the Debtor offset
them against Avondale’s post-petition shipments. Avondale
argues that the Debtor’s setoff against a post-petition
administrative claim - which will be paid in full - rather than
against a pre-petition unsecured claim - which will not be paid
in full - is improper. As a result of the Debtor’s setoff,
Avondale claims damages of $8,642.85 -- the difference between
receiving a pre-petition setoff amounting to 77.5 cents on the
dollar and receiving a dollar-for-dollar post-petition setoff.
Avondale asserts that these damages will constitute a cost of
administration if the Debtor does not reverse its setoff.

Conclusions of Law

A setoff is defined as “[a] debtor’s right to reduce the
amount of a debt by any sum the creditor owes the debtor.”
Black’s Law Dictionary 1376 (7th edition West Group 1999). It
“allows entities that owe each other money to apply their mutual
debts against each other, thereby avoiding ‘the absurdity of
making A pay B when B owes A.’” Citizens Bank of Maryland v.
Strumpf, 516 U.S. 16, 18 (1995) (quoting Studley v. Boylstin

Nat. Bank, 229 U.S. 523, 528 (1913)).

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Section 553 of the Bankruptcy Code recognizes the right of
setoff; however, both parties in this case agree that section
553 is not relevant here because it only applies to a pre-
petition setoff of a creditor against a pre-petition claim of
the debtor.” If a debtor wishes to claim a setoff against a
creditor’s post-petition claim, it must be based on section 558.
Section 558 provides:

The estate shall have the benefit of any defense

available to the debtor as against any entity other

than the estate, including statute of limitations,

statute of frauds, usury, and other personal defenses.

A waiver of any such defense by the debtor after the

commencement of the case does not bind the estate. 11

U.S.C. § 558.

Courts have found that section 558 preserves to the debtor
any pre-petition defenses a debtor may have, including any right
to setoff. See, e.g., In re PSA, Inc., 277 B.R. 51 (Bankr. D.
Del. 2002); In re Papercraft Corp., 127 B.R. 346 (Bankr. W.D.
Pa. 1991); In re M.W. Ettinger Transfer Co., 1988 WL 129334
(Bankr. D. Minn. 1988). Additionally, unlike section 553 --

which gives creditors a right to set off a mutual debt owed to

the debtor only if both debts arose prior to the start of the

* Section 553 provides, in pertinent part:

(a) Except as otherwise provided in this section and in section
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 crediotr against the debtor
that arose before the commencement of the case

11 U.S.C. § 553(a).

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bankruptcy action -- courts applying section 558 have eliminated
the pre-petition/post-petition distinction and have allowed
debtors to set off pre-petition claims against post-petition
obligations. PSA, 277 B.R. at 53; Papercraft, 127 B.R. at 350;
Ettinger, 1988 WL 129334 at *4.

The Debtor cites PSA, Papercraft, and Ettinger for
authority that section 558 allows it to set off pre-petition
charges for defective goods against post-petition shipments from
Avondale. This situation, however, is distinguishable from
those three cases. None of the creditors in the cases cited
above had a pre-petition claim against the debtor; all involved
a post-petition administrative claim by the creditor and a pre-
petition setoff the debtor claimed against the creditor, but no
offsetting pre-petition balance due the creditor from the
debtor.

Here, the Debtor had a pre-petition claim against Avondale
of $38,412.62 for defective goods shipped pre-petition against
the $1,472,355.49 the Debtor owed Avondale -- a classic setoff
situation governed by section 553. After the petition date, the
Debtor paid Avondale 77.5 percent of its pre-petition claim
without offsetting Avondale’s pre-petition debt for defective
goods. Now, the Debtor proposes to set off 100 percent of
Avondale’s pre-petition debt against Avondale’s post-petition

administrative claim, saving Debtor -- and costing Avondale --

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more than $8,000 or the 22.5 percent difference between a pre-
petition and post-petition setoff. The Critical Vendors Order,
however, expressly contemplated that some adjustments might be
necessary to amounts owed pre-petition by the Debtor.
Alternatively, the Debtor argues that the pre-petition
setoff was waived by virtue of the Critical Vendor and
Reclamation Orders. Again, the Debtor ignores the fact that the
Critical Vendor Order took into account that the final pre-
petition figures might need modification. That is precisely the

Situation here. Accordingly, it is

ORDERED:
1. The Motion is granted.
2. The Debtor shall set off $38,412.64 against the pre-

petition claim of Avondale.

3. Avondale shall disgorge any amount it was paid that
was in excess of 77.5 percent of its allowed pre-petition claim
after deducting the Debtor’s setoff from Avondale’s pre-petition
claim.

DONE and ORDERED in Tampa, Florida, this [ day of

tA becumaer

Michael/G. Williamson
United States Bankruptcy Judge

November, 2005.

Case 8:04-bk-24134-MGW Doc 1054 Filed 11/01/05

Copies furnished to:
Counsel for Debtors:

Denise D. Dell-Powell, Esq.
Michael P. Horan, Esq.

Erik P. Kimball, Esq.
Akerman Senterfitt

Post Office Box 3273

Tampa, FL 33601

Counsel for Official Committee
of Unsecured Creditors:

John D. Emmanuel, Esq.

Donald R. Kirk, Esq.

Fowler, White, Boggs Banker, P.A.
Post Office Box 1438

Tampa, FL 33601

Shannon Lowry Nagle, Esq.
Stroock & Stroock & Lavan, LLP
180 Maiden Lane

New York, NY 10038-4982

Counsel for Critical Vendor
Avondale Mills, Inc.:

Robert Quinn, Esq.
Robert A. Soriano, Esq.
Carlton Fields, P.A.
Post Office Box 3239
Tampa, FL 33601

Assistant United States Trustee:
Benjamin E. Lambers, Esq.

501 E. Polk Street, Suite 1200
Tampa, FL 33602

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