ROSEN v. DICK, (S.D.N.Y. 1979)

METZER, District Judge

A former chairman of the board and chief executive officer of a corporation now undergoing a Chapter X reorganization was not allowed permission to file a counterclaim for indemnification of attorney's fees in a recently concluded suit against a wholly-owned subsidiary of the reorganized concern, in the instant action against him by the trustee alleging fraud, breach of fiduciary duty and misrepresentation. Section 68 of the Bankruptcy Act provides that in all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and any debt shall be set off against the others and the balance only shall be allowed or paid. The central issue here is whether the alleged liability of the chairman for his activities in the acquisition of the subsidiary, which took place before the filing of the instant petition, and the liability of the insolvent firm to indemnify the chairman for his defense in the seperate litigation, which also occurred before the instant petition can be considered mutual debts.

A liability arising prior to filing and one arising after filing are not mutual debts. The indemnification liability was completely contingent on the happening of certain events which did not occur until long after the filing of the petition. There was no unliquidated debt at the time of filing. Thus, defendant's claim for indemnity and plaintiff's claims are not mutual, and cannot be set off. Accordingly, the defendant chairman's motion to set-off is denied. See Sec. 68 [§ 502(b)(3)] at ¶ 9556.