Government required to play by the rules in airline bankruptcy

November 16, 2006

In re Delta Air Lines (Delta Air Lines v. General Services Administration)(Bankr. S.D.N.Y. Nov. 3, 2006).  The Bankruptcy Code’s automatic stay (11 U.S.C. 362) prohibits a creditor from deducting its pre-petition claims against the debtor from its post-petition liabilities to the debtor.  The automatic stay helps ensure that all creditors are treated equally in the bankruptcy case.

In Delta’s bankruptcy case, the General Services Administration argued that it should be able to deduct the amounts of its pre-petition overpayments to Delta for government employee travel against the amounts it owes Delta for post-petition government employee travel.  GSA argued that it was exempt from the automatic stay, i.e., its deductions were allowable, due to the federal Transportation Payment Act and the doctrine of equitable recoupment.  The court disagreed, holding that “it is not equitable to treat the Government like all other creditors, who are barred . . . from offsetting pre-petition claims against post-petition liabilities.”


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