Setoff and Recoupment in Bankruptcy -- Recoupment
| III. RECOUPMENT
A. Recoupment Defined. Recoupment is the setting up of a demand arising from the same transaction as the plaintiff's claim, to abate or reduce that claim. Recoupment, a creditor's right long recognized in bankruptcy proceedings, is merely the means used to determine the proper liability on the amounts owed. See, e.g., Reiter v. Cooper, 113 S. Ct. 1213, 1218 n.2 (1993); Bull v. United States, 295 U.S. 247, 262 (1935) ("recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff's action is grounded"); In re Flagstaff Realty Assocs., 60 F.3d 1031 (3d Cir. 1995) ("[a] claim subject to recoupment avoids the usual bankruptcy channels and thus, in essence, is given priority over other creditor's claims"); United Structures of Amer. v. G.R.G. Eng'g, 9 F.3d 996, 999 (1st Cir. 1993) (recoupment is "'in the nature of a defense' and is intended to permit ... judgment to be rendered that does justice in view of the one transaction as a whole;" "allowing the creditor to recoup damages simply allows the debtor precisely what is due when viewing the transaction as a whole."); In re Holford, 896 F.2d 176, 178 (5th Cir. 1990); In re B & L Oil Co., 782 F.2d 155, 158 (10th Cir. 1986); In re Smith, 737 F.2d 1549, 1553 (11th Cir. 1994); In re Izaguirre, 166 B.R. 484, 490-93 (Bankr. N.D. Ga. 1994) ("[R]ecoupment merely adjusts the claim of the plaintiff under the contract. Hence, recoupment asserted as a defense is not an "offset" to a claim ... ; recoupment speaks not simply to the net amount due from one party to the other computed by subtracting one claim from the other, but rather to the amount of the plaintiff's claim alone on a particular contract, transaction or event."); In re Keisler, 176 B.R. 605, 607 (Bankr. M.D. Fla. 1994) (Amounts subject to recoupment are not a "debt" as defined in the Bankruptcy Code.); 4 Collier on Bankruptcy ¶ 553.03, at 553-12 (15th ed. 1991); see also In re Flagstaff Realty Assocs., 60 F.3d 1031 (3d Cir. 1995) (To the extent a debtor's claim is subject to recoupment, the debtor has no interest in the future income stream to the extent of the creditor's recoupment claim.); In re Gross Plumbing & Heating Co., 146 B.R. 914 (Bankr. W.D.N.Y. 1992) (discusses concept of recoupment as an adjustment of amounts owed and that amounts subject to recoupment are not property of the estate); Amoco Prod. Co v. Fry, 904 F. Supp. 3 (D.D.C. 1995) (Plaintiffs have no property right in funds withheld to preserve right of recoupment until all prior debts are resolved and satisfied.). But see In re Centergas, Inc., 172 B.R. 844, 851-52 (Bankr. N.D. Tex. 1994) (Recoupment is an impermissible violation of bankruptcy policy of equal distribution).
Coplay Cement Co. v. Willis & Paul Group, 983 F.2d 1435, 1440 (7th Cir. 1993) (recoupment is the "ancestor" of the compulsory counterclaim presently set forth in Fed. R. Civ. P. 13(a)); Frederick v. United States, 386 F.2d 481, 487 (5th Cir. 1967). In that context it has been said that "transaction" is a word of flexible meaning, including a series of occurrences, depending not so much on the immediateness of their connection as upon their logical relationship. Moore v. New York Cotton Exch., 270 U.S. 593, 610 (1926); In re Pinkstaff, 974 F.2d 113 (9th Cir. 1992); Montgomery Ward Dev. Corp. v. Juster, 932 F.2d 1378 (11th Cir. 1991); Tullos v. Parks, 915 F.2d 1192 (8th Cir. 1990); Savarese v. Agriss, 883 F.2d 1194, 1208 (3d Cir. 1989); United States v. Pullman Constr. Indus., Inc., 153 B.R. 539, 541-42 (N.D. Ill. 1993). Some courts, however, take a much more restrictive view of "transaction", usually requiring a single contract or even a single transaction under a contract. Compare In re University Medical Ctr., 973 F.2d 1065 (3d Cir. 1992) (recoupment requires single integrated transaction) and In re California Canners and Growers, 62 B.R. 18 (Bankr. 9th Cir. 1986) (each delivery under a single distributor's agreement a separate transaction for recoupment purposes) with In re B & L Oil, 782 F.2d 155 (10th Cir. 1986) (month-to-month purchases under a single contract arise from same transaction for recoupment). Compare In re Norsal Indus., 147 B.R. 85, 89 (Bankr. E.D.N.Y. 1992) (prepetition deposit for utility services can be used to recoup subsequent later unpaid monthly obligations as they arise out of the same transaction) with In re Village Craftsman, Inc., 160 B.R. 740, 747 (Bankr. D.N.J. 1993) (collecting cases on utility services recoupment and holding against recoupment of prepetition deposit). Other courts have required "'some type of overpayment,' whether accidentally or contractually made" to permit recoupment. In re Photo Mech. Servs., Inc., 179 B.R. 604, 613 (Bankr. D. Minn. 1995); In re Midway Airlines, Inc., 175 B.R. 239, 246 (Bankr. N.D. Ill. 1994).
See, e.g., In re Alpco, 62 B.R. 184, 188 (Bankr. S.D. Ohio 1986) (quoting In re Maine, 32 B.R. 452, 455 (Bankr. W.D.N.Y. 1983)); accord In re Flagstaff Realty Assocs., 60 F.3d 1031 (3d Cir. 1995) (where the creditor's claim for repair costs and the debtor's claim to rent payment arise from the lease relationship they arise from the same transaction and are subject to recoupment); Matter of Coxson, 43 F.3d 189, 193-94 (5th Cir. 1995) (where creditor's and debtor's obligations arise out of the same contract recoupment is appropriate); Distribution Servs. Ltd. v. Eddie Parker Interests Inc., 897 F.2d 811, 812 (5th Cir. 1990) ("Recoupment is a defense that goes to the foundation of plaintiff's claim by deducting from plaintiff's recovery all just allowances or demands accruing to the defendant with respect to the same contract or transaction."); First Nat'l Bank v. Master Auto Serv. Corp., 693 F.2d 308, 310 n.1 (4th Cir. 1982) ("Recoupment is the right of a defendant to have the plaintiff's monetary claim reduced by reason of some claim the defendant has against the plaintiff arising out of the very contract giving rise to the plaintiff's claim."); Speakman v. Bernstein, 59 F.2d 520, 522 (5th Cir. 1932) ("[Defendant]'s defensive right of recoupment under the contract remains so long as any right under that same contract is urged against him offensively"); FSLIC v. Smith, 721 F. Supp. 1039, 1042 (E.D. Ark. 1989) (recoupment is "the right of a defendant to have the plaintiff's monetary claim reduced by reason of some claim the defendant has against the plaintiff arising out of the very contract giving rise to the plaintiff's claim."); In re Midwest Serv. and Supply Co., 44 B.R. 262, 266 (D. Utah 1983) ("A single contract must be considered one transaction."); Waldschmidt v. CBS, Inc., 14 B.R. 309, 314 (M.D. Tenn. 1981) (in case under the Bankruptcy Act, court holds that where both obligations "grow out of the [same] contract," the obligations "unquestionably arise from the same transaction"); In re Bram, 179 B.R. 824 (Bankr. E.D. Tex. 1995) (where prepetition overpayments and postpetition payments arise by the terms of the same contract, they arise from the "same transaction"); In re LaPierre, 180 B.R. 95 (Bankr. D.S.C. 1994) (Reduction of ongoing payments is properly characterized as recoupment where the ongoing payments arise out of same contactual relationship as prior overpayments.); In re Izaguirre, 166 B.R. 484, 493 (Bankr. N.D. Ga. 1994) ("[R]ecoupment speaks not simply to the net amount due from one party to the other computed by subtracting one claim from the other, but rather to the amount of the plaintiff's claim alone on a particular contract, transaction or event."); In re Northeast Exp. Regional Airlines, Inc., 169 B.R. 258 (Bankr. D. Me. 1994) (Obligations "arising from" and "directly related" to contractual relationship are subject to recoupment.); In re Bob Brest Buick, Inc., 136 B.R. 322, 323 (Bankr. D. Me. 1991) (A business relationship is a "continuous one which permits recoupment."); In re Tidewater Memorial Hospital, 106 B.R. 876, 881-82 (Bankr. E.D. Va. 1989) ("Recoupment rests on the principle that it is just and equitable to settle in one action all claims growing out of the same contract or transaction."); In re Hiler, 99 B.R. 238, 242 (Bankr. D.N.J. 1989) (A defendant "clearly has a right of recoupment" where "all the claims arise out of the same contract."); see generally Cecile Indus. Inc. v. Cheney, 995 F.2d 1052, 1054 (Fed. Cir. 1993) ("Indisputably, the Government has long enjoyed the right to offset contract debts to the United States against contract payments due to the debtor."); In re Mohawk Indus., 82 B.R. 174 (Bankr. D. Mass. 1987); In re American Cent. Airlines, Inc., 60 B.R. 587 (Bankr. N.D. Iowa 1986). Contra University Medical Ctr. v. Sullivan, 973 F.2d 1065, 1081-82 (3d Cir. 1992) ("same transaction" requirement for recoupment must be narrowly construed); In re Thompson, 182 B.R. 140, 147-49 (Bankr. E.D. Va. 1995) ("One contract alone, however, is not sufficient to establish a single transaction, since separate transactions may occur within the confines of the contract."); In re California Canners and Growers, 62 B.R. 18 (Bankr. 9th Cir. 1986).
B. United States Right To Recoupment. The United States has a long recognized right to recoup federal monies erroneously paid out. See, e.g., United States v. Carr, 132 U.S. 644 (1890); Bechtel v. PBGC, 781 F.2d 906, 907 (D.C. Cir. 1986) (United States has inherent right to recoup past overpayments by adjusting the levels of ongoing payments).
C. Recoupment And The Automatic Stay. The automatic stay does not apply to recoupment. See In re Holford, 896 F.2d 176, 179 (5th Cir. 1990); University Medical Ctr. v. Sullivan, 122 B.R. 919, 925 (E.D. Pa. 1990), aff'd, 973 F.2d 1065 (3d Cir. 1992); In re Norsal Indus., 147 B.R. 85 (Bankr. E.D.N.Y.); In re Rooster, 127 B.R. 560 (Bankr. E.D. Pa. 1991); In re Visiting Nurse Ass'n, 121 B.R. 114 (Bankr. M.D. Fla. 1990); In re Hiler, 99 B.R. 238, 242-43 (Bankr. D.N.J. 1989); In re Midwest Serv. and Supply Co., 44 B.R. 262, 265 (D. Utah 1983); In re Maine, 32 B.R. 452 (Bankr. S.D.N.Y. 1983); In re Yonkers Hamilton Sanitarium, 22 B.R. 427 (Bankr. S.D.N.Y. 1982), aff'd, 34 B.R. 385 (S.D.N.Y. 1983). Contra In re Scharff, 143 B.R. 541 (Bankr. S.D. Iowa 1992); In re Heafitz, 85 B.R. 274 (Bankr. S.D.N.Y. 1988); In re Memorial Hosp., 82 B.R. 478 (W.D. Wis.), appeal dismissed, 862 F.2d 1299 (7th Cir. 1988); In re Klingberg Schools, 68 B.R. 173, 178 n.3 (N.D. Ill. 1986). See also In re Izagirre, 166 B.R. 484, 493 (Bankr. N.D. Ga. 1994) (Although creditor may not "technically" need relief from the stay, "the better approach is to seek relief from the stay as a precaution.")
D. Timing. The time limits of setoff do not apply; prepetition claims can be withheld from postpetition debts. See In re Midwest Serv. and Supply Co., 44 B.R. 262 (D. Utah 1983) (recoupment allowed when prepetition progress payments exceeded value of construction work when performance continued postpetition); Waldschmidt v. CBS, Inc., 14 B.R. 309 (M.D. Tenn. 1981) (prepetition advances by creditor can be recouped from royalties earned by debtor postpetition); In re Bob Brest Buick, Inc., 136 B.R. 322 (Bankr. D. Me. 1991) (recoupment is "without regard to the pre- or post-petition timing of a particular financial event"); In re Mohawk Indus., 82 B.R. 174, 177-78 (Bankr. D. Mass. 1987); In re American Cent. Airlines, Inc., 60 B.R. 587, 590 (Bankr. N.D. Iowa 1986). But see In re Ruiz, 146 B.R. 877 (Bankr. S.D. Fla. 1992) (recoupment only available if prepetition work produces postpetition revenue which is not dependent on the debtor's postpetition efforts).
E. Recoupment After Discharge. Recoupment is unaffected by a discharge in bankruptcy. In re Flagstaff Realty Assocs., 60 F.3d 1031 (3d Cir. 1995) (recoupment survives discharge even if creditor did not object to plan or seek a stay pending appeal); In re Harmon, 188 B.R. 421, 425 (Bankr. 9th Cir. 1995) (recoupment "unaffected by the debtor's discharge"); Brown v. General Motors Corp., 152 B.R. 935, 938 (W.D. Wis. 1993) (right of recoupment not a claim or debt to be discharged in bankruptcy); In re Bram, 179 B.R. 824 (Bankr. E.D. Tex. 1995) (recoupment does not constitute a dischargeable debt because it is essentially a defense to payment and does not permit an affirmative recovery); In re Izaguirre, 166 B.R. 484, 490-93 (Bankr. N.D. Ga. 1994) (disagrees with Brown's reasoning, but finds that recoupment as a defense survives discharge); In re Hiler, 99 B.R. 238, 244 (Bankr. D.N.J. 1989). Contra In re Kings Terrace Nursing Home & Health Facility, 184 B.R. 200 (S.D.N.Y. 1995) (Medicaid recoupment is a claim within the meaning of the Bankruptcy Code; hence, a right to recoupment is barred by the discharge), aff'g, 1995 WL 65531 (Bankr. S.D.N.Y. Jan. 27, 1995); In re Baker, 100 B.R. 80 (M.D. Fla. 1989).
F. Recoupment And The Statute Of Limitations. When recoupment is used as a defense to a plaintiff's action it is not barred by a statute of limitations as long as the main action itself is timely. United States v. Dalm, 494 U.S. 596 (1990); Bull v. United States, 295 U.S. 247, 262 (1935); Matter of Coxson, 43 F.3d 189, 193-94 (5th Cir. 1995); In re Romano, 175 B.R. 585, 595 (Bankr. W.D. Pa. 1994); In re Woolaghan, 140 B.R. 377, 383 (Bankr. W.D. Pa. 1992); In re Mid Atl. Fund, Inc., 60 B.R. 604, 609-10 (Bankr. S.D.N.Y. 1986) (statutory limitation periods generally have no application to offsetting counterclaims and other matters of defense).
G. Recoupment On An Unassumed Executory Contract. Failure of the debtor to assume an executory contract does not impair a creditor's ability to recoup prepetition overpayments from ongoing postpetition payments to a debtor, where both arise from the same contract. See In re Wang Labs., Inc., 155 B.R. 289, 290 (Bankr. D. Mass. 1993); In re Tidewater Memorial Hosp., 106 B.R. 876 (Bankr. E.D. Va. 1989); In re Advanced Professional Home Health Care, Inc., 94 B.R. 95, 97 (E.D. Mich. 1988); In re Mohawk Indus., 82 B.R. 174, 177-78 (Bankr. D. Mass. 1987); In re Neuman, 55 B.R. 702 (S.D.N.Y. 1985). Contra In re University Medical Ctr., 973 F.2d 1065 (3d Cir. 1992); In re Memorial Hosp., 82 B.R. 478, 483-84 (W.D. Wis. 1988). The right of recoupment is not contingent upon there being an express contract provision contemplating recoupment. See In re Holford, 896 F.2d 176, 178 (5th Cir. 1990). "This policy ... prevents the debtor from obtaining the benefits of a contract without accepting its burdens, and is consistent with the bankruptcy policy that executory contracts be assumed or rejected in whole." Mercy Hospital of Watertown v. New York Dep't of Social Servs., 171 B.R. 490, 495 (N.D.N.Y 1994).
H. Recoupment And Sovereign Immunity. As with setoff, recoupment alone should not waive sovereign immunity; recoupment is a merely a defense, not a claim (a right of payment) as defined in 11 U.S.C. § 101(5). In re Harmon, 188 B.R. 421 (Bankr. 9th Cir. 1995) ("Because recoupment only reduces a debt as opposed to constituting an independent basis for a debt, it is not a claim in bankruptcy ...."); Mercy Hospital of Watertown v. New York Dep't of Social Servs., 171 B.R. 490 (N.D.N.Y 1994) ("[R]ecoupment does not fall within even the broadest definition of claim for purposes of waiving immunity under § 106(a) or (b)."); Brown v. General Motors Corp., 152 B.R. 935, 938 (W.D. Wis. 1993) ("Because of its unique nature as an equitable defense, the right of recoupment does not constitute a claim within the meaning of 11 U.S.C. § 101(5) which defines a claim."); see also Mullen v. United States, 696 F.2d 470, 472 (6th Cir. 1985).
I. Recoupment And Creditors With Secured Interests. A creditor who holds a properly perfected Article 9 security interest is nonetheless subject to the defense of recoupment. See, e.g., First Nat'l Bank v. Master Auto Serv. Corp., 693 F.2d 308, 312 (4th Cir. 1982) (Bank with security interest in accounts receivable still subject to recoupment); United Cal. Bank v. Eastern Mt. Sports, 546 F. Supp. 945, 963 (D. Mass. 1982) (same), aff'd, 705 F.2d 439 (1st Cir. 1983); In re Don's Elec., Inc., 65 B.R. 399, 403 (Bankr. W.D. Wis. 1986) (same). But see In re Tucumseh Const. Co., 157 B.R. 471 (Bankr. E.D. Cal. 1993).
J. State Laws May Restrict Recoupment. In re Fox, 162 B.R. 729, 732 (Bankr. E.D. Va. 1993) (Virginia does not permit common law recoupment on a sealed instrument). However, we should argue that does not restrict the federal government.
K. Recoupment Of Claims Arising From Rejection. One court has held that claims arising from rejection of an executory contract are not available for recoupment. United States v. Dewey Freight Sys., Inc., 31 F.3d 620 (8th Cir. 1994). But see In re Hirschorn, 156 B.R. 379, 388 (Bankr. E.D.N.Y. 1993); In re Don & Lin Trucking Co., 110 B.R. 562, 568 (Bankr. N.D. Ala. 1990) (rejection under § 365 does not limit the non-debtor party to filing a proof of claim for damages) and Howard Johnson, Inc. v. Tucker, 157 F.2d 959, 961 (5th Cir. 1946) (claims for damages arising on rejection of an executory lease in bankruptcy are properly subject to recoupment where the obligations both arise out of the same transaction); In re Chestnut Ridge Plaza Assocs., 156 B.R. 477, 485 (Bankr. W.D. Pa. 1993) (creditor can offset losses incurred from rejection of lease against rents due the debtor under the rejected lease); In re Express Freight Lines, Inc., 130 B.R. 288, 291-92 (Bankr. E.D. Wis. 1991) (court allows setoff of claims resulting from rejection of an unexpired lease under § 365); cf. In re Klein Sleep Products, Inc., 173 B.R. 296, 299 (S.D.N.Y. 1994) ("Section 365 merely establishes the method for determining the date upon which a breach of an [executory contract] is deemed to occur. It does not purport to assign the priority awarded to damages flowing from the rejection of a[n executory contract]."). But see generally Matter of Southmark Corp., 62 F.3d 104, 106 (5th Cir. 1995) (a party to an executory contract has a claim against the debtor only when the debtor has rejected the contract).
L. Affirmatively Seeking Recoupment. Although recoupment is a defensive doctrine, a creditor may take the offensive and seek an adjudication that it may recoup without waiting for the debtor to bring suit. In re Flagstaff Realty Assocs., 60 F.3d 1031, 1035 (3d Cir. 1995).
IV. RECURRING SETOFF AND RECOUPMENT ISSUES
A. Medicare Recoupment. Can the United States recoup prepetition medicare overpayments from ongoing postpetition payments to healthcare providers? Compare (NO) University Medical Ctr. v. Sullivan, 973 F.2d 1065 (3d Cir. 1992); In re Consumer Health Servs., Inc., 171 B.R. 917 (Bankr. D.D.C. 1994), appeal dismissed, Civ. Act. No. 94-2029 SSH (D.D.C. Mar. 18, 1996) (appeal pending); In re Kings Terrace Nursing Home and Health Related Facility, 1995 WL 65531, *7-8 (Bankr. S.D.N.Y. Jan. 27, 1995) (Medicaid relationship not appropriate for recoupment), aff'd, 184 B.R. 200 (S.D.N.Y. 1995) with (YES) In re Heffernan Memorial Hosp. Dist., 192 B.R. 228 (Bankr. S.D. Cal. 1996); In re St. Johns Home Health Agency, Inc., 173 B.R. 238 (Bankr. S.D. Fla. 1994) (both holding that Medicare adjustment to ongoing payments to recover prior overpayments is properly characterized as recoupment and is not subject to the automatic stay); In re Visiting Nurse Ass'n, 121 B.R. 114 (Bankr. M.D. Fla. 1990); In re Homecall of S.W. Va., 1990 WL 278658 (Bankr. W.D. Va. 1990) and In re Yonkers Hamilton Sanitarium Inc., 34 B.R. 385, 387-88 (S.D.N.Y. 1983); see also Mount Sinai Hospital, Inc. v. Weinberger, 517 F.2d 329 (5th Cir.), modified, 522 F.2d 179 (5th Cir. 1975), cert. denied, 425 U.S. 935 (1976); Lowry Hospital Ass'n v. Blue Cross, 415 F. Supp. 589 (E.D. Tenn. 1976) (both holding that Medicare has common law right to recoup earlier overpayments from ongoing payments outside of bankruptcy).
B. Setoff Of Tax Refunds. Can the United States setoff prepetition debts against postpetition IRS tax refunds? The primary issue in these cases is when does the IRS tax refund to the debtor "arise." Generally, courts hold that the debtor's claim to a tax refund arises at the end of the tax year from which the refund results, and that the Internal Revenue Code provisions establishing when a tax refund is "allowed" do not control. In re Pettibone Corp., 161 B.R. 960, 963 (N.D. Ill. 1993), aff'd sub nom. Pettibone Corp. v. United States, 34 F.3d 536 (7th Cir. 1994). Compare United States v. Reynolds, 764 F.2d 1004 (4th Cir. 1985); and United States v. Norton, 717 F.2d 767 (3d Cir. 1983); with In re Runnels, 134 B.R. 562 (Bankr. E.D. Tex. 1991) and In re Eggenmeyer, 75 B.R. 20 (Bankr. S.D. Ill. 1987). However, at least one court has held that the setting off of tax overpayments and tax underpayments is not a "setoff" as contemplated by the Bankruptcy Code. In a discussion that sounds much like recoupment, the court held that the reopening and adjusting of 13 tax periods at the same time transformed the 13 year stretch into one accounting period. The court expressly limited this reasoning to corporate, as opposed to individual taxpayers. In re Pettibone Corp., 161 B.R. 960, 963 (N.D. Ill. 1993), aff'd sub nom. Pettibone Corp. v. United States, 34 F.3d 536 (7th Cir. 1994); accord In re Midway Indus. Contractors, Inc., 178 B.R. 734, 737 (N.D. Ill. 1995). Contra In re Chateaugay Corp., 1995 WL 386483, *5 (S.D.N.Y. Jun. 28, 1995) (holding that there is no common law right to offset tax refunds against claims of other federal agencies); In re Custom Ctr., Inc., 163 B.R. 309, 313 (E.D. Tenn. 1994) (rejecting Pettibone).
C. Setoff Against Family Farmers. Can the United States setoff prepetition debts from ongoing postpetition payments to family farmers? Compare (YES) United States v. Gerth, 991 F.2d 1428 (8th Cir. 1993); In re Buckner, 165 B.R. 942 (D. Kan. 1994), appeal dismissed, 66 F.3d 263 (10th Cir. 1995); In re Mohar, 140 B.R. 273 (Bankr. D. Mont. 1992); In re Allen, 135 B.R. 856 (Bankr. N.D. Iowa 1992); In re Lundell Farms, 86 B.R. 582 (Bankr. W.D. Wis. 1988); In re Greseth, 78 B.R. 936 (D. Minn. 1987); In re Parrish, 75 B.R. 14 (Bankr. N.D. Tex. 1987); In re Buske, 75 B.R. 213 (Bankr. N.D. Tex. 1987); In re Pinkert, 75 B.R. 218 (Bankr. N.D. Tex. 1987); In re Woloschak Farms, 74 B.R. 261 (Bankr. N.D. Ohio 1987); In re Matthieson, 63 B.R. 56 (D. Minn. 1986) with (NO) In re Young, 144 B.R. 45 (Bankr. N.D. Tex. 1992); In re Gore, 124 B.R. 75 (Bankr. E.D. Ark. 1990); In re Evatt, 112 B.R. 405 (Bankr. W.D. Okla. 1989), aff'd 112 B.R. 417 (W.D. Okla. 1990); In re Walat Farms, 69 B.R. 529 (Bankr. E.D. Mich. 1987).
D. Setoff Against Exempt Property. Can a creditor exercise a right of setoff against exempt property? Compare (YES) Posey v. Dep't of Treasury, 156 B.R. 910, 915 (W.D.N.Y. 1993); In re Glaze, 169 B.R. 956 (Bankr. D. Ariz. 1994) (exempt homestead sale proceeds subject to setoff); In re Runnels, 134 B.R. 562, 564 (Bankr. E.D. Tex. 1991); In re Swickard, 133 B.R. 902 (Bankr. S.D. Ohio 1991); In re Pieri, 86 B.R. 208 (Bankr. 9th Cir. 1988); In re Lee, 40 B.R. 123 (Bankr. E.D. Mich. 1984) with (NO) In re Laues, 90 B.R. 158 (Bankr. E.D.N.C. 1988); In re Wilde, 85 B.R. 147 (Bankr. D.N.M. 1988); In re Hinson, 65 B.R. 675 (Bankr. W.D. Tenn. 1986); In re Davies, 27 B.R. 898 (Bankr. E.D.N.Y. 1983); In re Monteith, 23 B.R. 601 (Bankr. N.D. Ohio 1982); In re Haffner, 12 B.R. 371 (Bankr. M.D. Tenn. 1981). See generally In re Powell, 173 B.R. 338, 340 (Bankr. E.D. Ky. 1994) (dicta contrasting Ky. statute which does not permit setoff against exempt property with Ohio statute which does).
E. Setoff And Recoupment Based On Statistical Sampling. Can the United States base recoupment or setoff on debts established through statistical sampling? Compare (YES) Ratanasen v. California Dep't of Health Servs., 11 F.3d 1467, 1470-71 (9th Cir. 1993) (collecting cases); Mount Sinai Hosp. v. Weinberger, 517 F.2d 329, modified, 522 F.2d 179 (5th Cir. 1975), cert. denied, 425 U.S. 935 (1976); and Mile High Therapy Ctrs. v. Bowen, 735 F. Supp. 984 (D. Colo. 1988) with (NO) 56 Comp. Gen. 963 (1977) (although the Government may base its setoff on an estimate, it may not base its estimate on a statistical sampling; a projection based on a random sample is not sufficiently certain in amount to warrant a setoff).
F. Setoff Of Attorneys Fees Under § 303(i). Can the United States setoff against attorney's fee awards imposed under § 303(i)? Compare In re Schiliro, 72 B.R. 147 (Bankr. E.D. Va. 1987) (no setoff of § 303(i) awards allowed because (1) award of attorney's fees analogous to penalty to discourage frivolous involuntary filings, and (2) fees are for the benefit of the attorney and lack mutuality for setoff purposes); In re K. P. Enters., 135 B.R. 174 (Bankr. D. Me. 1992) (no setoff of § 303(i) awards because purpose of award is to discourage creditors from improperly filing involuntary petitions); and 2 Collier on Bankruptcy ¶ 303.39 (setoff of awards under 303(i) should not be permitted) with In re Better Care, Ltd., 97 B.R. 405 (Bankr. N.D. Ill. 1989) (§ 303(i) attorney's fees awards are compensatory in nature, for the benefit of the debtor, and are subject to setoff).
G. Postpetition Interest in Recoupment and Setoff. Interest unmatured when the petition is filed is not allowed against the estate. 11 U.S.C. § 502(b)(2); see In re Compass Marine Corp., 146 B.R. 138, 157 (Bankr. E.D. Pa. 1992). However, interest continues to accrue on a prepetition debt which is oversecured under 11 U.S.C. § 506(b). See United States v. Ron Pair Enter., Inc., 489 U.S. 235, 237 (1989). An amount withheld subject to setoff is a secured claim under 11 U.S.C. § 506(a). Therefore, if and to the extent the debtor's claim against the United States is greater than the United States claim against the estate, the United States may collect interest from any monies withheld subject to setoff.
H. The Assignment of Claims Act And Setoff/Recoupment. The assignment by the contractor of amounts due on a government contract, even if properly assigned pursuant to the Assignment of Claims Act, 31 U.S.C. § 3727; 41 U.S.C. § 15, does not extinguish already accrued setoff or recoupment rights against those payables, unless the government expressly waives those rights through a "no setoff" commitment clause. Nothing in the Assignment of Claims Act alters the generally applicable rule that an assignee of a contract merely "stand in the shoes of its assignor and takes subject to those liabilities of its assignor that were in existence prior to the assignment." Septembertide Publishing, B.V. v. Stein and Day, Inc., 884 F.2d 675, 682 (2d Cir. 1989). Therefore, liabilities arising from a government contract are still "subject to ... defenses arising under the contract which the Government could have asserted against the contractor absent the assignment .... If the contractor could recover nothing, then in most cases the assignee, standing in the shoes of the contractor, is entitled to nothing." Produce Factors Corp. v. United States, 467 F.2d 1343, 1349 (Ct. Cl. 1972). This includes the right to recoupment against contract payments. Unity Bank & Trust Co. v. United States, 5 Cl. Ct. 380, 384 (1984) (the Act does not protect assignee from assignor's failure to comply with assigned contract's terms where the moneys at issue have yet to be disbursed); Modern Indus. Bank v. United States, 101 Ct. Cl. 808, 820-21 (1944) (assignee's right to payments subject to rights of the government under the contract); cf. Central Bank v. United Sates, 345 U.S. 639, 646 (1953) (assignee is always liable to defenses which "lay  in execution or in breach of the contract"). The statue also expressly permits the United States to set off any liability of the assignor which exists at the time notice of the assignment was received. Southside Bank and Trust Co. v. United States, 221 F.2d 813 (Ct. Cl. 1957); 37 Comp. Gen 318, 320 (1957); FAR 32.803(e) (the Act permits "the Government [to] apply against payments to the assignee any liability of the contractor to the Government arising independently of the assigned contract if the liability existed at the time notice of the assignment was received even though that liability had not yet matured so as to be due and payable."). However, government contracts may include a "no setoff commitment" which entitles an assignee to receive contract payments free of reduction or setoff for (1) any liability of the contractor arising independently of the contract, and (2) any liabilities of the contractor arising from the assigned contract resulting from renegotiation, fines, penalties, taxes, or social security contributions. FAR 32.801, 32.804(b).
I. Appeals From Adverse Setoff And Recoupment Decisions.
United States v. Gerth, 991 F.2d 1428 (8th Cir. 1993). However, most courts hold the decision to lift the stay to allow setoff is discretionary with the bankruptcy court, and denial of a motion to lift the stay may be overturned only upon a showing of abuse of discretion. If the court denies relief from the stay because it applied an erroneous legal principle or standard, that is an abuse of discretion. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (1990) (trial court abuses its discretion where its ruling is based "on an erroneous view of the law or on a clearly erroneous assessment of the evidence."); In re Seaescape Cruises, Ltd., 172 B.R. 1002, 1013 (S.D. Fla. 1994) (same); Contemporary Mortg. v. High Peaks Base Camp, 156 B.R. 890, 893 (N.D.N.Y. 1993) (same).
3. "[W]hether a creditor's conduct is so egregious" as to allow the court to deny setoff on equitable grounds should be considered a "question of law, over which an appellate court may exercise plenary review." See generally Matter of U.S. Abatment Corp., 39 F.3d 556, 559 (5th Cir. 1994) (discussing in context of equitable subordination).
J. Setoff Of Transportation Claims. The GSA may setoff overcharges and loss and damage claims against ongoing payments to transportation carriers. Dalton v. Sherwood Van Lines, Inc., 50 F.3d 1014, 1020 (Fed. Cir. 1995); IML Freight, Inc. v. United States, 639 F.2d 676, 678 (Ct. Cl. 1980); Burlington Northern, Inc. v. United States, 462 F.2d 526, 529 (Ct. Cl. 1972). If the transportation carrier is operating under a GBL solely, that offset is not subject to the Contract Disputes Act. Sherwood Van Lines, supra.
Updated February 19, 2015