BANKRUPTCY CORNER
BANKRUPTCY CORNER
Recoupment and Bankruptcy
JASON S . RIGOLI
Recoupment is a common law doctrine that “ permits one party to a transaction to withhold funds due the other party , as long as both debts arise from the same transaction .” In re Craig , Adv . Pro . 8:19-ap- 00203-RCT , 2019 Bankr . LEXIS . 4075 at * 4 , 2019 WL 10734045 ( Bankr . M . D . Fla . Dec . 9 , 2019 ) ( internal citations and quotation marks omitted ).
Recoupment and setoff are often used interchangeably , however , are distinctly separate concepts .
Setoff is codified in 11 U . S . C . § 553 , and “ grants a creditor the right ' to offset a mutual debt owing by such creditor to the debtor ' so long as both debts arose [ prepetition ] and are indeed mutual .’” Id . at FN 17 ( quoting Akincibasi v . Mascaritolo ( In re Akincibasi ), 372 B . R . 80 , 84 ( Bankr . M . D . Fla . 2007 ) ( citing In re Davidovich , 901 F . 2d 1533 , 1537 ( 10th Cir . 1990 ) ( quoting 11 U . S . C . § 553 )). “ Setoff differs from recoupment in that the mutual debt does not have to arise out of the same transaction .” Id . “ For example , a bank may obtain a borrower ' s written consent to seize an account for non-payment of a loan or other obligations .” Id . Setoff affects the amount of the creditor ’ s claim in the bankruptcy case .
Recoupment , in addition to having to arise out of the same transaction , does not permit a right to affirmative payment by the creditor against the debtor . See
Craig , at * 4-5 . This means that a creditor exercising a right to recoupment does not have a claim , as defined under 11 U . S . C . 101 ( 5 ), is not affected by the automatic stay nor is the right subject to the discharge injunction , as it is not a debt . See Craig at * 4-5 . Accord Barrett v . Barrett ( In re
Barrett ), 410 B . R . 113 , 122 ( Bankr . S . D . Fla . 2009 ).
Recoupment arises in varying situations including overpayment of benefits or advances made . With respect to advances in connection with employment , an employer ’ s right to recoupment can be cut off by the bankruptcy filing . The distinction is made in the debtor ’ s efforts . As Judge Mark put it :
The doctrine of recoupment , as it survives in bankruptcy , only applies if a debtor ' s pre-petition work product produces post-petition revenue which is not dependent upon the debtor ' s post-petition efforts . A defendant may not , consistent with the policy of the Bankruptcy Code , withhold that which is due a debtor for post-petition efforts to satisfy a pre-petition debt . In re
Sherman , 627 F . 2d 594 ( 2nd Cir . 1980 ); Waldschmidt v . CBS , Inc ., 14 Bankr . 309 ( M . D . Tn . 1981 ). A debtor ' s future earnings or earnings earned postpetition are protected to provide the debtor ' s fresh start . Local Loan Co . v .
Hunt , 292 U . S . 234 , 54 S . Ct . 695 , 78 L . Ed . 1230 ( 1934 ).
In re Ruiz , 146 B . R . 877 , 880 ( Bankr . S . D . Fla . 1992 ). The examples cited by Judge Mark are : ( i ) in Waldschmidt , prepetition George Jones made several records for CBS for which CBS advanced royalties , and postpetition the royalties from the prepetition songs continues to accrue . Id . CBS could recoup the advance from the royalties because the post-petition royalties did not relate to any post-petition efforts by the debtor . Id . On the other hand , a trucking company who prepetition advanced a truck driver fuel and other expenses could not recoup the advance from the truck driver ’ s post-petition earnings because the post-petition earnings were derived from the debtor ’ s post-petition work . Id . at 880-881 ( citing In re Ohning , 57 B . R . 714 , 714 ( Bankr . N . D . Ind . 1986 )).
A right to recoupment therefore continues to exist post-bankruptcy so long as the debtor continues to enforce the mutual obligation against the creditor . The creditor can reduce its obligation through recoupment by the amounts the debtor owes to the creditor under the same transaction if the recoupment is not from earnings derived from the debtor ’ s postpetition efforts . Once the debtor stops enforcing the obligation against the creditor under the specific transaction giving rise to the recoupment right , the creditor has no recourse to recover any amounts that may be outstanding from the debtor .
This article was submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
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PBCBA BAR BULLETIN 12