Westinghouse Credit Corp. v. D'Urso

• Decision Date: 29 January 2002
• Docket Number: Docket No. 99-7758(CON).,Docket No. 99-7752(L).
• Citation: 278 F.3d 138
• Parties: WESTINGHOUSE CREDIT CORPORATION, n/k/a CBS Corporation, Petitioner-Appellant, v. Florence B. D'URSO, Trustee, as successor to Florence B. D'Urso, Executrix under the Last Will and Testament of Camillo Durso, Deceased, Respondent-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

278 F.3d 138

WESTINGHOUSE CREDIT CORPORATION, n/k/a CBS Corporation, Petitioner-Appellant, v. Florence B. D'URSO, Trustee, as successor to Florence B. D'Urso, Executrix under the Last Will and Testament of Camillo Durso, Deceased, Respondent-Appellee.

Docket No. 99-7752(L).

Docket No. 99-7758(CON).

United States Court of Appeals, Second Circuit.

Argued December 9, 1999.

Decided January 29, 2002.

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John I. Karesh, Feltman, Karesh, Major & Farbman, LLP, New York, NY (Donald F. Schneider, Arthur D. Russell, Marlene D. Hall, Of Counsel), for Appellant.

Richard H. Dolan, Schlam Stone & Dolan, LLP, New York, NY (Bennette D. Kramer, Of Counsel), for Appellee.

Before: WINTER, F.I. PARKER, and SOTOMAYOR, Circuit Judges.

F.I. PARKER, Circuit Judge.

Petitioner-Appellant Westinghouse Credit Corporation, n/k/a CBS Corp. ("Westinghouse"), appeals from two judgments of the United States District Court for the Southern District of New York (Louis L. Stanton, Judge), entered May 26, 1999 and June 2, 1999 upon a May 24, 1999 memorandum endorsement, granting Westinghouse's motion to confirm an arbitration award, denying its motion for summary judgment, dismissing its claim against an escrow fund, granting Respondent-Appellee Florence B. D'Urso's motion for summary judgment, and directing the escrow agents to pay the remaining balance of the escrow fund to D'Urso.

This appeal concerns the 1989 sale of Durso Supermarkets, Inc. ("the Company") from D'Urso ("Seller") to T.F. Acquisition Corp., which later merged into DSI (collectively, "Buyer"). The $43,950,000 purchase price was paid with a cash payment and a note and mortgage. A portion of the cash payment was placed in escrow to provide for adjustments to the purchase price. After Buyer defaulted on the note, Seller obtained a judgment for nearly $8.2 million. Seller also obtained a judgment in an adversary proceeding in bankruptcy court, concerning the termination of a lease made pursuant to the sale of the company, for a net amount of $717,350. Meanwhile, Buyer contested the purchase price adjustment ("PPA") calculated and delivered by Seller, and eventually an arbitrator awarded Buyer's successor-in-interest, Westinghouse, an adjustment which, with interest, came to nearly $2.3 million. The issue raised on appeal is whether Seller was entitled to satisfy and extinguish the PPA awarded by the arbitrator by recoupment or setoff against her judgment on the note and lease. Because we find that the PPA and the judgment arise out of discrete and independent units of the transaction, and in light of the parties' intentions as reflected in their Stock Purchase Agreement, we hold that Seller may not apply recoupment in this case. We further hold that the parties may not apply the doctrine of setoff in this case because the requirement of mutuality has not been met. We therefore vacate the judgment of the district court and remand for further proceedings.

I. BACKGROUND

The facts of this consolidated appeal are undisputed. The appeal arises out of the sale of the Company, which comprised, among other things, 22 supermarkets and the real estate on which three of the stores were operated. On June 9, 1989, Seller and Buyer entered into the Stock Purchase Agreement ("Agreement"), which provided for the transfer of all shares of the Company to Buyer in exchange for a purchase price of $43,950,000. The Agreement also required Seller to deliver a Lease to the Buyer for properties owned by Seller upon which four of the stores were located.

Section 2.03 of the Agreement provided that the purchase price would be paid as follows:

(a) a down payment of $750,000 payable concurrent with the execution of the Agreement;

(b) a cash payment of $35,000,000 less interest on the down payment as follows: (i) $30,750,000 directly to Seller; and (ii) $4,250,000 to a designated agent ("Escrow Agent(s)") to be held as the Escrow Fund in accordance with the terms of an attached Escrow Agreement; and

(c) a Note executed jointly by Buyer and the Company for the balance of $8,200,000 ("Purchase Money Debt"), secured by a purchase money mortgage on the Company's owned realty, i.e., the property on which three of the 22 stores were located, and paid in monthly installments of interest with the principal and any accrued interest due on the second anniversary of the closing date.

Section 2.02 of the Agreement provided for the possibility of a post-closing purchase price adjustment ("PPA") once the final net worth of the Company had been determined by Seller's accountants and the final financial statements had been delivered to Buyer. Calculation of the PPA, if any, was to be made by reference to the final financial statements. Upon timely objection by either Buyer or Seller, any dispute over the calculation was to be submitted for final and binding arbitration by an accounting firm selected by Buyer and Seller. Payment of the PPA was to be made within 25 days after delivery of the final financial statements or, if applicable, within ten days of any decision by the arbitrator.

Section 9.08 of the Agreement provided, in relevant part, that "[i]n any case where Seller is obligated to pay Buyer any sum under this Agreement ... Buyer shall be entitled to make a claim against the Escrow Fund under the procedure set forth in the Escrow Agreement."

Although the Agreement was not contingent on the Buyer's ability to obtain financing, the Buyer entered into various agreements with Westinghouse to finance the purchase. Westinghouse is not a party to any of the agreements between Seller and Buyer, and Seller is not a party to any of the financing agreements between Buyer and Westinghouse.

On September 1, 1989, the transaction between Seller and Buyer closed. Seller transferred all stock in the Company to Buyer, and Buyer tendered the purchase price, comprising the cash payment of $35,000,000 (of which $4,250,000 was placed into the Escrow Fund held by the Escrow Agents) and the Note for $8,200,000. In addition, a separate Escrow Agreement was signed with Chemical Bank as Escrow Agent.

On December 14, 1989, Seller's accountants delivered to Buyer the final financial statements and a check in the amount of $190,302.70, representing the PPA as calculated by Seller's accountants. Buyer objected to Seller's calculation of the PPA, but did not proceed immediately to arbitration.

On September 1, 1991, the principal on the Note became due and Buyer defaulted. Seller filed suit on the Note in the Supreme Court of the State of New York, New York County, and in 1992 that court granted summary judgment for Seller in the amount of $8,196,690.50. D'Urso v. Peltz, No. 28371/91, (N.Y.Sup.Ct. July 6, 1992), aff'd, D'Urso v. Durso Supermarkets, Inc., 201 A.D.2d 251, 607 N.Y.S.2d 260 (1st Dep't 1994). Despite Buyer's attempts at appeal and collateral attack, Seller's judgment remains intact. In 1997, Seller received $5,345,276.68 from the sale of the mortgaged real estate as partial satisfaction of the judgment.

On July 9, 1992, Buyer filed a petition for bankruptcy in the United States Bankruptcy Court for the Southern District of New York. In the course of the bankruptcy proceedings, Buyer initiated an adversary proceeding against Seller in which it sought, among other things, judgment for the PPA pursuant to the Agreement. The Bankruptcy Court permitted Westinghouse to prosecute Buyer's PPA claim due to Westinghouse's security interest in the intangible assets of Buyer. Seller demanded arbitration of Buyer's PPA claim pursuant to the Agreement. Upon Seller's motion, the district court withdrew the standing reference to the Bankruptcy Court and in 1994 ordered Buyer to arbitrate its PPA claim. Durso Supermarkets, Inc. v. D'Urso (In re Durso Supermarkets, Inc.), 170 B.R. 211, 216 (S.D.N.Y.1994).

Another adversary proceeding concerned the Lease, which Seller had terminated when Buyer defaulted on the Note. After a bench trial in Bankruptcy Court, Seller was awarded a net amount of $717,350 in unpaid rent and taxes. Durso Supermarkets, Inc. v. D'Urso (In re Durso Supermarkets, Inc.), 193 B.R. 682 (Bankr. S.D.N.Y.1996), amended by Corrected Final Order and J., Ch. 11 Case No. 92-B-43864 (PBA), Adv. No. 93-9475A (JHG) (Apr. 5, 1996).¹

During the same period, Seller was negotiating with the New York State taxing authorities to resolve a claim for unpaid sales taxes that had accrued prior to the closing. After reaching an agreement to settle the dispute with the State, Seller sought to pay the settlement amount out of the Escrow Fund. Upon refusal by Buyer and Westinghouse, Seller commenced an adversary proceeding, seeking to pay the State from the Escrow Fund. In 1993, Seller paid the sales taxes to the State, mooting the specific relief requested by Seller in that proceeding. As a result, Seller and Buyer exchanged a draft amended complaint and answer in 1995, but never filed those pleadings. Seller's unfiled draft amended complaint sought, among other things, setoff against the state court judgment obtained on the Note. The district court held this proceeding in abeyance pending the outcome of the arbitration related to the Escrow Fund.

On July 21, 1998, the arbitrator issued its decision, awarding Westinghouse the principal amount of $337,251.26 plus interest in the amount of $1,961,813.89 for a total of almost $2.3 million on Buyer's PPA claim. On August 6, 1998, Seller sought a pre-motion conference with the district court on her claim that, since the arbitration award should be set off against the unpaid judgments on the Note and Lease, she was entitled to the remainder of the Escrow Fund. On August 17, 1998, Westinghouse petitioned the district court for an order confirming the arbitration award and directing the escrow agents to release sufficient funds from the Escrow Fund for satisfaction of the arbitration award. Seller filed a response to the petition in which sh...