Peterson Distributing, Inc., In re

• Decision Date: 30 April 1996
• Docket Number: No. 95-4066,95-4066
• Citation: 82 F.3d 956
• Parties: 35 Collier Bankr.Cas.2d 1183, 29 Bankr.Ct.Dec. 21, Bankr. L. Rep. P 76,995, 13 Colo. Bankr. Ct. Rep. 120 In re PETERSON DISTRIBUTING, INC., Debtor, CONOCO, INC., a Delaware corporation, Appellee, v. Harriet E. STYLER, as Trustee for Peterson Distributing, Inc., Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 956

82 F.3d 956

35 Collier Bankr.Cas.2d 1183, 29 Bankr.Ct.Dec. 21,

Bankr. L. Rep. P 76,995,

13 Colo. Bankr. Ct. Rep. 120

In re PETERSON DISTRIBUTING, INC., Debtor CONOCO, INC., a Delaware corporation, Appellee, v. Harriet E. STYLER, as Trustee for Peterson Distributing Inc., Appellant.

No. 95-4066.

United States Court of Appeals Tenth Circuit.

April 30, 1996.

Appeal from the United States District Court for the District of Utah, 94-CV-697; David Sam, Judge.

Brent A. Bohman (Frederick M. MacDonald with him on the briefs), Pruitt, Gushee & Bachtell, Salt Lake City, Utah, for Plaintiff/Appellee Conoco, Inc.

Kevin R. Anderson (Harriet E. Styler with him on the briefs), Kruse, Landa & Maycock, Salt Lake City, Utah, for Defendant-Appellant.

ANDERSON, KELLY, and HENRY, Circuit Judges.

HENRY, Circuit Judge.

In this adversary action, brought by Conoco, Inc. ("Conoco") against the bankruptcy trustee ("Trustee") for Peterson Distributing, Inc. ("Peterson"), Conoco seeks to recoup or setoff $69,370.49 worth of credit card invoices against its $245,159.06 claim in Peterson's bankruptcy estate. The trustee of Peterson's bankruptcy estate counterclaims for the turnover of the $69,370.49 in credit card invoices. The United States Bankruptcy Court for the District of Utah held that the doctrine of recoupment did not apply and that Conoco was only entitled to a setoff of those invoices submitted and credited to Peterson's account prior to the date Peterson filed its bankruptcy petition. Conoco appealed the bankruptcy court's decision to the United States District Court for the District of Utah, which reversed the decision of the bankruptcy court. The district court found that Conoco was entitled to recoup the entire $69,370.49 against its claim in Peterson's estate. Peterson now appeals from the decision of the district court. We reverse the decision of the district court.

I. BACKGROUND

The parties have stipulated to the following facts:

The business relationship between Peterson and Conoco was governed by a Jobber Franchise Agreement, which incorporated the Conoco Credit Card Guide for Dealers (and its associated bulletins) and an Electronic Fund Transfer Agreement. Under the terms of the Jobber Franchise Agreement, Conoco agreed to sell products to Peterson on credit, who in turn sold those products to customers and other retail dealers. Conoco also agreed to accept credit card invoices from Peterson and to pay Peterson the face amount of the invoices less a three percent processing fee. If an invoice was acceptable under the terms of the Credit Card Guide, Conoco bore the risk of collection. The Credit Card Guide required, in part, that a credit card invoice be legible, signed by the consumer and not include charges for materials or services disputed by the cardholder. An invoice that failed to meet the requirements set forth in the Credit Card Guide was charged back to Peterson. On or about May 8, 1987, Peterson joined Conoco's Preauthorized Electronic Fund Transfer Payment System. The Electronic Fund Transfer Program provided that, on a bi-weekly basis, Conoco could automatically withdraw from Peterson's bank account the amount owing to Conoco for purchases. The amount owing to Conoco for purchases was reduced automatically by the face amount of the credit card invoices (less the three percent collection fee) that were submitted to Conoco and not charged back to Peterson.

Peterson filed a petition for relief under Chapter 11 of the United States Bankruptcy Code on June 28, 1991. As of that date, Peterson owed Conoco $245,159.06 for purchases of Conoco products. After the petition date, Peterson made six cash purchases of Conoco products. Also, Peterson continued to accept credit cards as payment for retail sales and to assign credit card invoices to Conoco. Peterson has submitted and Conoco has accepted credit card invoices totaling $69,370.49 that have not been credited against Peterson's account. Of these invoices, $22,808.90 were submitted and accepted before the petition date. The remainder, $46,561.59, was not available as a credit against Peterson's account until after the petition date.

II. DISCUSSION

We exercise jurisdiction pursuant to 28 U.S.C. § 158(d). Our review of the bankruptcy court's decision is governed by the same standards of review that govern the district court's review of the bankruptcy court. Taylor v. IRS, 69 F.3d 411, 415 (10th Cir.1995). Accordingly we review the bankruptcy court's legal determinations de novo and its factual findings under the clearly erroneous standard. Robinson v. Tenantry (In re Robinson), 987 F.2d 665, 667 (10th Cir.1993) (per curiam). A finding of fact is clearly erroneous if it is without factual support in the record or if, after reviewing all of the evidence, we are left with the definite and firm conviction that a mistake has been made. Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985).

Peterson raises two claims on appeal: (1) that the district court erred in reversing the bankruptcy court's judgment, which held that Conoco was not entitled to recoupment, and (2) that the bankruptcy court properly determined that Conoco's right of setoff under 11 U.S.C. § 553 was limited to $22,809.90, the total of the credit card invoices available as a credit against Peterson's account with Conoco before the bankruptcy filing. We address each issue in turn.

A. Recoupment

1. General Principles

Although modern counterclaim doctrine has replaced common law recoupment in most areas of the law, recoupment remains a distinct doctrine in bankruptcy cases, Davidovich v. Welton (In re Davidovich), 901 F.2d 1533, 1537 (10th Cir.1990) (per curiam). Originally an equitable rule of joinder for claims arising out of a single transaction, recoupment allowed adjudication in one suit of two claims that otherwise had to be brought separately under the common law forms of action. Id. Davidovich described recoupment as follows:

In the modern bankruptcy setting, this rule [of recoupment] has evolved to permit a creditor to offset a claim that " 'arises from the same transaction as the debtor's claim,' " without reliance on the setoff provisions and limitations of [11 U.S.C.] section 553, because the creditor's claim in this circumstance is " 'essentially a defense to the debtor's claim against the creditor rather than a mutual obligation, and application of the limitations on setoff in bankruptcy would be inequitable.' "

Id. (quoting Lee v. Schweiker, 739 F.2d 870, 875 (3rd Cir.1984)).

The doctrine of recoupment may be better understood by way of comparison with the doctrine of setoff. Setoff, codified in 11 U.S.C. § 553(a), gives a creditor the right "to offset a mutual debt owing by such creditor to the debtor" provided that both debts arose before commencement of the bankruptcy action and are in fact mutual. See id. The creditor's mutual debt and claim generally arise from different transactions. 4 Collier on Bankruptcy § 553.03, at 553-14 (Lawrence P. King et al. eds., 15th ed. 1996). "Recoupment, on the other hand, is the setting up of a demand arising from the same transaction as the plaintiff's claim or cause of action...." Id. at 553-15. Recoupment allows the defendant, in a suit between the estate and another, "to show that because of matters arising out of the transaction sued on, he or she is not liable in full for the plaintiff's claim." Id. at 553-17. Thus, recoupment is an equitable doctrine that allows the determination of a "just and proper liability" regarding such a claim. Id.

Recoupment is "narrowly construed" in bankruptcy cases because it violates the basic bankruptcy principle of equal distribution to creditors. See Ashland Petroleum Co. v. Appel (In re B & L Oil Co.), 782 F.2d 155, 158 (10th Cir.1986) ("A fundamental tenet of bankruptcy law is that a petition for bankruptcy operates as a 'cleavage' in time. Once a petition is filed, debts that arose before the petition may not be satisfied through post-petition transactions.... Any recoupment exception to this general principle perhaps should be narrowly construed."). Therefore, for the purposes of recoupment, "same transaction" is a term of art that must be narrowly defined. See Davidovich, 901 F.2d at 1538 (" 'The fact that the same two parties are involved ... and that a similar subject matter gave rise to both claims ... does not mean that the two arose from the "same transaction" ' for purposes of the doctrine of recoupment." (quoting Lee, 739 F.2d at 875)); see also, University Medical Ctr. v. Sullivan (In re Univ. Medical Ctr.), 973 F.2d 1065, 1081 (3d Cir.1992) (rejecting the "open-ended" definition of same transaction that is used in discerning compulsory counterclaims under Fed.R.Civ.P. 13(a) in favor of a narrowly construed definition of the term for equitable recoupment in bankruptcy). The Third Circuit held in University Medical Center that for claims to arise from the "same transaction" for the purposes of recoupment "both debts must arise out of a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations." 973 F.2d at 1081.

Although not included in the Uniform Commercial Code or the Bankruptcy Code, recoupment functions like a security interest, in that it grants priority to a creditor's claim in the bankruptcy estate in so far as the estate has a claim against the creditor arising from the "same transaction" as the creditor's claim. The "same transaction" requirement acts as a mechanism to ensure that equitable reasons for recoupment are present before a creditor may attain priority through the doctrine of recoupment.

Conoco contends that as a rule courts have found claims involving the same contract to arise out of the "same transaction." See United States v. Midwest Serv. & Supply Co. (In re Midwest Serv. & Supply Co.), 44 B.R. 262,...