Cohen v. Goldberg

• Decision Date: 23 November 1998
• Citation: 720 A.2d 1028,554 Pa. 201
• Parties: Jeffrey H. COHEN, Appellant, v. Lisa A. GOLDBERG, Appellee.
• Court: Pennsylvania Supreme Court

720 A.2d 1028

554 Pa. 201

Jeffrey H. COHEN, Appellant, v.Lisa A. GOLDBERG, Appellee.

Supreme Court of Pennsylvania.

Argued September 15, 1998.

Decided November 23, 1998.

Peggy Lynn Ferber, Lorraine W. Mervan, Stanley E. Levine, Pittsburgh, for Jeffrey H. Cohen.

Joann Ross Wilder, Brian C. Vertz, Eric A. Schaffer, Pittsburgh, for Lisa A. Goldberg.

Before FLAHERTY, C.J., and ZAPPALA, CAPPY, CASTILLE, NIGRO and NEWMAN, JJ.

OPINION

NEWMAN, Justice.

Jeffrey H. Cohen(Cohen) appeals from an Order of the Superior Court that reversed an Order of the Court of Common Pleas of Allegheny County, Family Division(trial court) directing Lisa A. Goldberg(Goldberg) to pay Cohen approximately one hundred twenty-seven thousand dollars ($127,000.00) as his 50 percent share of their marital estate.The issue in this appeal is whether Goldberg is entitled to recoupment of certain loans discharged in Cohen's bankruptcy.

FACTUAL AND PROCEDURAL HISTORY

The parties were married on September 4, 1988.Immediately prior to the marriage, they entered into a Premarital Agreement by which both parties agreed that, if there were a divorce, they would divide the marital property equally between them.During the marriage, Cohen, a pediatric ophthalmologist, borrowed various sums of money from Goldberg, a dermatologist, to support Cohen's failing medical practice.

On the advice of Goldberg's attorney and accountant, some of the loans were formalized in writing.In 1988, Cohen signed a promissory note to Goldberg in the amount of four thousand dollars ($4,000.00), and in 1991, Cohen signed another promissory note in the amount of one hundred two thousand dollars ($102,000.00).Goldberg also made additional loans to Cohen, totaling approximately fifty thousand dollars ($50,000.00), which were not evidenced by promissory notes.All of the loans were unsecured and interest free.

On May 18, 1992, Cohen, whose medical practice was no longer financially viable, filed a voluntary Petition for Relief pursuant to Chapter 7 of the United States Bankruptcy Code,11 U.S.C. §§ 701 et seq.¹Cohen listed Goldberg as an unsecured nonpriority creditor, and Goldberg filed a Proof of Claim for amounts owed pursuant to the loans.The Proof of Claim was allowed, but Goldberg received no distribution when Cohen's bankruptcy was discharged on September 22, 1992.Goldberg did not object to the discharge.

Shortly after that, the parties separated, and on May 19, 1994, Cohen filed a Complaint for Divorce.With respect to the equitable distribution of the marital property, Goldberg argued that she was entitled to a setoff or recoupment against Cohen's share of the property to compensate for the loans discharged in Cohen's bankruptcy.Following a hearing, the trial court concluded that Goldberg was not entitled to any setoff or recoupment.Accordingly, pursuant to the Premarital Agreement, the court divided the marital properly evenly between the parties.

Goldberg appealed to the Superior Court, which, in a published Opinion, reversed the Order of the trial court.The Superior Court reviewed the doctrines of setoff and recoupment in the context of bankruptcy, noting that, "the doctrine of recoupment is limited only by the requirement that both debts arise `from the same transaction.'"Cohen v. Goldberg,695 A.2d 806, 809(Pa.Super.1997)(quoting4 Collier on Bankruptcy § 553.03(Lawrence P. King, ed., 15th ed.1992)).The court concluded that, while Goldberg was not entitled to a setoff, she was entitled to recoupment of the amounts discharged in Cohen's bankruptcy:

Instantly, there can be no doubt that [Goldberg's] loans to [Cohen] were made only because the parties were spouses....It is equally obvious that [Goldberg] would not have incurred the equitable distribution debt but for the marriage.To now permit [Cohen] to escape recoupment by claiming that the loans from [Goldberg] and the equitable distribution proceeding are different transactions would be to ignore the common element giving rise to both debts, and without which neither would exist.This result can be avoided only by construing the parties' marriage as a single transaction from which both debts arose.

Id., at 810-11.We find, however, that the Superior Court erred in determining that the parties' marriage constituted a single transaction for purposes of recoupment.Therefore, we reverse.

DISCUSSION

Although there is no recoupment provision in the Bankruptcy Code, bankruptcy law recognizes the common law doctrine of recoupment:

Recoupment "is the setting up of a demand arising from the same transaction as the plaintiff's claim or cause of action, strictly for the purpose of abatement or reduction of such claim."[Quoting4 Collier on Bankruptcy § 553.03(Lawrence P. King, ed., 15th ed.1992)(emphasis added) ].This doctrine is justified on the grounds that "where the creditor's claim against the debtor arises from the same transaction as the debtor's claim, it 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."[QuotingLee v. Schweiker,739 F.2d 870, 875(3d Cir.1984) ].

University Medical Center v. Sullivan,973 F.2d 1065, 1079-80(3d Cir.1992).Federal courts have consistently held that the "same transaction" requirement must be interpreted quite narrowly.See, e.g., In re B & L Oil Co.,782 F.2d 155(10th Cir.1986);Lee, supra.For example, in University Medical Center, the United States Court of Appeals for the Third Circuit held as follows:

For the purposes of recoupment, a mere logical relationship is not enough; 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.'"[QuotingLee,739 F.2d at 875].Rather, 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.

Id., at 1081.AccordIn re Peterson Distributing, Inc.,82 F.3d 956(10th Cir.1996);Reading Company v. City of Philadelphia,155 B.R. 890(E.D.Pa.1993);In re Women's Technical Institute,200 B.R. 77(Bankr. D.Mass.1996).The most common application of the doctrine of recoupment in bankruptcy is where "either the creditor has made some type of overpayment to the debtor or both the creditor and the debtor have claims arising from a single contract."ReadingCompany,155 B.R. at 911.

Considering these analytical guidelines, the Superior Court's construing the parties' marriage as a single transaction for purposes of recoupment was clearly erroneous.In the first instance, we question whether, in the context of recoupment, the union of two individuals in the bonds of matrimony and their subsequent life together can be considered a "transaction" at all.Even if it could, we would have to consider the parties' divorce to be a separate "transaction," which would negate a claim for recoupment arising out of equitable distribution proceedings.

Moreover, the Superior Court's finding that the parties' marriage was a "common element giving rise to both debts, and without which neither would exist,"Cohen v. Goldberg,695 A.2d at 811, is insufficient to render the marriage a single transaction for purposes of recoupment."A set of common facts differs substantially from a single transaction or a single series of transactions that gives rise to both a debtor's and a creditor's claims against each other."ReadingComp...