In re JAG, Inc.

• Decision Date: 26 November 1980
• Docket Number: Adv. No. A80-0298.,Bankruptcy No. 80-00101-JG
• Citation: 7 BR 624
• Parties: In re J.A.G., INC., Debtor. FRAMINGHAM WINERY, INC., Plaintiff v. J.A.G., INC., Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

7 B.R. 624 (1980)

In re J.A.G., INC., Debtor FRAMINGHAM WINERY, INC., Plaintiff v. J.A.G., INC., Defendant.

Bankruptcy No. 80-00101-JG, Adv. No. A80-0298.

United States Bankruptcy Court, D. Massachusetts.

November 26, 1980.

Richmond, Rosen, Crosson & Resnek, Boston, Mass., for plaintiff.

Kaye, Fialkow, Richmond & Rothstein, Boston, Mass., for defendant.

MEMORANDUM AND ORDER

JAMES N. GABRIEL, Bankruptcy Judge.

The plaintiff herein, Framingham Winery, Inc. (Winery) commenced this adversary proceeding seeking declaratory judgment as to its legal right to set-off and for a determination of the amount of its claims against the defendant. The defendant, J.A.G., Inc., a Chapter 11 debtor, has filed a motion for summary judgment alleging it is entitled to judgment as a matter of law. After a hearing on the motion, and submission of affidavits and legal memoranda, the court will grant partial summary judgment as to the issue of set-off and will schedule for trial the outstanding factual issues necessary for a determination of the validity and amount of plaintiff's claims.

On or about November 1, 1974, J.A.G., Inc. entered into a lease, as lessor, with S.C.I. Corp. for the premises at 700 Worcester Road, Framingham, Massachusetts. Subsequently, S.C.I. assigned its interest as tenant to the plaintiff, Framingham Winery, Inc.

By its terms, the lease required J.A.G. to construct the leasehold premises and improvements according to contract specifications, and to deliver such premises for occupancy within a designated time frame. Paragraph 4B of the lease provides that "The obligation to pay rent shall commence at that time that the Landlord has completed the improvements described and defined in Exhibit "D" and has delivered to Tenant a certificate of occupancy or like approval from the Building Commissioner or authority with like jurisdiction in the Town of Framingham."

On January 22, 1980, J.A.G. filed a petition under Chapter 11 of the Bankruptcy Code. It is undisputed that plaintiff did not take possession of the premises at 700 Worcester Road, Framingham, as tenant, until April 29, 1980, subsequent to the Chapter 11 filing, at which time the obligation to pay rent commenced.

In August 1980, after the Winery took possession of the premises, J.A.G. sold the ground lease. The proposed buyer, as a condition precedent to closing, demanded that the Winery execute a Certificate of Estoppel, holding it harmless for all breaches under the construction/lease contract. The debtor created a "CURE FUND" out of the proceeds of the sale, limited by agreement of the parties to $135,000, for any damages which may have accrued to the Winery. The plaintiff then issued a Certificate of Estoppel to the purchasers.

The Winery alleges claims against the debtor in excess of $100,000 arising principally from the debtor's three year delay in readying the premises for occupancy and for failure to deliver the premises in accordance with contract specifications. The plaintiff further contends that it has a right to set-off those claims against the rent reserved under the lease.

Even assuming that plaintiff has valid claims against J.A.G., the defendant contends that the Winery is not entitled to any right of set-off whether such claims arose pre- or post-petition. The debtor has therefore sought summary judgment as to the issue of set-off.

In determining whether an issue is appropriate for summary judgment, the court must apply the standards set-forth in Rule 56(c) of the Federal Rules of Civil Procedure, applicable in bankruptcy by Rule 756 of the Rules of Bankruptcy Procedure. In relevant part, Rule 56(c) provides that a court is to grant the motion if:

the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

The defendant contends that the determination of the issue of set-off is an issue of law which is appropriately determined in a motion for summary judgment. Although the Federal Rule does not explicitly authorize the granting of summary judgment in favor of the adverse party, the court may grant such relief where it is warranted. Ziviak v. United States, 411 F.Supp. 416 at 425 (D.Mass.) aff'd 429 U.S. 801, 97 S.Ct. 36, 50 L.Ed.2d 64 (1976); Boston Public Housing Tenant's Policy Council, Inc. v. Lynn, 388 F.Supp. 493 at 498 (D.Mass. 1974); See also: 6 Moore's Federal Practice, Par. 56.12. The corresponding Massachusetts Rules of Civil Procedure 56(c) specifically states that "summary judgment, when appropriate, may be rendered against the moving party."

This court finds that the essence of the dispute as to set-off is a matter of law and that no material facts are actually controverted. As to this issue alone the law is determinative and therefore the issue is susceptible to resolution by summary judgment. Bloomgarden v. Coyer, 479 F.2d 201 (D.C.Cir. 1973).

The debtor filed its petition under Chapter 11 on January 22, 1980. At that time the Winery had not taken possession of the leasehold premises and neither party has asserted the Winery then owed any outstanding rental obligation to J.A.G. It is undisputed that no set-off occurred prior to the date of the debtor's filing.

Set-off, as generally understood, is "that right which exists between two parties, each of whom under an independent contract owes an ascertained amount of the other, to set-off his respective debt by way of mutual deduction." John Wills, Inc. v. Citizen's National Bank of Netcong, 125 N.J.Law 546, 16 A.2d 804 at 806. In the instant case, as of the time of filing, the Winery owed no definite obligation to J.A.G. — rent had not yet become due under the lease and it was uncertain whether the premises would become available for occupancy. Mutuality of obligation is a necessary prerequisite for the right of set-off to accrue. Ansfield v. Whitewater Oil Co., 254 F.Supp. 494 (D.C.Wis. 1966). "To entitle a creditor to use the set-off principle against the bankrupt's estate, there must be mutual debts — that is, creditor's debt must be owed to the estate of the bankrupt and the estate's debt must be owed to such creditor." McDaniel National Bank v. Bridwel, 74 F.2d 331 (CCA Mo. 1934). See also: Avant v. U.S., 165 F.Supp. 802 (D.C.Va. 1958).

In this instance, assuming the debtor owed the plaintiff pre-petition debt, the Winery at the time of filing was an unsecured creditor, to whom no right of set-off existed. "A covenant to pay rent creates no debt until the time stipulated for payment arrives . . . (T)he obligation upon the rent covenant is altogether contingent." Standard Oil Co. of N.J. v. Elliot, 80 F.2d 158 (4th Cir. 1935). (Quoting: In re Roth and Appel, 181 F. 667 at 669 (2d Cir.). The court in Standard Oil held that post-petition rent owed to the bankrupt estate could not be set-off against pre-petition indebtedness owed to the lessee because the obligations lacked mutuality. Standard Oil at p. 159.

In Zimmerman v. Home Insurance Co., 175 S.C. 18, 177 S.E. 896 (1935), the court stated that rent to be earned and to accrue in the future is not an existing debt, but a contingent liability which is not to be allowed, upon principle, as a set-off. (at p. 896) No rent liability in fact accrued in this case until more than three months after J.A.G., Inc., filed its reorganization petition. The rent which subsequently became due was owed to the debtor estate. Therefore, as to pre-petition claims which the Winery may have, there was no mutuality of obligation at the time of debtor's filing and no right to set-off.

The Bankruptcy Code is explicit. Section 553 provides that:

Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case . . . (emphasis added)

The Legislative history reflects the intent to recognize the existing doctrine of set-off and codify earlier case law as it developed under the Bankruptcy Act. House Report No. 95-595, 95th Congress, 1st Session, (1977) at 185, U.S. Code Cong. & Admin. News 1978, p. 5787. The Code does not change the yardstick for determination of the right to set-off in bankruptcy, which is mutuality. Mutual debts must be owing when the petition is filed commencing the bankruptcy proceeding. 11 U.S.C. Section 553(a); Avant v. U.S., 165 F.Supp. 802 at 805 (E.Va. 1958). Since there existed no mutuality of debts pre-petition, the Winery's claim to set-off for pre-petition debts must be denied.

The debtor has further contended that even if the Winery's claims arose post-petition, the plaintiff still has no right to set-off against its post-petition rental obligations. The defendant bases its position on the lease document itself, the provisions of Massachusetts law and the Bankruptcy Code.

Neither party has asserted that provisions in the lease provide any contractual right of set-off to the lessee in this situation. The Winery, during oral argument, agreed that the lease did not establish the right to set-off for any alleged damages arising out of a delay in the delivery of the premises for occupancy or for default in the contract specifications.

This is a commercial, non-residential lease entered into in this Commonwealth. Massachusetts law controls. "Covenants in leases are generally dependent, in the absence of any clear indication to the contrary." Sniger v. Fentin, 4 Mass.App. 215 at 217, 344 N.E.2d 420 (1976) (Citing: Barry v. Frankini, 287 Mass. 196 at 201, 191 N.E. 651 (1934). The clear intent of this lease is that the Winery's obligation to pay rent is independent of covenants made by J.A.G.

Massachusetts law is clear. The...