In re Sentinel Products Corp.
| Decision Date | 30 January 1996 |
| Docket Number | Civil Action No. 94-CV-598 (RSP). |
| Citation | 192 BR 41 |
| Parties | In re SENTINEL PRODUCTS CORPORATION, PI, Inc., Packaging Industries Group, Inc., et al., Debtors. PACKAGING INDUSTRIES GROUP, INC., Plaintiff/Appellee, v. DENNISON MANUFACTURING CO., INC., Defendant/Appellant. |
| Court | U.S. District Court — Northern District of New York |
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Hanify & King, P.C., Boston, MA (David Lee Evans, Charles A. Dale III, of counsel), for Appellant, Dennison Manufacturing Co., Inc.
Wynn & Wynn, Providence, RI (Daniel J. Vieira, of counsel), for Appellee, Packaging Industries Group, Inc.
Dennison Manufacturing Co., Inc. ("Dennison") appeals from the March 21, 1994, Memorandum-Decision and Order of the United States Bankruptcy Court for the Northern District of New York (Mahoney, J.) granting summary judgment to Packaging Industries Group, Inc. ("Packaging") and dismissing Dennison's cross-motion for summary judgment. Because it held that Dennison improperly set off debts between the parties, the bankruptcy court entered judgment against Dennison in the amount of $118,907 plus interest.
This litigation concerns the treatment of obligations between a seller, Packaging, and buyer, Dennison, that accrued prior to Packaging's Chapter 11 bankruptcy filing. The first debt stems from a patent infringement lawsuit that a third party, Refac International, Ltd., brought against Dennison in September 1987 in the United States District Court for the District of New Jersey. The lawsuit involved products Dennison bought from a Packaging affiliate, Sentinel Products Corp. ("Sentinel"). In a letter dated March 30, 1988, Dennison notified Packaging about the infringement suit, demanded indemnification, and invited Packaging to defend the action pursuant to the Uniform Commercial Code.1 In another letter dated May 27, 1988, Dennison demanded indemnification from Packaging and invited Packaging to take over the litigation. Although Packaging supplied Dennison with technical information regarding the allegedly infringing products, Packaging never formally entered the lawsuit. In November 1988, Dennison settled the patent infringement suit at a total cost of $111,596, which included $31,596 for Dennison's attorney fees.
The second debt between the parties concerns the sale of products by Packaging to Dennison. In April 1988, Dennison owed Packaging a balance of $118,907. Packaging filed a voluntary petition for reorganization under Chapter 11 on May 25, 1988, when ten affiliated Packaging entities simultaneously filed ten petitions. Based on the record below, Dennison did not participate in the bankruptcy proceedings.
On February 22, 1989, Dennison sent a letter to Packaging in which Dennison set off the $118,907 it owed Packaging against the $111,596 Dennison spent defending and settling the patent infringement action. In making this setoff, Dennison relied on the Uniform Commercial Code and the indemnity clause in its purchase order form. Dennison sent Packaging a $7,311 check to cover the balance it owed Packaging, and Packaging deposited the check.
Packaging emerged from bankruptcy on April 18, 1991, when the bankruptcy court approved the Debtors' First Amended Consolidated Plan of Reorganization (the "consolidated plan"). On October 11, 1991, Packaging sued Dennison to recover $118,907. In its complaint, Packaging alleged that Dennison's setoff was wrongful, violated the automatic stay provision of the bankruptcy code,2 and breached the parties' sales contract. Dennison's answer in December 1991 asserted various affirmative defenses and three counterclaims concerning Packaging's failure to defend and indemnify Dennison in the patent infringement lawsuit.
Both parties subsequently moved for summary judgment. On March 21, 1994, the bankruptcy court dismissed Dennison's motion and granted Packaging's motion on the grounds that Dennison was not entitled to set off its infringement litigation defense costs against the outstanding balance of its account with Packaging.3 For the purposes of its decision, the bankruptcy court resolved in Dennison's favor alleged factual disputes concerning Packaging's duty to defend and indemnify Dennison and the amount of the infringement litigation costs attributable to Packaging's products. The court then held that Dennison was not entitled to setoff as a matter of law because the two debts lacked mutuality. In other words, the setoff was improper because Dennison owed money to Packaging, but the patent infringement lawsuit concerned a separate Packaging affiliate, Sentinel. The court also held that "equitable considerations join the legal shortcomings in denying Dennison's claim of setoff' because Dennison's singular action in taking the setoff while Packaging was in Chapter 11 proceedings disregarded the role of the bankruptcy court. Bankr.Op. at 11. Dennison now appeals. Oral argument took place on October 17, 1994.
The district court has jurisdiction to review final orders of the bankruptcy courts. 28 U.S.C. § 158(a). In conducting this review, however, I may not set aside the bankruptcy court's findings of fact unless they are clearly erroneous. Bankr.R. 8013. On a summary judgment appeal, I may consider the legal conclusions of the bankruptcy court de novo. In re Operation Open City, Inc., 170 B.R. 818, 821 (S.D.N.Y.1994).
Because this appeal concerns cross-motions for summary judgment, I apply familiar analysis.4 Summary judgment shall enter if, when viewing the evidence in the light most favorable to the nonmovant, the court determines that there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 456, 112 S.Ct. 2072, 2076-2077, 119 L.Ed.2d 265 (1992). A party seeking summary judgment must demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-2553, 91 L.Ed.2d 265 (1986). If the movant satisfies this initial burden, then the burden shifts to the nonmovant to proffer evidence demonstrating that a trial is required because a disputed issue of fact exists. Weg v. Macchiarola, 995 F.2d 15, 18 (2d Cir.1993). The nonmovant must do more than present evidence that is merely colorable, conclusory, or speculative and must present "concrete evidence from which a reasonable juror could return a verdict in his favor...." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986). The nonmovant must do more than show "some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).
As a preliminary matter, Dennison argues that the bankruptcy court erroneously granted summary judgment because the court specifically identified an issue of material fact. Contrary to Dennison's contention, the bankruptcy court did not find a factual dispute regarding whether Dennison actually effected a setoff. The clear language of the opinion below shows that there was a dispute over when the setoff occurred because the parties failed to present accounting records as evidence of an actual setoff. Bankr.Op. at 5 & n. 1. Nevertheless, it is irrelevant whether Dennison in its February 1989 letter to Packaging took a setoff or — as Dennison claims — merely preserved its right to the setoff. In either event, the legal issue is the same, that is, whether Dennison now should pay Packaging $118,907. I therefore reject Dennison's argument that summary judgment was improper on these grounds.
The bankruptcy court held that Packaging was entitled to summary judgment as a matter of law because under no circumstances could Dennison offset its debt to Packaging against money owed to Dennison by Sentinel. The court held that because Packaging and Sentinel are "separate and distinct legal entities," the element of mutuality required for setoff under Section 553 of the bankruptcy code was absent. Bankr.Op. at 10. On appeal, Dennison contends that mutuality does exist because by the terms of the consolidated plan Packaging and all of its affiliated entities, including Sentinel, are treated as one.
Section 553(a) of the bankruptcy code preserves a creditor's right to set off a "mutual debt" between the debtor and creditor as long as both debts "arose before the commencement of the bankruptcy case." 11 U.S.C. § 553(a).5 This section of the bankruptcy code does not create an independent right but rather preserves for the creditor's benefit any setoff right that it may have under applicable nonbankruptcy law.6 In re Westchester Structures, Inc. 181 B.R. 730, 738-739 (Bankr.S.D.N.Y.1995); see also Darr v. Muratore, 8 F.3d 854, 860 (1st Cir.1993). Section 553 also imposes additional restrictions on a creditor seeking setoff. Darr, 8 F.3d at 860. The additional restrictions, of course, are that the offset debts must be mutual, prepetition debts. Westchester, 181 B.R. at 739. Importantly, the decision to allow setoff rests in the sound discretion of the bankruptcy court. In re Public Serv. Co. of New Hampshire, 884 F.2d 11, 16 n. 2 (1st Cir.1989) (citing Internal Revenue Serv. v. Norton, 717 F.2d 767, 772 (3d Cir.1983)); Bohack Corp. v. Borden, Inc., 599 F.2d 1160, 1165 (2d Cir.1979).
There is no dispute that the debts between Dennison and Packaging existed prior to Packaging's Chapter 11 filing. However, the parties contest the mutuality of the debts. Most generally, mutual debts are "due to and from the same person in the same capacity." Modern Settings, Inc. v. Prudential-Bache Sec., Inc., 936 F.2d 640, 648 (2d Cir.1991) (quoting Beecher v. Vogt Mfg. Co., 227 N.Y. 468, 473, 125 N.E. 831 (1920)); see also WJM, Inc. v. Massachusetts Dep't of Pub. Welfare, 840 F.2d 996,...
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