In re Sunbelt Vacation Travel, Inc., Bankruptcy No. 88-01551
| Citation | 94 BR 715 |
| Decision Date | 23 November 1988 |
| Docket Number | Adv. No. 88-1276.,Bankruptcy No. 88-01551 |
| Parties | In re SUNBELT VACATION TRAVEL, INC., Debtor. PERDIDO PASS RESTAURANT, Dale E. McMath and Helen V. McMath, Plaintiffs, v. SUNBELT VACATION TRAVEL, INC., Defendant. |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Southern District of Alabama |
Beth McFadden Rouse, Mobile, Ala., for Perdido Pass Restaurant, Inc.
Barry A. Friedman, Mobile, Ala., for debtor.
Stephen R. Windom and M. Donald Davis, Jr., Mobile, Ala., for Perdido Pass Properties.
This matter came on for hearing on the Motion for Relief from Stay filed by Perdido Pass Restaurant, Inc., requesting permission to setoff $59,866.03 in withheld rent payments against money owed to its principals by the Debtor. Also before the Court is a counterclaim filed by the Debtor requesting a turnover of the withheld funds. Appearing were Beth McFadden Rouse, attorney for Movant, Stephen R. Windom and M. Donald Davis, Jr., attorneys for Perdido Pass Properties, and Barry A. Friedman, attorney for the Debtor. Having reviewed the matter, the Court makes the following findings of fact and conclusions of law.
1. Perdido Pass Properties (hereafter "the Partnership"), an Alabama partnership, entered into a lease agreement on May 21, 1985, with The Perdido Pass Restaurant, Inc. (hereafter "the Restaurant"), to lease to the Restaurant certain real property owned by the Partnership for purposes of operating a restaurant.
2. On August 22, 1985, the Partnership borrowed money from First Federal Savings and Loan Association (currently known as and hereafter referred to as "Altus Bank") and gave the Bank a mortgage on the property in question.
3. The mortgage provided, inter alia, that the Partnership assigned its rents to the mortgagee to secure the debt, and further, that the principal amount might be accelerated upon any subsequent assignment to others.
4. On June 24, 1986, the Partnership sold the subject property to Sunbelt Vacation Travel, Inc. (hereafter "the Debtor"). A vendor's lien deed was executed on that date, which provided, inter alia, that the Debtor took the property subject to Altus' mortgage, and agreed to abide by the terms of the mortgage. The vendor's lien was recorded on June 25, 1986.
5. In conjunction with the sale of the subject property to The Debtor, the Partnership executed an assignment of its leases and rents in the property to the Debtor. Among those leases assigned was that of the Restaurant.
6. In addition to the vendor's lien deed executed on June 25, 1986, a security agreement was entered into on the same date in which the Debtor gave the Partnership a security interest in, inter alia, the leases and rents and payments under leases of the property. The Debtor also agreed not to transfer any of the collateral without the consent of the Partnership, to keep the collateral free of other liens, and that upon a default, the Partnership could demand possession to the collateral.
7. In order to perfect the security agreement, a UCC-1 financing statement was filed by the Partnership in the Probate Court of Baldwin County, in which county the subject property is located, on June 25, 1986. On June 27, 1986, a UCC-1 was similarly filed with the Secretary of State of Alabama. Among the items of collateral covered by the financing statements are the leases and rents of the subject property.
8. On May 11, 1988, Dale and Helen McMath, the individual owners of the Restaurant, as well as individual guarantors on the lease with the Debtor, made a loan to the Debtor in the amount of $100,000.00. A note was executed on May 13, 1988, evidencing the loan and providing for payment in sixty days together with ten percent (10%) interest per annum.
9. On May 31, 1988, an addendum was added to the lease between the Restaurant and the Debtor which provided upon the Debtor's default on the repayment of the debt to the McMaths the Restaurant would be authorized to credit rent payments due to the Debtor against the note indebtedness.
10. On July 15, 1988, the Restaurant first withheld rents otherwise due to the Debtor based on the Debtor's default on the note. The amount withheld was $8,817.86. At that time the debt owed to the Restaurant by the Debtor was $101,753.60.
11. Further rent amounts were subsequently withheld as follows: August 1, 1988 — $12,640.00; August 15, 1988 — $12,428.55; September 1, 1988 — $9,840.00; September 15, 1988 — $5,670.52; October 1, 1988 — $7,600.00; October 15, 1988 — $2,869.10.
12. On August 9, 1988, the Restaurant was notified by the Partnership that future rents should be sent to the Partnership due to the Debtor's default on its payments to the Partnership.
13. The Debtor filed a petition under Chapter 11 of the Bankruptcy Code on September 7, 1988.
14. The Restaurant filed the instant motion for relief from the stay seeking authorization to setoff the rents it has withheld against the loan indebtedness of the Debtor. The Restaurant also claims a right to setoff $3,384.61 expended in repairing the property. The Debtor on the other hand, requests that the withheld rent payments be turned over.
15. On November 14, 1988, the Court entered an interlocutory Order requiring the Restaurant to turn over to the Debtor funds representing withheld postpetition rents. The Restaurant was further ordered to pay over to the Clerk of the Bankruptcy Court the funds representing withheld prepetition rents.
16. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2). This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 157(b)(1).
Section 542(b) of the Bankruptcy Code provides an entity that owes a debt to the bankruptcy estate shall turn over said debt, except to the extent it is subject to setoff under Section 553 of the Code against a claim against the Debtor. 11 U.S.C. § 542(b). Applied to the instant case, if The Restaurant owes a debt to the Debtor, it must be paid unless it may be setoff under Section 553 against a debt the Debtor owes to the Restaurant. With certain exceptions, Section 553 of the Code allows setoff to the extent that it is available under applicable nonbankruptcy law. 11 U.S.C. § 553.
The Restaurant is before the Court requesting the stay be lifted to allow the retention of the rents it has withheld. The Debtor having asserted a counterclaim for a Section 542 turnover, the Restaurant submits two theories, actually equitable defenses, on which it should be allowed to retain the rents: recoupment and setoff.
Conspicuously absent in the language of both Section 542 and 553 is any mention of recoupment. A debt must be paid "except to the extent that such debt may be offset under Section 553 . . ." 11 U.S.C. § 542(b). Perhaps the difference in the two defenses explains this. Setoff is a type of "confession and avoidance"; the debt is owed but the defendant is not required to pay it because of an offsetting debt. Alabama Power Co. v. Kendrick, 219 Ala. 692, 123 So. 215 (1929). Carolina Portland Cement Co. v. Alabama Construction Co., 162 Ala. 380, 50 So. 332 (1909). A plea of recoupment, however, avers that the full debt is not owed because of some act of the plaintiff. Alabama Power Co., supra. Since the wording of Section 553 pertains to debts owed to a debtor which may be setoff, recoupment is by definition not within the ambit of Section 553. Accord 4 Collier on Bankruptcy 553.03 (15th Ed. 1988) and the cases cited therein.
Therefore, if the Restaurant can successfully assert recoupment, there is no debt owed to the Debtor, at least to the extent of the Debtor's claim against the Restaurant. If there is no debt, the application of Section 553 is unnecessary. If recoupment is not allowed, however, the Court must reach the issue of whether setoff is available under Alabama law, and if so, to what extent bankruptcy limits that setoff.
Recoupment has been defined as "the right of a defendant, in the same action, to cut down the plaintiff's demand either because the plaintiff has not complied with some cross obligation of the contract on which he sues or because he has violated some duty which the law imposes on him in the making or performance of that contract." 20 Am.Jur.2d, Counterclaim, Recoupment, Etc. 1 (1965); See also Carolina Portland Cement Co. v. Alabama Construction Co., 162 Ala. 380, 50 So. 332 (1909). Recoupment is a recognized equitable defense in Alabama. Norton v. Bumpus, 221 Ala. 167, 127 So. 907 (1930). Carolina Portland Cement Co., supra.
Crucial to successful recoupment is the requirement the subject matter of the plea of recoupment must arise out of the same transaction upon which the plaintiff's claim is based. Scroggins v. Alabama Gas Corporation, 275 Ala. 650, 158 So.2d 90, 95 (1963); Norton v. Bumpus, supra. Thus, recoupment has been allowed by a defendant in an assault and battery case who seeks damages for assault committed by the plaintiff at the same time, Brown v. Patterson, 214 Ala. 351, 108 So. 16 (1926), and allowed by a defendant in a suit for work and labor done seeking damages for negligent performance by the plaintiff. Burnett & Bean v. Miller, 205 Ala. 606, 88 So. 871 (1921).
The dispositive issue as to recoupment is whether the note claim of the McMath's arose from the same transaction as the Debtor's claim for the rents. The issue is further refined to whether the addendum to the lease allowing the application of rents against the loan indebtedness forms a sufficient nexus to unite the two debts into the same transaction. Without the addendum, there is no connection between the loan and the rents.
On May 31, 1988, the date the addendum to the Debtor-Restaurant lease was executed, the Partnership held a perfected security interest in the lease and rents of the Debtor by virtue of the Security Agreement entered into on June 24, 1986. Altus also held a security interest in these rents pursuant to...
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