Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-4_05-ap-04223/USCOURTS-canb-4_05-ap-04223-0/pdf.json

Parties Involved:
Lois I. Brady
Plaintiff
Areena R. Chaudhry
Defendant

Document Text:

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

1300 Clay Street (2d fl.) 

 Oakland, CA. 94612

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Decision

 

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re No. 04-45127

 Adv. No. 05-4223

ZAHID CHAUDHRY,

 Debtor. /

LOIS I. BRADY,

 Plaintiff,

vs.

AREENA R. CHAUDHRY,

 Defendant. /

DECISION

This is an adversary proceeding in which the plaintiff, Lois I.

Brady (“Brady”), trustee in bankruptcy of the estate of Zahid

Chaudhry (the “debtor”), seeks relief against defendant Areena R.

Chaudhry (“Chaudhry”) in connection with an alleged debt Chaudhry

owed to the debtor at the date of the debtor’s chapter 7 petition.

The alleged debt is for the unpaid portion of the purchase price of

real property that the debtor sold to Chaudhry as part of a sale and

leaseback transaction. 

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Signed: April 04, 2006

________________________________________

EDWARD D. JELLEN

U.S. Bankruptcy Judge

________________________________________

Entered on Docket 

April 04, 2006

GLORIA L. FRANKLIN, CLERK 

U.S BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

Case: 05-04223 Doc# 37 Filed: 04/04/06 Entered: 04/04/06 15:00:10 Page 1 of

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

1300 Clay Street (2d fl.) 

 Oakland, CA. 94612

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1Bushra S. Chaudhry’s participation with the debtor as a 

co-seller and co-lessee under the Sales Agreement is not relevant

to the motions now before the court. Therefore, for purposes of

clarity, the court will hereafter disregard Bushra S. Chaudhry’s

participation as a party to the Sales Agreement. 

Decision 2

The parties have filed cross-motions for summary judgment. The

court will grant Chaudhry’s motion and deny Brady’s motion.

A. Background

The material facts are undisputed. On September 30, 2003, the

debtor and his spouse, Bushra S. Chaudhry, entered into a written

Sales Agreement (the “Sales Agreement”) with Chaudhry pursuant to

which Chaudhry agreed to purchase certain real property in Hayward,

California (the “Property”) from the debtor and his spouse1 for a

purchase price of $370,000. Chaudhry agreed to pay the major

portion of the purchase price through the assumption of a $268,000

loan that was secured by the Property. As to the balance, the Sales

Agreement provided as follows:

The sellers will rent that aforementioned property for an

amount of $1,500 per month. The rent will be deducted

from their equity until the equity is depleted. The

sellers and the buyer can, at that time, negotiate another

lease agreement at the current market rate.

If the sellers decide not to reside in the aforementioned

property the sellers’ remaining equity will be paid no

later than December 31, 2010.

Thus, Chaudhry was to pay the remainder of the purchase price

through a monthly $1,500 credit in reduction of the outstanding

balance she owed, which monthly credits were to continue as long as

the debtor desired to remain in the Property. If, however, the

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

1300 Clay Street (2d fl.) 

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Decision 3

debtor decided to vacate the Property, the balance of the purchase

price would be due by December 31, 2010.

The debtor filed his chapter 7 petition on September 20, 2004. 

At that date, the remaining balance of the purchase price was

$35,637. This amount represents the original purchase price, less

credits for the loan payments Chaudhry made, less 12 monthly rent

credits totaling $18,000. 

After the petition, the debtor continued to reside in the

Property. Brady made demand on Chaudhry for payment of $35,637 and 

Chaudhry denied liability. Brady then filed this adversary

proceeding.

B. Discussion

1. Summary Judgment

“Summary judgment is properly granted when there is no genuine

issue of material fact and moving party is entitled to judgment as a

matter of law.” Clipper Express v. Rocky Mountain Motor Tariff

Bureau, Inc., 690 F.2d 1240, 1250 (9th Cir. 1982), cert. denied, 459

U.S. 1227 (1983). Under Fed. R. Bankr. P. 7056, which incorporates

Fed. R. Civ. P. 56, the court may grant summary judgment or partial

summary judgment if there is no genuine issue of material fact, and

the movant is entitled to the requested judgment as a matter of law.

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

1300 Clay Street (2d fl.) 

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2All further section references herein are to the Bankruptcy

Code, as in effect prior to October 17, 2005.

3Section 542(a) provides:

Except as provided in subsection (c) or (d) of this section,

an entity, other than a custodian, in possession, custody, or

control, during the case, of property that the trustee may use,

sell, or lease under section 363 of this title, or that the

debtor may exempt under section 522 of this title, shall deliver

to the trustee, and account for, such property or the value of

such property, unless such property is of inconsequential value

or benefit to the estate.

4

Section 542(b) provides:

Except as provided in subsection (c) or (d) of this section,

an entity that owes a debt that is property of the estate and

that is matured, payable on demand, or payable on order shall pay

such debt to, or on the order of, the trustee, except to the

extent that such debt may be offset under section 553 of this

title against a claim against the debtor.

Decision 4

2. Contentions of the Parties

Brady raises two basic arguments in support of her position. 

First, Brady argues that pursuant to Bankruptcy Code § 541(a),2

 the

debt that Chaudhry owed to the debtor became property of the

bankruptcy estate at the time of the bankruptcy filing. It follows,

argues Brady, that as of the petition date, Chaudhry was obliged

pursuant to § 542(a)3 to “deliver” the purchase price to her. 

Alternatively, Brady argues that Chaudhry is obligated pursuant

to § 542(b)4

 to pay a debt of $35,637 to her (conceding, however,

that such payment is not due until December 31, 2010). In this

regard, Brady contends that Chaudhry is not entitled to offset any

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

1300 Clay Street (2d fl.) 

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Decision 5

postpetition rent against the debt pursuant to § 553. This is so,

argues Brady, because the requisite “mutuality” is lacking due to

the fact that Chaudhry’s debt to the debtor arose prepetition

whereas the debtor’s debt for rent that accrued after the bankruptcy

filing was a postpetition debt.

Chaudhry concedes that, under § 541(a), her debt to the debtor

became property of the debtor’s bankruptcy estate. Chaudhry argues,

however, that even if the doctrine of mutuality bars offset of the

postpetition rent against the purchase price, the doctrine of

“recoupment” permits deduction of the monthly rent from the balance

of the purchase price for so long as the debtor remains in

possession of the Property, and to the extent any funds remain owing

after the debtor vacates, such funds will not be due until December

31, 2010. In response, Brady argues that recoupment does not apply,

and in any event, that Chaudhry waived her right to argue

recoupment.

The court holds that: (a) Chaudhry is not obligated to

“deliver” the balance of the purchase price to Brady pursuant to 

§ 542(a), (b) Chaudhry’s obligation to pay Brady under § 542(b) is

subject to recoupment, (c) under the undisputed facts of this case,

Chaudhry’s debt to the debtor, and thus her debt to Brady, has been

eliminated to the extent of any postpetition rent during any period

the debtor occupied the Property, and that (c) any remaining unpaid

balance will not be payable by Chaudhry until December 31, 2010.

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

1300 Clay Street (2d fl.) 

 Oakland, CA. 94612

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Decision 6

 3. Turnover and § 542(a)

It is clear that § 542(a) is inapplicable in a situation, as

here, where a trustee seeks a money judgment for an alleged debt. 

Otherwise, § 542(b), which deals specifically with the trustee’s

collection of debts owed to the debtor, would be superfluous. 

Moreover, as noted by Chaudhry, the case law is consistent that 

§ 542(a) does not apply absent a res consisting of identifiable

property or proceeds. See, e.g., In re Sun Spas by Schaeffer, Inc.,

122 B.R. 452, 455 (Bankr. M.D. Fla. 1990); In re Gailey, Inc., 119

B.R. 504, 514 (Bankr. W.D. Pa. 1990). See also Maggio v. Zeitz, 333

U.S. 56, 64 (1948) (pre-code). 

Here, there is no res of identifiable property or proceeds. 

The court therefore holds that Chaudhry is entitled to summary

judgment as to Brady’s claims based on § 542(a).

4. Recoupment and § 542(b)

In their briefs, the parties initially directed their arguments

to the portion of § 542(b) that allows offset under § 553. Chaudhry

has now re-focused her argument on the doctrine of recoupment. 

Because the court believes recoupment is available here, it will

forgo discussion of the setoff arguments the parties initially

advanced.

The requirements for recoupment and setoff are not the same.

In general, setoff is available when entities owe each other money

on their respective debts to each other. See Citizens Bank of

Maryland v. Strumpf, 116 S.Ct. 286, 289 (1995). “The defining

characteristic of setoff is that ‘the mutual debt and claim . . .

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NORTHERN DISTRICT OF CALIFORNIA

1300 Clay Street (2d fl.) 

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Decision 7

are generally those arising from different transactions.’” Newbery

Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392, 1398 (9th Cir. 1996)

(internal citation omitted; emphasis in the original); In re TLC

Hospitals, Inc., 224 F.3d 1008, 1011 (9th Cir. 2000). 

In contrast, “recoupment ‘is the setting up of a demand arising

from the same transaction as the plaintiff’s claim or cause of

action, strictly for purposes of abatement or reduction of such

claim.’” Newbery, 95 F.3d at 1399 (internal citation omitted; 

emphasis in the original). As the court in Newbery explained,

recoupment is not subject to the automatic stay under § 362(a), nor

is it subject to any limitations imposed by § 553. Id. Moreover,

recoupment “‘relaxes the requirement of mutuality for setoff of

debts as it relates to the pre or postpetition character of those

debts.’” Id. (Internal citation omitted.) 

A bankruptcy trustee takes property subject to rights of

recoupment. In re Madigan, 270 B.R. 749, 754 (9th Cir. BAP 2001);

In re Flagstaff Realty Assocs., 60 F.3d 1031, 1035 (3d Cir. 1995). 

To determine whether recoupment is available, courts have asked

whether the claim “arises out of the transaction or occurrence that

is the subject matter of the opposing party’s claim.” Fed. R. Civ.

P. 13(a); Madigan, 270 B.R. at 755. As the court in Madigan noted,

“‘courts have permitted a variety of obligations to be recouped

against each other, requiring only that the obligations be

sufficiently interconnected so that it would be unjust to insist

that one party fulfill its obligation without requiring the same of

the other party.’” Id. (Internal citation omitted.)

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

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Decision 8

Here, recoupment is available to Chaudhry. As reflected by the

Sales Agreement, the sale to Chaudhry and the leaseback to the

debtor were integrated obligations under a single agreement. 

Chaudhry was not obligated under the Sales Agreement to make any

payments to the debtor so long as the debtor occupied the Property. 

The debtor was not obligated to make any rent payments to Chaudhry

so long as a balance was owing on the purchase price. (Per the

Sales Agreement, “[T]he rent will be deducted from . . . equity

until the equity is depleted.”) 

Brady argues that denial of Chaudhry’s right of recoupment

would not be inequitable to Chaudhry because she should have evicted

the debtor upon the bankruptcy filing and relet the Property. If

Chaudhry had done so, argues Brady, Chaudhry would not be in the 

position of owing the balance of the purchase price as of the

petition date to Brady, and yet not being able to recover any rent

from the debtor. (As of the petition date, the Sales Agreement did

not require the debtor to pay any rent except as credits against the

purchase price.) But, as Chaudhry notes, the debtor was not in

default under the Sales Agreement at the date of the petition, and

the theory on which Chaudhry would have effected such an eviction is

problematic. 

Brady argues that recoupment is not available because the sale

and leaseback were two separate transactions. For the reasons

stated above, the court disagrees. Under the Sales Agreement, one

integrated transaction was involved, the netting provisions of which

- rent against purchase price - were central to the deal from the

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NORTHERN DISTRICT OF CALIFORNIA

1300 Clay Street (2d fl.) 

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5

Fed. R. Civ. P. 8(c) provides, in part: “When a party has

mistakenly designated a defense as a counterclaim or a

counterclaim as defense, the court on terms, if justice so

requires, shall treat the pleading as if there had been a proper

designation.” Fed. R. Civ. P. 8(e)(1) provides: “Each averment

of a pleading shall be simple, concise, and direct. No technical

forms of pleading or motions is required.” Fed. R. Civ. P. 8(f)

provides: “All pleadings shall be so construed as to do

substantial justice.” 

Decision 9

standpoint of both parties. 

Brady also argues that Chaudhry waived the right to argue

recoupment because her answer to the complaint, as initially filed,

did not mention recoupment. 

This argument fails. On June 24, 2005, Chaudhry, acting

without benefit of counsel, wrote a letter to the court stating that

she intended the letter to be her response to the complaint. The

letter described the parties’ obligations under the Sales Agreement

and emphasized that the rent payments were to be deducted from the

purchase price. Although Chaudhry did not use the word

“recoupment,” her allegations in response to the complaint were

specific and clear, and certainly sufficient to put Brady on notice

of her factual contentions and to put recoupment at issue. See Fed.

R. Civ. P. 8(c), 8(e)(1), and 8(f), applicable via Fed. R. Bankr. P.

7008.5 

In addition, on August 12, 2005, after employing counsel,

Chaudhry filed an amended answer setting forth various affirmative

defenses. The second affirmative defense stated: “Plaintiff’s

claims are barred by the doctrines of setoff and recoupment.”

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

1300 Clay Street (2d fl.) 

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Decision 10

On November 22, 2005, this court entered its Order Setting

Aside Default and Default Judgment. Paragraph 2 of that order

provided that the above referenced letter would be deemed as an

answer to the complaint. Paragraph 3 of the order provided: “The

Answer to Complaint filed by Plaintiff on August 12, 2005 is hereby

deemed an amended answer.”

The court holds that Chaudhry did not waive her right to assert

recoupment against Brady.

C. Conclusion

The court will grant Chaudhry’s motion for summary judgment and

deny Brady’s motion for summary judgment. The court requests

Chaudhry to submit a proposed order so providing within 15 days. It

appears to the court that no further issues remain. If so, Chaudhry

may also submit a proposed judgment on the merits (the parties to

bear their own costs).

**END OF ORDER**

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NORTHERN DISTRICT OF CALIFORNIA

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Decision 11

COURT SERVICE LIST

Mariam S. Marshall, Esq.

Marshall & Ramos

350 Frank H. Ogawa Plaza #600

Oakland, CA 94612

Lawrence L. Szabo, Esq.

Law Offices

3608 Grand Avenue #1

Oakland, CA 94610-2024

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