PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

________________

No. 17-3607

________________

In re: REVEL AC INC., et al.,

Debtors

IDEA BOARDWALK, LLC

v.

REVEL ENTERTAINMENT GROUP, LLC;

POLO NORTH COUNTRY CLUB, INC.

Polo North Country Club,

Appellant

________________

Appeal from the United States District Court

for the District of New Jersey

(D.C. Civil Action No. 3-16-cv-08683)

District Judge: Honorable Michael A. Shipp

________________

Argued September 26, 2018
2

Before: AMBRO, CHAGARES, 

and GREENAWAY, JR., Circuit Judges

(Opinion filed: November 30, 2018)

Stuart J. Moskovitz [Argued]

4400 Route 9 South, Suite 1000 

Freehold, NJ 07728

Counsel for Appellant

Jeffrey A. Cooper [Argued]

Barry J. Roy

John H. Harmon

Rabinowitz Lubetkin & Tully

293 Eisenhower Parkway, Suite 100

Livingston, NJ 07039

Counsel for Appellee

________________

OPINION OF THE COURT

________________

AMBRO, Circuit Judge

We determine whether the operator of two nightclubs 

and a beach club at the Revel casino in Atlantic City, New 

Jersey, may reduce its outstanding rent obligations based on 

“recoupment” payments that the initial owner of the casino—

Revel AC, Inc.—agreed to make under a complex commercial 

lease before it filed for Chapter 11 bankruptcy. The 

Bankruptcy Court and District Court both held that the 

nightclub operator is permitted to reduce its rental obligations 
3

under a tenant-protective provision of the Bankruptcy Code, 11 

U.S.C. § 365(h), and the doctrine of equitable recoupment. We 

affirm on both grounds.

I. Background

A. Facts and Procedural History

When Revel entered Chapter 11 in 2014, one of its 

tenants, plaintiff-appellee IDEA Boardwalk, LLC, continued 

to operate two nightclubs and a beach club on the casino 

premises. As Revel worked through its bankruptcy, IDEA 

sought to protect its right to continue operating on the casino 

premises under a long-term lease (the “Lease”) by filing an 

adversary proceeding in the Bankruptcy Court. IDEA initially 

filed against Revel as the owner, but defendant-appellant Polo 

North Country Club, Inc., became the defendant in the 

proceeding (and IDEA’s landlord under the Lease) when it 

purchased Revel’s assets, including the casino, for a small 

fraction of the casino’s building cost per a purchase agreement 

dated March 20, 2015 (the “Purchase Agreement” or 

“Agreement”). The Bankruptcy Court approved the sale 

shortly thereafter (the “Sale Order”). 

The Purchase Agreement provided that Polo would 

purchase Revel’s assets free and clear of all liabilities except 

for those listed in the Agreement. As relevant here, it stated 

that Polo’s only surviving liability with respect to the Lease 

would be a potential liability to IDEA for an administrative 

expense claim up to a specified maximum amount. (Purchase 

Agreement § 2.3(f).) The Agreement also stated that Polo 

would acquire certain legal claims Revel may have against 

IDEA with respect to the Lease (id. § 2.1(m)), which the 

parties understand to include any rent payments that IDEA may 

still owe under the Lease.
4

The Sale Order generally authorized Polo’s purchase of 

Revel’s assets “free and clear of all liens, claims, 

encumbrances and other interests of any kind” under § 363(f) 

of the Bankruptcy Code, 11 U.S.C. § 363(f). (Sale Order ¶ 6.) 

In light of prior litigation concerning the rights of tenants on 

Revel’s properties,1the Sale Order also contained two carveout provisions that expressly preserved certain rights relating 

to IDEA’s continued use of the casino premises under the 

Lease. The first carve-out preserved “[a]ny rights (including 

rights of setoff and recoupment), claims and defenses of IDEA 

. . . with respect to [IDEA’s adversary proceeding against 

Revel].” (Id. ¶ 14.) The second reserved “any rights elected 

to be retained by [IDEA or other tenants] pursuant to section 

365(h) of the Bankruptcy Code” after Revel’s rejection of the 

governing tenancy agreements, including, in IDEA’s case, the 

Lease. (Id. ¶ 18.)

The Sale Order’s carve-out of these tenant rights set the 

stage for further litigation between IDEA and Polo concerning 

IDEA’s rights and obligations as Polo’s tenant under the Lease. 

Shortly after entering the Sale Order, the Bankruptcy Court 

granted a long-pending motion by Revel to reject the Lease

retroactively to September 2, 2014, the date on which the Revel 

casino closed its doors. In response to that order, IDEA filed a 

notice of its election to retain its rights as a tenant under § 

365(h) of the Code, as expressly allowed by the Sale Order. 

IDEA also asked the Bankruptcy Court to clarify its rights as a 

 

1 Polo first tried to purchase Revel’s assets under a sale order 

that would have extinguished IDEA’s possessory rights under 

the Lease. That order was stayed by our Court in a prior 

decision, see In re Revel AC, Inc., 802 F.3d 558, 575 (3d Cir. 

2015), and superseded by the Sale Order we now review.
5

tenant after Revel’srejection of the Lease and sale of the casino 

to Polo. 

In an omnibus order in June 2015, the Bankruptcy Court 

clarified major aspects of the post-petition landlord–tenant

relationship between IDEA and Polo. That order substantially 

narrowed the litigation between IDEA and Polo but left open 

an important question about the rights IDEA retained under the 

Lease—namely, whether IDEA is permitted to deduct from its 

outstanding rent obligations certain “recoupment” amounts 

owing to IDEA under the Lease. To seek the Bankruptcy 

Court’s clarification on this point, IDEA filed a motion for 

summary judgment on one of its pending claims in the 

adversary proceeding. The Bankruptcy Court granted in part 

IDEA’s motion for summary judgment, declaring that: 

(i) IDEA may “offset (against rent) any damages caused, after 

rejection, by [Polo’s] nonperformance” under the Lease; and 

(ii) it may “apply and setoff the Recoupment Amount, as 

defined in the Lease, for both the period prior to [Polo’s] 

acquisition of title and after.” 

The Bankruptcy Court’s ruling that IDEA may reduce 

its rent obligations by the recoupment amounts under the 

Lease, which is the only aspect of the Bankruptcy Court’s 

summary judgment order on appeal, gave two independent 

grounds: (1) the recoupment provisions of the Lease “fall 

within the ambit of rights preserved under Code 

§ 365(h)(1)(A)(ii),” In re Revel AC, Inc., 2016 WL 6155903, 

at *11 (Bankr. D.N.J. Oct. 21, 2016); and (2) IDEA could 

deduct amounts based on the equitable doctrine of recoupment. 

Id. at *11–12. Polo appealed to the District Court the 

Bankruptcy Court’s grant of summary judgment, which 

affirmed on the same two grounds. It now appeals to us. 
6

B. The Lease 

The Lease is long and neither simple nor direct. Indeed 

it is an almost impenetrable web of formulas, defined terms, 

and cross-references—a “bloated morass,” in the words of the 

Bankruptcy Court. We accordingly do not recite the Lease 

provisions verbatim, but instead summarize its relevant 

provisions, which relate to capital contributions, rent 

obligations, and recoupment obligations.2

Capital contributions. The Lease contemplated that 

both Revel and IDEA would make capital contributions to 

“build out” the IDEA venues before opening them. (Lease 

§ M(a).) The total budget for this build-out was roughly $80 

million, with Revel responsible for about $48 million and 

IDEA bound for $16 million. (Id.) The remaining $16 million 

would either be contributed by IDEA (at IDEA’s option) or by 

Revel if IDEA did not make the contribution. (Id. § M(b).) 

These capital contributions—and, in particular, the relative 

proportions of capital contributed by IDEA and Revel—were 

the foundation for rent and recoupment calculations under the 

Lease (described below).

Rent obligations. The Lease contemplated that IDEA 

would pay rent to Revel each month on a venue-by-venue 

basis. IDEA’s capital contribution was apportioned among its 

 

2 We make one clarification concerning our use of the term 

“recoupment.” We use “recoupment amounts” to describe 

Revel’s contractual obligation under the Lease to make certain 

recoupment payments because the Lease itself uses the term 

“recoupment.” However, this contractual obligation is not the 

same as the concept of “equitable recoupment,” which is an 

equitable doctrine from the common law (as we discuss 

below). 
7

three venues based on certain percentages specified in the 

Lease. (Id. Ex. K.) Then, each month, the rent for a given 

venue was calculated to be the distributable cash flow from that 

venue multiplied by the percentage share of capital contributed 

to that venue by Revel as part of the pre-opening build-out. 

(Id. § C.1(a)(i).)

Recoupment obligations. Under the Lease, Revel would 

make certain “recoupment” payments to IDEA in the first four 

years of the Lease term. These occurred every three months 

for IDEA’s two nightclubs and twice a year for the beach club. 

(Id. § C.1(d)(vi).) On each of the calculation dates, IDEA and 

Revel would determine (a) whether the venue in question had 

reached a certain threshold in gross sales, and (b) whether it 

had registered a positive return on capital investment, as 

measured by comparing the venue’s year-to-date distributable 

cash flow (as defined in the Lease) to the portion of IDEA’s 

capital contribution allocated to that venue for the time period 

in question using a straight-line depreciation over four years. 

(Id. §§ C.1(a)(i)(1), C.1(d).) For each of these calculation 

dates, if the venue met the applicable gross-sales threshold but 

did not have a positive return to capital net of depreciation, 

Revel would refund to IDEA the amount necessary to cause the 

latter to break even for that period. (Id.) 

II. Jurisdiction and Standard of Review

The District Court had jurisdiction under 

28 U.S.C. § 158(a). In re Truong, 513 F.3d 91, 93 (3d Cir. 

2008) (per curiam). We have jurisdiction per 28 U.S.C. 

§ 158(d)(1) and exercise the same standard of review as did 

the District Court. In re Heritage Highgate, Inc., 679 F.3d 

132, 139 (3d Cir. 2012). It reviewed the Bankruptcy Court’s 

grant of summary judgment de novo. See In re Klaas, 858 

F.3d 820, 827 (3d Cir. 2017). We do the same.
8

III. Discussion

The Bankruptcy Court and the District Court both ruled 

that IDEA has a right to reduce its rent obligations to Polo by 

the amount of Polo’s recoupment obligations under the Lease. 

Both Courts based this ruling on two independent grounds: 

First, the tenant rights that IDEA retained by making an 

election under § 365(h) of the Bankruptcy Code include the 

right to reduce its rent obligations by the recoupment amounts. 

Second, even if § 365(h) did not extend to the recoupment 

amounts, IDEA would be permitted to reduce its rent 

obligations under the doctrine of equitable recoupment. 

A. Section 365(h) Election

Section 365 of the Bankruptcy Code governs a debtor’s 

rejection of executory contracts and unexpired leases during 

bankruptcy. Subsection (h) protects a tenant whose landlord 

files for bankruptcy and then rejects the tenant’s lease. In 

relevant part, it provides that 

[i]f the trustee[3]rejects an unexpired lease of real 

property under which the debtor is the lessor . . . 

[and] the term of such lease has commenced, the 

lessee may retain its rights under such lease

(including rights such as those relating to the 

amount and timing of payment of rent and other 

amounts payable by the lessee and any right of 

use, possession, quiet enjoyment, subletting, 

assignment, or hypothecation) that are in or 

 

3 With narrow exceptions not relevant here, rights and powers 

given to a trustee under Chapter 11 of the Code may be 

exercised as well by a debtor in possession (here Revel, as the 

debtor) when no trustee is appointed for the debtor’s estate. 

See 11 U.S.C. § 1107(a). 
9

appurtenant to the real property for the balance 

of the term of such lease . . . . 

11 U.S.C. § 365(h)(1)(A)(ii). 

In the Sale Order approving Revel’s sale of assets to 

Polo, the Bankruptcy Court expressly preserved “any rights 

elected to be retained by [IDEA or other tenants] pursuant to 

section 365(h) of the Bankruptcy Code” after the debtor’s 

rejection of the governing tenancy agreements, including the 

Lease. (Sale Order ¶ 18.) And IDEA preserved those rights 

by making an election under § 365(h) when the Bankruptcy 

Court approved Revel’s motion to reject the Lease.

Under subsection (h), the rights IDEA reserved under 

the Lease include those “relating to the amount and timing of 

payment of rent and other amounts payable by the lessee.” 

11 U.S.C. § 365(h)(1)(A)(ii). As we have explained 

previously, a tenant who makes an election under this 

provision is “entitled to remain under the same rental terms as 

are set forth in the lease.” Megafoods Stores, Inc. v. Flagstaff 

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

1034 (3d Cir. 1995) (quoting In re TM Carlton House 

Partners, 97 B.R. 819, 823 (Bankr. E.D. Pa. 1989)). 

There is no doubt the “rental terms” under which IDEA 

leased the venue premises include the right to receive 

recoupment payments under the Lease. Although it contains 

distinct provisions addressing “rent” and “recoupment,” they 

are inextricably related and combine to establish IDEA’s rental 

terms under the Lease. In their net effect, the rent and 

recoupment provisions ensured that IDEA would pay rent in 

the first four years of the Lease term only when an IDEA venue 

turned a profit (as measured by the year-to-date distributable 

cash flow from the venue and accounting for the depreciation 

of capital that IDEA contributed to that venue). To render the 
10

“recoupment” component of this framework inoperative, while 

still calculating the “rent” component using the same formulas, 

would upend the rent framework established in the Lease and 

deny IDEA’s statutory right to remain in possession of the 

premises under the same “rental terms.” Flagstaff, 60 F.3d at 

1035. Accordingly, by virtue of its election under § 365(h), 

IDEA is permitted to reduce its rent obligations by the 

recoupment amounts applicable under the Lease for the 

balance of the term of the Lease after the date of rejection—

i.e., after September 2, 2014.4

B. Equitable Recoupment

The doctrine of equitable recoupment “is not codified 

in the Bankruptcy Code, but has been established through 

decisional law.” In re Anes, 195 F.3d 177, 182 (3d Cir. 1999)

(quoting Flagstaff, 60 F.3d at 1035). When a claim against a 

debtor qualifies for equitable recoupment, the claim “avoids

the usual bankruptcy channels,” in that it receives full value in 

the netting of obligations between a creditor and the debtor 

without regard to the bankruptcy priority of the claim—“thus, 

in essence, [the claim] is given priority over other creditors’ 

 

4 We note that, in addition to the general tenant protections in 

§ 365(h)(1)(A)(ii), another provision addresses a tenant’s right 

to reduce its rent obligations under a rejected lease based on 

the landlord’s nonperformance of its obligations under the 

lease after the rejection. See 11 U.S.C. § 365(h)(1)(B). 

Although we need not rest our decision on this particular 

provision, we note that it appears to provide another basis on 

which IDEA could reduce its rent obligations based on the 

recoupment amounts under the Lease, assuming, as the record 

suggests, that Revel ceased to perform its recoupment 

obligations after moving to reject the Lease. 
11

claims.” Flagstaff, 60 F.3d at 1035; see also In re Anes, 195 

F.3d at 181–82 (discussing equitable recoupment).5

Recoupment means “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.” In re Univ. Med. Ctr., 973 F.2d 1065, 1079 (3d 

Cir. 1992) (quoting 4 COLLIER ON BANKRUPTCY § 553.03, at 

553-15 to -17 (emphasis added by Univ. Med. Ctr.)). For 

purposes of equitable 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.’” 

Id. at 1081 (quoting Lee v. Schweiker, 739 F.2d 870, 875 (3d 

Cir. 1984)). “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.

IDEA contends that the doctrine of equitable 

recoupment requires reducing its existing rent obligations by 

Polo’s recoupment obligations. We agree. As summarized 

above, the rent and recoupment provisions created a rental 

framework that ensured IDEA would pay rent in the first four 

years of the Lease term only when a venue made profit as 

measured by a formula set out in the Lease. To give effect to 

this framework, the recoupment provisions of the Lease 

performed a periodic downward adjustment to IDEA’s rent 

obligations under the Lease. Given this countervailing relation 

between the rent obligations and recoupment amounts under 

 

5 For this reason, we have pointed out that equitable 

recoupment, “as a non-statutory, equitable exception to the 

automatic stay, should be narrowly construed.” In re Univ. 

Med. Ctr., 973 F.2d 1065, 1081 (3d Cir. 1992). 
12

the Lease, there is no question the rental obligations and 

recoupment amounts “aris[e] from the same transaction,” Univ. 

Med. Ctr., 973 F.2d at 1079 (citation and emphasis omitted), 

for purposes of equitable recoupment. In this context, we also 

have no trouble concluding it would be inequitable to require 

IDEA to pay the full amount of its rental obligations without 

applying the countervailing downward adjustments 

contemplated by the recoupment provisions. See Flagstaff, 60 

F.3d at 1035 (ruling that tenant could reduce its rent under the 

doctrine of equitable recoupment based on the cost of making 

repairs the bankrupt landlord was obligated to make, because 

“[b]oth the claim for repair costs and the rent arise from the 

lease, and it would be inequitable for the landlord to receive 

rent without compensating [the] tenant for undertaking 

repairs”).

That Polo obtained Revel’s assets “free and clear of all 

liens, claims, encumbrances and other interests of any kind” in 

a sale under Code § 363(f) does not change the result. The Sale 

Order expressly preserved “[a]ny rights (including rights of 

setoff and recoupment), claims and defenses of IDEA . . . with 

respect to [IDEA’s adversary proceeding against Revel].” 

(Sale Order ¶ 14.) That preserved IDEA’s assertion of 

equitable recoupment here. Further, as we have explained in 

prior cases, the doctrine of equitable recoupment is an 

affirmative defense, and the sale of assets “free and clear” of 

liens, encumbrances, and interests “does not include defenses 

to claims.” Folger Adam Sec., Inc. v. DeMatteis/MacGregor,

JV, 209 F.3d 252, 257, 258–64 (3d Cir. 2000); accord In re 

Trans World Airlines, Inc., 322 F.3d 283, 289 (3d Cir. 2003) 

(“[A] right of recoupment is a defense and not an interest and 

therefore is not extinguished by a § 363(f) sale.” (quoting 

Folger, 209 F.3d at 261)). 

In short, IDEA is entitled to reduce its rent obligations 

by the recoupment amounts under the Lease based on the 
13

doctrine of equitable recoupment. We also clarify that 

equitable recoupment applies to rent and recoupment amounts 

under the Lease regardless whether they arose before or after 

Revel filed its bankruptcy petition and regardless whether they 

arose before or after Revel rejected the Lease.6

* * * * *

When IDEA agreed to operate two nightclubs and a 

beach club at the Revel casino, it agreed under the Lease to pay 

rent only when its venues met certain financial benchmarks. 

Section 365(h) of the Bankruptcy Code and the doctrine of 

equitable recoupment entitled IDEA to continue paying rent on 

those same terms even after its landlord filed for bankruptcy 

and rejected the Lease. Nothing in the agreements or court 

orders governing third-party Polo’s purchase of the casino in 

bankruptcy changes this result. We therefore affirm, holding 

that IDEA may reduce its rent obligations by the recoupment 

amounts provided under the Lease. 

 

6 For the avoidance of any doubt, we do not hold that IDEA is 

entitled to recover affirmatively any recoupment amount from 

Polo. Rather, IDEA’s rights under § 365(h) and the equitable 

recoupment doctrine are limited to giving IDEA the right to 

reduce its rent obligations to Polo. Nothing in this opinion 

should be construed to allow IDEA to recover any additional 

monies from Polo (such as for the recoupment of capital 

contributions) beyond the reduction of rent that IDEA owes to 

Polo under the Lease.