Case Name: In re CALIFORNIA CANNERS AND GROWERS, A California agricultural nonprofit cooperative association, Debtor. CALIFORNIA CANNERS AND GROWERS, A California agricultural nonprofit cooperative association, Appellee, v. MILITARY DISTRIBUTORS OF VIRGINIA, INC., a Virginia corporation, Appellant
Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
Jurisdiction: United States
Decision Date: 1986-06-16
Citations: 62 B.R. 18
Docket Number: BAP No. NC 85-1542-AsEMe; Bankruptcy No. 3-83-01255-JR; Adv. No. 3-85-0054-4R
Parties: In re CALIFORNIA CANNERS AND GROWERS, A California agricultural nonprofit cooperative association, Debtor. CALIFORNIA CANNERS AND GROWERS, A California agricultural nonprofit cooperative association, Appellee, v. MILITARY DISTRIBUTORS OF VIRGINIA, INC., a Virginia corporation, Appellant.
Judges: Before ASHLAND, ELLIOTT, and MEYERS, Bankruptcy Judges.
Reporter: West's Bankruptcy Reporter
Volume: 62
Pages: 18–24

Head Matter:
In re CALIFORNIA CANNERS AND GROWERS, A California agricultural nonprofit cooperative association, Debtor. CALIFORNIA CANNERS AND GROWERS, A California agricultural nonprofit cooperative association, Appellee, v. MILITARY DISTRIBUTORS OF VIRGINIA, INC., a Virginia corporation, Appellant.
BAP No. NC 85-1542-AsEMe.
Bankruptcy No. 3-83-01255-JR.
Adv. No. 3-85-0054-4R.
United States Bankruptcy Appellate Panels of the Ninth Circuit.
Argued and Submitted April 17, 1986.
Decided June 16, 1986.
Joseph R. Mayes, Virginia Beach, Va., for appellant.
Paul A. Epstein, Epstein & Harris, San Francisco, Cal., for appellee.
Before ASHLAND, ELLIOTT, and MEYERS, Bankruptcy Judges.

Opinion:
ASHLAND, Bankruptcy Judge:
Military Distributors of Virginia, Inc. appeals an order granting summary judgment to California Canners and Growers on its claim against Military Distributors for post-petition delivery of goods. The order refused to allow Military Distributors to offset its pre-petition claim against California Canners for goods delivered. We affirm.
STANDARD OF REVIEW
We review the grant of summary judgment under the same standard as the trial court; after viewing the evidence, de novo, in the light most favorable to Military Distributors, we must determine whether the trial court correctly found that there was no genuine issue of material fact and that California Canners was entitled to judg ment as a matter of law. Ward By & Through Ward v. United States Dept. of Labor. 726 F.2d 516, 517 (9th Cir.1984).
STATEMENT OF FACTS
California Canners filed a Chapter 11 petition in bankruptcy on June 13,1983 and filed this adversary proceeding on February 4, 1985 objecting to the claim of Military Distributors.
Military Distributors admitted that it owes California Canners $86,842.47 for goods which California Canners as debtor in possession invoiced, shipped, and delivered to Military Distributors after the date of the Chapter 11 filing. Military Distributors contends that it is entitled to a setoff or credit of $68,810.52 for pre-petition debts owed by California Canners to Military Distributors.
Before bankruptcy, California Canners sold and delivered goods to Military Distributors which subsequently, upon the order of California Canners, shipped goods to various military installations. Military Distributors billed California Canners for the goods it delivered plus service charges and drayage. California Canners in turn billed the government. California Canners was on the government's approved list of suppliers; Military Distributors was not. California Canners received payment from the government but did not pay Military Distributors for several separate orders and shipments taking place before bankruptcy.
The post-petition invoices of California Canners represent several shipments made in connection with several orders placed by Military Distributors after bankruptcy.
Military Distributors argues that summary judgment should not have been granted since the parties disagree as to whether the claims arose from the "same transaction" and the bankruptcy court made no specific finding of fact in that respect.
ISSUE
Whether recoupment between post-petition and pre-petition claims arising from the same transaction is precluded and, if not, whether the claims here arise out of the same transaction.
DISCUSSION
Recoupment originated as an equitable rule of joinder. Under recoupment, a defendant could meet a plaintiffs claim with a countervailing claim that arose "out of the same transaction." See J. Moore, 3 Moore's Federal Practice ¶ 13.02, at 13-13 n. 1 (2d ed. 1985); See also In re B & L Oil Company, 782 F.2d 155 (10th Cir.1986).
Modem rules of pleading have diminished the importance of the common-law distinctions between recoupment and setoff. Id. However, in bankruptcy the distinctions are important. Setoff is allowed in only very narrow circumstances in bankruptcy. 4 Collier on Bankruptcy ¶ 553.03 (15th ed. 1981). But a creditor properly invoking the recoupment doctrine can receive preferred treatment even though setoff would not be permitted. Id. The court in Lee v. Schweiker, 739 F.2d 870 (3d Cir.1984) stated:
The justification for the recoupment doctrine is that where the creditor's claim arises from the same transaction as the debtor's claim, it is essentially a defense to the debtor's claim against the creditor rather than a mutual obligation, and application of the limitations on setoff in bankruptcy would be inequitable.
Lee v. Schweiker, at 875.
The Lee court distinguished the cases in which recoupment was allowed and emphasized that most recoupment cases involved single contracts that provided for advance payments based on estimates of what would ultimately be owed, subject to later correction. The analysis in those cases was based on the treatment of executory contracts in bankruptcy. When an exec-utory contract is involved, courts have reasoned that a debtor who assumes the favorable aspects of the contract (post-petition performance) also must take the unfavorable aspects of the same contract (obligation to repay pre-petition overpayments). Lee at 876. For example, when a recording company paid advance royalties to a musician, it was allowed to recoup the advances from post-bankruptcy record sales, rather than being required to claim as an unsecured creditor for the outstanding overpayment total at the time of the bankruptcy filing. Waldschmidt v. CBS, Inc., 14 B.R. 309, 314 (M.D.Tenn.1981).
Recoupment has been applied when progress payments on repair or construction contracts were made in excess of the value of the work performed before bankruptcy and performance continued after bankruptcy. In re Midwest Service and Supply Co., 44 B.R. 262, 265 (D.Utah 1983). The recoupment doctrine also was applied to allow the government to recover Medicare overpayments from post-bankruptcy reimbursements to a hospital that continued to operate after filing a Chapter 11 petition. In re Yonkers Hamilton Sanitarium, Inc., 22 B.R. 427, 433 (Bankr.S.D.N.Y.1982), aff'd 34 B.R. 385 (S.D.N.Y.1983).
Recoupment was also applied when a party paid sums by mistake and the court determined that the other creditors would be unjustly enriched if they were permitted to share in the monies. In re B & L Oil Co., 782 F.2d 155 (10th Cir.1986).
Military Distributors contends that the entire course of dealing between California Canners and Military Distributors was governed by a distributor agreement. Under that agreement, the pre-petition and post-petition claims grew out of the same transaction. Military Distributors argues further that the California Canners' distributor agreement was the sole contract between the parties and the only agreement before the court on the motion for summary judgment.
The California Canners/Military Distributors agreement states that Military Distributors agrees to:
1. Maintain adequate inventories necessary to fill all orders in full and on time.
2. Stock and list any additional items requested by Dunham & Smith Agencies, Inc.
3. To list all items being sold to the Military in the civilian order guide.
4. Military Distributors agrees to a service fee of 6% to be paid on delivered cost less any and all allowances.
5. As soon as possible after making delivery, to send signed Military delivery tickets and purchase orders, if any, for reimbursement by check.
6. CCG terms are 2% 10 days net 30 days.
7. Dunham & Smith has the responsibility for notifying Military Distributors of any new placements and estimated monthly movement. Dunham & Smith will also see that sufficient lead time is given so orders may be delivered complete and on time.
8. Any conditions and exceptions not covered will be- mutually resolved.
The agreement between the parties shows that the arrangement was intended to establish an overall relationship between the parties. The agreement contemplates that the parties might enter into transactions for the sale and purchase of goods. The agreement does not address terms and conditions for the purchase of specific quantities of goods, delivery, price, or payment terms (other than payment terms to California Canners).
It appears that the pre-petition debt that Military Distributors seeks to recover represents the final steps in several single transactions, that is, the delivery of goods to the military installations. The post-petition claims of California Canners represent the first steps in a number of separate and distinct transactions. The goods in California Canners' post-petition invoice are not the same goods as in Military Distributors' pre-petition invoices.
Military Distributors' position would, in effect, permit anyone to offset post-petition claims against pre-petition claims. This would result in preferential treatment among creditors.
CONCLUSION
The sales and purchases set out in California Canners' invoices constitute the transactions between the parties. Each transaction gave rise to a debt in a specific amount. Military Distributor's debt to California Canners is entirely a post-petition debt. The offset claimed by Military Distributors is for California Canners' pre-petition obligations to Military Distributors. Recoupment would not be appropriate since one transaction occurred pre-petition and the other post-petition.
We affirm the order granting summary judgment.