Opinion ID: 562073
Heading Depth: 1
Heading Rank: 3

Heading: offset for tort damages

Text: 17 In addition to an offset against the fraudulent transfer for contractual damages, Bustamante seeks an offset for tort damages suffered because of McConnell's fraudulent loan transactions with Northwest Bank & Trust. He seeks this offset on the basis of Sec. 553(a) of the Bankruptcy Code, which grants a creditor the right 'to offset a mutual debt owing by such creditor to the debtor' so long as both debts arose before the commencement of the bankruptcy action and are indeed mutual. In re Davidovich, 901 F.2d 1533, 1537 (10th Cir.1990) (per curiam). Section 553(a) setoffs, however, do not apply to actions by the Trustee to recover fraudulent transfers: It would defeat the purpose of the Bankruptcy Act's provisions relating to fraudulent transfers to allow [creditors] to offset the value of the property thus transferred to them by the amount of their unsecured claim against [the debtor]. Mack v. Newton, 737 F.2d 1343, 1366 (5th Cir.1984). 18 If Bustamante is to offset the Trustee's recovery with McConnell's tort liability, he must satisfy the conditions for recoupment, a rule that has evolved to permit a creditor to offset a claim that 'arises from the same transaction as the debtor's claim,' without reliance on the setoff provisions and limitations of section 553. Davidovich, 901 F.2d at 1537. Recoupment allows a defendant to reduce the amount of a plaintiff's claim by asserting a claim against the plaintiff which arose out of the same transaction to arrive at a just and proper liability on the plaintiff's claim. In re Holford, 896 F.2d 176, 178 (5th Cir.1990) (emphasis in original). Bustamante might thus assert recoupment based on the contract but not on an unrelated tort, consisting of McConnell's alleged conspiracy with one David Dabney to secure a fraudulent title policy on the Ironwood I project naming Dabney as owner. With this title policy, they took out a loan on the property secured by a mortgage to Northwest Bank & Trust. Bustamante seeks damages for having to defend against Northwest's attempted foreclosure and generally for suffering a cloud on his title to Ironwood I. 19 The bankruptcy court correctly refused to offset the $600,000 with these asserted tort damages. The contract and the alleged fraud did not arise out of the same transaction. Except that they both involved the same property, they were unrelated. Bustamante alleges no fraud in either the inducement or the execution of his Ironwood sales contract. Moreover, he does not allege that McConnell's fraud interfered with either party's performance of the contract. Cf. Davidovich, 901 F.2d at 1538 (The fact that the same two parties are involved in the claims to be offset, and that a similar subject matter gave rise to both claims does not mean that the two arose from the 'same transaction' for purposes of the doctrine of recoupment.). As the bankruptcy court stated, Bustamante should be required to present his claim in the bankruptcy case and obtain such satisfaction of it as is available to other similarly situated creditors.