Court Opinion

ID: 9735115
Source: CourtListenerOpinion
Date Created: 2023-08-26 18:02:20.035314+00
Date Added: 2024-06-11T18:26:55.340153
License: Public Domain

SALADINO, Bankruptcy Judge, dissenting.
Although I agree with most of what is stated in the majority opinion, including *822the conclusion that § 502(h) does not, standing alone, operate to limit Standard’s ability to assert a recoupment defense, I would affirm. Instead of focusing on a de novo review of the legal issues surrounding § 502(h), I believe the bankruptcy court’s order denying an equitable remedy should be reviewed from an abuse of discretion standard. C.T. Development Corp. v. Barnes (In re Oxford Development, Ltd.), 67 F.3d 683, 685 (8th Cir.1995).
The bankruptcy court expressly recognized that recoupment is an equitable doctrine and that it should apply only where it would be inequitable to allow the debtor to enjoy the benefits of the transaction without also meeting its obligations. In United States v. Dewey Freight System, 31 F.3d 620 (8th Cir.1994), the Eighth Circuit Court of Appeals engaged in an extensive review of how recoupment has been applied in bankruptcy. The Dewey court never expressly said it was weighing the equities, but it did look at the recoupment issue “from the perspective of the Bankruptcy Code’s treatment of executory contracts.” In other words, it looked at how the claims arose (under § 365(g)(1) and § 502(g)) and the impact recoupment would have on the bankruptcy estate:
However, once the contracts were rejected, any damages caused by rejection, such as those asserted by USPS in this case, are treated as pre-petition unsecured creditor claims. In these circumstances, it would frustrate the basic purpose of § 365 in a Chapter 11 proceeding to allow USPS to reduce the amount it owes to Debtor for post-petition services by offsetting claims that § 365 has explicitly removed from the post-petition scene.
“The fundamental purpose of reorganization is to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources.” [N.L.R.B. v.] Bildisco, 465 U.S. at 528, 104 S.Ct. at 1197 [79 L.Ed.2d 482 (1984)]. We may not construe the equitable doctrine of recoupment so as to frustrate both the specific commands of § 365(g)(1) and § 502(g), and this overriding purpose of Chapter 11.
Id. at 625. Similarly, the bankruptcy court here correctly recognized that the recoupment analysis was impacted by the trustee’s preference demand and § 502(h). Although its conclusion that § 502(h) alone precludes recoupment is certainly debatable, the bankruptcy court did note that recoupment should be narrowly construed, there is a general hesitancy to apply re-coupment in bankruptcy cases, and that it would be inimical to the purpose of equal distribution among creditors “to interpret § 502(h) in such a way that would permit that creditor to once again obtain preference over other creditors by use of the doctrine of recoupment.” That is the same sort of “equitable” analysis conducted by the Eighth Circuit in Dewey.
I note that the majority pointed out additional equitable factors4 that are certainly relevant, were raised on appeal, and clearly support denial of recoupment in this case. Even though the bankruptcy court did not mention those same factors in its order, they are in the record and the parties stipulated to the underlying facts. In any event, the bankruptcy court had the discretion to deny the equitable claim of recoupment and, based on the record, did not abuse that discretion. Accordingly, *823although I get there by a slightly different path (as did the court in Dewey), I think the bankruptcy court correctly denied re-coupment.

. The majority noted that if recoupment were allowed, the permanently disabled debtor would effectively be repaying the overpayment a second time, which would impair the debtor’s fresh start. Further, Standard failed to defend or even question the preference demand.