Opinion
Case No. 99-51514-WS.
February 27, 2007
OPINION IN CONNECTION WITH MOTION OF FRED S. FINDLING FOR AN ORDER AUTHORIZING SET-OFF OR RECOUPMENT
Fred S. Findling ("Findling") acted as Debtor's attorney during some portion of this case and in connection therewith the Court approved payment of attorney fees to him in the amount of $45,000, which the Trustee paid out of estate funds. Thereafter, by virtue of the Supreme Court Decision in Lamie v. U.S. Trustee, 530 U.S. 956, 123 S.Ct. 2664, 156 L.Ed.2d 653, 2003, the Court entered an order dated October 12, 2004 ("Disgorgement Order"), requiring disgorgement of those paid fees. In the meantime, Debtor had been pursuing in state court a malpractice action against Findling arising out of his representation of Debtor in this bankruptcy case. That state court action resulted in its dismissal and the awarding to Findling, against Debtor individually, of $35,000 in sanctions and costs, all by an order dated February 6, 2004 ("Sanctions Order"). Both the Disgorgement Order and the Sanctions Order are now final orders. Findling seeks an order of this Court permitting him to set-off against his $45,000 disgorgement liability to the Trustee the $35,000 owed him by the Debtor individually, thus reducing his obligation to the Trustee to the $10,000 difference. (The actual amounts may differ by now to the extent there is for example any interest or other items properly taken into account.)
During the oral arguments the Court and the parties focused on set-off principles, exploring for example whether there existed the required mutuality in light of the fact that the Sanctions Order arising out of the state court action was the personal obligation of Kloian, whereas the debt owed by Findling under the Disgorgement Order was owed to the bankruptcy estate, and not to Kloian personally — complicated, however, by the possibility of there eventually being a surplus estate. Findling did however also mention that what is sought here might in essence be considered a recoupment (as opposed to a set-off), which, if so, might lead to a different result.
After noting that 11 U.S.C. § 553 is not applicable to this kind of situation (i.e., two claims both arising post petition), the difference between set-off and recoupment was discussed by the Court in Transcommunications, Inc. v. U.S. Xpress, Inc., 355 B.R. 668 (Bkrtcy.E.D.Tenn., 2006) where at page 670, it said:
A recoupment is close kin to a setoff, the difference being that a setoff cancels mutual debts owed between the parties whereas recoupment cancels only such mutual debts as arise out of the same transaction. Recoupment is not defined in the Bankruptcy Code, nor does the re-coupment doctrine, as applied in the bankruptcy courts, derive from any part of the Code. Rather, its origin is in the common law, and it is held that "[t]he sole requirement governing the applicability of the recoupment doctrine is that the sum of the amount to be reduced must have arisen out of the `same transaction' as the original sum." Reeves v. Columbia Gas (In re Reeves), 265 B.R. 766, 770 (Bankr.N.D.Ohio 2001); accord, Waldschmidt v. CBS, Inc., 14 B.R. 309, 314 (M.D.Tenn. 1981); Paris v. Transamerica Ins. Group (In re Buckley Assocs. Ins., Inc.), 67 B.R. 331, 334 (Bankr.E.D.Tenn. 1986).
See also In re 105 East Second Street Associates, 207 B.R. 64 (Bankr.S.D.N.Y. 1997).
Thus, if the two items in question arose out of the "same transaction" it is recoupment that is involved and consequently mutuality is not required. There are differences among the Courts as to what constitutes the "same transaction." See general discussion at Collier, Bankruptcy, 553.10(1). The more liberal view appears to be that expressed in Newbery Corp. v. Fireman's Fund Ins. Co., 95 F.3d 139 (9th Cir 1996) where the Court discussed the differences between set-off and recoupment in the bankruptcy context, mentioning that recoupment involves defenses to the other party's claim or positions asserted (often in the form of a mandatory counter-claim or similar) for purpose of abatement or reduction, being essentially claims which bear a "logical relationship" (quoting from Moore v. New York Cotton Exchange, 270 U.S. 593; 46 S.Ct. 367, 70 L.Ed. 750 (1926) to one another — to the point that it would be "inequitable" to be in essence favor one party over another by not permitting recoupment in such circumstances. The other view appears to adopt a narrower test requiring that obligations to arise out of a single integrated transaction. See In re University Medical Center, 973 F.2d 1065 (3rd Cir 1992). In this case, Findling performed legal services for Debtor in the bankruptcy case and was awarded and paid fees for doing so. Notwithstanding that, Debtor sued Findling in state court for malpractice in connection with the same services for which the Bankruptcy Court awarded Findling the indicated fees. The result of that State Court suit was the Sanctions Order. The obligation of Findling to pay back what the Bankruptcy Court awarded him arose simply because in the interim the Supreme Court decided the statute precluded payment of Debtor's post petition attorney fees out of the bankruptcy estate, thus requiring the attorney to seek payment of such from assets of the Debtor not compromising the bankruptcy estate. At its core, and in substance, what we basically have here is a debt for attorney fees versus a claim for malpractice in connection with the performance of those same services. The facts that the debt to the Trustee arose from the necessity of seeking a return of fees paid on the one hand, or sanctions and costs arising from an unsuccessful assertion of a malpractice claim on the other, do not change the substantive relationship between the two countervailing claims. The transaction or relationships at their core is the attorney — client relationship and the requirement to pay for services rendered, subject to any defense thereto, such as malpractice, in the performance of those same services. In this Court's view that constitutes the "same transaction," likely under either the "logical relationship" or the "single integrated transaction" test. Should there be a question about it, however, this Court adopts the indicated more liberal view which clearly encompasses considering the countervailing claims involved here as emanating from the "same transaction." Such results in the proper characterization of the Sanctions Claim as an appropriate recoupment with reference to the Disgorgement Claim. That concluded, the Court need not address the question of whether or not the application of the principles of set-off would also produce a similar result. Findling shall prepare and present an appropriate order.