Opinion
CIVIL ACTION NO. 06-40150-RWZ.
May 29, 2007
MEMORANDUM OF DECISION AND ORDER
Appellant-Creditor Wainwright Bank Trust Company ("Wainwright") appeals from a Bankruptcy Court decision denying its claim to recoup funds deposited in a bank account postpetition to offset debtor Grand Wireless, Inc.'s ("Debtor" or "Wireless") prepetition overdrafts. For the reasons below, the Bankruptcy Court's order denying the recoupment claim is affirmed.
I. Factual and Procedural Background
Debtor opened a commercial checking account with Wainwright on June 30, 1992. Debtor later arranged for a monthly Verizon deposit to be credited to the account through an automated clearing house ("ACH") transaction. In February 2006, it kited a number of checks between the Wainwright account and a Bank of America account. When the dust settled, the Wainwright account was overdrawn by $273,301.61 dollars. Wireless subsequently agreed to repay Wainwright the full amount of the overdrafts plus interest and attorneys' fees. The parties memorialized this agreement in a Settlement Agreement ("Agreement"), which also granted Wainwright a security interest in Debtor's assets and was personally guaranteed by Debtor's principal and president.
Wainwright apparently never recorded the security interest granted by the Agreement.
After the date of the Agreement, Verizon made two ACH transfers into the Wainwright account. The first, in the amount of $184,870.62, occurred prepetition on March 15, 2006, and was applied against the overdrafts to reduce the balance owed. On May 1, 2006, ten days after Wireless filed a petition for bankruptcy under Chapter 11, Verizon made a second ACH transfer in the amount of $145,711.15. Wainwright filed a motion with the Bankruptcy Court for approval to recoup from this deposit the remaining amount owed, $88,457.71, plus interest and attorneys' fees. The motion was opposed by both the bankruptcy trustee and the committee of unsecured creditors. The bankruptcy judge denied the motion and this appeal followed.
II. Standard of Review
On appeal, the district court is bound by the Bankruptcy Court's findings of fact unless clearly erroneous. Fed.R.Bankr.P. 8013; see also In re Ballarino, 180 B.R. 343, 346 (D. Mass. 1995). Conclusions of law reached by the Bankruptcy Court, however, are reviewed de novo. In re LaRoche, 969 F.2d 1299, 1301 (1st Cir. 1992). Here, there is no disagreement about the facts; the parties disagree on whether those facts meet the standard necessary to allow Wainwright to recoup from the funds transferred into Debtor's account the amount owed it from the check kiting.
III. Legal Standard
Recoupment is an equitable remedy which allows parties to offset mutual debts which arise out of the same transaction. United Structures of Am., Inc. v. G.R.G. Eng'g, S.E., 9 F.3d 996, 998 (1st Cir. 1993). Unlike setoff, recoupment is not expressly regulated by the Bankruptcy Code. Id. In addition, unlike setoff, recoupment generally allows a creditor to adjust postpetition amounts owed to a debtor by prepetition overpayments to that debtor. See In re Bob Brest Buick, Inc., 136 B.R. 322, 324 (Bankr. D. Mass. 1991) (allowing creditor car manufacturer to offset via recoupment sums owed debtor car dealership postpetition by overpayments made prior to bankruptcy filing where dealership relationship continued through filing and the parties prepetition balanced accounts monthly with the party owing paying the other).
The sine qua non of recoupment, however, is that the overpayment and the adjusting repayment arise out of the same transaction such that it would be inequitable for the debtor to enjoy the benefits of the transaction without meeting its obligations. See In re Holyoke Nursing Home, Inc., 372 F.3d 1, 5 (1st Cir. 2004) (allowing Medicare to deduct prepetition overpayments paid as estimates for covered services from postpetition reimbursements owed to bankrupt nursing home because "the Medicare provider agreements [] constitute a single, ongoing, and integrated transaction"); In re Public Service Co. of New Hampshire, 107 B.R. 441, 445 (Bankr. D. N.H. 1989) (allowing electric utility customer deposits made prepetition to be applied against the customers' accounts postpetition, finding "the deposits are part of a single electricity contract that each non-residential customer had with PSNH"). By contrast, where the transactions are merely related, recoupment is not allowed. See In re Schafer, 315 B.R. 765 (Bankr. D. Colo. 2004) (holding recoupment was not allowed from debtor's checking and savings accounts postpetition to satisfy outstanding line of credit because the prepetition loan was a separate transaction from the banking relationship). Even though an equitable doctrine, recoupment is construed narrowly in keeping with the general policy not to prefer one creditor over another in bankruptcy. Id.
IV. Analysis
The determinative issue in this case, then, is whether the amounts owed Wainwright due to the prepetition overdrafts and the postpetition Verizon deposit to Debtor's account arise out of the same transaction. The Bankruptcy Court held that the Agreement created a new relationship between the parties:
[A]s I understand it, the . . . recoupment has to arise out of the same transaction and one agreement, one relationship, one account in this case. Here, when they entered into the discussions that ultimately led to a settlement agreement, it seems to me that, although they now would — wish they didn't because they got no benefit of the new relationship in the new agreement, they entered into a new deal, and they created a second relationship, not just a deposit relationship. I'm not sure I would characterize it as a lender/lending situation, but it's clearly indebted — a debtor/creditor situation, and a different one with different additional terms than existed under the prior contract which they're now seeking the recoupment under. So on that basis it's a separate, new and separate agreement, not arising out of the same contract, but a distinct one, I am denying the motion of Wainwright.
(J. Rosenthal, Jr., J.U.S.B.C., Hr'g Tr. 20:7-25, Case # 06-40593, Bankr. W.D. Mass., June 22, 2006 (Appellant's Appendix ("App.") (Docket # 4), Tab 14) (emphasis added).) I find no error in the Bankruptcy Court's conclusion. At the time of the overdrafts, Debtor was bound by the terms of the Wainwright deposit account it opened on June 30, 1992. (See App. Exs. A-B.) There is no indication that this account agreement required Debtor to pay interest or attorneys' fees on an overdraft, nor is there any suggestion that Debtor granted a security interest in any corporate assets or that any corporate officer personally guaranteed any funds. (Id.) After the overdrafts, the parties' relationship was governed by the Agreement, signed on March 8, 2006. (App. Ex. H.) The Agreement provided a detailed repayment plan for the overdrafts, including dates of payments, payment by Debtor of legal fees and expenses totaling $5,790, and accrual of interest at 12% per year on the unpaid balance, as well as a number of other terms including the grant of a security interest, a personal guarantee, indemnification, expenses and rights on default. (Id.)
In addition, the Agreement explicitly supercedes all "prior . . . oral and written agreements" and purports to "contain[] the entire agreement of the parties with respect to the subject matter hereof," that is, the Debtor's account with Wainwright and the February 2006 overdrafts. (App. Ex. H ¶ 18.)
V. Conclusion
The grant of additional rights and establishment of additional amounts due under the Agreement constitute a separate transaction from the banking relationship that was the source of the $273,301.61 debt owed the bank. Therefore, the bank may not recoup the amounts due under the Agreement from funds deposited in Debtor's bank account postpetition. The order of the Bankruptcy Court denying Wainwright's motion for recoupment is affirmed. Judgment may be entered accordingly.