What Are Setoff And Recoupment In Bankruptcy?

In Chapter 11 bankruptcies in South Florida, the topics of setoff and recoupment may arise in a business’s bankruptcy case. These terms are important in the bankruptcy context and in business bankruptcy cases under Chapter 11 because they can affect how accounts are settled between creditors and debtors who have filed for bankruptcy. While setoff and recoupment are often discussed in relation to one another, it is important to know that the doctrines of setoff and recoupment are distinct from one another even though they can both impact how accounts are settled in a Chapter 11 bankruptcy case. Our West Palm Beach bankruptcy attorneys can provide you with more information about setoff and recoupment, and we can begin working with your business on a Chapter 11 bankruptcy case today.

Setoff and Bankruptcy 

Setoff is a doctrine that allows parties to offset mutual debts against one another that arose prior to the bankruptcy case. The doctrine of setoff is confirmed in Section 553(a) of the U.S. Bankruptcy Code, which says that “this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case.” There are some exceptions, but generally speaking, setoff is permitted under the U.S. Bankruptcy Code. To be clear, the U.S. Bankruptcy Code does not create or establish a right of setoff, but it does clarify that a right of setoff can exist in various circumstances.

The purpose of the doctrine of setoff is largely one of practicality. According to the U.S. Supreme Court in Citizens Bank of Maryland v. Strumpf (1995), “[t]he right of setoff (also called “offset”) allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A.”

Only pre-bankruptcy debts, or pre-bankruptcy petition debts, can be offset. Since the right to setoff is halted by the automatic stay, a creditor will first need to ask the court to lift the automatic stay. Then, the creditor will be responsible for showing that there is a right of setoff.

Recoupment and Bankruptcy 

Unlike the right of setoff, recoupment is not considered or addressed within the U.S. Bankruptcy Code. Instead, as the U.S. Department of Justice (DOJ) clarifies, the “parameters of recoupment are derived from the common law pleading rules concerning counterclaims.” What is recoupment? The DOJ defines it as “the setting up of a demand arising from the same transaction as the plaintiff’s claim, to abate or reduce that claim.” Further, “recoupment, a creditor’s right long recognized in bankruptcy proceedings, is merely the means used to determine the proper liability on the amounts owed.”

Recoupment only applies when there are debts from the “same transaction.” With recoupment, a creditor can withhold payments in order to offset debts that have arisen from the “same transaction.” As the DOJ explains, the doctrine of recoupment only applies where “the mutual debts arise from the same contract.” Unlike setoff, “the automatic stay does not apply to recoupment,” and recoupment is also “unaffected by a discharge in bankruptcy.”

Contact a Chapter 11 Bankruptcy Lawyer in West Palm Beach 

If you have questions about setoff or recoupment in your Chapter 11 bankruptcy case, you should seek advice from one of the experienced West Palm Beach Chapter 11 bankruptcy lawyers at Kelley Kaplan & Eller today.

Sources:

law.cornell.edu/uscode/text/11/553

supreme.justia.com/cases/federal/us/516/16/

justice.gov/jm/civil-resource-manual-67-setoff-and-recoupment-bankruptcy#:~:text=Recoupment%20is%20the%20setting%20up,liability%20on%20the%20amounts%20owed