497 B.R. 590
Bankr. D. Idaho2013Background
- Debtor Antonio Azevedo, a dairy farmer, sold milk to Davisco from 1997–2012 and in Dec. 2010 received a $100,000 patron advance from Davisco for December milk that otherwise would have been paid in January.
- The parties agreed Davisco would recoup the advance (plus 8% interest) by deducting fixed amounts from future milk payments over time rather than netting it out immediately.
- Azevedo filed Chapter 12 on Sept. 20, 2011; Davisco continued monthly deductions and recovered the advance in full by Dec. 2011, $25,810.56 of which was deducted postpetition during the Chapter 12 case.
- Azevedo’s Chapter 12 case converted to Chapter 7 in May 2012; the Chapter 7 trustee sued under 11 U.S.C. § 549 to avoid the postpetition deductions as unauthorized transfers and sought recovery.
- Davisco asserted the equitable defense of recoupment; both parties moved for summary judgment and the court decided the issues as a matter of law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether recoupment is available as a defense to a trustee's § 549 avoidance action | Trustee: recoupment is not a lawful defense to § 549 actions (or at least should not displace the Code’s scheme) | Davisco: recoupment is an equitable defense that can bar recovery where claims arise from the same transaction | Court: recoupment is available as a defense to § 549 actions (not precluded as a matter of law) |
| Whether the deductions satisfy the "same transaction" requirement for recoupment | Trustee: multiple deliveries/deductions are separate transactions so recoupment does not apply | Davisco: the Patron Advance Disbursement was a single agreement creating ongoing obligations; deductions were part of that single transaction | Court: the logical-relationship test satisfied — the December 2010 advance and subsequent deductions arise from the same aggregate transaction |
| Whether applying recoupment would be inequitable or violate pro rata distribution | Trustee: allowing recoupment would prejudice other unsecured creditors and upset pro rata distributions | Davisco: retaining the deducted amounts was equitable — advance aided reorganization efforts and was ordinary commercial practice | Court: applying recoupment is equitable here and does not unjustly prefer Davisco; policy concerns do not bar recoupment under these facts |
| Ultimate remedy: may trustee recover the postpetition deductions under § 549? | Trustee: yes — avoid and recover deductions as unauthorized postpetition transfers | Davisco: deductions are valid recoupment and not recoverable by trustee | Court: denied trustee summary judgment; granted Davisco summary judgment; trustee's complaint dismissed with prejudice |
Key Cases Cited
- Reiter v. Cooper, 507 U.S. 258 (Sup. Ct. 1993) (approves defensive use of recoupment in bankruptcy)
- In re Straightline Inv., Inc., 525 F.3d 870 (9th Cir. 2008) (discusses recoupment in trustee § 549 action and denies recoupment where defendant engaged in inequitable conduct)
- Newbery Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392 (9th Cir. 1996) (explains recoupment does not inherently subvert pro rata distribution and treats recoupment as equitable defense)
- Megafoods Stores, Inc. v. Flagstaff Realty Assocs., 60 F.3d 1031 (3d Cir. 1995) (recognizes that trustees take property subject to recoupment rights)