Opinion
CIVIL ACTION NO. 02-CV-719
October 9, 2003
MEMORANDUM AND ORDER
Plaintiff's Warrington Market, Inc. ("Warrington Market") and its two principals, plaintiffs Dennis Campbell and Paul Sarelakos, filed this action against Fleming Companies, Inc. ("Fleming"), claiming that they had detrimentally relied upon Fleming's unfulfilled promise to renew a commercial lease for the premises where Warrington Market operated a supermarket. Fleming's failure deprived Warrington Market of its business opportunities and the ability to pay its creditors. Fleming counterclaimed against Warrington Market for payment for grocery supplies it had delivered to Warrington Market before it went out of business.
Plaintiff Theresa Campbell stated a cause of action under the Equal Credit Opportunity Act, 15 U.S.C. § 1691(a)(1), seeking to void a personal guaranty that Fleming required her to sign in connection with the refinancing of Warrington Market's debt owing Fleming. Compl. Ct. VI. She asserts that Fleming violated the ECOA by requiring her to sign the guaranty because she was the spouse of a credit applicant although she had no interest or role in the business. Her claim was not submitted to the jury and was left for the court to decide.
During the pendency of this litigation, Fleming filed a petition for relief under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court for the District of Delaware. Warrington Market was granted relief from the automatic bankruptcy stay to resume litigating this action to final order. After a four day trial, a jury returned a verdict awarding Warrington Market $774,456.47 in damages on its promissory estoppel claim, and $333,594.34 to Fleming on its counterclaim.
In re Fleming Cos., Inc., No. 03-10945 (MFW) (Bankr. D. Del. petition filed Apr. 1, 2003).
Plaintiff's Dennis Campbell and Paul Sarelakos were each awarded $12,000 in damages. The verdict in their favor is not implicated by this motion.
Warrington Market seeks to mold the verdict to reflect Fleming's net liability of $440,860.11, effectively erasing Warrington Market's obligation to Fleming. Warrington Market contends that molding the verdict is permissible under the common law right of setoff, does not violate the Bankruptcy Code, and is permitted by the Bankruptcy Court's order granting relief from the stay. Fleming argues that setoff is prohibited by the Bankruptcy Code, would avoid the Bankruptcy Code's automatic stay provision, and would give Warrington Market a prohibited preferential secured creditor status.
We agree with Warrington Market. Setoff is justified under § 553 of the Bankruptcy Code and liquidation of the respective claims was contemplated by the Bankruptcy Court. Accordingly, we shall grant Warrington Market's motion and mold the verdict.
Setoff Is Equitable and Comports with the Bankruptcy Code
Setoff is an "equitable right to be permitted solely within the sound discretion of the court." Foster v. Mutual Fire, Marine, Inland Ins. Co., 614 A.2d 1086, 1095 (Pa. 1992); see also In re Bevill, Bresler Schulman Asset Mgmt. Corp., 896 F.2d 54, 57 (3d Cir. 1990). "A setoff is often justified where a plaintiff owes a debt to an insolvent party and will be forced to pay off that debt without being allowed to recover a debt the insolvent party may owe to the plaintiff." Adams v. Zimmerman, 73 F.3d 1164, 1173 (1st Cir. 1996). Absent compelling circumstances, setoff is appropriate to adjust the mutual rights and obligations of the parties to reflect the balance between them. See In re Bevill, Bresler Schulman Asset Mgmt. Corp., 896 F.2d at 57; In re Nuclear Imaging Sys., Inc., 260 B.R. 724, 738-39 n. 12 (Bankr. E.D. Pa. 2000).
Setoff may be denied "where the creditor has committed inequitable, illegal or fraudulent acts, or the application of setoff would violate public policy," or where setoff would "significantly affect a debtor's ability to reorganize." In re Nuclear Imaging Sys., Inc., 260 B.R. at 739 n. 12. Fleming offers nothing to justify denying setoff. Warrington Market has not engaged in any inequitable or illegal conduct. Nor has there been a showing that setoff violates any public policy or would impair Fleming's ability to reorganize.
On the contrary, equity compels setoff. The debt owing Fleming arose directly from the business relationship it had with Warrington Market. The loss of the business opportunities caused by Fleming's failure to renew the lease as promised deprived Warrington Market of income and consequently its ability to pay Fleming. Hence, setoff will result in an equitable adjustment of the mutual debts which have been determined by the jury.
In circumstances such as these, setoff would ordinarily be applied without question. However, Fleming's bankruptcy status requires a closer look before the mutual debts are adjusted. Thus, we must determine whether the pending bankruptcy proceedings preclude setoff in this case.
Section 553 of the Bankruptcy Code provides that the Code "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 [bankruptcy] case." 11 U.S.C. § 553. Indeed, "[s]ection 553 incorporates and preserves in bankruptcy law the right of setoff available at common law." In re Bevill, Bresler Schulman Asset Mgmt. Corp., 896 F.2d at 57. The jury determined that Warrington Market and Fleming were responsible for their mutual debts which had arisen before Fleming filed its bankruptcy petition. Id. at 59. Thus, because these mutual debts arose prior to the bankruptcy, Warrington Market's right to setoff is saved by § 553.
Although Warrington Market relies on the Bankruptcy Code's preservation of the common law right of setoff, Fleming does not address Warrington Market's rights under 11 U.S.C. § 553.
Fleming claims, without any legal support and in the face of contrary statutory language, that molding the jury verdict will give Warrington Market a preferential secured creditor status prohibited by § 506 of the Bankruptcy Code. However, that provision must be read in conjunction with § 553 which permits setoff. Section 506 states that "[a]n allowed claim . . . that is subject to setoff under section 553 of this title is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property." 11 U.S.C. § 506(a). Consequently, "[d]espite having the effect of a preference, a setoff is a long-recognized right and is generally favored." S.E.C. v. Elliott, 953 F.2d 1560, 1573 (11th Cir. 1992). Thus, setoff is an exception to the rule against preferential treatment of creditors. See Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir. 1984).
The Bankruptcy Court Order Lifting the Stay Permits Setoff
Fleming invokes the automatic stay provision of the Bankruptcy Code. However, neither the Bankruptcy Code nor the Bankruptcy Court's order lifting the stay prohibits setoff.
Filing a petition under the Bankruptcy Code operates as a stay of "the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor." 11 U.S.C. § 362(a)(7). The statutory protection applies only while a stay is in effect. Warrington Market sought and obtained relief from the stay in order to litigate this action to final order. Consequently, as long as there is no stay, setoff remains an available option until the entry of final judgment.
The Bankruptcy Court's order is clear. It contemplates a final resolution of this litigation. The order reads: "[T]he automatic stay imposed by Section 362 of the Bankruptcy Code is modified to permit [plaintiffs] to litigate the Federal Court action . . . to final order. . . ." A final order concludes the litigation on the merits and results in the entry of a judgment. See Ortiz v. Dodge, 126 F.3d 545, 547 (3d Cir. 1997). Once the verdict is molded, a final judgment reflecting the parties' respective rights and obligations within the context of the litigation can be entered.
Confusing the difference between liquidation and collection of a claim, Fleming relies upon the final paragraph of the Bankruptcy Court order, which states that "following liquidation of the claims in the Federal Court Action, the parties must seek further relief from the automatic stay before proceeding to collect any judgment from the debtors or any property of their estates." Warrington Market is not attempting to collect. It seeks only a liquidation of the claims.
Conclusion
Molding the verdict satisfies the requirements of 11 U.S.C. § 553 and is consistent with the intent of the Bankruptcy Court's order, which contemplates a final liquidation of the claims in this case. Therefore, the verdict shall be molded to reflect net liability.
Because the molded verdict eliminates any obligation of Warrington Market to Fleming, there is no need to reach the issue of the validity of the guaranty signed by Theresa Campbell. Therefore, judgment will be entered in her favor.
ORDER
AND NOW, this 9th day of October, 2003, upon consideration of the Plaintiff's' Motion to Mold the Jury Verdict to Account for the Setoff of the Claims and Counterclaims (Document No. 100), the Memorandum of Fleming Companies, Inc. in Opposition to Plaintiff's' Motion to Mold the Jury Verdict, and the Plaintiff's' Reply in Support of Their Motion to Mold the Jury Verdict to Account for the Setoff of the Claims and Counterclaims, it is ORDERED that the motion to mold the verdict is GRANTED.It is further ORDERED as follows:
1. JUDGMENT IS ENTERED in favor of the plaintiff Warrington Market, Inc. and against the defendant Fleming Companies, Inc. in the amount of $440,860.11.
2. JUDGMENT IS ENTERED in favor of plaintiff Dennis Campbell and against Fleming Companies, Inc. in the amount of $12,000.
3. JUDGMENT IS ENTERED in favor of plaintiff Paul Sarelakos and against Fleming Companies, Inc. in the amount of $12,000.
4. JUDGMENT IS ENTERED in favor of third party defendant Trammel Crow Corporate Services, Inc. and against the defendant Fleming Companies, Inc.
5. JUDGMENT IS ENTERED in favor of plaintiff Theresa Campbell and against the defendant Fleming Companies, Inc.