In Re: GasMark Ltd

• Court: Court of Appeals for the Fifth Circuit
• Decided: November 15, 1999
• Docket: 98-20941
• Status: Published

Opinion

Revised November 15, 1999

UNITED STATES COURT OF APPEALS For the Fifth Circuit

___________________________

No. 98-20941 ______________________________

In The Matter of GASMARK LTD., Debtor ______________________________

BRENDA HEROD,

Appellant,

VERSUS

SOUTHWEST GAS CORPORATION,

Appellee.

___________________________________________________

Appeal from the United States District Court for the Southern District of Texas ___________________________________________________ November 1, 1999 Before REYNALDO G. GARZA, HIGGINBOTHAM and DAVIS, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

The Chapter 11 bankruptcy trustee ("Trustee") for Gasmark

Ltd. ("Gasmark") appeals the district court's judgment allowing

Southwest Gas Corporation ("Southwest") to reduce its

indebtedness to Gasmark by more than $500,000. More

particularly, the Trustee challenges the bankruptcy court’s

acceptance of Southwest’s recoupment claim for liquidated damages

that Southwest asserted was owed because Gasmark failed to deliver gas due under the contract.1 The bankruptcy court

concluded that even though Gasmark delivered no gas to Southwest,

which supported Southwest's recoupment, under the contract,

Gasmark’s contractual opportunity to sell gas to Southwest was

the type of benefit that supported Southwest’s right to recoup

liquidated damages for Gasmark’s breach. The bankruptcy court

then allowed Southwest to reduce its indebtedness to Gasmark for

the purchase price of gas Gasmark delivered pre-petition by the

liquidated damages due Southwest. We disagree with this

conclusion reached by both the bankruptcy court and the district

court and reverse.

I.

Southwest and Gasmark entered into a natural gas supply

contract for the period of November 1992 to March 1993. Pursuant

to the terms of the contract, Southwest had the right to buy

anywhere from a minimum of 15,000 MMBtu per day up to a maximum

of 30,000 MMBtu per day. The contract provided that Southwest

was entitled to liquidated damages if Gasmark failed to deliver

the amount of gas nominated by Southwest. In addition, the

contract provided that if Southwest failed to nominate the

minimum of 15,000 MMBtu per day, Gasmark was entitled to damages.

1 The Trustee also argues that Southwest was a creditor of Gasmark and was therefore bound by the terms of the plan. According to Gasmark, the terms of the plan prohibit Southwest from recouping its damage claims. Because we hold for other reasons that the district court and bankruptcy court erred in allowing Southwest to recoup we do not decide whether the terms of the plan barred Southwest's recoupment.

2 On or about February 19, 1993, Gasmark informed Southwest

that Gasmark was insolvent, was not going to perform for the

remainder of the contract, and might file a bankruptcy petition.

From February 19, 1993, to February 24, 1993, Southwest placed

daily nominations of 18,000 MMBtu. On February 25, 1993,

Southwest increased its nominations to 30,000 MMBtu per day for

the remainder of February as well as for the entire month of

March 1993. The contract expired by its terms on March 31, 1993.

Gasmark failed to provide any of the gas Southwest nominated

from February 25, 1993, through the contract's expiration on

March 31, 1993. On March 4, 1993, Gasmark filed a Chapter 11

petition for reorganization under the Bankruptcy Code. Southwest

received notice of the bankruptcy on March 23, 1993.

Southwest owed Gasmark $769,648.69 for gas Southwest

received before the filing of the bankruptcy petition. On April

1, 1993, Southwest delivered a gas settlement statement to

Gasmark that reflected a reduction in this indebtedness by

$39,708.04 for nondeliveries in February 1993, and by $464,983.00

for nondeliveries in March 1993. Following these reductions,

calculated according to the contract's damage provisions for

nondelivery, Southwest paid Gasmark the resulting balance of

$265,270.54. Because it recouped its damage claim for non-

delivery, Southwest did not file a claim for damages in the

bankruptcy action.

3 The bankruptcy court held that Southwest was entitled to

reduce its debt to Gasmark because of Gasmark’s non-deliveries.

The court reasoned that Southwest's reduction of the debt was a

recoupment not a setoff, and the recoupment was appropriate

because Gasmark's estate received benefits from the executory

contract. The district court affirmed this judgment. The

Trustee appeals.

II.

We review the bankruptcy and district courts’ findings of

fact for clear error and their legal conclusions de novo. Traina

v. Whitney National Bank, 109 F.3d 244, 246 (5th Cir. 1997).

A.

We first consider whether the bankruptcy court correctly

permitted Southwest to recoup post-petition claims arising under

the executory contract against indebtedness Southwest owed

Gasmark for pre-petition gas deliveries.

The bankruptcy court held that pursuant to the executory

contract, Southwest was entitled to liquidated damages of

$39,708.04 for nondeliveries in February 1993, and $464,983.00

for nondeliveries in March 1993. The bulk of Southwest’s

liquidated damages claim for the month of March 1993, was based

on Gasmark's failure to perform the executory contract after

4 March 4, 1993, when it filed its Chapter 11 petition.

The bankruptcy court agreed that the post-petition executory

contract between Gasmark and Southwest was enforceable by Gasmark

but unenforceable by Southwest. The bankruptcy court then quoted

from the Supreme Court’s decision in Bildisco:

If the debtor in possession elects to continue to receive benefits from the other party to an executory contract pending a decision to reject or assume the contract, the debtor in possession is obligated to pay for the reasonable value of those services, which, depending on the circumstances of a particular contract, may be what is specified in the contract.

NLRB v. Bildisco and Bildisco, 465 U.S. 513, 531, 104 S.Ct.

1188, 1199, 79 L.Ed.2d 482 (1984). Applying Bildisco, the

bankruptcy court concluded that because Gasmark received a

benefit from Southwest, Southwest was entitled to invoke the

doctrine of recoupment and deduct its liquidated damages from the

amount it owed Gasmark.

We have no quarrel with the general legal principles set

forth by the bankruptcy court and the district court as

summarized above. The flaw in the bankruptcy court’s reasoning,

however, is in applying those general principals to the record

evidence in this case. Our review of the record fails to reveal

any basis upon which the bankruptcy court could find that Gasmark

enjoyed a concrete benefit from Southwest’s continued nominations

of gas under the contract. As the above quote from Bildisco--

upon which the bankruptcy court relied--plainly states, Gasmark’s

5 only obligation to Southwest was to compensate Southwest for any

benefit Gasmark received from Southwest’s continued performance

under the contract. No evidence was presented that Gasmark

derived any economic benefit from Southwest’s continued

nominations of gas. No evidence was presented that the debtor’s

unexercised option to sell gas had any value. Because we are

persuaded that the bankruptcy court and the district court erred

in concluding that Gasmark enjoyed a benefit from Southwest’s

continued nominations of gas under the contract, it follows that

those courts erred in permitting Southwest to recoup the post-

petition liquidated damages provided for under the contract.

B.

We next consider Southwest’s recoupment claim for its

liquidated damages suffered pre-petition.

Before Gasmark filed its petition, Southwest was entitled to

enforce Gasmark’s obligations under the contract and assert a

claim against Gasmark for breach of contract. However, Southwest

attempted to recoup its damages and did not file a proof of claim

in Gasmark's bankruptcy. The Bankruptcy Code does not mention or

define the term "recoupment," yet recoupment is an equitable

doctrine that has long applied in the bankruptcy context. See In

re U.S. Abatement Corp., 79 F.3d 393, 398 (5th Cir. 1996). In

Abatement we stated that recoupment “allows a defendant to reduce

6 the amount of a plaintiff’s claim by asserting a claim against

the plaintiff which arose out of the same transaction to arrive

at a just and proper liability on the plaintiff’s claim.” Id. at

398 (citations omitted). But as the above quote indicates, the

fact that identical parties are engaged in transactions of a

similar subject matter may not be enough to permit recoupment.

The obligations must arise out of a single integrated transaction

so that it would be inequitable for the debtor to enjoy the

benefits of the transaction without also meeting its obligations.

5 COLLIER ON BANKRUPTCY ¶ 553.10[1] (Lawrence P. King ed., 15th

ed. rev. 1999).

Reduced to its essence, recoupment is "an equitable doctrine

designed to determine a just liability on the plaintiff's claim."

Abatement, at 398 (quoting In re Holford, 896 F.2d 176, 179 (5th

Cir. 1990)). The classic recoupment right occurs when a buyer

erroneously overpays a seller for goods or services. Courts

allow the buyer to recoup its overpayment by reducing the

purchase price to the extent of the overpayment. "[E]ven though

an overpayment is not a required element for recoupment, the

doctrine is often applied to prevent a windfall to the debtor in

the overpayment context." 5 COLLIER ON BANKRUPTCY ¶ 553.10[1].

Our review of this record finds no inequities accruing to

Southwest that are in any way comparable to the buyer who has

overpaid the seller. In the absence of injury to Southwest or

7 benefit or enrichment to Gasmark, we feel no equitable tug in

Southwest's favor that supports application of the narrow

doctrine of recoupment. Because Southwest did not file a proof

of claim in Gasmark's bankruptcy and Gasmark's plan has been

confirmed, Southwest no longer has a claim for pre-petition

damages.

For the above reasons, the judgment of the district court is

REVERSED and the case is REMANDED to the district court for entry

of judgment consistent with this opinion.