Revised November 15, 1999
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
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No. 98-20941
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In The Matter of GASMARK LTD.,
Debtor
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BRENDA HEROD,
Appellant,
VERSUS
SOUTHWEST GAS CORPORATION,
Appellee.
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Appeal from the United States District Court
for the Southern District of Texas
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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.
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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
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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
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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
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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
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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.
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