Recoupment is an equitable remedy – not expressly addressed in the Bankruptcy Code – that permits the offset of mutual debts arising out of the same transaction or occurrence. Unlike typical setoff, if recoupment applies, prepetition debts can be set off against postpetition debts. A recent decision from the Delaware bankruptcy court demonstrates that the availability of recoupment often depends on how the court defines the contours of the “same transaction or occurrence” requirement.

The Bankruptcy Court for the District of Delaware recently faced a question of first impression: whether an allowed postpetition administrative expense claim can be used to set off preference liability. In concluding that it can, the court took a closer look at the nature of a preference claim.

Facts and Arguments

Courts have applied various standards for determining when a “claim” arises for the purposes of the Bankruptcy Code, particularly in the tort context. A recent decision from the United States Bankruptcy Court for the Western District of Pennsylvania illustrates that the standard may differ depending on whether the claim in question is a creditor’s claim against the debtor’s estate or a debtor’s claim against a third-party.

Practitioners generally identify “excusable neglect” as the standard that bankruptcy courts apply in determining whether to allow a creditor’s untimely proof of claim. A creditor who lets the bar date pass finds itself in the undesirable position of having to persuade the bankruptcy court that its neglect to file a timely proof of claim was excusable.