US Aeroteam, Inc. et al v. Delphi Automotive Systems LLC

UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
In re: 	U.S. AEROTEAM, I NC.,
Debtor-in-Possession
Case No. 	03-41063
Adv. No. 	04-3047
U.S. AEROTEAM, I NC.,
Plaintiff
v.
DELPHI AUTOMOTIVE SYSTEMS , LLC,
Defendant
Judge L. S. Walter
Chapter 11
AMENDMENT TO COURT’S DECISION ON SUMMARY JUDGMENT:
1) DENYING SUMMARY JUDGMENT TO DELPHI AUTOMOTIVE
SYSTEMS, LLC ON ITS RECOUPMENT CLAIM; AND
2) DENYING DELPHI AUTOMOTIVE SYSTEMS, LLC’S REQUEST
FOR DELAY OF THE TRIAL IN THIS MATTER.
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: October 05, 2005
____________________________________________________________
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The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and
the standing General Order of Reference in this District. This proceeding constitutes a core
proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). 	This matter is before the court on Delphi
Automotive System, LLC’s Limited Motion Pursuant to Bankruptcy Rule 9023 and Rule 59(e)
of the Federal Rules of Civil Procedure for Amendment of the August 1, 2005 Order Granting
Partial Summary Judgment to Defendant Delphi Automotive Systems and Denying Summary
Judgment to Plaintiff U.S. Aeroteam, Inc. [Doc. 61] and the Response filed by Plaintiff U.S.
Aeroteam, Inc. [Doc. 68].
PROCEDURAL BACKGROUND
On August 1, 2005, the court entered its decision on the cross-motions for summary
judgment filed in this adversary proceeding by Plaintiff U.S. Aeroteam, Inc. (“USAT”) and
Defendant Delphi Automotive Systems, LLC (“Delphi”). [Doc. 57.] The court granted Delphi
summary judgment on a portion of its setoff claim and denied summary judgment to USAT. The
court determined that there were factual issues as to the remainder of Delphi’s claim for setoff
that must proceed to trial.
Significantly, the court decided not to address Delphi’s alternative claim for recoupment
of a specific portion of funds related to the assigned claim of Texas Foundries. [Doc. 57, p. 12,
n.8.] Because Delphi had a valid claim for setoff of the Texas Foundries claim, the court
determined that it need not resolve the alternative cause of action for recoupment of that same
claim. Id.
Following the entry of the court’s decision on summary judgment, Delphi filed its motion
requesting an amendment of the decision. Delphi requests that the court amend its decision to
resolve the recoupment claim because an action for recoupment, unlike setoff, is not limited by
the automatic stay or § 553’s limitation on a creditor’s ability to exercise a setoff against debts
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owed to the debtor incurred during the ninety days prior to the bankruptcy filing and while the
debtor is insolvent. Consequently, Delphi requests that the court address the sufficiency of its
recoupment claim to avoid these setoff limitations. The court will oblige Delphi’s request and
address its claim for recoupment in this amendment to the court’s determinations on summary
judgment.
In addition, Delphi requests a delay of the trial in this adversary proceeding on the
remaining issues because at least some of those matters may be impacted by the resolution of a
separate adversary proceeding. The court concludes that this request is not properly considered
on summary judgment, but is instead an issue for the court to consider as part of its case
management. Consequently, the court will refrain from determining when to hold a trial in this
matter until after consultation with the parties during a status conference.
FACTUAL BACKGROUND
Delphi wants to recoup the Texas Foundries assigned claim against USAT from the
accounts payable that Delphi owes to USAT for certain component parts. The facts related to the
assigned claim and the accounts payable, as stated in the court’s prior decision on summary
judgment and/or the parties’ documentary evidence submitted on summary judgment, are as
follows:
USAT contracted with the Energy and Chassis Systems division of Delphi (“E & C”) to
produce a part known as the hub and motor extension assembly (“HUB Assembly”) and began
production of the part in August of 2001. The parties’ contractual relationship with respect to
the HUB Assembly, as well as other parts purchased by Delphi from USAT, was documented in
purchase orders used by the Delphi divisions to purchase parts from USAT which USAT
accepted by shipping parts to Delphi at stated prices. [Adv. Doc. 30, ¶ 8; Adv. Doc. 35, ¶ 10 and
Adv. Doc. 36, Ex. 1 (summary of purchase orders).] The purchase orders set the prices for the
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relevant parts through a date certain. [Adv. Doc. 30, ¶ 8.] The purchase orders obligated Delphi
to order all of its specified parts through USAT and required USAT to deliver to Delphi a
sufficient quantity of the parts to meet Delphi’s production needs. Id. Delphi asserts that the
failure of USAT to deliver the component parts it was contractually obligated to deliver could
cause a shut down of manufacturing operations and irreparable harm to both GM and Delphi.
USAT disputes that its ability to supply parts to Delphi could force such a shut down.
The purchase orders were subject to Delphi’s General Terms and Conditions governing
the terms of shipping, billing, quality, termination and other aspects of the parties’ contractual
obligations. [Adv. Doc. 36, Ex. 2.] Section 21 of the General Terms and Conditions, entitled
“Setoff and Recovery,” states:
With respect to any monetary obligations of Seller [USAT] or Seller’s affiliates to
Buyer [Delphi] or Buyer’s affiliates, Buyer may (i) setoff such obligations against
any sums owing to Seller or Seller’s affiliates and/or (ii) recoup such obligations
from any amounts paid to Seller or Seller’s affiliates by Buyer or Buyer’s
affiliates.
Id. USAT does not dispute that the purchase orders were subject to the Terms and Conditions
including this paragraph providing Delphi with setoff and recoupment rights. [Adv. Doc. 41, ¶
11.]
USAT purchased component parts for the HUB Assembly from other companies. [Adv.
Doc. 30, ¶ 17.] HUB bearings were purchased from SKF Bearings, HUB castings from Texas
Foundries and the rotors from E & C. [Adv. Doc. 30, ¶ 17-18.] 	USAT’s purchase of the rotors
from E & C was a separate transaction from E & C’s purchase order with USAT to produce the
HUB Assembly. [Adv. Doc. 30, ¶ 19 and Ex. A, ¶12.]
In the beginning, USAT paid all of the suppliers of the component parts needed for the
HUB Assembly. [Adv. Doc. 30, ¶ 16.] In late 2002 to 2003, however, USAT began having
trouble paying its suppliers.
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USAT stopped paying E & C for the rotors in 2002. [Adv. Doc. 35, ¶ 18.] 	As of the
petition filing date, the accounts payable owed by USAT to E & C for the rotors totaled
$567,683.84. [Id.; Adv. Doc. 41, ¶ 18.]
With regard to the castings, USAT accumulated accounts payable owed to Texas
Foundries in the amount of $187,436.84. [Adv. Doc. 35, ¶ 19; Adv. Doc. 41, ¶ 19.] 	At some
point in August of 2003, Delphi received notice of the accumulation of USAT’s debt to Texas
Foundries and Delphi feared that Texas Foundries would stop shipment of the castings absent
full payment. [Adv. Doc. 39, Ex. A, ¶¶ 8-9.] The parties dispute the exact timing and nature of
the notice, but agree that in late August of 2003, a series of correspondence occurred between
employees of USAT, Delphi and Texas Foundries regarding USAT’s troubled operations. [Id.,
¶¶ 7-9; Adv. Doc. 41, ¶ 19.] On summary judgment, USAT objects to the presentation by Delphi
of certain e-mails from Texas Foundries as impermissible hearsay.
The undisputed facts include that at 12:05 p.m. on August 26, 2003, USAT employee Jeff
Milam sent an e-mail to George Mansfield and Thomas Dunn at Delphi advising that USAT
wished to resolve the matter with Texas Foundries without the assistance of Delphi regarding the
“old payables” owed to Texas Foundries. [Adv. Doc. 30, Ex. A-6.] 	USAT requested that
Delphi limit its assistance to consignment of materials moving forward. Id. Nonetheless, at 2:16
p.m. on August 26, 2003, Thomas Dunn emailed Texas Foundries with Delphi’s commitment to
pay the $187,436.84 owed by USAT to Texas Foundries. [Adv. Doc. 36, Ex. 6; Adv. Doc. 41, ¶
19.] In exchange, Texas Foundries was to assign to Delphi all rights in the corresponding
receivables. [Adv. Doc. 36, Ex. 6.] Texas Foundries agreed to Delphi’s terms and released
production and shipment of the castings. Id. Delphi and Texas Foundries did not document their
agreement with purchase orders and invoices until November of 2003. [Adv. Doc. 41, ¶ 19.]
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Furthermore, Delphi did not pay the $187,436.84 owed to Texas Foundries until January 7, 2004,
following USAT’s bankruptcy filing. [Adv. Doc. 35, ¶ 20; Adv. Doc. 41, ¶ 20.]
Delphi asserts its recoupment claim for the $187,436.84 payment of USAT’s obligation
to Texas Foundries as a defense to turnover of funds Delphi owes to USAT. Specifically, Delphi
wants to recoup the amount of the assigned claim from the accounts payable that Delphi owes to
USAT under the HUB Assembly purchase orders that accrued during the ninety days prior to
bankruptcy. USAT does not dispute Delphi’s assertion that the amount of payables owed by
Delphi under the HUB Assembly purchase orders accrued during the ninety days prior to
USAT’s bankruptcy were in excess of its $187,436.84 recoupment claim. [See Doc. 61, ¶ 12.]
SUMMARY JUDGMENT STANDARD
The court applies the summary judgment standard contained in Fed. R. Civ. P. 56(c),
incorporated in bankruptcy adversary proceedings by reference in Fed. R. Bankr. P. 7056, to
Delphi’s request for summary judgment on its recoupment claim. A more detailed description of
that standard is contained in the court’s original decision on summary judgment.
LEGAL ANALYSIS
A. 	Recoupment
In its previous decision on summary judgment, the court analyzed setoff which allows
parties to offset mutual debts generally arising from separate transactions. In re Gaither, 200
B.R. 847, 850 (Bankr. S.D. Ohio 1996). In contrast, recoupment pertains to the setting up of a
demand arising from the same transaction as the plaintiff’s claim. Id.; Photo Mechanical
Services, Inc. v. E.I Dupont De Nemours & Co. (In re Photo Mechanical Services, Inc), 179 B.R.
604, 612 (Bankr. D. Minn. 1995). More specifically, recoupment is the right of a defendant in
the same action to reduce or abate a plaintiff’s claim because the plaintiff has not complied with
some cross-obligation of the same transaction. See In re Dunning, 269 B.R. 357, 369 (Bankr.
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N.D. Ohio 2001); Harris v. Scotsman Queen Products Division of King-Seeley Thermos Co. (In
re Handsco Distributing, Inc.), 32 B.R. 358, 359 (Bankr. S.D. Ohio 1983). The court notes that
recoupment is a non-statutory remedy that prefers one creditor over another contrary to the
Bankruptcy Code’s strong policy favoring equal treatment of creditors. New York State Electric
and Gas Corp. v. McMahon (In re McMahon), 129 F.3d 93, 97 (2 nd Cir. 1997); In re American
Sunlake Ltd. Partnership, 109 B.R. 727, 730 (Bankr. W.D. Mich. 1989). Consequently, the
recoupment doctrine is a limited one that should be narrowly construed. McMahon, 129 F.3d at
97; American Sunlake, 109 B.R. at 730.
The key requirement to recoupment is that the cross-claim arise from the same
transaction as that for which the debt was incurred. Reeves v. Columbia Gas of Ohio (In re
Reeves), 265 B.R. 766, 770 (Bankr. N.D. Ohio 2001); Handsco Distributing, 32 B.R. at 360.
Consequently, valid recoupments are generally restricted to cross-claims arising out of one
contract and may even be restricted to cross-obligations arising from a single provision of one
contract. Dunning, 269 B.R. at 370; Reeves, 265 B.R. at 770-71.
Courts have allowed recoupments involving more than one contract in limited
circumstances when the contracts are “integrated” and involve reciprocal and dependent
obligations. Reeves, 265 B.R. at 771 (utilizing a fact-based approach that looks at the intent of
the parties when entering the contracts; if it was intended that the parties’ performance of the
obligations giving rise to opposing claims were dependent on each other, “then equity holds that
such claims should be deemed to have arisen from a single integrated transaction”). Based on
this approach, recoupment has been allowed when an insurance company’s continued obligation
to pay a debtor benefits in one contract was contingent on the debtor signing a separate
agreement to repay any overpayments received. Sigman v. Aetna Life Ins. Co. (In re Sigman),
270 B.R. 858, 861-62 (Bankr. S.D. Ohio 2001). In contrast, the doctrine of recoupment did not
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apply to a company attempting to recoup loaned advances to a debtor-employee from the earned
commissions owed to that same employee. In re Passafiume, 242 B.R. 630, 635-36 (Bankr.
W.D. Ky. 1999). The commissions and loaned advances arose from several independent
contracts and, at best, language in the subsequent loan agreement allowing the company to offset
loaned funds against earned but unpaid commissions was nothing more than an afterthought and
did not give rise to an integrated transaction. Id at 635.
Delphi has cited a decision holding that a defendant who took “prudent steps” to mitigate
damages following a plaintiff-debtor’s breach of contract could recoup the damages from the
plaintiff who sued the defendant for using its equipment to complete the project. Newbery
Electric, Inc. v. MCI Constructors, Inc. (In re Newbery Corp.), 145 B.R. 998 (9th Cir. B.A.P.
1992) withdrawn on other grounds, 161 B.R. 999 (9th Cir. B.A.P. 1994). In that case, the court
deemed the entire set of circumstances to be one transaction based on the defendant’s general
duty to mitigate its damages following a breach under the initial contract. Id. at 1001. However,
this decision contains a strong dissent stating that the defendant’s independent actions in using
the plaintiff’s equipment to mitigate its own damages was not contemplated as part of the
parties’ initial contract. Id. at 1004-05. According to the dissent, the cross-claims are not
“integral” to each other and cannot be considered one transaction for recoupment purposes. Id.
This court agrees with the carefully considered dissent in Newbery supporting a narrow
construction of recoupment: unless two separate contracts are “integrated” and involve
reciprocal and dependent obligations, they cannot support a defendant’s claim for recoupment.
In the case at hand, the cross-obligations asserted by Delphi clearly arise from two
contracts: 1) Delphi’s agreement with Texas Foundries to pay USAT’s debt in exchange for
continued shipment of parts and an assignment of Texas Foundries’ claim against USAT; and 2)
the HUB Assembly purchase orders requiring Delphi to pay for parts assembled by USAT. For
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the doctrine of recoupment to apply, these two contracts must contain dependent and reciprocal
obligations so closely intertwined that the contracts may be considered one integrated
transaction.
After a thorough review of the facts presented on summary judgment, the court concludes
that Delphi’s agreement with Texas Foundries is a separate and independent transaction from the
purchase orders. In the HUB Assembly purchase orders, Delphi agreed to pay USAT for the
assembly of certain components. 	Although these purchase orders were subject to Delphi’s
General Terms and Conditions giving Delphi the right to recoup amounts owed by USAT from
USAT’s affiliates [Adv. Doc. 36, Ex. 2, Section 21], neither this provision nor the purchase
orders themselves contemplate Delphi receiving a right to recoup amounts from USAT for
Delphi’s voluntary payment of USAT’s monetary obligation to a third party supplier. In fact,
Delphi provides no evidence on summary judgment that Delphi and USAT entered the HUB
Assembly purchase orders with the understanding that Delphi could pay a third party supplier
and obtain a right of recoupment against USAT.
Instead, the facts support that Delphi made an independent and voluntary decision to pay
USAT’s debt to Texas Foundries long after Delphi contracted with USAT respecting the HUB
Assembly purchase orders. Although Delphi argues that it paid USAT’s debt to Texas Foundries
because it believed this second agreement was necessary to mitigate damages and irreparable
harm arising from USAT’s difficulties in meeting its obligations pursuant to the HUB Assembly
purchase orders, there was no obligation for Delphi to do so arising from the purchase orders.
The court concludes that the two contracts at issue, between Delphi and USAT on the one hand
and Delphi and Texas Foundries on the other, contain only independent and non-reciprocal
obligations. Consequently, they do not form a single transaction for recoupment purposes and
the court denies Delphi’s request for summary judgment on this matter.
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B. 	Timing of Trial on Insolvency of Debtor / Remaining Setoff Issues
As a final matter, Delphi requests that the court consider delaying the trial to determine
the remaining setoff issues in this adversary proceeding until after the resolution of a separate
adversary proceeding, U.S. Aeroteam, Inc. v. Delphi Automotive Systems, LLC, Adv. No. 04-
3110. In Adv. No. 04-3110, USAT filed a complaint requesting $2.2 million from Delphi in
cancellation of contract damages. Although not specifically related to the case at hand, the $2.2
million cancellation claim could impact a determination as to USAT’s insolvency during the
ninety days prior to bankruptcy and, consequently, Delphi’s entitlement to setoff of its payables
accrued during this period under § 553.
For this reason, Delphi requests the trial in this matter be delayed until after resolution of
the other adversary proceeding. USAT argues against delay asserting that the litigation in the
cancellation of contract adversary proceeding, presently before the United States District Court
on Delphi’s motion for withdrawal of the reference filed on July 21, 2004, could be protracted.
USAT asserts that the value of the cancellation of contract claim should be estimated for
purposes of this adversary proceeding.
The court has carefully considered both arguments and concludes that this is not a matter
to be determined on summary judgment, but is instead a case management determination
regarding the appropriate timing of the trial in this matter. For this reason, the court denies
Delphi’s request that it be determined as part of the court’s amended decision on summary
judgment. The court will, instead, make its determination as to the appropriate timing of the trial
in this matter following a status conference with the parties.
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CONCLUSION
The court concludes that Delphi has failed to provide facts supporting its claim for
recoupment and, consequently, summary judgment on its recoupment claim is denied.
The court further denies Delphi’s request to delay the trial in this matter. The court will
determine the appropriate timing of the trial following a status conference with the parties.
SO ORDERED.
cc:
U S Aeroteam Inc
One Edmund Street
Dayton, OH 45404
Thomas R Noland
Tina F Woods
Statman, Harris, Siegel & Eyrich
Fifth Third Building
110 N Main Street, Suite 1520
Dayton, OH 45402
(937) 222-1090
Fax : (937)222-1046
Email: notices@shsedayton.com
Delphi Automotive Systems LLC
c/o CT Corporation Systems
1300 E 9th Street
Cleveland, OH 44114
Paula A Osborne
150 West Jefferson Ave
Suite 100
Detroit, MI 48226
313-225-7040
Email: osborne@butzel.com
Thomas B Radom
100 Bloomfield Hills Parkway
Suite 200
Bloomfield Hills, MI 48304
(248) 258-1413
Email: Radom@butzel.com
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US Trustee
170 N High St
Suite 200
Columbus, OH 432150
# # #
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