United States: Recoupment Or Setoff? - A Distinction With A Difference

Last Updated: October 1 2015
Article by David M. Grogan

Setoff is commonly encountered in bankruptcy and non-bankruptcy situations.  If there are mutual debts between two entities, either may generally offset the debts.  These debts frequently arise where one entity is a vendor to a customer and selling on credit, and at the same time is also making occasional purchases on credit from the customer.  If one entity owes $100 to a second entity but is owed $300 by this second entity, these mutual debts may be offset, leaving just the $200 owed by the second entity.

Recoupment is a subset of setoffs.  It has been defined as "the setting up of a demand arising from the same transaction as the plaintiff's claim or cause of action, strictly for the purpose of abatement or reduction of such claim."1  In addition to mutuality, an element necessary for recoupment is that the two sets of claims must have been part of a single integrated business transaction between the two entities.

A factual situation involving recoupment and setoff.

Associated Wholesalers Inc., a large cooperative food distributor serving supermarkets and convenience stores, filed for Chapter 11 under the name ADI Liquidation, Inc., along with related entities.  As is common in Chapter 11 cases, the debtors were not reorganized under a stand-alone plan of reorganization, but instead were sold as operating entities under an auction procedure known as a Section 363 sale.

Pursuant to the order approving the sale, the buyer of the debtors' assets purchased the assets free and clear of all claims and liens, with the liens to attach to the proceeds of the sale.  Included in the purchased assets were the debtor's accounts receivable.  The sale order further provided that the purchased assets were free and clear of all setoff rights held by creditors and that these setoff rights would be preserved and would attach to the proceeds of the sale as held by the debtors. 

What is the effect of these provisions?  Assume a vendor is owed $100,000 by the debtors but also owes the debtors $30,000 for prepetition purchases from the debtors, and further assume that prepetition unsecured claims in the bankruptcy case will receive a distribution of 10 percent.  Under Scenario A, assuming no sale, but after applying the vendor's setoff rights, the vendor's claim would be reduced by $30,000 by virtue of the setoff against the $30,000 the vendor owes the debtors, with the remaining claim against the estate of $70,000 receiving a distribution of $7,000.

As a result of the sale order in the ADI cases providing that the buyer acquired the debtors' accounts receivable, including the $30,000 claim, the buyer asserted that it was entitled to offset that claim against post-sale purchases from this vendor.  Under this Scenario B, the vendor would have no setoff right against the estate, and the vendor would have its $100,000 prepetition claim and receive a $10,000 distribution.  However, the vendor would be out of pocket the full $30,000 that it has to pay the buyer.  Thus, instead of a recovery of $7,000, the vendor has a loss of $20,000, or a $27,000 cash swing.

The payoff for vendors of the recoupment/setoff distinction.

The order approving the sale in the ADI cases, although drafted by counsel for the debtors and the asset buyer, was modified by the bankruptcy court to provide that the sale, while free and clear of setoff rights, was not free and clear of recoupment rights of the vendors, and all such recoupment rights were preserved.

The recoupment rights in the ADI cases arise from advertising credits asserted by the debtors against its vendors prior to the bankruptcy filing, which credits are common in the retail industry. The ADI debtors bought print advertisements and charged the vendors whose products appeared in the advertisements by issuing invoices to the vendors.  A previous decision by a Delaware bankruptcy court held that such advertising allowances fit within the requirement of being a single integrated business transaction such that their invoices are considered a recoupment, rather than a mere setoff, against the vendor's invoices for the sale of its products to the debtor.

As a result of the court's modification of the sale order, the vendors in the ADI cases should be entitled to prevent any setoff of prepetition advertising allowances by the asset buyer against post-sale purchases by it from the vendors, because the doctrine of recoupment, rather than setoff, applies to the claims.  The vendors' right to recoup payment of their invoices from the amounts they owe for advertising allowances means that they should obtain the $7,000 recovery in Scenario A above.

However, the asset buyer, which may be feeling a bit of buyer's remorse for paying too much for the purchased assets, is challenging the analysis set out above and asserting that it is entitled to a full setoff of the prepetition advertising allowances, as purchased accounts receivable, against its post-sale purchases.  In the hypothetical above, this argument would give the buyer a windfall of $30,000 to the detriment to the vendor.

Summary of the advantage of recoupment over setoff.

The remedy of setoff has the risk that the two sets of transactions will be separated by a Section 363 sale, so that the vendor will not be able to effect the setoff and will have to pay the full amount of its obligation while receiving only partial value on the obligation owed to it.  In the ADI cases, the vendors were protected by the court's modification of the sale order preserving recoupment rights, provided the claims arise from a single integrated business transaction.  In light of ADI, vendor creditors who also have obligations owed to a bankruptcy debtor should object to the Section 363 sale to preserve setoff and recoupment rights.

One more twist from the ADI court.

The good news of the above decision is tempered by a subsequent decision in this case, which decided that the debtor may determine that it will first offset what it is owed by the vendor against the vendor's section 503(b)(9) administrative priority claim.  The effect of this decision is that, to the amount that the debtor offsets against the 503(b)(9) claim, the ultimate distribution to the vendor on that portion of its claim is reduced from 100 percent to, in the hypothetical situation above, 10 percent.  Vendors should include in their terms of sale that the vendor has the right to determine the means of applying any setoffs.  However, some bankruptcy courts are often debtor and lender friendly (Delaware), and may refuse to enforce such provisions.


1. University Med. Ctr. v. Sullivan (University Med. Ctr.), 973 F.2d 1065, 1079 (3d Cir. 1992) (emphasis in original).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.