Brady v. Chaudhry

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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Decision
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 04-45127
Adv. No. 05-4223
ZAHID CHAUDHRY,
Debtor. 	/
LOIS I. BRADY,
Plaintiff,
vs.
AREENA R. CHAUDHRY,
Defendant. /
DECISION
This is an adversary proceeding in which the plaintiff, Lois I.
Brady (“Brady”), trustee in bankruptcy of the estate of Zahid
Chaudhry (the “debtor”), seeks relief against defendant Areena R.
Chaudhry (“Chaudhry”) in connection with an alleged debt Chaudhry
owed to the debtor at the date of the debtor’s chapter 7 petition.
The alleged debt is for the unpaid portion of the purchase price of
real property that the debtor sold to Chaudhry as part of a sale and
leaseback transaction.
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Signed: April 04, 2006

EDWARD D. JELLEN
U.S. Bankruptcy Judge

Entered on Docket
April 04, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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1Bushra S. Chaudhry’s participation with the debtor as a
co-seller and co-lessee under the Sales Agreement is not relevant
to the motions now before the court. 	Therefore, for purposes of
clarity, the court will hereafter disregard Bushra S. Chaudhry’s
participation as a party to the Sales Agreement.
2	Decision
The parties have filed cross-motions for summary judgment. 	The
court will grant Chaudhry’s motion and deny Brady’s motion.
A. 	Background
The material facts are undisputed. 	On September 30, 2003, the
debtor and his spouse, Bushra S. Chaudhry, entered into a written
Sales Agreement (the “Sales Agreement”) with Chaudhry pursuant to
which Chaudhry agreed to purchase certain real property in Hayward,
California (the “Property”) from the debtor and his spouse 1 for a
purchase price of $370,000. 	Chaudhry agreed to pay the major
portion of the purchase price through the assumption of a $268,000
loan that was secured by the Property. 	As to the balance, the Sales
Agreement provided as follows:
The sellers will rent that aforementioned property for an
amount of $1,500 per month. 	The rent will be deducted
from their equity until the equity is depleted. 	The
sellers and the buyer can, at that time, negotiate another
lease agreement at the current market rate.
If the sellers decide not to reside in the aforementioned
property the sellers’ remaining equity will be paid no
later than December 31, 2010.
Thus, Chaudhry was to pay the remainder of the purchase price
through a monthly $1,500 credit in reduction of the outstanding
balance she owed, which monthly credits were to continue as long as
the debtor desired to remain in the Property. 	If, however, the
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UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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3	Decision
debtor decided to vacate the Property, the balance of the purchase
price would be due by December 31, 2010.
The debtor filed his chapter 7 petition on September 20, 2004.
At that date, the remaining balance of the purchase price was
$35,637. 	This amount represents the original purchase price, less
credits for the loan payments Chaudhry made, less 12 monthly rent
credits totaling $18,000.
After the petition, the debtor continued to reside in the
Property. 	Brady made demand on Chaudhry for payment of $35,637 and
Chaudhry denied liability. 	Brady then filed this adversary
proceeding.
B. 	Discussion

Summary Judgment
“Summary judgment is properly granted when there is no genuine
issue of material fact and moving party is entitled to judgment as a
matter of law.” Clipper Express v. Rocky Mountain Motor Tariff
Bureau, Inc., 690 F.2d 1240, 1250 (9th Cir. 1982), cert. denied, 459
U.S. 1227 (1983). 	Under Fed. R. Bankr. P. 7056, which incorporates
Fed. R. Civ. P. 56, the court may grant summary judgment or partial
summary judgment if there is no genuine issue of material fact, and
the movant is entitled to the requested judgment as a matter of law.
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UNITED
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BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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2All further section references herein are to the Bankruptcy
Code, as in effect prior to October 17, 2005.
3Section 542(a) provides:
Except as provided in subsection (c) or (d) of this section,
an entity, other than a custodian, in possession, custody, or
control, during the case, of property that the trustee may use,
sell, or lease under section 363 of this title, or that the
debtor may exempt under section 522 of this title, shall deliver
to the trustee, and account for, such property or the value of
such property, unless such property is of inconsequential value
or benefit to the estate.
4Section 542(b) provides:
Except as provided in subsection (c) or (d) of this section,
an entity that owes a debt that is property of the estate and
that is matured, payable on demand, or payable on order shall pay
such debt to, or on the order of, the trustee, except to the
extent that such debt may be offset under section 553 of this
title against a claim against the debtor.
4	Decision
2. 	Contentions of the Parties
Brady raises two basic arguments in support of her position.
First, Brady argues that pursuant to Bankruptcy Code § 541(a), 2 the
debt that Chaudhry owed to the debtor became property of the
bankruptcy estate at the time of the bankruptcy filing. 	It follows,
argues Brady, that as of the petition date, Chaudhry was obliged
pursuant to § 542(a) 3 to “deliver” the purchase price to her.
Alternatively, Brady argues that Chaudhry is obligated pursuant
to § 542(b) 4 to pay a debt of $35,637 to her (conceding, however,
that such payment is not due until December 31, 2010). 	In this
regard, Brady contends that Chaudhry is not entitled to offset any
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BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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5	Decision
postpetition rent against the debt pursuant to § 553. 	This is so,
argues Brady, because the requisite “mutuality” is lacking due to
the fact that Chaudhry’s debt to the debtor arose prepetition
whereas the debtor’s debt for rent that accrued after the bankruptcy
filing was a postpetition debt.
Chaudhry concedes that, under § 541(a), her debt to the debtor
became property of the debtor’s bankruptcy estate. 	Chaudhry argues,
however, that even if the doctrine of mutuality bars offset of the
postpetition rent against the purchase price, the doctrine of
“recoupment” permits deduction of the monthly rent from the balance
of the purchase price for so long as the debtor remains in
possession of the Property, and to the extent any funds remain owing
after the debtor vacates, such funds will not be due until December
31, 2010. 	In response, Brady argues that recoupment does not apply,
and in any event, that Chaudhry waived her right to argue
recoupment.
The court holds that: (a) Chaudhry is not obligated to
“deliver” the balance of the purchase price to Brady pursuant to
§ 542(a), (b) Chaudhry’s obligation to pay Brady under § 542(b) is
subject to recoupment, (c) under the undisputed facts of this case,
Chaudhry’s debt to the debtor, and thus her debt to Brady, has been
eliminated to the extent of any postpetition rent during any period
the debtor occupied the Property, and that (c) any remaining unpaid
balance will not be payable by Chaudhry until December 31, 2010.
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UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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6	Decision
3. 	Turnover and § 542(a)
It is clear that § 542(a) is inapplicable in a situation, as
here, where a trustee seeks a money judgment for an alleged debt.
Otherwise, § 542(b), which deals specifically with the trustee’s
collection of debts owed to the debtor, would be superfluous.
Moreover, as noted by Chaudhry, the case law is consistent that
§ 542(a) does not apply absent a res consisting of identifiable
property or proceeds. 	See, e.g., In re Sun Spas by Schaeffer, Inc.,
122 B.R. 452, 455 (Bankr. M.D. Fla. 1990); In re Gailey, Inc., 119
B.R. 504, 514 (Bankr. W.D. Pa. 1990). 	See also Maggio v. Zeitz, 333
U.S. 56, 64 (1948) (pre-code).
Here, there is no res of identifiable property or proceeds.
The court therefore holds that Chaudhry is entitled to summary
judgment as to Brady’s claims based on § 542(a).
4. 	Recoupment and § 542(b)
In their briefs, the parties initially directed their arguments
to the portion of § 542(b) that allows offset under § 553. 	Chaudhry
has now re-focused her argument on the doctrine of recoupment.
Because the court believes recoupment is available here, it will
forgo discussion of the setoff arguments the parties initially
advanced.
The requirements for recoupment and setoff are not the same.
In general, setoff is available when entities owe each other money
on their respective debts to each other. 	See Citizens Bank of
Maryland v. Strumpf, 116 S.Ct. 286, 289 (1995). 	“The defining
characteristic of setoff is that ‘the mutual debt and claim . . .
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BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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7	Decision
are generally those arising from different transactions.’” Newbery
Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392, 1398 (9th Cir. 1996)
(internal citation omitted; emphasis in the original); In re TLC
Hospitals, Inc., 224 F.3d 1008, 1011 (9th Cir. 2000).
In contrast, “recoupment ‘is the setting up of a demand arising
from the same transaction as the plaintiff’s claim or cause of
action, strictly for purposes of abatement or reduction of such
claim.’” 	Newbery, 95 F.3d at 1399 (internal citation omitted;
emphasis in the original). 	As the court in Newbery explained,
recoupment is not subject to the automatic stay under § 362(a), nor
is it subject to any limitations imposed by § 553. 	Id. 	Moreover,
recoupment “‘relaxes the requirement of mutuality for setoff of
debts as it relates to the pre or postpetition character of those
debts.’” Id. (Internal citation omitted.)
A bankruptcy trustee takes property subject to rights of
recoupment. 	In re Madigan, 270 B.R. 749, 754 (9th Cir. BAP 2001);
In re Flagstaff Realty Assocs., 60 F.3d 1031, 1035 (3d Cir. 1995).
To determine whether recoupment is available, courts have asked
whether the claim “arises out of the transaction or occurrence that
is the subject matter of the opposing party’s claim.” 	Fed. R. Civ.
P. 13(a); Madigan, 270 B.R. at 755. 	As the court in Madigan noted,
“‘courts have permitted a variety of obligations to be recouped
against each other, requiring only that the obligations be
sufficiently interconnected so that it would be unjust to insist
that one party fulfill its obligation without requiring the same of
the other party.’” Id. (Internal citation omitted.)
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BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
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8	Decision
Here, recoupment is available to Chaudhry. 	As reflected by the
Sales Agreement, the sale to Chaudhry and the leaseback to the
debtor were integrated obligations under a single agreement.
Chaudhry was not obligated under the Sales Agreement to make any
payments to the debtor so long as the debtor occupied the Property.
The debtor was not obligated to make any rent payments to Chaudhry
so long as a balance was owing on the purchase price. 	(Per the
Sales Agreement, “[T]he rent will be deducted from . . . equity
until the equity is depleted.”)
Brady argues that denial of Chaudhry’s right of recoupment
would not be inequitable to Chaudhry because she should have evicted
the debtor upon the bankruptcy filing and relet the Property. 	If
Chaudhry had done so, argues Brady, Chaudhry would not be in the
position of owing the balance of the purchase price as of the
petition date to Brady, and yet not being able to recover any rent
from the debtor. (As of the petition date, the Sales Agreement did
not require the debtor to pay any rent except as credits against the
purchase price.) 	But, as Chaudhry notes, the debtor was not in
default under the Sales Agreement at the date of the petition, and
the theory on which Chaudhry would have effected such an eviction is
problematic.
Brady argues that recoupment is not available because the sale
and leaseback were two separate transactions. 	For the reasons
stated above, the court disagrees. 	Under the Sales Agreement, one
integrated transaction was involved, the netting provisions of which

rent against purchase price - were central to the deal from the
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BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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5Fed. R. Civ. P. 8(c) provides, in part: “When a party has
mistakenly designated a defense as a counterclaim or a
counterclaim as defense, the court on terms, if justice so
requires, shall treat the pleading as if there had been a proper
designation.” 	Fed. R. Civ. P. 8(e)(1) provides: “Each averment
of a pleading shall be simple, concise, and direct. 	No technical
forms of pleading or motions is required.” 	Fed. R. Civ. P. 8(f)
provides: “All pleadings shall be so construed as to do
substantial justice.”
9	Decision
standpoint of both parties.
Brady also argues that Chaudhry waived the right to argue
recoupment because her answer to the complaint, as initially filed,
did not mention recoupment.
This argument fails. 	On June 24, 2005, Chaudhry, acting
without benefit of counsel, wrote a letter to the court stating that
she intended the letter to be her response to the complaint. 	The
letter described the parties’ obligations under the Sales Agreement
and emphasized that the rent payments were to be deducted from the
purchase price. 	Although Chaudhry did not use the word
“recoupment,” her allegations in response to the complaint were
specific and clear, and certainly sufficient to put Brady on notice
of her factual contentions and to put recoupment at issue. 	See Fed.
R. Civ. P. 8(c), 8(e)(1), and 8(f), applicable via Fed. R. Bankr. P.
7008. 5
In addition, on August 12, 2005, after employing counsel,
Chaudhry filed an amended answer setting forth various affirmative
defenses. 	The second affirmative defense stated: “Plaintiff’s
claims are barred by the doctrines of setoff and recoupment.”
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BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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10	Decision
On November 22, 2005, this court entered its Order Setting
Aside Default and Default Judgment. 	Paragraph 2 of that order
provided that the above referenced letter would be deemed as an
answer to the complaint. 	Paragraph 3 of the order provided: “The
Answer to Complaint filed by Plaintiff on August 12, 2005 is hereby
deemed an amended answer.”
The court holds that Chaudhry did not waive her right to assert
recoupment against Brady.
C. 	Conclusion
The court will grant Chaudhry’s motion for summary judgment and
deny Brady’s motion for summary judgment. 	The court requests
Chaudhry to submit a proposed order so providing within 15 days. 	It
appears to the court that no further issues remain. 	If so, Chaudhry
may also submit a proposed judgment on the merits (the parties to
bear their own costs).
END OF ORDER
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UNITED
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BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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11	Decision
COURT SERVICE LIST
Mariam S. Marshall, Esq.
Marshall & Ramos
350 Frank H. Ogawa Plaza #600
Oakland, CA 94612
Lawrence L. Szabo, Esq.
Law Offices
3608 Grand Avenue #1
Oakland, CA 94610-2024
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