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Foods v. Cranberry Growers Cooperative

United States District Court, W.D. Wisconsin

February 12, 2019

MAXWELL FOODS, Appellant,
v.
CRANBERRY GROWERS COOPERATIVE, d/b/a CRANGROW, Appellee.

          OPINION AND ORDER

          BARBARA B. CRABB DISTRICT JUDGE

         This case arises out of a dispute between appellant Maxwell Foods and appellee Cranberry Growers Cooperative, d/b/a CranGrow, regarding the amount Maxwell Foods owes to CranGrow under two contracts for the sale of cranberries. In a written order entered on June 27, 2018, the bankruptcy court concluded that Maxwell Foods owes CranGrow $128, 475 under one contract and that Maxwell Foods cannot rely on CranGrow's alleged breach of a subsequent contract to recoup or setoff the amount Maxwell Foods owes. Dkt. #1-1. Maxwell Foods appeals from the bankruptcy court's order under 28 U.S.C. § 158(a)(1). For the reasons set out below, I will affirm the bankruptcy court's decision.

         BACKGROUND

         In February 2017, Maxwell Foods and CranGrow entered into an agreement under which the parties agreed that (1) Maxwell would be the sole distributor of CranGrow's cranberries in Australia through the end of 2017; (2) CranGrow would sell seven loads of cranberries to Maxwell during 2017 at $1.15 a pound with specific payment terms; and (3) if Maxwell stayed current on all payments for the seven loads, it would remain the sole distributor of CranGrow's cranberries in Australia through the end of 2018. Dkt. #225-1, case no. 1-17-13318-cjf (Bankr. W.D. Wis. 2017). The agreement contains no requirement that CranGrow sell to Maxwell or that Maxwell buy exclusively from CranGrow. Nor does the agreement contain any terms or agreement for sales beyond the first seven loads.

         Maxwell Foods placed purchase orders for seven loads of cranberries in February and March 2017, and CranGrow shipped and delivered all seven loads under the February 2017 agreement in 2017. Maxwell has not yet paid CranGrow for the last three loads of cranberries, for which it owes $128, 475.

         On September 25, 2017, CranGrow filed a petition for Chapter 11 bankruptcy in the Western District of Wisconsin. Between September 27 and October 3, 2017, Maxwell Foods and CranGrow exchanged several emails regarding potential additional orders from Maxwell. As part of the email exchanges, Maxwell sent “Purchase Order 93, ” proposing that Maxwell purchase 10 loads of April to June 2017 cranberries at $1.05 per pound. (The parties dispute whether CranGrow accepted Purchase Order 93. According to Maxwell, CranGrow accepted the terms of the Purchase Order on October 3, 2017, making Purchase Order 93 an enforceable contract. According to CranGrow, the parties continued to negotiate the terms of Purchase Order 93 throughout October and into November 2017.)

         By November 14, 2017, CranGrow still had not shipped any cranberries to Maxwell Foods under Purchase Order 93. On November 14, Maxwell sent an email to CranGrow requesting cranberries from July 2017. CranGrow responded that it was sold out of cranberries. Because Maxwell could not purchase cranberries from CranGrow, it had to purchase cranberries at a higher price from other suppliers for $110, 000 more than it would have paid CranGrow.

         On January 31, 2018, Maxwell Foods filed a “Motion for Order Authorizing Recoupment” in the bankruptcy court, contending that (1) Purchase Order 93 was a valid contract that obligated CranGrow to sell 10 loads of cranberries to Maxwell; (2) CranGrow breached the contract, forcing Maxwell to purchase cranberries from other suppliers for an additional $110, 100; and (3) Maxwell Foods should be allowed to recoup or setoff the $110, 100 amount from the $128, 475 debt it owes CranGrow.

         The bankruptcy court certified the dispute between the parties as a “contested matter” and allowed the parties to engage in discovery. On May 15, 2018, CranGrow filed a motion for summary judgment, asking the bankruptcy court to deny Maxwell Foods's recoupment motion. Maxwell then asked to depose two representatives of CranGrow, but CranGrow declined, stating that it would agree to the depositions if the bankruptcy court denied CranGrow's motion for summary judgment.

         On June 27, 2018, the bankruptcy court granted CranGrow's motion for summary judgment and denied Maxwell Foods's recoupment motion. For purposes of summary judgment, the bankruptcy court assumed that Purchase Order 93 was a valid contract that required CranGrow to sell cranberries to Maxwell. Dkt. #1-1 at 9. However, the bankruptcy court concluded that (1) the common law doctrine of recoupment did not apply because the February 2017 agreement and Purchase Order 93 were not part of a “single integrated transaction”; and (2) Maxwell was not entitled to setoff under 11 U.S.C. § 553 because the February 2017 agreement and Purchase Order 93 did not both arise prepetition and were not “mutual” obligations as required under that section. Id. at 10-13.

         OPINION

         On appeal, Maxwell Foods has not developed any argument challenging the bankruptcy court's rejection of its setoff claim under 11 U.S.C. § 553. However, Maxwell contends that the bankruptcy court erred in rejecting its claim to equitable recoupment under common law. Specifically, Maxwell contends that the bankruptcy court erred by granting summary judgment on the recoupment defense to CranGrow before the close of discovery and by concluding that the February 2017 agreement and Purchase Order 93 were not part of a single integrated transaction such that Maxwell would be entitled to recoupment. In considering Maxwell's arguments, I review the bankruptcy court's conclusions of law de novo and its findings of fact for clear error. Adams v. Adams, 738 F.3d 861, 864 (7th Cir. 2013).

         Maxwell Foods's argument challenging the timing of the bankruptcy court's decision is without merit. Maxwell contends that the bankruptcy court's summary judgment decision was premature because there are genuine factual disputes regarding whether Purchase Order 93 was a valid and enforceable agreement. Maxwell argues that its planned depositions of two of CranGrow's corporate officers are highly relevant to that factual dispute. However, any dispute regarding the enforceability of Purchase Order 93 is immaterial to the bankruptcy court's rejection of Maxwell's recoupment and setoff arguments. For purposes of summary judgment, both CranGrow and the bankruptcy court assumed that Purchase Order 93 was enforceable and that CranGrow owed Maxwell $110, 100 as a result of CranGrow's failure to fulfill Purchase Order 93. Nonetheless, the bankruptcy court concluded that Maxwell was not entitled to recoupment or setoff of its liability to CranGrow under the February 2017 agreement because the two agreements were independent contracts and were not part of a single integrated transaction. Maxwell has not explained how additional discovery regarding the validity of Purchase Order 93 could affect the bankruptcy court's analysis or the outcome of its recoupment or setoff defenses in any way. Therefore, the timing of the bankruptcy court's decision is not a basis for remand.

         The next question is whether the bankruptcy court erred in rejecting Maxwell's recoupment defense. The Bankruptcy Code does not discuss recoupment, but courts have long applied the equitable doctrine of recoupment in the bankruptcy context. 5 Collier on Bankruptcy ¶ 553.10 (16th ed.). The common law doctrine of recoupment is more limited than the statutory right to setoff under 11 U.S.C. § 553. In particular, § 553 permits a creditor to offset certain mutual debts in a bankruptcy proceeding so long as both the debtor's and creditor's debts arose either prepetition or postpetition. In other words, under § 553, a creditor may not set off a prepetition claim against a postpetition obligation. Id.; In re Health Management Ltd. Partnership, 336 B.R. 392, 395 (Bankr. C.D. Ill. 2005); In re CDM Management Services, Inc., 226 B.R. 195, 196 (Bankr. S.D. Ind. 1997). In contrast, a creditor ...


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