Appeal from the Decree in the Court of Common Pleas of Allegheny County, Family Division, No. FD94-05764. Before FOLINO, J.
Before: Tamilia, J., Saylor, J., and Schiller, J. Opinion BY Tamilia, J.
The opinion of the court was delivered by: Tamilia
Lisa A. Goldberg appeals the June 25, 1996 divorce Decree which confirmed the June 6, 1996 Decree in equitable distribution adjudicating issues relating to the parties' marital estate.
Prior to 1987, appellee, a pediatric ophthalmologist, conducted a practice in Oklahoma. Upon the failure of that practice in 1987, appellee relocated to Pittsburgh to begin a new practice. To do so, he took a bank loan in the amount of $318,000, a substantial portion of which constituted past debt from the Oklahoma practice. Appellee's father co-signed the loan. Appellee and appellant, a dermatologist, met some time thereafter, married on September 4, 1988, and had one child. Immediately prior to the marriage, on September 2, 1988, the parties entered into an antenuptual agreement which provided, in relevant part, that in the case of divorce "marital property will be divided equally." (R. 123a.) Appellee concedes that appellant paid all of the parties living expenses throughout the marriage (N.T., 6/6/96, p. 42), and that he received substantial loans from appellant during the marriage to keep his failing practice afloat. In this regard, appellant presented to the trial court, and appellee does not contest the validity of, promissory notes in the amount of $106,000. Appellant also claims she lent appellee more than $50,000 which was not secured by promissory notes. Although appellee contests the amount, he concedes receiving loans from appellant in excess of those memorialized by the promissory notes. Despite the bank loan co-signed by his father and the loans from appellant, appellee's practice was not successful. On May 18, 1992, appellee filed a Chapter 7 petition in United States Bankruptcy Court. Debts listed in the petition included the loans made by appellant. One month later, on June 22, 1992, appellee accepted salaried employment in Philadelphia and separated from appellant. *fn1 On September 22, 1992, appellee received a discharge in bankruptcy. In May, 1994, apparently unsatisfied with avoiding repayment of the substantial loans from appellant, appellee filed a divorce action raising claims for equitable distribution, alimony, alimony pendente lite and counsel fees. Following a hearing held on June 6, 1996, the court concluded that appellee's discharge in bankruptcy precluded appellant from receiving an offset or recoupment for the marital loans against appellee's share of the marital estate. Thereafter, the court enforced the parties antenuptual agreement, with the result that appellant was ordered to pay appellee approximately $127,000 as his share of the marital estate.
On appeal, appellant challenges the trial court's failure to allow her to offset or recoup the amount of marital loans against appellee's share of the marital estate. In rejecting these claims, the trial court found that under the Supremacy Clause of the United States Constitution, Art. VI, cl. 2, a debt which is discharged pursuant to federal bankruptcy law may not be considered in a subsequent state equitable distribution proceeding. Our review of this holding requires examination of the doctrines of set-off and recoupment, as advanced by appellant.
While the trial court found these doctrines inapplicable under our facts, it correctly recognized that under the proper facts both setoff and recoupment are recognized by bankruptcy law. See Lee v. Schweiker , 739 F.2d 870, 875 (3rd Cir. 1984) ("Both doctrines were subsequently adopted in bankruptcy, setoff by statute, see 11 U.S.C. § 108 (1976), repealed by Bankruptcy Reform Act of 1978, Pub.L.No.95-895, 92 Stat. 2549 (1978); and recoupment by decision, see In re Monongahela Rye Liquors , 141 F.2d 864 (3d Cir. 1944.") (footnote omitted)). Since the validity of these doctrines under bankruptcy law cannot be questioned, we must determine whether they were properly rejected by the trial court in this case. We begin our analysis by considering the doctrines at length.
The doctrines of "setoff" and "recoupment" had their origins in the era of common law pleading, under which the scope of a "case" was far less inclusive than it is today, and under which claim joinder was far narrower. Both doctrines permitted countervailing claims, which otherwise could not have been asserted together, to be raised in a case based on any one of them. ... In bankruptcy, however, setoff and recoupment play a role very different from their original role as rules of pleading. Setoff, in effect, elevates an unsecured claim to secured status, to the extent that the debtor has a mutual, pre-petition claim against the creditor. See 11 U.S.C. § 506(a). Setoff is limited, however, by the provisions of 11 U.S.C. § 553. Among those limitations is that pre-petition claims against the debtor cannot be setoff against post-petition debts to the debtor. Recoupment, on the other hand, allows the creditor to assert that certain mutual claims extinguish one another in bankruptcy, in spite of the fact that they could not be "setoff" under 11 U.S.C. § 553. The justification for the recoupment doctrine is that where the creditor's claim against the debtor arises from the same transaction as the debtor's claim, it is essentially a defense to the debtor's claim against the creditor rather than a mutual obligation, and application of the limitations on setoff in bankruptcy would be inequitable.
Lee, (supra) at 875 (footnotes omitted).
More recently, the Third Circuit Court of Appeals again considered the doctrines of setoff and recoupment:
To grasp the scope of the recoupment doctrine, it is helpful to first distinguish recoupment from a creditor's ability to setoff certain claims. The doctrine of setoff, as incorporated in bankruptcy code section 553, gives a creditor a right "to offset a mutual debt owing by such creditor to the debtor," provided that both debts arose before commencement of the bankruptcy action and are in fact mutual. In re Davidovich , 901 F.2d 1533, 1537 (10th Cir. 1990). 'Setoff, in effect, elevates an unsecured claim to secured status, to the extent that the debtor has a mutual, pre-petition claim against the creditor.' [ Lee v. Schweiker ] Generally, the mutual debt and claim are the product of different transactions. 4 Collier on Bankruptcy § 553.03 at 553-14 (Lawrence P. King, Ed., 15th ed. 1992). Pursuant to the limitations imposed by code section 553, a creditor's pre-petition claims against a debtor cannot be setoff against post-petition debts owed to the debtor. Id .
The Bankruptcy Code does not contain a recoupment provision. The common law doctrine of recoupment provides an exception to setoff in bankruptcy cases. Recoupment 'is 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.' 4 Collier on Bankruptcy § 553.03, at 553-15-17 (emphasis added) This doctrine is justified on the grounds that 'where the creditor's claim against the debtor arises from the same transaction as the debtor's claim, it is essentially a defense to the debtor's claim against the creditor rather than a mutual obligation, and application of the limitations on setoff in bankruptcy would be inequitable.' Lee, 739 F.2d at 875. Thus, so long as the creditor's claim arises, out of the identical transaction as the debtors, that claim may be offset against the debt owed to the debtor, without concern for the limitations put on the doctrine of setoff by code section 553. Davidovich, 901 F.2d at 1537. In the bankruptcy context, recouping has often been applied where the relevant claims arise out of a single contract 'that provides for advance payments based on estimates on what ultimately would be owed, subject to later correction. In re B&L Oil Co. , 782 F.2d 155, 157 (10th Cir. 1986). However, an express contractual right is not necessary to affect a recoupment. See In re Holford, 896 F.2d 176, 178 (5th Cir. 1990).
In re University Medical Center , 973 F.2d 1065, 1079-1080 (3rd Cir. 1992) (emphasis added). Having defined the doctrines at issue, we must now determine whether the trial court properly found that appellant was not able to setoff or recoup her loans to appellee against ...