Adv. Case No. A96-001132-003 (DMD)
U.S.B.C. Bancap No. 98-3090

DECISION ON APPEAL

This is an appeal from a judgment and an amended judgment of the bankruptcy court in the adversary case of William Barstow, Trustee, v. Caudle and Associates, Inc., d/b/a Chuck E. Cheese, Case No. A96-01132-003. Oral argument was requested and has been heard.

STATEMENT OF THE CASE

Appellant is Caudle & Associates, Inc., d/b/a Chuck E. Cheese (hereinafter "CEC"). Appellee is trustee William Barstow.

In re Roasters of Alaska, LLC, Case No. A96-001132, was filed on December 4, 1996, as a Chapter 11 bankruptcy and 7 ABR 147      was converted to a Chapter 7 bankruptcy on March 26, 1998. William Barstow was appointed as the Chapter 7 trustee. On November 23, 1998, the trustee filed an adversary action (No. A96-001132-003) against CEC to collect monies that were owed Roasters by CEC. At the time of the filing of the Chapter 11 petition, CEC owed Roasters over $45,000.00 which was later reduced to $39,289.45. This amount was then "zeroed out" with a year-end adjustment in 1996. In the adversary proceeding, the trustee sought to collect this money from CEC as an account receivable, claiming that the year-end adjustment was made post-petition and violated the automatic stay.

At trial, CEC asserted an affirmative defense of recoupment, claiming that the debt was zeroed out because of a three-way loan between CEC, Roasters, and another restaurant company called Northern Entertainment, d/b/a Pierce Street Annex (PSA). All three companies were owned by the same principals, Larry L. Caudle and William H. Adair. The alleged three-way loan occurred in 1995. In 1995, over a period of several months, CEC loaned $44,900.00 to PSA, which was going out of business. In July of 1995, PSA loaned $39,500.00 to Roasters to purchase the Roasters franchise because Caudle and Adair had not yet capitalized Roasters. (PSA had received the $39,500.00 as part of a judgment against a third-party.) CEC claims the intent was to have Roasters pay CEC back the money that PSA loaned to Roasters since PSA owed CEC money. Roasters made two payments to CEC in September of 1995. These payments show up on Roasters' general ledger as accounts receivable due from CEC. At the end of 1995, CEC claims that 7 ABR 148      year-end adjustments were to be made that would zero out all monies owed between the three companies. However, when the 1995 tax returns were prepared, it was discovered that these adjustments had not been made. These year-end adjustments were not made until December 31, 1996.

The bankruptcy court held that CEC was not entitled to recoupment from Roasters and that the trustee was entitled to recover on his claim. In its memorandum decision, the bankruptcy court concluded that: 

[t]here is no written contract among PSA, CEC and Roasters giving rise to a recoupment defense by CEC. The testimony of Caudle and his accountant Kimura as to some "understanding" that CEC's liability to Roasters would be offset by monies PSA owed CEC is not credible. I find that the payments made by PSA to Roasters in June of 1995 and from Roasters to CEC in September of 1995 were random events that did not arise from the same transaction and were not logically related. Caudle simply shifted cash from corporation to corporation as the need arose; there were no other "understandings". CEC is not entitled to recoupment from Roasters and the trustee is entitled to recover the full amount of his claim.[^1.]

The bankruptcy court entered an order and judgment in favor of the trustee in the amount of $39,289.45. The bankruptcy court also awarded the trustee $21,555.17 in prejudgment interest. The trustee filed a motion for reconsideration requesting an award of attorney's fees pursuant to Rule 82, Alaska Rules of Civil Procedure. The bankruptcy 7 ABR 149      court granted the motion and entered an amended judgment awarding the trustee $6,428.94 in attorney's fees.

CEC timely filed an appeal of the bankruptcy court's judgment and amended judgment raising two issues on appeal:  (1) did the bankruptcy court err in determining that appellant was not entitled to recoupment from Roasters; and (2) did the bankruptcy court err in awarding attorney's fees and prejudgment interest to the trustee?

DISCUSSION

The court "review[s] a bankruptcy court's findings of fact by the clearly erroneous standard, but its conclusion of law are subject to de novo review." In re Devers, 759 F.2d 751, 753 (9th Cir. 1985).

Recoupment

The first issue on appeal is whether the bankruptcy court erred in determining that CEC was not entitled to recoupment from Roasters.

Recoupment "is the setting up of a demand arising from the same transaction as the plain-tiff's claim or cause of action, strictly for the purpose of abatement or reduction of such claim."

Newbery Corp. v. Fireman's Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir. 1996) (quoting 4 Collier on Bankruptcy, ¶ 553.03, at 553-15, (15th ed. 1995)). Recoupment has been applied in bankruptcy proceedings and is thought not to be subject to the automatic stay, but recoupment is applied only in cases where the countervailing claims arise from the same transaction. Id. at 1399, 1400. In the Ninth Circuit, to determine whether claims arise from the same transaction, the court applies the 7 ABR 150      "logical relationship" test that was outlined by the Supreme Court in Moore v. New York Cotton Exchange, 270 U.S. 593 (1926). Id. at 1403. "In Moore, the Court stated that '"[t]ransaction" is a word of flexible meaning. It may comprehend a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship.'" Id. (quoting Moore, 270 U.S. at 610).

In the instant case, the bankruptcy court held that CEC had no right to recoupment because there was no written contract setting up the right to recoupment, the evidence of some kind of "understanding" was not credible, and the loans at issue were random events and not logically related. CEC claims these findings were in error.

CEC first argues that there does not have to be an express contract between the entities setting up a right to recoupment, and thus the court's finding that there was no written contract is irrelevant. CEC is correct that there does not have to be a written contract providing for recoupment. See 5 Collier on Bankruptcy ¶ 553.10[1] (Lawrence P. King ed. 1995). The bankruptcy court did not state otherwise. It found correctly that there was no written contract to support a recoupment claim. The bankruptcy court went on to consider other evidence which might support a recoupment claim.

CEC next argues that the bankruptcy court erred in finding the evidence of an understanding that CEC's liability to Roasters would be offset by monies PSA owed to CEC was not credible. In particular, CEC asserts that the bankruptcy 7 ABR 151      court had no reason to find the testimony of Roger Kimura, CEC's accountant, not credible after the court had approved Kimura as the accountant for the debtor in this case.

Both Caudle and Kimura testified about there being some kind of general intent to do year-end adjustments to take care of the loans. The bankruptcy court found this testimony not credible. The fact that the bankruptcy court had previously approved Kimura as the accountant for the debtor in this case is irrelevant to whether the bankruptcy court correctly found Kimura's testimony on the intent of the entities as to the 1995 loan transactions to be incredible. The trial court is in a much better position to assess credibility, and its credibility assessments are generally accorded great deference. See Fed. R. Civ. P. 52(a); Anderson v. Bessemer City, North Carolina, 470 U.S. 564, 574 (1985). CEC has not demonstrated that there was any clear error in the bankruptcy court's finding as to Caudle's and Kimura's credibility. Considering all of the evidence, the bankruptcy court could and did correctly find that there was no loan plan between the three businesses and that Caudle simply shifted cash from one business to the other as and when needed.

Without there being some kind of understanding about an offset, it is difficult to perceive how the loans could be considered part of the same transaction. But CEC argues that in concluding that the loans were random events and not logically related, the bankruptcy court ignored the law of Newbery and misapplied the logical relationship test. CEC contends that the evidence in this case reflects that the loans had a 7 ABR 152      logical relationship. CEC submits that the evidence presented at trial established the following:  in early 1995 it loaned money to PSA; in July of 1995, PSA loaned money to Roasters; in September of 1995, Roasters paid CEC the money Roasters owed PSA. CEC claims this type of transaction is exactly the type of transaction the court approved in Newbery, and that these loans were clearly part of the "same transaction."

The trustee contends that the bankruptcy court did not ignore Newbery and did not misapply the logical relationship test. The trustee argues that the bankruptcy court correctly concluded that the loans were not part of a single transaction or a single contract and so recoupment plainly does not apply here. In making his argument, the trustee relies on In re University Medical Ctr., 973 F.2d 1065, 1081 (3d Cir. 1992). This reliance is misplaced as the Third Circuit has adopted a much narrower test for determining what is the "same transaction" than has the Ninth Circuit. The test this court must apply, and the test the bankruptcy court did apply, is the "logical relationship" test discussed in Newbery.

The bankruptcy court plainly did not ignore Newbery. The bankruptcy court laid out the facts of Newbery and concluded that the situation in this case was much different. The bankruptcy court made no errors of fact or law in doing so.

In Newbery, one of the claims at issue arose out of a general 7 ABR 153      indemnity agreement; the other claim arose out of a second contract into which the general indemnity agreement was incorporated. The Ninth Circuit concluded the general indemnity agreement was part of the second contract, and thus the two claims at issue were logically related because they arose out of the same contract (the second contract).

In the instant case, there was no contract, no understanding. The only evidence to tie the loans together is that the three companies were owned by the same two people. Nothing in Newbery suggests that this would be sufficient evidence to support a finding that otherwise seemingly random events were part of the same transaction.

CEC raises another argument which, it contends, requires a reversal of the bankruptcy court's decision in favor of the trustee. CEC argues that what the trustee is attempting to do here is contrary to Alaska law and cannot be allowed. This argument was not presented to the bankruptcy court. Generally, "an argument must be presented to the bankruptcy court before it may be considered on appeal." In re Perez, 30 F.3d 1209, 1213 (9th Cir. 1994). However, this rule is flexible, and the district court has discretion to consider appeal arguments that involve purely legal questions even if they were not presented to the bankruptcy court. Id. at 1214. In this case, the court declines to consider this argument that was not presented to the bankruptcy court, in large part because this was an adversary proceeding. Although the rule regarding new arguments on appeal is more flexible in the bankruptcy context "to reflect the reality that bankruptcy proceedings are not precisely analogous to normal adversary litigation[,]" id. at 1213, a bankruptcy adversary proceeding, 7 ABR 154      such as the one on which the instant appeal is based, is governed by normal litigation rules.

That said, if this argument were properly before this court, the court would find it unavailing. CEC is contending that it was an intended beneficiary of Roasters' promise to pay back the loan PSA received from CEC. As an intended beneficiary, CEC argues that it would have been subrogated to PSA's claim against Roasters and that it could have asserted this right of subrogation as an affirmative defense to any claim filed by Roasters against CEC. Such a defense would suffer from the same fatal flaw as CEC's recoupment defense. There is no credible evidence establishing that CEC was an intended beneficiary of the agreement between PSA and Roasters.

CEC also raises an argument that it is inequitable to make it liable to the trustee for its loan from Roasters when it has paid an IRS administrative claim of $38,000 on behalf of Roasters. CEC contends that the bankruptcy court refused to consider these payments, and that it was unjust of the court to so refuse.

During trial, the bankruptcy court allowed CEC to introduce testimony relating to the $38,000 IRS claim. The court perceives no legal or factual basis for disallowance of the trustee's claim against CEC because CEC paid an IRS claim on behalf of Roasters.

Prejudgment Interest

The next issue on appeal is the bankruptcy court's award of prejudgment interest. It is within the bankruptcy 7 ABR 155      court's discretion to award prejudgment interest. See In re Niles, 106 F.3d 1456, 1463 (9th Cir. 1997). When a claim arises under state law, as did the claim here, the award of prejudgment interest is also governed by state law. Id.

CEC first argues that the bankruptcy court erred in awarding prejudgment interest because the trustee never filed a motion requesting prejudgment interest so CEC never had an opportunity to oppose such a request. This argument is meritless. CEC erroneously believes that the prejudgment interest was awarded as a result of the trustee's motion for reconsideration; whereas, the award of prejudgment interest was made in the original judgment, not the amended judgment that was entered as a result of the trustee's motion for reconsideration. The trustee requested prejudgment interest in his initial complaint. The trustee indicated in both his trial brief and reply brief that he was seeking an award of prejudgment interest. CEC had ample opportunity to respond to the trustee's request for prejudgment interest.

CEC next argues that the trustee has waived its right to prejudgment interest by failing to put on any evidence at trial in support of this claim. Because the trustee did not put on any evidence, CEC contends that it did not raise at trial an equitable argument it believes would have resulted in a smaller prejudgment interest award. CEC appears to be suggesting that had the trial court heard evidence on the IRS payments that CEC made for Roasters[^2. ] and evidence 7 ABR 156      about a tentative settlement agreement, it would have not awarded prejudgment interest at all or at least not for the time during which the parties were working on the settlement agreement.

Alaska law is contrary to CEC's contention that the trustee was required to offer evidence to support his request for pre-judgment interest. In Cole v Bartels, 4 P.3d 956, 958 (Alaska 2000), the Alaska Supreme Court indicated that prejudgment interest could be awarded as a matter of course unless the party opposing it can prove that it would constitute a double recovery. CEC knew that the trustee was requesting prejudgment interest. If CEC had evidence that would have defeated the trustee's request for prejudgment interest, it should have offered that evidence at trial.

CEC next argues that the bankruptcy court used the incorrect rate of interest to calculate the amount of prejudgment interest awarded. [^3.] In its memorandum decision, the bankruptcy court noted that: 

   Interest has been conservatively determined based upon the state law rate of 10.5% per annum and the following principal amounts:  (1) $33,388.22 from Sept. 30, 1995, through December 31, 1995; (2) $45,000.00 from January 1, 1996, through December 31, 1996; (3) $39,289.45 7 ABR 157      from January 1, 1996, to November 13, 2000.[^4.]

CEC contends that the bankruptcy court erred in using a rate of 10.5% and that the bankruptcy court should have used the rate that is currently provided for in AS 09.30.070(a). The current version of AS 09.30.070(a) limits the prejudgment interest rate to three percentage points above the 12th Federal Reserve District's discount rate as of January 2 of the year in which the judgment was entered. (At the time judgment was entered in this case, the AS 09.30.070(a) interest rate would have been somewhere around 9%.) However, AS 09.30.070(a) was amended in 1997, and the amended version, upon which CEC relies, does not apply to causes of action accruing on or before August 7, 1997. See 1997 Alaska Sess. Laws § 55, ch. 26. The cause of action in this case accrued before that date; thus, the pre-1997 version of AS 09.30.070 applies here. That version provides that "[t]he rate of interest on judgments and decrees for the payment of money is 10.5 percent a year...." AS 09.30.070(a) (1996). The bankruptcy court did not err in using an interest rate of 10.5% to calculate prejudgment interest.

CEC also argues that the bankruptcy court erred in awarding prejudgment interest from the date the receivable first appeared on Roasters' books. CEC contends that the earliest the prejudgment interest should have begun accruing was the date the complaint in this matter was filed.

7 ABR 158     

On appeal, both parties assume that AS 09.30.070(b) governs the accrual of prejudgment interest in this case. Subsection 70(b) provides: 

   (b) Except when the court finds that the parties have agreed otherwise ... prejudgment interest accrues from the day process is served on the defendant or the day the defendant received written notification that an injury has occurred and that a claim may be brought against the defendant for that injury, whichever is earlier. The written notification must be of a nature that would lead a prudent person to believe that a claim will be made against the person receiving the notification, for personal injury, death, or damage to property.

Subsection (b) clearly applies in tort cases. See Lloyd's & Inst. of London Underwriting Companies v. Fulton, 2 P.3d 1199, 1210 (Alaska 2000) ("AS 09.30.070[] which governs accrual [of pre-judgment interest] in cases involving personal injury, death, or property damage"). It is not clear whether AS 09.30.070(b) applies in non-tort cases, in particular contract cases. In Henash v. Ipalook, 985 P.2d 442, 451 (Alaska 1999), the court observed that in "several recent cases, we have noted that AS 09.30.070(b) might only apply to actions for 'personal injury, death, or damage to property,' but we have not yet resolved this issue." In Hanson v. Kake Tribal Corp., 939 P.2d 1320, 1330-31 (Alaska 1997), the court refused to reach the issue of whether AS 09.30.070(b) applied to a contract claim. In other cases where the parties did not raise the issue of whether AS 09.30.070(b) applied to a non-tort case, the Alaska Supreme Court has applied the rule that "'all damages "should carry interest from the time the cause of 7 ABR 159      action accrues, unless for some reason peculiar to an individual case such an award of interest would do an injustice."'" Hofmann v. von Wirth, 907 P.2d 454, 455 (Alaska 1995) (quoting Tookalook Sales and Service v. McGahan, 846 P.2d 127, 129 (Alaska 1993), quoting State v. Phillips, 470 P.2d 266, 274 (Alaska 1970)).

Had the parties not raised the issue of the applicability of AS 09.30.070(b), it is fairly clear that prejudgment interest in this case would have begun accruing from the date the debt was due, which is presumably the date the account receivable was entered in Roasters' general ledger. However, the parties did raise the issue of whether AS 09.30.070(b) applies, albeit not until oral argument, and the court must consider the issue here.

Because the parties assume that AS 09.30.070(b) applies to this case, the court will also assume that the statute applies, in part because the court is convinced that the legislative intent of AS 09.30.070(b) was to limit prejudgment interest in all cases, not just tort cases. That said, it is clear from the face of the statute that the written notice provision accrual date in AS 09.30.070(b) cannot apply here. The portion of AS 09.30.070(b) that provides that prejudgment interest may begin accruing from the day the defendant received written notification that an injury has occurred plainly applies only in cases involving personal injury, death, or damage to property. However, the rest of the statute can and does apply to this matter. Indeed, the section begins with an exception for situations where the 7 ABR 160      parties have "agreed" on a date from which interest will accrue. For purposes of this case, AS 09.30.070(b) provides that prejudgment interest begins accruing from the date process was served on the defendant, unless the parties have agreed otherwise.

On remand, the bankruptcy court will consider whether the parties had an agreement as to when interest should begin accruing. If there is no agreement, then prejudgment interest should begin accruing from the date process was served on appellant.

Attorney's Fees

Finally, CEC appeals the bankruptcy court's award of attorney's fees to the trustee. As a general matter, attorney's fees are not awarded in bankruptcy actions. However, the Ninth Circuit has recognized that "[w]here a contract or statute provides for an award of attorneys' fees, a creditor may be entitled to such fees in bankruptcy proceedings. Such an award is governed by state law." In re Fobian, 951 F.2d 1149, 1153 (9th Cir. 1991). Because this case involved only state law issues, the trustee, on motion for reconsideration, moved for and was granted attorney's fees pursuant to Rule 82, Alaska Rules of Civil Procedure.

At oral argument, CEC conceded that if it did not prevail on appeal on its recoupment defense, which it has not, attorney's fees would properly be awarded to the trustee pursuant to Rule 82. Thus, the bankruptcy court's decision to award 7 ABR 161      attorney's fees is affirmed.[^5.] However, the amount of the fees may require adjustment base upon the court's decision on prejudgment interest.

CONCLUSION

The bankruptcy court's amended judgment in favor of the trustee in the amount of $39,289.45 is affirmed. The bankruptcy court's amended judgment awarding attorney's fees to the trustee is also affirmed as to liability, but vacated as to the amount of fees. The bankruptcy court's amended judgment awarding prejudgment interest is reversed and remanded for further proceedings consistent with this opinion.

DATED at Anchorage, Alaska, this 7^th day of August, 2001.

 

H. Russel Holland, Judge
District of Alaska

N O T E S:

1.    Memorandum Decision at 4 (Nov. 15, 2000) (Clerk's Docket No. 21 in Adversary Case No. A96-01132-003).

2.    CEC insists that it was not allowed to present evidence about the IRS payments. The record shows otherwise.

3.    CEC originally argued that the bankruptcy court had violated Rule 52, Federal Rules of Civil Procedure, by failing to make findings of fact and conclusions of law as to the prejudgment interest. At oral argument, however, CEC conceded that the bankruptcy court had made findings and conclusions.

4.    Memorandum Decision at 5, n.6 (Nov. 15, 2000) (Clerk's Docket No. 21 in Adversary Case No. A96-01132-003).

5.    The court notes that the bankruptcy court should have given CEC an opportunity to respond to the trustee's motion for an award of attorney's fees. Rule 9013-2(b)(2) of the Local Bankruptcy Rules states in pertinent part that the court "will not amend or make additional findings, or grant a new trial, rehearing, or reconsideration without first requesting opposition be filed." In this instance, the bankruptcy court entered an amended judgment awarding attorney's fees after a motion for reconsideration by the trustee without giving CEC an opportunity to oppose the motion.