On September 26, 2023, the First Department issued a decision in AOG, LLC v. Kind Operations Inc., 2023 NY Slip Op. 04710, holding that a recoupment defense should have been dismissed for lack of a contractual duty to make the payments to be recouped, explaining:
On June 18, 2019, plaintiff AOG, LLC purchased TruFood’s assets, including its accounts and contract rights, but not its liabilities. As of the time of the sale, KIND had failed to pay in full on at least 58 of Trufood’s invoices as required under the Manufacturing Agreement, totaling $7,239,605.38 in past due accounts receivable (the TruFood Invoices). Since AOG purchased only Trufood’s assets AOG disclaimed responsibility for invoices Trufood owed its suppliers which were outstanding as of June 18, 2019 (the Supplier Invoices). KIND paid certain of the Supplier Invoices in the total amount of $4,840,563.07 (the Supplier Payments) Because KIND used many of the same suppliers as TruFood and, as a result, the nonpayment of these Supplier Invoices threatened KIND’s business.
In this action, AOG asserts, among other things, causes of action for breach of contract and account stated, alleging that KIND violated its obligations under the Manufacturing Agreement by failing to pay the TruFood Invoices. KIND asserted various affirmative defenses, including a seventh affirmative defense alleging that AOG’s claims are barred, in whole or in part, by the doctrine of equitable recoupment and/or subject setoff, and that the Supplier Payments were the basis for recoupment or setoff.
Supreme Court should have granted AOG’s motion to dismiss the affirmative defense. KIND’s recoupment defense, which is premised on TruFood’s failure to pay its suppliers, does not seek, as necessary for a recoupment defense, to deny the validity of AOG’s claim based on breach of the contract that plaintiff seeks to enforce. KIND has identified no obligation contained in the Manufacturing Agreement between it and TruFood requiring TruFood to pay its suppliers or requiring KIND to pay those suppliers if TruFood failed to do so. Thus, there is no indication that TruFood breached the Manufacturing Agreement by not paying its suppliers. Nor do the parties’ debts arise out of a single integrated transaction, since the Supplier concerned TruFood’s contractual obligations to its suppliers and are therefore entirely separate from KIND’s obligations to pay the TruFood Invoices pursuant to the Manufacturing Agreement.
(Internal quotations and citations omitted).