Plaintiff Cannot Make a Claim for Setoff or Recoupment, Even if Framed as a Claim for Declaratory Judgment

On October 11, 2023, Justice Chan of the New York County Commercial Division issued a decision in BT Supplies W., Inc. v. Brookline, LLC, 2023 NY Slip Op. 33713(U), holding that a plaintiff cannot make a claim for setoff or recoupment, even if framed as a claim for declaratory judgment, explaining:

In seeking dismissal of BT’s recoupment and setoff claim, Lilogy argues that the doctrines of recoupment and setoff are either defenses or counterclaims and cannot serve as an independent claim for affirmative relief. Relying on Enrico & Sons Con tr., Inc. v Bridgemarket Assoc., 252 AD2d 429, 430 [1st Dept 19981), quoting Enrico & Sons, Lilogy asserts that recoupment is an
equitable doctrine. It is really a defense, as it denies the validity of plaintiffs claim in the amount claimed because it denies the validity of plaintiffs claim in the amount claimed, and does not entitle defendants to any affirmative relief or any
amounts in excess of the amount demanded by plaintiff. In response, BT argues that declaratory judgment is the flipside of an affirmative defense, even if recoupment and setoff are defensive in nature.

The doctrine of recoupment permits a defendant to seek equitable recoupment in an otherwise untimely defense or counterclaim, if it arises from the transactions, occurrences, or series of transactions or occurrences alleged in the
complaint. The counterclaims or defenses must arise from or relate to the same transactions or series of transactions. Recoupment is defensive in nature because it denies the validity of plaintiffs claim in the amount claimed, and does not entitle defendants to any affirmative relief or any amounts in excess of the amount demanded by plaintiff.

As to a setoff, Lilogy’s argument lumps setoff with recoupment, the case it cites in support, Enrico & Sons, speaks to recoupment only. In any event, a set-off is a money demand independent of and unconnected with the plaintiffs cause of action which may be pied as a defense or a counterclaim. And a setoff is allowed if mutual debts or mutual credits are involved; debts and credits are mutual when they are due to and from the same person in the same capacity and need not arise from the same transaction.

Here, BT, as a plaintiff, cannot maintain its declaratory judgment because recoupment is defensive in nature and a right of the defendant. Furthermore, the doctrine of recoupment requires debts arise from the same transactions. The debt in BT’s recoupment claim arises from the Second Purchase Order, whereas $549,965 deposit to be recouped arises from the First Purchase Order, a purchase order under the constraint of the Supply Agreement. Since the arbitrator decided that the Second Purchase Order is a separate and distinct transaction from the Supply Agreement, the debts arise from different transactions, rather the same transaction. Therefore, BT cannot bring the declaratory judgment claim under the doctrine of recoupment.

(Internal quotations and citations omitted).

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