Recoupment Affirmative Defense Not Extinguished By Debtor's 363(f) Sale

On March 30, 2012, Judge Sidney H. Stein of the District Court for the Southern District of New York held that a claimant's affirmative defense of recoupment was not extinguished by the debtor's section 363(f) sale. Hispanic Independent Television Sales LLC v. Kaza Azteca America Inc., 10 Civ. 932 (SHS), 2012 U.S. Dist. LEXIS 46239 (S.D.N.Y. Mar. 30, 2012).

Background

In December 2005, Interep National Radio Sales and one of its wholly owned subsidiaries entered into a national television sales representation agreement with Kaza Azteca America Inc.. As part of the agreement, Kaza retained Interep to sell television spots to be aired during Kaza's television programming, and Interep agreed to serve as "Kaza's exclusive national representative" for the sale of the national television spot advertising time. The contract also required that Interep maintain a sales force of 20 salespersons.

Interep and its subsidiaries filed for chapter 11 protection in the Bankruptcy Court for the Southern District of New York on March 30, 2008. The case was later converted to chapter 7 in October 2008. Kaza filed a proof of claim in the bankruptcy proceeding asserting that Interep breached its contract with Kaza and that it was entitled to liquidated damages totaling $522,536 as a result of Interep's breach. Subsequently, the Trustee, as seller, and Hispanic Independent Television Sales LLC ("HITS"), as purchaser, entered into an asset purchase agreement pursuant to section 363(f), whereby the Trustee assigned to HITS its right to all of Interep's accounts receivable. Kaza objected to this sale. The Bankruptcy Court held that the trustee could sell Kaza's accounts receivable to HITS free and clear of interests in the property; however, the Bankruptcy Court also held that the Kaza agreement could not be assumed and assigned to HITS.

Interep and the Trustee subsequently moved to disallow Kaza's proof of claim, and on January 26, 2011, the Bankruptcy Court granted the motion. Kaza did not object to the disallowance of its proof of claim. In March 2011, Kaza filed a motion for reconsideration requesting that the Bankruptcy Court set aside the order disallowing Kaza's claim. Kaza stated that it intended to withdraw its proof of claim if its motion was granted, and did so to preserve its recoupment claim against HITS and to avoid a successful collateral estoppel challenge to its claims by HITS. In September 2011, the Bankruptcy Court granted Kaza's motion for...