UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

COVINGTON DIVISION

IN RE:

IMPACT, INC.

d/b/a Complete Cellular

DEBTOR CASE NO. 93-21122

CHAPTER 11

IMPACT, INC. PLAINTIFF

VS. ADV. NO. 93-2087

SOUTHERN OHIO TELEPHONE CO.,

et al. d/b/a CELLULAR ONE DEFENDANT

MEMORANDUM OPINION

The plaintiff initiated this matter by filing its Complaint on November 4, 1993. At the same time it filed a Motion for Preliminary Injunction and Request for Emergency Hearing. This Motion sought an injunction against the defendant for the setoff of funds allegedly owed to the plaintiff, and sought to restrain the defendant from offsetting any further funds. The defendant filed its Objection to Motion for Preliminary Injunction and Objection to Request for Preliminary Hearing on November 5, 1993.

The Court conducted a hearing on the Motion for Preliminary Injunction on November 5, 1993. The Motion was sustained and on November 12, 1993, an Order Sustaining Motion for Preliminary Injunction was entered. This Order required the defendant to pay the plaintiff $6,352.33, which represented residual payments for the month of October 1993, less $2000.00 in security deposits not paid by the plaintiff to the defendant. The defendant was further restrained "from exercising any further setoff to either commission, residual check, or other accrual, except in the ordinary course of business, on monies to be paid to the Debtor after filing of the Petition, until further order of this Court."

The defendant filed its Answer on December 8, 1993. On January 6, 1994, as set out above, the plaintiff filed a Motion to Determine Right of Cellular One to Withhold Residual Payments. Therein the plaintiff alleged that it was owed residual payments of $5,500.00 for the month of November 1993. It asked the Court to determine whether the defendant could offset negative commission amounts against the amount owed for residuals.

After the filing of the defendant's Response and two hearings on the issue, the parties were ordered to submit briefs for the Court's consideration. Both parties have now filed their briefs.

The record in this case indicates that the plaintiff filed its Chapter 11 petition in this Court on October 5, 1993. It had entered into the Cellular Mobile Radio Sales Referral Agreement ("the contract") with the defendant on March 21, 1992. The contract provides for the payment of base commissions for the activation of service for subscribers. If the subscriber terminates the service within six months, the commission is charged back.

The contract authorizes the deduction of these charged-back commissions from "any future payment". (See Exhibit C to the contract, item 4(b)). The contract also provides for residual commissions to be paid on the basis of the number of subscribers referred, activated and retained within a calendar month. The plaintiff filed a Motion to Reject Executory Contract on January 5, 1994. This Court sustained the Motion in a hearing on January 12, 1994.

The defendant contends that residual commissions are "future payments" from which charged-back base commissions may be deducted. In addition, the defendant contends that, despite the prohibition of the Preliminary Injunction, it may take these payments under the theory either of setoff or recoupment, or both, because they were "in the ordinary course of business". The plaintiff disagrees and takes the position that the defendant may neither setoff nor recoup "negative commission" amounts from residuals because the residuals are earned and are property of the estate, while negative commission amounts are contingent interests. All of the sums in controversy accrued post-petition.

As stated above, this contract was specifically rejected. The actions in dispute here took place in the "gap" period between the filing of the Chapter 11 petition and the rejection of the contract. The relative positions of the parties in the gap period is set out by the court in In re Feyline Presents, Inc., 81 B.R. 623 (Bkrtcy.D.Colo. 1988):

At page 626.

In the case at bar the parties continued to perform their "respective roles" under the contract. This Court must determine whether the defendant's actions during the gap period constitute a violation of the Preliminary Injunction, or merely the conduct of business under the contract as with any other party. The defendant, of course, argues that it was doing the latter, and that the plaintiff must accept the burdens as well as the benefits of the contract. A case cited by the defendant, In re Midwest Service and Supply Co., Inc., 44 B.R. 262 (D.Utah 1983), supports this position.

The Midwest court found that where a debtor elected to continue its participation under a time and materials contract with the General Services Administration, it assumed the burden of contractual provisions regarding overpayment. The debtor could not use the automatic stay as a weapon to obtain benefits under the contract, and simultaneously prevent the government from recouping such overpayment, as allowed by the contract. In re Midwest Service and Supply Co., Inc., at page 265. See also In re Yonkers Hamilton Sanitarium Inc., 22 B.R. 427, 435 (Bkrtcy.S.D.N.Y. 1982). Since the sums involved in the present matter accrued post-petition, the Court specifically does not address the matter of pre-petition claims and their setoff or recoupment.

Both the Midwest and Yonkers Hamilton cases involve government contracts with provisions allowing recoupment for overpayment. However, it is not necessary that there be any express contractual right to withhold payments for a transaction to be a recoupment. Matter of Holford, 896 F.2d 176, 178 (5th Cir. 1990). The Holford court explains recoupment as follows:

At page 178. Based on this definition, this Court believes that the defendant's action may be more properly characterized as recoupment than setoff; it certainly cannot be both, as the defendant contends.

The contract at issue here does not contain the same kind of specific provision as in the cases set out above, but there are similarities. The contract provides:

................

This provision clearly states that if a paid base commission is not later earned, as the contract requires, the defendant may deduct that paid commission from any payment due the salesperson (the plaintiff herein). Such language appears to have the same effect as a provision in a contract which allows recoupment of overpayments, as in the Midwest and Yonkers Hamilton cases, supra. If the base commission is paid, but not later earned, it is, is effect, an overpayment.

In consideration of all of the foregoing, it is therefore the opinion of this Court that the defendant has not violated the Preliminary Injunction. Its action in deducting negative base commissions from residual commission amounts is in the nature of a recoupment provided for in the contract, and undertaken in the ordinary course of business. An order in conformity with this opinion will be entered separately.

Dated:

By the Court -

____________________________

Judge

Copies to:

Debtor

Michael L. Baker, Esq.

Philip L. Hanrahan, Esq.