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Posted: July 13, 2017

Time-Barred Claims Could be Used as Counterclaims Under Equitable Recoupment Doctrine

On June 29, 2017, the First Department issued a decision in California Capital Equity, LLC v. IJKG, LLC, 2017 NY Slip Op. 05312, holding that claims that were time-barred could nonetheless be a sserted as counterclaims, explaining:

The doctrine of equitable recoupment, as codified in CPLR 203(d), applies to IJKG’s counterclaim for tortious interference with its contractual right of first offer, which otherwise would be barred under the applicable three-year statute of limitations. The doctrine 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, and some courts have even required a tight nexus between the claim and counterclaim.

. . .

At this, the pleading stage, however, we cannot conclude that the counterclaim does not arises out of the same series of transactions that forms the basis of, and is not sufficiently related to, the cause of action for breach of the tax distribution provisions of the Note Agreement. If proved, the counterclaim could be used defensively as a shield for recoupment purposes, but IJKG could not obtain any affirmative relief, such as disgorgement. Therefore, IJKG can assert its otherwise untimely counterclaim solely to offset any damage award or deficiency judgment that plaintiff may obtain in its favor against IJKG.

(Internal citations omitted).

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