Recoupment Defense Fails When Basis for Defense is Plaintiff’s Breach of Separate Contracts With Nonparties

On September 26, 2023, the First Department issued a decision in AOG, LLC v. KIND Operations Inc., Case No. 2022-05296, reversing Justice Margaret Chan’s order and dismissing defendants’ recoupment defense, because the basis for the recoupment defense was plaintiff’s breach of separate contracts with nonparties, rather than the contract at issue with defendants, explaining:

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 “den[y] the validity” of AOG’s claim based on breach of the contract that plaintiff seeks to enforce (Enrico & Sons Contr., Inc. v Bridgemarket Assoc., 252 AD2d 429, 430 [1st Dept 1998]). 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” (Hispanic Ind. Tel. Sales, LLC v Una Vez Mas, LP, 110 AD3d 474, 475 [1st Dept 2013]), 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.

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning recoupment or setoff defenses.