## Facts

- A commercial landlord entered bankruptcy after leasing office space to a tenant under a lease that included excess space.
- The tenant alleged the landlord fraudulently induced the lease by representing that the surplus space could be easily sublet.
- When the tenant could not sublet the extra space, he claimed fraud damages and began reserving rights on rent payments.
- After learning of the landlord’s bankruptcy, the tenant stopped paying rent, asserting he was netting fraud damages against rent obligations under the lease.
- The landlord sued for nonpayment in state court; the tenant counterclaimed for fraud to reduce or eliminate rent owed.
- The landlord sought bankruptcy-court relief, alleging the counterclaim and rent withholding violated the automatic stay; the bankruptcy court treated the rent withholding as a prohibited setoff and imposed contempt sanctions, which the district court affirmed.

## Issues

1. Whether the tenant’s withholding of rent based on alleged fraud arising from the same lease transaction was a permissible recoupment or an impermissible setoff stayed by 11 U.S.C. § 362(a)(7).
2. Whether contempt sanctions were proper if the tenant’s conduct was recoupment rather than a stay-violating setoff.

## Decision

- The Fifth Circuit reversed the lower courts’ characterization of the tenant’s conduct as setoff.
- The court held the tenant’s fraud-based reduction of rent obligations under the same lease was recoupment.
- Because recoupment is not barred by § 362(a)(7) in the manner setoff is, the tenant did not violate the automatic stay.
- The court vacated the contempt order and reversed the stay-violation determination to the extent it rested on treating the conduct as setoff.

## Legal Principles

- Recoupment permits a party to reduce the opposing party’s claim by asserting a demand arising from the same transaction, functioning as a defensive adjustment of the amount owed.
- Setoff involves mutual obligations arising from different transactions and is subject to bankruptcy limitations, including the automatic stay under 11 U.S.C. § 362(a)(7).
- The “same transaction” requirement is central: when both the debtor’s claim and the creditor’s reducing claim are part of one integrated contract relationship, recoupment may apply.
- If conduct is properly classified as recoupment, imposing contempt sanctions for violating the automatic stay is improper absent an underlying stay violation.

## Conclusion

The Fifth Circuit held that a tenant’s fraud-based reduction of rent under the same lease constitutes recoupment rather than a setoff, so the automatic stay did not bar the tenant from netting the claims, and contempt sanctions for an alleged stay violation could not stand.


In re Holford, 896 F.2d 176 (5th Cir. 1990)