In re Holford

In March 1982, Alden Holford leased office space from the company M. Lane Powers Investment Builder (Powers) (debtor) for $1,326 per month. Holford leased more space than he needed because Powers’s vice president assured Holford that the extra space could be sublet easily. The pro rata rental share of the extra space was $600 per month. Holford subsequently tried to sublet the extra space but was unsuccessful. In January 1983, Holford accused Powers of fraudulently inducing Holford to enter the lease based on the assurance about easy subletting. Beginning in February 1983, Holford noted on his monthly rent checks that he was not waiving his rights regarding the extra space. Powers subsequently filed for bankruptcy. When Holford learned of the bankruptcy proceedings, Holford stopped sending rent checks to Powers, asserting that he was recovering his fraud damages from the rental payments. Powers sued Holford for nonpayment of rent, and Holford counterclaimed for fraud damages. Powers then filed a motion to show cause in the bankruptcy proceeding, asserting that Holford had violated the Bankruptcy Code’s automatic stay by filing his fraud counterclaim. The bankruptcy court found that Holford had properly filed the counterclaim but concluded that Holford had violated 11 U.S.C. § 362(a)(7) by setting off his fraud damages against the post-petition rent due to Powers. The bankruptcy court also imposed contempt penalties on Holford. The district court affirmed, and Holford appealed. On appeal, the court considered whether the lower courts had properly characterized Holford’s actions as a setoff or whether Holford’s actions were instead a recoupment that might not have violated the automatic stay.