The Doctrine of Equitable Recoupment Is A Litigation Shield – Not A Sword
August 03, 2017
The doctrine of equitable recoupment, which is codified in CPLR 203(d) permits a defendant to assert an otherwise untimely defense or counterclaim. The Appellate Division, First Department recently applied the doctrine in California Capital Equity, LLC v. IJKG, LLC, and highlighted a few caveats that a litigator should bear in mind when relying upon the doctrine. Importantly, one must keep in mind that the doctrine of equitable recoupment is to be used as a shield, not a sword.
Plaintiff California Capital Equity, LLC (“CalCap”) commenced an action against defendants IJKG, LLC (“IJKG”) and Vivek Garipalli (“Garipalli”)¹ (collectively, “Defendants”) asserting claims of breach of contract, fraud, and breaches of fiduciary duty arising out of, among other things, Defendants’ failure to make interest payments to CalCap pursuant to a Note Agreement. In response, IJKG asserted counterclaims for tortious interference with contract, breach of implied covenant of good faith and fair dealing, and unjust enrichment.
CalCap moved to dismiss IJKG’s counterclaims for tortious interference with contract and unjust enrichment on the ground that these counterclaims were barred by New York’s three-year statute of limitations. Justice Ramos of the New York County Commercial Division denied CalCap’s motion, finding that the doctrine of equitable recoupment permitted IJKG to assert its otherwise time-barred counterclaims.
The First Department affirmed Justice Ramos’ ruling. The Court explained that the doctrine of equitable recoupment, which is codified in CPLR 203(d), permits a defendant to seek equitable recoupment in an otherwise untimely defense or counterclaim. However, there are two main caveats with respect to the doctrine: (1) the defense or counterclaim must arise from the same transaction, occurrence, or series of transactions or occurrences as alleged in the complaint; and (2) the doctrine may only be asserted to offset any damage award or deficiency judgment that a plaintiff may obtain in its favor against a defendant. In other words, the doctrine of equitable recoupment may only be used defensively as a shield for recoupment purposes, and not as a sword for a defendant to obtain affirmative relief on an otherwise stale counterclaim.
Applying these principles, the First Department concluded that IJKG’s tortious interference of with contract counterclaim, if proved, could be used defensively for recoupment purposes, but that IJKG could not obtain any relief from the counterclaims, such as disgorgement. Accordingly, the Court permitted IJKG to assert its counterclaim for tortious interference with contract solely to offset any damage award or deficiency that CalCap may obtain in its favor.
¹ Although Garipalli was named as a defendant in the lawsuit, all claims against him have been dismissed.