By: Dean Langdon
Recoupment allows one party (Party A) to a contract to keep payments that are due to the other party (Party B) when Party B owes money to Party A at the same time. There must be an over-payment by one party, and the competing claims must arise from a single contract. If Party B is relying on a steady revenue stream from Party A as part of an ongoing business, recoupment of an over-payment by Party A can interrupt that revenue stream and cause financial distress.
Recoupment is common in the healthcare industry. Medicare payments are actually an estimated payment based on services provided. Each year a Medicare provider submits a cost report and the Medicare agency recalculates what the provider should have been paid. In situations where the provider was overpaid, Medicare will recover the over-payments by deducting them from payment for future services – recoupment.
Recoupment is also found in the oil, gas and coal industries in connection with mineral leases. Mineral leases may require a minimum annual royalty whether or not minerals are actually mined or extracted. Royalty payments to owners/lessors are normal under a mineral lease. However, to avoid double payments, the entity extracting minerals will deduct the minimum annual royalty from future royalty payments – a recoupment. Parties to mineral leases bargain for specific recoupment terms, and a particular mineral lease may not have a recoupment provision.
Entertainers may also have money recouped from what they earn. Musical artists often have expenses advanced to pay for recording and producing their work, and those payments are traditionally recouped from future royalties that would otherwise be due to the artists. Again, this right is often specifically set forth in a written contract.
A right of recoupment may exist regardless of whether or not it is specifically included in a contract, and if one party chooses to recoup, it can affect the other party’s financial stability. While the automatic stay of bankruptcy stops most collection efforts, it does not affect the ability to recoup. The legal theory is that where the right of recoupment exists, the party that is owed money under the contract has no legal right to it, so it is not affected by the automatic stay of bankruptcy. For more information about recoupment, please call or email our office.
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