United Structures of America, Inc. v. G.R.G. Engineering , 9 F.3d 996 ( 1993 )

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 93-1354
UNITED STRUCTURES OF AMERICA, INC. AND
UNITED STATES OF AMERICA FOR THE USE OF
UNITED STRUCTURES OF AMERICA, INC.,
Plaintiffs, Appellees,
v.
G.R.G. ENGINEERING, S.E.
AND NEW HAMPSHIRE INSURANCE COMPANY,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Juan M. Perez-Gimenez, U.S. District Judge]
Before
Breyer, Chief Judge,
Selya and Stahl, Circuit Judges.
John E. Mudd with whom Cordero, Miranda & Pinto was on brief for
appellants.
Mark S. Finkelstein with whom Elizabeth D. Alvarado, Shannon,
Martin, Finkelstein & Sayre, David P. Freedman, and O'Neill & Borges
were on brief for appellee United Structures of America, Inc.
November 18, 1993
BREYER, Chief Judge. The plaintiff, having
supplied steel to a now bankrupt subcontractor, has sued the
general contractor, seeking to recover payment for the steel
from the bond that a federal statute, the Miller Act,
requires certain general contractors to provide. 40 U.S.C.
270a-270b. The general contractor says the steel was
defective, and it wants to deduct from the promised purchase
price the amount that it says it had to spend to cure the
defects. The district court, relying upon a Ninth Circuit
case, United States ex rel. Martin Steel Constructors v.
Avanti Steel Constructors, 750 F.2d 759 (9th Cir. 1984),
cert. denied sub nom. Harvis Construction v. United States
ex rel. Martin Steel Constructors, 474 U.S. 817 (1985), held
that where the supplier has a contract with a subcontractor
but not with the general contractor, the Miller Act forbids
the general contractor from taking such "offsetting"
deductions. We disagree with the Ninth Circuit. We
therefore vacate the district court's judgment.
I
Background
The Miller Act requires general contractors
working on federal government projects to furnish a payment
bond "for the protection of all persons supplying labor and
material" to the project. 40 U.S.C. 270a(a)(2). It
permits a supplier who has a "direct contractual
relationship with a subcontractor but no contractual
relationship . . . with the contractor furnishing" the bond
to sue on the bond for "the balance . . . unpaid at the time
of institution" of the suit, and to recover "judgment for
the sum or sums justly due him," as long as he complies with
certain notice requirements. Id. 270b(a). Puerto Rico's
"Little Miller Act" sets up a similar scheme for work on
projects undertaken by the Puerto Rican government. 22
L.P.R.A. 47, 51.
The plaintiff, United Structures of America
("United"), supplied steel to a subcontractor on two
projects, one for the United States government at Roosevelt
Roads Naval Station, the other for the Puerto Rican
government at Hato Rey Police Headquarters. Defendant
G.R.G. Engineering ("GRG") was the general contractor on
both projects. The subcontractor did not pay United in
full. When the subcontractor went bankrupt, United gave GRG
proper notice, and then sued GRG (and GRG's insurer) on the
payment bond for the amounts it believed were still due,
approximately $105,000 for the Roosevelt Roads project and
$177,000 for the police station project.
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United moved for summary judgment, attaching
various bills and receipts in support of its claims. GRG
opposed the summary judgment motion. An affidavit (and a
few working papers) of Luis Marin Aponte, a GRG partner and
licensed engineer, constituted GRG's only effort to "set
forth specific facts showing that there is a genuine issue"
that might warrant a trial, Fed. R. Civ. P. 56(e). Marin's
affidavit said that GRG did not owe United any money because
(1) United engaged in a fraudulent billing practice known as
"front loading"; (2) GRG had to spend "$88,887 . . . due to"
United's "non-compliance with the specifications of the
equipment supplied" for the Roosevelt Roads project; and (3)
GRG had to spend an additional "$107,622 . . . to correct
defects and/or deficiencies in the materials" that United
"furnished" for the police station project.
The district court granted summary judgment in
favor of United, holding (1) that this affidavit failed to
provide, or to point to, any specific factual evidence
supporting GRG's "front loading" theory; (2) that the
evidence regarding allegedly defective steel was irrelevant
because the law does not give GRG "the right to assert a
set-off defense"; and (3) that GRG, in any event, had not
"offered specific evidence in support of" its allegations,
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"for example, an affidavit prepared by an engineer
testifying that the materials were indeed defective."
GRG then moved for reconsideration. It pointed
out that Marin, its affiant, was indeed a licensed engineer,
and it provided a few additional documents and bills
suggesting possible defects and related costs. The district
court, although it acknowledged Marin's professional
qualifications, denied the motion for reconsideration,
solely on the basis of the Ninth Circuit's holding that the
Miller Act does not "allow[] a set-off defense by a general
contractor not in privity with" a supplier. Avanti, 750
F.2d at 762.
GRG now appeals, claiming primarily that the
district court and the Ninth Circuit have not correctly
interpreted the Miller Act with regard to the "set-off"
issue. We agree with GRG.
II
Analyzing the "Set-off"
In Avanti, the Ninth Circuit considered a set of
facts virtually identical to the facts before us. A
subcontractor on a government project bought steel from a
supplier; the subcontractor went bankrupt; the supplier sued
the general contractor on its Miller Act bond; and the
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general contractor asserted, as a defense, a claim of
damages arising from "late and defective shipments."
Avanti, 750 F.2d at 760. The Ninth Circuit held that "a
set-off defense is not available in a Miller Act claim in
the absence of privity." It added that "allowing a set-off
defense by a general contractor not in privity with [the
supplier] would unduly burden the enforcement of the rights
created by the Act." Id. at 762.
We disagree with the Ninth Circuit. We believe it
appropriate to draw a distinction that the Ninth Circuit did
not draw, namely a technical distinction between what the
law normally calls a "setoff" (or "set-off," or "offset"),
and what it calls "recoupment." The law dictionary defines
a "setoff" as a "counter-claim demand which defendant holds
against plaintiff, arising out of a transaction extrinsic of
plaintiff's cause of action." Black's Law Dictionary 1230
(5th ed. 1979) (emphasis added). If Smith sues Jones for
$10,000 for grain that Smith supplied, and Jones seeks to
reduce the judgment by $5,000 representing Smith's
(unrelated) unpaid rental of Jones' summer cottage, Jones is
seeking a setoff. "Recoupment," on the other hand, is "a
reduction or rebate by the defendant of part of the
plaintiff's claim because of a right in the defendant
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arising out of the same transaction." Id. at 1147 (emphasis
added). If Smith sues Jones for $10,000 for grain that
Smith supplied, and Jones seeks to reduce the judgment by
$5,000 representing Jones' expenditure to dry out Smith's
(defectively) wet grain (or the cost of buying replacement
grain, or the grain's lost value), Jones is seeking a
recoupment.
This distinction, although somewhat technical, is
well established in the law. See, e.g., In re B & L Oil
Co., 782 F.2d 155, 157 (10th Cir. 1986); 1 David G. Epstein
et al., Bankruptcy 6-45, at 703 (1992) ("setoff involves
mutual debts arising from unrelated transactions and
recoupment covers reciprocal obligations arising out of the
same transaction") (footnotes omitted); Michael E. Tigar,
Comment, 53 Cal. L. Rev. 224, 225 n.9 (1965) ("'Recoupment
is contradistinguished from setoff in these . . . essential
particulars: 1st. In being confined to matters arising out
of, and connected with, the transaction or contract upon
which the suit is brought . . . .'" (quoting Waterman, Set-
Off, Recoupment and Counterclaim 480 (2d ed. 1872))). See
generally 20 Am. Jur. 2d Counterclaim, Recoupment, and
Setoff 11, 16-18 (1965).
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This technical legal terminology does not
necessarily reflect ordinary usage. After all, a grain
buyer who wants to deduct from the contract price the cost
of drying the defectively wet grain might say that he simply
wants to "set off" the drying costs against the contract
price. Lawyers, too, might fall into this manner of
speaking, for often the technical legal distinction does not
matter. See, e.g., B & L Oil, 782 F.2d at 157 ("Modern
rules of pleading have diminished the importance of the
common-law distinctions surrounding recoupment and its
companion, setoff."); 20 Am. Jur. 2d 10 (1965) ("The
distinctions between . . . recoupment and setoff are no
longer of much importance . . . ."). In a few specialized
circumstances, however, the difference takes on more
significance.
One such circumstance is bankruptcy. The unusual
nature of bankruptcy proceedings means that certain devices,
ordinarily available to creditors seeking to recover from
debtors, may be unavailable when the debtor is in, or near,
bankruptcy. Among these devices is setoff, which may be
used by a creditor against an insolvent debtor who later
files for bankruptcy only under the circumstances described
in 11 U.S.C. 553, and against a debtor already in
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bankruptcy only by seeking relief from the automatic stay,
11 U.S.C. 362(a)(7). See 1 Epstein et al., supra, 3-
15, 6-38 to 6-44. The reason is that the bankruptcy laws
are generally designed to maximize the debtor's assets for
the benefit of all creditors, and allowing a creditor to
invoke setoff might allow the creditor an unfair advantage
over other creditors (the creditor, by reducing the debt he
owes the debtor dollar for dollar against the debt owed him
by the debtor, receives full value for the latter simply
because he owed money to the debtor). Thus, returning to
our earlier example, if Smith is in bankruptcy and Jones is
permitted to reduce his $10,000 grain debt to Smith by
$5,000 because of the unpaid cottage rental, Jones has (1)
deprived the estate of $5,000 it would otherwise have had to
benefit other creditors; and (2) received full value on his
$5,000 claim against Smith, even though other creditors
might not receive full value.
Recoupment, on the other hand, is not a mechanism
which reduces mutual debts "for the sake of convenience,"
id. 6-45, at 704 (describing setoff), but rather is "in
the nature of a defense" and is intended to "permit . . .
judgment to be rendered that does justice in view of the one
transaction as a whole." Rothensies v. Electric Storage
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Battery Co., 329 U.S. 296, 299 (1946); see also 4 Collier on
Bankruptcy 553.03, at 553-17 (Lawrence P. King, ed., 15th
ed. 1993) (point of recoupment is to "arriv[e] at a just and
proper liability" on the plaintiff's claim). As such, when
a debtor in bankruptcy seeks to recover from a creditor
whose claim against the debtor arises out of the same
transaction, allowing the creditor to recoup damages simply
allows the debtor precisely what it is due when viewing the
transaction "as a whole." So although it might not make
sense to allow Jones to claim a setoff in Smith's
bankruptcy, allowing Jones to recoup the $5,000 that he had
to spend to dry out Smith's defective grain seems fair to
all concerned, perhaps because a debtor has, in a sense, no
right to funds subject to recoupment. See In re Holford,
896 F.2d 176, 179 (5th Cir. 1990). This explains why
recoupment is not expressly regulated by the Bankruptcy
Code; some courts even find recoupment unaffected by the
automatic stay. See id.; 1 Epstein et al., supra, 6-45,
at 712 & n.36. Whether a creditor's action against a
bankrupt debtor is characterized as a setoff or a recoupment
will, therefore, have important effects on the creditor's
ability to prosecute the action.
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The Miller Act seems to us to offer another
situation in which one should distinguish setoff from
recoupment. The language of the Act permits a supplier to
recover, not the full contract price, but the "sums justly
due him." 40 U.S.C. 270b(a). In our view, the aim of
recoupment, "do[ing] justice in view of the one transaction
as a whole," Rothensies, 329 U.S. at 299, would seem to
match the statute's requirement of determining the sums
"justly due" a supplier, making recoupment an appropriate
defense in Miller Act cases. Indeed, we do not see how the
full contract price of goods supplied can possibly be
"justly due" a person who supplied defective goods. Setoff,
on the other hand, has less bearing on whether a particular
sum is "justly due" the claimant, since setoff functions
mostly as a convenient method of dealing with mutual,
unrelated debts. Since a true setoff is not before us,
however, we need only note the difference and need not go
beyond the subject of recoupment to consider when or whether
setoff is unavailable under the Miller Act.
Further, the policies underlying the Miller Act
seem to permit recoupment. The Act is intended "to protect
those whose labor and materials go into public projects,"
Clifford F. MacEvoy Co. v. United States ex rel. Calvin
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Tomkins Co., 322 U.S. 102, 107 (1944), but this
"protect[ion]" does not include payments to which the
supplier's underlying contract does not entitle him. We
know this is true because a Miller Act claim brought by a
subcontractor who is in privity with the general contractor
"is subject to reduction" for "defective articles or work,"
even though the subcontractor's "labor and materials" were
as much a part of the project as were those of an out-of-
privity supplier. 8 John C. McBride & Thomas J. Touhey,
Government Contracts 49.490[4], at 49-658 (1993); see,
e.g., United States ex rel. Browne & Bryan Lumber Co. v.
Massachusetts Bonding & Ins. Co., 303 F.2d 823, 828 (2d Cir.
1962), cert. denied sub nom. Ove Gustavsson Contracting Co.
v. Browne & Bryan Lumber Co., 371 U.S. 942 (1962); United
States ex rel. Acme Maintenance Engineering Co. v.
Wunderlich Contracting Co., 228 F.2d 66, 68 (10th Cir. 1955)
(defense of defective workmanship available against
subcontractor; failed in this case because general
contractor did not meet its burden of proof). We do not
understand why the existence or nonexistence of privity of
contract should make any difference with regard to these
general policies. Nor do we understand how permitting a
general contractor to reduce a supplier's claim by the
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amount that the general contractor spent remedying the
supplier's failure to comply with his contract somehow
"unduly burdens" the supplier's Miller Act rights. But cf.
Avanti, 750 F.2d at 762. On the contrary, disallowing
recoupment would seem to give the supplier "rights" to which
his contract does not entitle him.
In short, neither United nor the Avanti court
itself has pointed to any policy of the Miller Act which
would be served by the Avanti rule, nor can we imagine what
such a policy would be. We have examined the legislative
history of the Miller Act, and the cases and treatises
discussing it, but we have found nothing that suggests the
conclusion reached in Avanti. The materials and policies we
have considered, and the language of the statute, point the
other way.
For these reasons, we conclude that the general
contractor in this case is entitled to assert a recoupment
type of defense. Insofar as GRG shows that United delivered
defective goods that failed to meet contract specifications,
and proves reasonably foreseeable damages caused by those
defects, GRG may reduce the award to United by the amount of
those damages.
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United also asserted a claim under Puerto Rico's
Little Miller Act (for the police station project). Our
review of that Act has suggested no reason why the result
should be different. We note our belief that
"compensation," the Puerto Rican equivalent of setoff
discussed at length by the parties and the district court,
see 31 L.P.R.A. 3221-22; Garcia Mendez v. Vazquez Bruno,
440 F. Supp. 985, 988-89 (D.P.R. 1977), is as inapplicable
to this case as setoff itself, since compensation, like
setoff, is primarily a device allowing the convenient
simplification of relations between mutually indebted
parties. See Walla Corp. v. Banco Comercial de Mayaguez,
114 D.P.R. 216, transl. at 285 (1983).
III
Application of the Law to This Case
Applying our interpretation of the law to the
record before us, we conclude the following:
First, the district court correctly granted
summary judgment in respect to GRG's "front loading" claim.
We find no specific facts in GRG's opposition to summary
judgment that demonstrate a "genuine" or "material" issue of
fact with respect to that claim.
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Second, we believe that the district court's grant
of summary judgment, at least by the time it denied the
motion for reconsideration, rested upon an erroneous view of
the law. The district court, therefore, should reconsider
the motion. The summary judgment record, however, is
somewhat confused because GRG presented some pieces of
evidence in its initial opposition and other pieces of
evidence when it moved for reconsideration. Under these
circumstances, we shall ask the district court to begin the
summary judgment proceedings anew, so that the parties and
the court may proceed under the proper legal standard. GRG,
however, may raise only the issue of recoupment. In all
other respects, the court will assume that United is
entitled to summary judgment.
The judgment of the district court is vacated.
The plaintiff may file a new motion for summary judgment in
the district court. The defendant may not oppose that
motion on the issue of liability, but may contest damages
based on the principles of recoupment as outlined in this
opinion.
So ordered.
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