Opinion ID: 740486
Heading Depth: 2
Heading Rank: 2

Heading: The District's Postjudgment Assertion of Setoff

Text: 38 The District takes the position that [e]quitable setoff is a defense to execution upon judgment (District's brief on appeal at 8), apparently believing that a defendant who possesses a claim is entitled simply to refuse to pay a money judgment against it without ever having pleaded its own claim during the course of the litigation that led to the judgment. We find it unsurprising that the District cites no authority for that proposition, for the very purpose of allowing assertion of setoff as a counterclaim is to permit entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A. Citizens Bank v. Strumpf, --- U.S. at ----, 116 S.Ct. at 289 (internal quotation marks omitted); see Lalime v. Desbiens, 115 Vt. at 168, 55 A.2d 121 (purpose of setoff is to allow defendant in the suit to liquidat[e] the whole or a part of his claim). 39 Under the Federal Rules of Civil Procedure, a defendant's claim of setoff against a plaintiff is to be made by means of counterclaim in its answer to the complaint. See Fed.R.Civ.P. 13. The Rule provides for, inter alia, compulsory counterclaims, which generally consist of claims that a defendant has at the time of his answer and that arose out of the same occurrence or transaction as the claim asserted by the plaintiff. See Fed.R.Civ.P. 13(a). Such claims may, but need not, be asserted in the answer if, at the time the action was commenced, they were the subject of another pending action. See id. The Rule also provides for permissive counterclaims, i.e., principally claims of the defendant that did not arise out of the same occurrence or transaction as the claim asserted by the plaintiff. See Fed.R.Civ.P. 13(b). The provision in subdivision (a) of Rule 13 for [c]ompulsory counterclaims does not mean that a defendant is compelled to assert the claim and cannot waive it. It means merely that if the claim is one that is within the scope of Rule 13(a) and is not asserted as a counterclaim, its assertion in a later action will be vulnerable to a defense of estoppel. See, e.g., Fed.R.Civ.P. 13 Advisory Committee Note 7 (1937) (If the action proceeds to judgment without the interposition of a counterclaim as required by subdivision (a) of this rule, the counterclaim is barred.); 6 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 1417 (2d ed. 1990); 3 Moore's Federal Practice p 13.12, at 13-52 (2d ed. 1995). Similarly, the provision for [p]ermissive counterclaims in subdivision (b) does not mean that the defendant who chooses not to assert such a claim in his answer is permitted to assert it at his whim later in the litigation or as a postjudgment remedy of self-help. It means merely that if he chooses not to assert it as a counterclaim, that election has no estoppel effect that would prevent him from asserting it in a later suit. See, e.g., 6 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 1420, at 156. 40 Rule 13 also provides that a claim not asserted by the defendant in his answer may, if the court allows, be asserted later in a supplemental answer if the claim had not matured or had not been acquired by the time the original answer was served, see Fed.R.Civ.P. 13(e), or in an amended answer if the defendant had the claim at the time of his original answer but failed to assert it through oversight, inadvertence, or excusable neglect, or if justice requires that the amendment be allowed, see Fed.R.Civ.P. 13(f). A belated motion to file such a pleading may properly be denied where the delay is lengthy or where there is no reasonable explanation for the failure to assert it, or to make the motion, earlier. See, e.g., Crown Life Insurance Co. v. American National Bank & Trust Co., 35 F.3d 296, 300 (7th Cir.1994) (affirming refusal to allow a counterclaim first asserted by defendant three months after the district court granted summary judgment for plaintiff); Imperial Enterprises, Inc. v. Fireman's Fund Insurance Co., 535 F.2d 287, 293 (5th Cir.1976) (same where defendant was aware of the facts underlying its alleged counterclaim for almost a year before it made its motion); Kirbens v. Wodis, 295 F.2d 372, 375 (7th Cir.1961) (same where request to assert counterclaim for a setoff was made after entry of judgment for plaintiff though the defendant could have asserted the claim at least two and one-half years earlier). 41 The effect of a setoff, assuming the plaintiff establishes his own claim, is to reduce the size of the judgment entered in the plaintiff's favor. See generally Fed.R.Civ.P. 13(c); 6 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 1426. In order to determine whether there should be a setoff, the district court must determine whether the setoff claim is disputed, and if it is disputed whether it is meritorious. The court cannot timely make these determinations if the claim is not asserted until after final judgment. See, e.g., Lalime v. Desbiens, 115 Vt. at 168, 55 A.2d 121 (setoff is a demand which a defendant makes against the plaintiff in the suit  (emphasis added)). 42 In the present case, the District argues that neither Rule 13 nor Fed.R.Civ.P. 54(d), which governs posttrial motions for attorneys' fees, required it to assert its setoff claim during the pendency of this litigation. Indeed, it contends that it was unable to assert a setoff until after plaintiffs' fee application was granted (District's brief on appeal at 13 (for the District's judgment to enjoy validity as a setoff, Plaintiffs first had to establish the § 1988 entitlement itself)), and that when the fee application was filed the District had no claim to assert because the state-court judgment had not been entered: 43 When Plaintiffs' Rule 54(d)(2) motion was filed, the District's state court claim was the subject of another pending action. No enforceable judgment had yet been entered against any Plaintiff and the District's claim was not yet acquired, 44 (District's brief on appeal at 14). Both of these arguments are frivolous. 45 First, the contention that for the District's judgment to enjoy validity as a setoff, Plaintiffs first had to establish the § 1988 entitlement itself, to the extent that it is meant to be responsive to the present challenge to the timeliness of the District's assertion of setoff, is nonsense. If it were true, no defendant could assert a valid setoff in its answer, for the answer obviously is due before the plaintiff's claim is adjudicated. Rule 13 plainly requires that a setoff claim, if it is to be asserted, be asserted in a pleading during the lawsuit. 46 Second, the District's statement that the District had not yet acquired its claim against plaintiffs when the fee application was made, on the premise that the District's claim was not created until entry of the state-court judgment, evinces a fundamental misconception of the nature of a claim. A claim need not already have been reduced to judgment in order to be asserted as a counterclaim. Rule 13(a) and Rule 13(b), when read together, embrace any claim a defending party may have against his opponent. 6 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 1420, at 164; see also id. § 1401, at 11 (at common law, setoff could be based on contract). The District obviously had a contract claim against these plaintiffs that arose upon the parties' execution of the settlement agreement in which plaintiffs agreed to pay the District $200,000. That agreement was executed on or before September 30, 1994; the Rule 54(d) fee application was filed on October 21. Thus, the District had in fact acquired its contract claim against these plaintiffs prior to the filing of the fee application. 47 Further, even if the District were correct that it had no claim until the state-court judgment was entered, that judgment was entered before the District filed its response to the fee application. As the District itself acknowledged to the district court, when Plaintiffs eventually stipulated to be parties [to the state court action], and subject to the state court judgment, a counterclaim 'matured' which at the option of the District, and permission of the [district] court, could have been presented as a counterclaim by supplemental pleading. (District's Postjudgment Motion for Setoff at 12.) Thus, whether on the basis of contract or state-court judgment, the District plainly had the option of seeking to assert its setoff in its response to the Rule 54(d) application. We do not suggest either that the terms of Rule 54(d) itself require the assertion of counterclaims in response to a motion for fees or that the District's claim here was a compulsory counterclaim. But if the District wished to have its claim set off against any fee award in the present suit, it was required to assert the claim in the present suit prior to the entry of judgment, and its opposition to the Rule 54(d) application was the obvious occasion for such an assertion. Had the District informed the court at that time that it wished to set off the state-court judgment in the present action, the district court would no doubt have allowed the assertion of that claim; we would then have had the opportunity to review the court's decision as to the propriety of a setoff when the adjudication of the fee application was before us in Valley Disposal II; and this litigation would presumably have been concluded a year ago. 48 Instead, barely a week after the state-court judgment was entered, the District filed its opposition to the fee application in the district court on a variety of untenable grounds, but opted to make no mention whatever of any desire to assert a claim of setoff. Indeed, at no time did the District assert its setoff claim prior to the conclusion of the fee litigation. Although as the district court noted, the claim could have been raised innumerous times before final judgment (Tr. 19), the District chose the self-help route of simply refusing to comply with the district court's judgment. 49 Having allowed the case to proceed to final judgment without exercising its option to seek permission to assert setoff, the District could have moved to vacate the judgment pursuant to Fed.R.Civ.P. 60(b), in order to seek permission to assert its counterclaim belatedly. But in order to prevail on such a motion, it would have been required to make a showing required by that Rule, such as mistake, inadvertence, or excusable neglect. The District has proffered no reason for its failure to make any attempt to assert setoff until some 16 months after the District concedes it could have asserted it. And the record reveals no basis on which its delay until after plaintiffs attempted to execute on the judgment entered in their favor could be found excusable. 50 In sum, the District was not required by Rule 13 to assert its setoff claim in this action in order to preserve its right to enforce in state court or in some other action the rights it received in the settlement agreement or the state-court judgment. But without pleading setoff prior to the entry of the final judgment in the present action, or without making some showing such as excusable neglect in support of a Rule 60(b) motion, it was not entitled to a setoff here.