Court Opinion

ID: 7858015
Source: CourtListenerOpinion
Date Created: 2022-09-08 17:48:10.67203+00
Date Added: 2024-06-11T16:30:00.074754
License: Public Domain

LAVERY, J.,
dissenting. I respectfully dissent from the majority opinion, which affirms the trial court’s decision to preclude the defendant Edward J. Winter from asserting recoupment as a defense. I disagree with the majority’s conclusion that the trial court properly found that Atlease, and not Winter, would be the proper party to assert a recoupment defense and that mutuality of obligation was a prerequisite for Winter to assert the recoupment defense in this case. I would conclude that Winter was a proper party to assert, and should have been allowed to assert, the defense of recoupment in this case for the reasons I present.
The majority and the trial court have misplaced then-focus on the requirement of mutuality of obligation instead of on the law of suretyship. The issue that is before us, and was before the trial court, is simply whether a guarantor such as Winter may assert the defenses of its principal in a suit brought by the beneficiary of the suretyship agreement. The hornbook law answer is yes on the facts of this case.1
“As a general rule, when a creditor sues a guarantor and does not name the principal debtor in the action, the guarantor is not entitled to raise defensively the claims of the principal debtor against the creditor. . . . The rationale behind this rule is to protect the claims of the principal, since the guarantor may not be in the *845best position to assert them.” (Citations omitted.) First Texas Service Corp. v. Roulier, 750 F. Sup. 1056, 1060-61 (D. Colo. 1990). “Despite the general rule which prohibits the guarantor from asserting the principal’s claims, courts have recognized three exceptions. A guarantor may assert the independent claim of the principal to set-off the creditor’s claim against the guarantor where (1) the surety has taken an assignment of the claim or the principal has consented to the surety’s use of the claim, (2) both principal and surety are joined as defendants, or (3) the principal is insolvent. See Restatement of Security § 133 (2) at 360 (1941). See also Arctic Contractors, Inc. v. State of Alaska, 573 P.2d 1385 (Alaska 1978).” (Emphasis added.) Continental Group, Inc. v. Justice, 536 F. Sup. 658, 661 (D. Del. 1982).2 “The guarantor’s right to assert the principal’s claims under these exceptions is in the nature of setoff against the creditor’s claim on the guaranty; the guarantor may not recover affirmatively. . . . Thus, if the guarantor’s recovery on his counterclaims exceeds his liability under the guaranty, the guarantor may not *846recover this excess.” (Citation omitted.) First Texas Service Corp. v. Roulier, supra, 1061.3
The Restatement of Security § 133 (2) (b), p. 360 (1941), states that “[t]he surety cannot set off against the creditor the principal’s claims against the creditor unless . . . the principal is made a party to the action instituted by the creditor . . . .” The Restatement of Suretyship and Guaranty (Third), § 34 (1), p. 143 (1995), states that “the secondary obligor may raise as a defense to the secondary obligation any defense of the principal obligor to the underlying obligation . . . .” “A surety, when sued with the principal, can set off or recoup any demand which would be available to the principal alone. ... As a general rule it may be said that, when the surety and principal are joined as defendants, a claim due from the creditor to the principal alone can be advanced as a set-off or by way of recoupment . . . .” F. Childs, Handbook of the Law of Suretyship and Guaranty (1907) § 148, p. 272; see L. Simpson, Handbook on the Law of Suretyship (1950) § 70, pp. 324—25;4 D. Pingrey, A Treatise on the Law of Suretyship and Guaranty (1913) § 144, p. 170; 74 Am. Jur. 2d 77-78, Surety-*847ship § 107 (1974); Great American Ins. Co. v. Fred J. Gallagher Const. Co., 16 Ariz. App. 479, 494 P.2d 379 (1972); Becker v. W.P. Northway, 44 Minn. 61, 46 N.W. 210 (1890); Raymond Bros. v. Green & Co., 12 Neb. 215, 10 N.W. 709 (1881).
This rule, allowing a surety to assert the defenses of the obligor, has even been expressed by our Supreme Court. “Because the surety’s contract is ancillary to that of the debtor, suretyship law has permitted the surety to assert the defenses or the discharge of his debtor unless the very purpose of the suretyship was to shift the risk of this event from the creditor to the surety.” (Emphasis added.) American Oil Co. v. Valenti, 179 Conn. 349, 352-53, 426 A.2d 305 (1979).
There is even a learned treatise that states: “Where the counterclaim, however, is in the nature of a mere recoupment or matter in mitigation constituting an entire or partial failure of the consideration of the debt for which the surety is bound, such counterclaim will ordinarily be available to the surety even though he is sued without his principal, and there has been no assignment or consent to the use of the counterclaim by the latter.” E. Spencer, The General Law of Suretyship (1913) § 194, p. 272.
In this case, the plaintiffs sold a car rental business to Atlease. The major assets of that business were automobiles that were held out for lease. The consideration given for the business was the agreement by Atlease to pay the remaining balance on a note owed by the plaintiffs payable to Citytrust. As part of the consideration, Winter signed a guarantee of this note assumed by Atlease.
Winter’s recoupment defense claims that the odometers of the automobiles purchased by Atlease were rolled back by the plaintiffs and, therefore, the value of the automobiles was less than what was originally *848represented to Atlease when the business was purchased. Thus, this claim alleges a failure of the consideration for the underlying debt. Arguably, Atlease has agreed to pay back a loan under false pretenses. Atlease, as the primary obligor, has a valid recoupment defense.5
The plaintiffs brought suit against both Winter and Atlease. Therefore, both the primary obligor, Atlease, and the secondary obligor, Winter, were parties to this action. Atlease failed to appear and a default judgment was entered against it. Winter should have been allowed to raise the defense of recoupment belonging to Atlease against the plaintiffs. The failure of Atlease to appear and raise the recoupment defense itself does not prevent Winter from doing so. It would be inequitable to allow the plaintiffs to prevail without providing Winter the opportunity to present a recoupment defense.
The majority opinion denies Winter the opportunity to present the recoupment defense, which he is properly entitled to assert under the facts of this case. I would conclude that the trial court improperly precluded Winter, as the guarantor, from presenting the recoupment defense of Atlease, the primary obligor.
I would reverse the judgment of the trial court and remand this case for further proceedings.

 The majority argues that Winter did not properly raise this claim to the trial court. I disagree. Winter raised the defense of recoupment in his pleadings and, therefore, to the trial court. It is the trial court that ignored the law of suretyship and the established rule that when a guarantor and principal are joined together as defendants, the guarantor can assert the defenses of his principal. The trial court choose to focus only on mutuality of obligation. Under the facts of this case, where the guarantor and principal are joined as defendants, mutuality of obligation is not the issue.

 The defenses of recoupment and set-off are generally discussed together and used interchangeably throughout case law and treatises. “Recoupment is the act of rebating or recouping a part of a claim on which one is sued by means of a legal or equitable right resulting from a counterclaim arising out of the same transaction. ... In the absence of a statute providing otherwise, recoupment is purely defensive and not offensive, at least when employed in a court of law. It goes to the justice or existence of plaintiffs claim, and only to the abatement, reduction, or mitigation of the damages claimed by plaintiff.” 80 C.J.S. 5-6, Set-off and Counterclaim § 2 (1953). “A set-off is a counterdemand which a defendant holds against a plaintiff, arising out of a transaction extrinsic of the plaintiffs cause of action . . . 80 C.J.S. 7, Set-off and Counterclaim § 3 (1953). “Recoupment and set-off are distinguishable from each other as to origin, subject matter, pleading, and the judgment recoverable. . . . However, recoupment and set-off are closely related, and a recoupment is, in a sense, a set-off. In some jurisdictions, by virtue of code or statutory provisions, there is no longer any substantial difference between the two terms; and sometimes the terms are used interchangeably, or one is erroneously employed when the other is obviously intended.” 80 C.J.S. 19, Set-off and Counterclaim § 10 (1953).

 In Connecticut, General Statutes § 42a-l-201 (40) provides: “ ‘Surety’ includes guarantor.”

 The following cases are cited in L. Simpson, supra, § 70, p. 325 n.97 (1950). “Balsley v. Hoffman, 13 Pa. 603 [1850]; Aultman & Taylor Co. v. Hefner, 67 Tex. 54, 2 S.W. 861 (1886); Webb-Harris Auto Co. v. Industrial Acceptance Corporation, 164 Ga. 54, 137 [S.E.] 770 (1927); Himrod v. Baugh, 85 Ill. 435 (1877); Slayback v. Jones, 9 Ind. 470 (1857); Park v. Ensign, 66 Kan. 50, 71 P. 230, 97 Am. St. Rep. 352 (1903); Spencer v. Almoney, 56 Md. 551 (1881); Temple St. Cable Ry. v. Hellman, 103 Cal. 634, 37 P. 530 (1894); Waterman v. Clark, 76 Ill. 428 (1875); Elia v. Bavuso, 204 Ill. App. 314 (1917); Hayes v. Cooper, 14 Ill. App. 490 (1884); Reeves v. Chambers, 67 Iowa 81, 24 N.W. 602 (1885); Harrison v. Henderson, 4 Ga. 198 (1848); Peirce v. Bent, 69 Me. 381 (1879); [M’Hardy] v. Wadsworth, 8 Mich. 349 (1860); Van Etten v. Kosters, 48 Neb. 152, 66 N.W. 1106 (1896); Raymond Bros. v. Green & Co., 12 Neb. 215, 10 N.W. 709, 41 Am. Rep. 763 (1881); Mahurin v. Pearson, 8 N.H. 539 (1837); Springer v. Dwyer, 50 N.Y. 19 (1872); Gunnis, Barrett & Co. v. Weigley, 114 Pa. 191, 6 A. 465 (1886); Hollister v. Davis, 54 Pa. 508 (1867); Bell v. Campbell, 143 S.W. 953 (Tex. Civ. App. 1912); Boyd v. Beaudin, 54 Wis. 193, 11 N.W. 521 (1882).”

 Winter abandoned the defense of set-off raised in his pleadings. The terms set-off and recoupment are used interchangeably in the treatises and case law. See footnote 2. The majority misconstrues my discussion of the law of suretyship because it does not agree that the defense of recoupment is interchangeable with the use of the term set-off in the quoted passages.