Court Opinion

ID: 195040
Source: CourtListenerOpinion
Date Created: 2011-02-07 02:30:49+00
Date Added: 2024-06-11T17:26:38.023757
License: Public Domain

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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                             3

          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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                             4

"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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                             5

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

                            -6-
                             6

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).
      

                            -7-
                             7

          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

                            -8-
                             8

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
                                                            

                            -9-
                             9

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.

                            -10-
                             10

          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
                                                            

                            -11-
                             11

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

                            -12-
                             12

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.  

                            -13-
                             13

          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.

                            -14-
                             14

          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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                             15