Newbery Corp. v. Fireman's Fund Ins. Co.

Decision Date11 September 1996
Docket NumberNos. 94-16806,95-15336,s. 94-16806
Citation95 F.3d 1392
Parties36 Collier Bankr.Cas.2d 1297, 29 Bankr.Ct.Dec. 956, Bankr. L. Rep. P 77,075, 96 Cal. Daily Op. Serv. 6775, 96 Daily Journal D.A.R. 11,095 NEWBERY CORPORATION; Newbery Electric, Inc., Plaintiffs-Counter-Defendants-Appellants, and Citibank (Arizona), Plaintiff-Intervenor-Appellant, v. FIREMAN'S FUND INSURANCE COMPANY; The American Insurance Company; National Surety Corp.; Associated Indemnity Corporation; American Automobile Insurance Co., Defendants-Counter-Claimants-Appellees. NEWBERY CORPORATION; Newbery Electric, Inc., Plaintiffs-Appellees, v. FIREMAN'S FUND INSURANCE COMPANY; The American Insurance Company; National Surety Corp.; Associated Indemnity Corporation; American Automobile Insurance Co., Defendants-Appellants.
CourtU.S. Court of Appeals — Ninth Circuit

Douglas A. Bartman, Law Offices of Malcolm A. Misuraca, San Francisco, CA, for plaintiffs-appellants.

Rob Charles and John P. Frank, Lewis and Roca LLP, Tucson, AZ, for plaintiff-intervenor-appellant.

Curtis A. Jennings, Jay M. Mann and Robert J. Berens, Jennings & Haug, Phoenix, AZ, for defendants-appellees.

Appeal from the United States District Court for the District of Arizona, Samuel Conti, District Judge, Presiding. D.C. No. CV-89-00288-SC.

Before KOZINSKI, THOMPSON, and O'SCANNLAIN, Circuit Judges.

OPINION

O'SCANNLAIN, Circuit Judge:

We examine the application of the doctrine of recoupment in a breach of contract action brought by the debtor in a bankruptcy proceeding.

I

In early 1987, Newbery Electric, Inc. was a large electrical subcontractor with numerous projects pending. 1 For a number of those projects, including the one at issue in the present appeal, Newbery obtained performance and payment bonds from its surety Fireman's Fund. The bonds guaranteed that Newbery's work would be completed and its employees and suppliers paid. In exchange, Newbery entered into a "General Indemnity Agreement," by which it promised to indemnify Fireman's Fund against all losses which Fireman's Fund might sustain because of claims on the bonds.

On or about June 2, 1987, Newbery abandoned all of the projects which Fireman's Fund had bonded and defaulted on the bonds. On June 4, 1987, Newbery, its primary lender Citibank (Arizona), 2 and Fireman's Fund entered an agreement (the "June 4, 1987 Agreement"). Pursuant to that agreement, Newbery transferred its bonded projects to Fireman's Fund and allowed Fireman's Fund to use Newbery's equipment to complete the projects. Fireman's Fund promised to pay rent for its use to Citibank, which owned a perfected security interest in Newbery's equipment. Recital B of the June 4, 1987 Agreement specifically incorporated by reference the General Indemnity Agreement between Newbery and Fireman's Fund.

In accordance with its bond obligations, Fireman's Fund hired a subcontractor, Electric Service and Supply Company ("ESSCO"), and completed Newbery's subcontract. 3 ESSCO used Newbery's equipment and Fireman's Fund thus incurred an obligation to Citibank for equipment rent. Fireman's Fund failed to pay the rent as promised, resulting in the present suit.

Within a week after the June 4, 1987 Agreement was signed, Newbery filed Chapter 11 reorganization petitions in bankruptcy court in Arizona. While the bankruptcy proceeding was pending, Newbery filed a multi-million dollar lender liability claim against Citibank. In resolution of that suit, Newbery and Citibank entered a settlement agreement in February 1989 (the "Settlement Agreement"). Under the Settlement Agreement, Newbery released Citibank from its lender liability claim, and Citibank in turn advanced $1.25 million to Newbery. The loan was nonrecourse, to be repaid only from certain "Pooled Assets" which were to be distributed to Newbery and Citibank in accordance with an agreed sharing formula. The Pooled Assets included, inter alia, the claim to the equipment rentals owed by Fireman's Fund to Citibank under the June 4, 1987 Agreement. Under paragraph 8(c) of the Settlement Agreement, Citibank specifically assigned its rights to the equipment rental claim against Fireman's Fund to Newbery "as a Pooled Asset." Citibank also released its security interest in Newbery's equipment, and Newbery granted Citibank a new security interest in the Pooled Assets (to collateralize Newbery's new nonrecourse debt to Citibank). Citibank subsequently perfected its interest by filing in Arizona. Finally, in May 1989 Citibank executed a separate assignment document (the "Assignment"), expressly assigning to Newbery all of Citibank's right, title and interest to the equipment rentals. 4

In 1989, after Fireman's Fund failed to pay the promised equipment rent, Newbery filed the present action. 5 Newbery also sued ESSCO, Fireman's Fund's completion contractor, in quantum meruit. ESSCO's motion for summary judgment was granted, and ESSCO was dismissed from the case. In June 1990 Fireman's Fund moved for summary judgment on its defenses of recoupment and setoff, and Newbery filed a cross-motion for summary judgment on the same issues. 6 On January 21, 1992, Judge Broomfield issued an order (the "1992 Order") which, among other things, (1) granted Fireman's Fund's motion for summary judgment on its defense of recoupment; (2) granted partial summary judgment to Fireman's Fund on its alternative defense of setoff; and (3) denied Newbery's cross-motion. In June 1992, Newbery and Citibank filed a motion for reconsideration of the 1992 Order. The district court denied that motion in January 1993. The court also denied Newbery's and Citibank's request to reform their Settlement Agreement. 7

In March 1993 the district court certified an interlocutory appeal of its orders under 28 U.S.C. § 1292(b). The parties and court apparently sought to obtain an appellate ruling which would control numerous other similar cases which are presently pending between the same parties. This court dismissed the interlocutory appeal as premature. Newbery Corp. v. Fireman's Fund Ins., No. 93-80155 (9th Cir. May 17, 1993). The district court then decided to try the instant case to a jury as a test case for Fireman's Fund's recoupment and setoff defenses.

In June 1994 a jury trial was held solely on the issue of the amount of rents due under Newbery's breach of contract action. The jury awarded rents in the amount of $17,455. Based on its previous rulings on Fireman's Fund's recoupment and setoff defenses, the court ordered that Newbery and Citibank take nothing, and it entered judgment in favor of Fireman's Fund. Citibank and Newbery timely appealed.

Following the jury trial, Fireman's Fund filed a motion for attorneys' fees and expenses, arguing that it was the "successful party" and was thus entitled to such fees under Arizona law. The court denied the motion, and Fireman Fund timely appealed. The two appeals were consolidated and are presently before us.

II

We first consider Newbery's and Citibank's argument that the district court erred in granting summary judgment on Fireman's Fund's recoupment defense. Of course, we review a grant of summary judgment de novo. Fosson v. Palace (Waterland), Ltd., 78 F.3d 1448, 1452 (9th Cir.1996). We must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Id. We may affirm on any ground fairly supported by the record. Id.

A

Both Newbery and Citibank first argue that the district court should not have applied the recoupment doctrine in this case because recoupment allegedly conflicts with the bankruptcy principle of ratable distribution of assets among creditors. In support, they cite Quittner v. Los Angeles Steel Casting Co., 202 F.2d 814 (9th Cir.1953). For a number of reasons, we disagree. First, the Supreme Court has implicitly rejected the portion of Quittner upon which Newbery and Citibank rely. Second, the weight of modern authority suggests that recoupment clearly does not violate the bankruptcy principle to which they refer. Explanation requires a brief review of the doctrines of setoff and recoupment and of the rationales for the dissimilar application of those doctrines in the bankruptcy context.

"The right of setoff (also called 'offset') allows 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 of Maryland v. Strumpf, --- U.S. ----, ----, 116 S.Ct. 286, 289, 133 L.Ed.2d 258 (1995) (citation omitted). The defining characteristic of setoff is that "the mutual debt and claim ... are generally those arising from different transactions." 4 Collier on Bankruptcy p 553.03, at 553-14 (15th ed. 1995) ("Collier ").

Setoff in bankruptcy cases is governed by 11 U.S.C. § 553. 8 It has been used by creditors "as a defense in an action by the trustee for the recovery of money from the creditor." Collier p 553.01, at 553-7. Section 553 "is not an independent source of law governing setoff; it is generally understood as a legislative attempt to preserve the common-law right of setoff arising out of non-bankruptcy law." United States v. Arkison (In re Cascade Roads, Inc.), 34 F.3d 756, 763 (9th Cir.1994) (quoting United States v. Norton, 717 F.2d 767, 772 (3d Cir.1983)). Under section 553(a), each debt or claim sought to be offset must have arisen prior to filing of the bankruptcy petition. In addition, "a claim may ... be set off without regard to whether it is contingent or unliquidated, as long as the claim qualifies as 'mutual' under applicable nonbankruptcy law...." Collier p 553.01, at 553-6 (citation omitted). 9 In order for countervailing debts to be "mutual," they must be "in the same right and between the same parties, standing in the same capacity." Collier p 553.04, at...

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