United Structures of America, Inc. v. G.R.G. Engineering, S.E.

• Decision Date: 07 September 1993
• Docket Number: No. 93-1354,93-1354
• Citation: 1993 WL 466489,9 F.3d 996
• Parties: , 39 Cont.Cas.Fed. (CCH) P 76,598 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. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 996

9 F.3d 996

62 USLW 2350, 39 Cont.Cas.Fed. (CCH) P 76,598

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.

No. 93-1354.

United States Court of Appeals, First Circuit.

Heard Sept. 7, 1993.

Decided Nov. 18, 1993.

John E. Mudd, with whom Cordero, Miranda & Pinto, Old San Juan, PR, was on brief for defendants, appellants.

Mark S. Finkelstein, with whom Elizabeth D. Alvarado, Shannon, Martin, Finkelstein & Sayre, Houston, TX, David P. Freedman, and O'Neill & Borges, Hato Rey, PR, were on brief for appellee United Structures of America, Inc.

Before BREYER, Chief Judge, SELYA and STAHL, Circuit Judges.

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. Secs. 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, 474 U.S. 817, 106 S.Ct. 60, 88 L.Ed.2d 49 (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. Sec. 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. Sec. 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. Secs. 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.

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, "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 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 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 Sec. 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 Sec. 480 (2d ed. 1872))). See generally 20 Am.Jur.2d Counterclaim, Recoupment, and Setoff Secs. 11, 16-18 (1965).

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 Sec. 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. Sec. 553, and against a debtor already in bankruptcy only by seeking relief from the automatic stay, 11 U.S.C. Sec. 362(a)(7). See 1 Epstein et al., supra, Secs. 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...