United Structures v. G.R.G. Engineering

• Court: Court of Appeals for the First Circuit
• Decided: November 18, 1993
• Docket: 93-1354
• Status: Published

Opinion

USCA1 Opinion

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

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                                          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).
             ______

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                                          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

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                                          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
                                         __________     _________________

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                                          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.

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                                          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
             _________________________     ______________________________

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                                          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

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                                          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.  

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                                          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.

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                                          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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