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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
_____________
________________________
appellants.
Mark S. Finkelstein with whom Elizabeth D. Alvarado, Shann
____________________
______________________
_____
Martin, Finkelstein & Sayre, David P. Freedman, and O'Neill & Bor
____________________________ _________________
_____________
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

requires

bond that

federal

statute, the

Miller

certain general contractors to provide.

270a-270b.

The

general contractor

Act,

40 U.S.C.

says the steel

was

defective, and it wants to deduct from the promised purchase


price the amount
defects.

that it says it

The district

case, United

States ex

had to spend to

court, relying upon a


rel. Martin

cure the

Ninth Circuit

Steel Constructors

v.

__________________________________________________
Avanti Steel Constructors, 750
__________________________

F.2d 759

(9th Cir.

cert. denied sub nom. Harvis Construction v.


______________________ ___________________

1984),

United States
_____________

ex rel. Martin Steel Constructors, 474 U.S. 817 (1985), held


_________________________________
that where the supplier has a contract with
but not with
the

general

deductions.

a subcontractor

the general contractor, the Miller Act forbids


contractor
We

from

disagree

with

taking
the

such
Ninth

"offsetting"
Circuit.

We

therefore vacate the district court's judgment.


I
Background
__________
The
working

Miller

Act

requires

general

contractors

on federal government projects to furnish a payment

bond "for the protection of all persons supplying

labor and

material"
permits

to the
a

relationship

project.

40

U.S.C.

has

supplier

who

with

subcontractor

relationship . . . with

270a(a)(2).

It

"direct

contractual

but

contractual

no

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.

"Little Miller

Act" sets

projects

undertaken by

L.P.R.A.

("United"),
projects,

supplied

the Puerto

steel

Station,
Hato

projects.

the

Rey

to

work on

government.

Structures
a

of

22

America

subcontractor

The

other

Police

for

the

on

Puerto

Headquarters.

was the

general

subcontractor did

two

Rican

Defendant
contractor on

not pay

United in

When the subcontractor went bankrupt, United gave GRG

proper notice, and then sued


payment

scheme for

Rican

United

Engineering ("GRG")

full.

Puerto Rico's

one for the United States government at Roosevelt

government at

both

up a similar

plaintiff,

Naval

G.R.G.

270b(a).

47, 51.
The

Roads

Id.
___

bond for

GRG (and GRG's insurer) on the

the amounts it

approximately $105,000

believed were

for the Roosevelt

$177,000 for the police station project.


-33

still due,

Roads project and

United
various bills

moved

for

and receipts in

opposed the summary

attaching
GRG

An affidavit (and

Marin Aponte, a GRG partner and

engineer, constituted

forth specific facts

judgment,

support of its claims.

judgment motion.

few working papers) of Luis


licensed

summary

GRG's only

effort to

"set

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

defects

additional "$107,622 .

and/or deficiencies in

. . to correct

the materials"

that United

"furnished" for the police station project.


The

district court

favor of United, holding


provide,
supporting

or

granted

summary judgment

in

(1) that this affidavit failed

to

to

point to,

any

specific

GRG's

"front

loading"

theory;

factual evidence
(2)

that

the

evidence regarding allegedly defective steel was


because

the law does

set-off defense";

not give GRG

and (3) that

"offered specific evidence

irrelevant

"the right to

assert a

GRG, in any event,

in support of"

had not

its allegations,

-44

"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

few

additional

documents

and

bills

suggesting possible defects and related costs.

The district

court,

professional

although

qualifications,

it
denied

solely on the basis of

acknowledged
the

for

reconsideration,

the Ninth Circuit's holding that the

Miller Act does not "allow[]


contractor not

motion

Marin's

in privity

a set-off defense by a general


with" a

supplier.

Avanti, 750
______

F.2d at 762.
GRG
district

appeals,

court and

interpreted
issue.

now

claiming

the Ninth

the Miller

primarily

Circuit

Act with

that

the

have not

correctly

to the

"set-off"

regard

We agree with GRG.


II
Analyzing the "Set-off"
_______________________
In Avanti, the
______

facts

virtually

subcontractor

Ninth Circuit considered a

identical

to

on a government

the facts

before

set of
us.

project bought steel

from a

supplier; the subcontractor went bankrupt; the supplier sued


the

general contractor

on

its Miller

Act

bond; and

the

-55

general

contractor asserted,

damages

arising

Avanti, 750

from

F.2d at 760.

"late
The

as

and

defense,
defective

claim

of

shipments."

Ninth Circuit held

that "a

______
set-off defense

is not available

the absence of privity."


defense by

a general

supplier]

in a Miller Act

claim in

It added that "allowing a set-off

contractor not

in privity with

[the

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

law normally calls

technical distinction between


a "setoff" (or "set-off,"

and what it calls "recoupment."


a

what the

or "offset"),

The law dictionary defines

"setoff" as a "counter-claim demand which defendant holds

against plaintiff, arising out of a transaction extrinsic of


____________
plaintiff's cause of action."
____________________________
(5th ed.

1979) (emphasis added).

$10,000 for grain


reduce

Black's Law

the

If Smith sues

that Smith supplied,

judgment

by

Dictionary 1230

$5,000

Jones for

and Jones seeks

representing

to

Smith's

(unrelated) unpaid rental of Jones' summer cottage, Jones is


seeking a

setoff.
______

reduction

or

plaintiff's

"Recoupment,"

rebate

by

claim because

the
of
-66

on the other hand,

defendant
a

right

of
in

part
the

is "a
of

the

defendant

arising out of the same transaction."


____________________________________
added).

If

Smith sues

Jones for

Id. at 1147 (emphasis


___
$10,000 for

Smith supplied, and

Jones seeks to

$5,000 representing

Jones' expenditure

reduce the judgment


to dry

(defectively) wet grain

(or the cost of

grain, or

lost value),

the

grain's

grain that
by

out Smith's

buying replacement

Jones

is

seeking

recoupment.
__________
This distinction, although
well established in

the law.

somewhat technical, is

See, e.g., In re B & L Oil


_________ _________________

Co., 782 F.2d 155, 157 (10th Cir. 1986); 1 David G.


___
et al., Bankruptcy
mutual

debts

6-45, at 703

arising

from

(1992) ("setoff involves

unrelated transactions
_______________________

recoupment covers reciprocal obligations arising


same transaction")
________________
Comment,

(footnotes omitted);

53 Cal. L. Rev.

1st.

and

out of the

Michael E.

Tigar,

224, 225 n.9 (1965) ("'Recoupment

is contradistinguished from setoff in these .


particulars:

Epstein

. . essential

In being confined to matters arising out

of, and

connected with,

which the suit

the transaction

Setoff
______

20

upon

is brought . . . .'" (quoting Waterman, Set-

Off, Recoupment and Counterclaim


generally
_________

or contract

Am.

Jur.

2d

480 (2d ed. 1872))).

See
___

Counterclaim, Recoupment, and


______________________________

11, 16-18 (1965).

-77

This
necessarily

technical

legal

reflect ordinary

buyer who wants

terminology

usage.

After

to deduct from the contract

does
all, a

not
grain

price the cost

of drying the defectively wet grain might say that he simply


wants to

"set off" the

drying costs

price.

Lawyers, too,

might

fall

against the
into

this

contract
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

common-law

distinctions

companion,

setoff."); 20

distinctions between
longer of

. .

the

surrounding
Am.
.

recoupment

Jur. 2d

however,

the

the

and

10 (1965)

recoupment and

much importance . . . .").

circumstances,

importance of

its
("The

setoff are

no

In a few specialized

difference

takes

on

more

significance.
One

such circumstance is bankruptcy.

The unusual

nature of bankruptcy proceedings means that certain devices,


ordinarily available

to creditors

debtors, may be unavailable when


bankruptcy.
used

the debtor is in, or near,

devices is

setoff, which

may be

who later

files for bankruptcy only under the circumstances

described

11

creditor against an

recover from

insolvent debtor

in

by a

Among these

seeking to

U.S.C.

553,

and against
-88

debtor

already

in

bankruptcy only by
11 U.S.C.
15, 6-38

seeking relief from the

362(a)(7).
to 6-44.

See
___

The

1 Epstein et al., supra,


_____

reason is that the

are generally designed


the benefit

and allowing

allow the creditor an

assets for

a creditor

by the debtor,
because he

receives full

owed money to

to

value for

the debtor).

reduce his

$5,000 because of

the debt he

dollar against the debt owed him

our earlier example, if Smith


permitted

to

unfair advantage

over other creditors (the creditor, by reducing


owes the debtor dollar for

3-

bankruptcy laws

to maximize the debtor's

of all creditors,

invoke setoff might

automatic stay,

the latter
Thus,

simply

returning to

is in bankruptcy and Jones is

$10,000

grain debt

the unpaid cottage rental,

to

Smith by

Jones has (1)

deprived the estate of $5,000 it would otherwise have had to


benefit other creditors;
$5,000

claim

and (2) received full value on his

against Smith,

even

though other

creditors

might not receive full value.


Recoupment,

on the other hand, is not a mechanism

which

reduces mutual debts

id.
___

6-45, at 704

the nature of

"for the sake

of convenience,"

(describing setoff), but rather

a defense" and is

is "in

intended to "permit .

. .

judgment to be rendered that does justice in view of the one


transaction as

a whole."

Rothensies
__________
-99

v. Electric Storage
_________________

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
a

debtor in

whose claim

bankruptcy
against

the

seeks to

claim).

recover from

debtor arises

out

transaction, allowing the creditor to recoup


allows the debtor precisely what
transaction "as
sense

to

a whole."

allow

Jones

claim

bankruptcy, allowing Jones to recoup


______
to spend

to dry out

896

funds subject to

F.2d 176,

recoupment

is

179

of

the

(5th

it might
setoff
______

not make

in

Smith's

the $5,000 that he had


fair to

debtor has, in a sense, no

recoupment.
Cir. 1990).

not expressly

same

damages simply

Smith's defective grain seems

all concerned, perhaps because a


right to

a creditor

it is due when viewing the

So although
to

As such, when

regulated

See In re Holford,
___ ______________
This explains
by the

why

Bankruptcy

Code; some

courts even

automatic stay.
at

712 &

find recoupment

See id.; 1 Epstein


___ ___

n.36.

Whether a

unaffected by

et al., supra,
_____

creditor's

the
6-45,

action against

bankrupt debtor is characterized as a setoff or a recoupment


will,

therefore, have important

effects on

the creditor's

to

offer

ability to prosecute the action.

-1010

The
situation

in

recoupment.

Miller Act

seems

which

should

The

recover, not the


due him."

as

a whole,"

to

distinguish

language of the Act permits


full contract price, but

40 U.S.C.

recoupment,

one

us

270b(a).

In

another

setoff

from

a supplier to

the "sums justly

our view, the

aim of

"do[ing] justice in view of the one transaction


Rothensies, 329
__________

U.S. at

299, would

seem to

match

the statute's

"justly

due" a

requirement

supplier, making recoupment

defense in Miller Act cases.


full

of determining

contract price

of

the

an appropriate

Indeed, we do not see

goods

supplied

can

how the

possibly

"justly due" a person who supplied defective goods.


on the other hand, has
sum is

"justly due"

mostly

as a

unrelated
however, we

be

Setoff,

less bearing on whether a particular


the claimant,

convenient

debts.

sums

method

Since a

need only note

of

since setoff
dealing

true setoff

functions

with

is not

mutual,

before us,

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

seem to permit recoupment.


those

whose labor and

Act

The Act is intended "to protect

materials go into

Clifford F. MacEvoy Co.


_________________________

the Miller

public projects,"

v. United States ex rel. Calvin


______________________________
-1111

Tomkins
Co.,
_____________

322

U.S.

102,

"protect[ion]"

does

not

include

supplier's underlying
know this

"is

(1944),

payments

contract does

is true because

subcontractor

107

but

to

which

the

him.

We

not entitle

a Miller Act claim

this

brought by a

who is in privity with the general contractor


__

subject to reduction" for "defective articles or work,"

even

though the subcontractor's

as much a

part of the project

privity supplier.
Government

"labor and materials" were


as were those of

John C. McBride

Contracts

49.490[4], at

an out-of-

& Thomas
49-658

J. Touhey,
(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

subcontractor;

failed

contractor did

not meet

understand why the


contract should
general policies.

workmanship
in

this

available

case

its burden of

because
proof).

existence or nonexistence of

make any
Nor

difference with
do we

against

We

do not

privity of

regard to

understand how

general

these

permitting a

general

contractor

to

reduce a

supplier's

claim

by the

-1212

amount

that

the

general

supplier's failure

to

contractor

comply

with

spent
his

remedying the

contract

"unduly burdens" the supplier's Miller Act rights.


Avanti,
______

750 F.2d

at

762.

On

the contrary,

somehow
But cf.
________

disallowing

recoupment would seem to give the supplier "rights" to which


his contract does not entitle him.
In short,
itself has

neither

pointed to

United nor

any policy of

would be served by the Avanti rule,


______
such a
history

policy would be.


of the

discussing it,

Miller

the

the Miller

court

Act which

nor can we imagine what

We have examined
Act, and

Avanti
______

the

the legislative

cases and

but we have found nothing

treatises

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,

contractor in this case


type of defense.

we conclude that

the general

is entitled to assert a

recoupment

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.

-1313

United also
Little Miller
review of
should

Act (for

that Act has


be

different.

asserted a claim
the police

under Puerto Rico's

station project).

suggested no reason why


We

note

our

Our

the result

belief

that

"compensation,"
discussed

the

Puerto

Rican

at length by the

equivalent

3221-22; Garcia Mendez


_____________

440 F. Supp. 985,

988-89 (D.P.R. 1977), is as

this case

setoff,

is

as setoff
primarily

simplification
parties.

See
___

of

itself,
a

setoff

parties and the district court,

see 31 L.P.R.A.
___

to

of

device

relations

Walla Corp. v.
___________

v. Vazquez Bruno,
_____________
inapplicable

since compensation,
allowing

between

the

like

convenient

mutually

indebted

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.

-1414

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

The district court, therefore,

motion.

The

summary

judgment

somewhat

confused

because

GRG

evidence

in

evidence when

its

record,

and

is

pieces

of

other

for reconsideration.

circumstances, we shall ask the district


summary judgment proceedings

however,

presented some

initial opposition

it moved

should reconsider

pieces of

Under

these

court to begin the

anew, so that the

parties and

the court may proceed under the proper legal standard.


however, may
other

raise only

respects,

the

the issue of

court

will

recoupment.

assume

that

GRG,
In all

United

is

entitled to summary judgment.


The

judgment of

The plaintiff may file a


the

district court.

motion on the
based

the

district court

new motion for summary judgment in


The defendant

issue of liability,

on the principles

opinion.
So ordered.
___________

is vacated.

may

not oppose

but may contest

of recoupment as

that

damages

outlined in this

-1515