Opinion
No. CV 08 5014708
June 4, 2010
MEMORANDUM OF DECISION ON MOTION TO STRIKE SETOFFS
This tort action arises out of a contract for the removal of an athletic bubble at Central Connecticut State University (University) and the construction of a new bubble. The complaint alleges the following facts. The original plaintiff, Merritt Contractors, Inc., (Merritt), had a contract with the University to do this work. Merritt subcontracted some of the work to the defendant, Air Structures American Technologies, Inc. (Air Structures). Air Structures was negligent in performing its work under the subcontract. As a result, considerable damage was caused to the athletic facility, and Merritt was required to expend funds to repair the facility.
Subsequently, Merritt's insurer, OneBeacon Insurance Company (OneBeacon), was substituted as the plaintiff. An amended complaint was filed, making the same allegations as the original complaint and alleging, in addition, that OneBeacon had paid $72,493.70 to Merritt to compensate it for the damages caused by Air Structures' negligence.
Air Structures filed an answer with eight special defenses and two setoff claims. The first set-off claims that Air Structures is still owed money under the original contract between itself and Merritt; the second, that money is owed to Air Structures because it provided labor and materials to Merritt which were not contemplated under the original contract and for which it has not been paid.
OneBeacon moved to strike the first, second and sixth special defenses and the two setoff claims. After oral argument on the motion, this court struck the special defenses because they did not state facts supporting their claims of law or were inapposite in a negligence action, and took the motion under advisement insofar as it addressed the setoff claims.
Thus, the remaining question, which this memorandum addresses, is, under what circumstances, if at all, may a defendant assert setoff claims based on contractual or quasi-contractual rights in a subrogation action alleging negligence on the part of the defendant?
I
"Subrogation, a legal fiction, is broadly defined as the substitution of one person in the place of another with reference to a lawful claim or right." 73 Am.Jur.2d., Subrogation § 1 (2001); See Home Owners' Loan Corp. v. Sears, Roebuck Co., 123 Conn. 232, 238 (1937). "Insurance companies seeking subrogation proceed against the responsible party under the theory of equitable subrogation, not conventional subrogation." Middlesex Mutual Assurance Co. v. Vaszil, 89 Conn.App. 482, 486 (2005), rev'd on other grounds, 279 Conn. 28 (2006). "The object of [equitable] subrogation is the prevention of injustice. It is designed to promote and to accomplish justice, and is the mode which equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and good conscience, should pay it . . . As now applied, the doctrine of equitable subrogation is broad enough to include every instance in which one person, not acting as a mere volunteer or intruder, pays a debt for which another is primarily liable, and which in equity and good conscience should have been discharged by the latter . . ." (Citations omitted; internal quotation marks omitted.) Allstate Ins. Co. v. Palumbo, 109 Conn.App. 731, 735, cert. granted on other grounds, 289 Conn. 954 (2008). "A subrogee has no rights against a third person beyond what the subrogor had." Continental Ins. Co. v. Connecticut National Gas Corp., 5 Conn.App. 53, 60 (1985).
II
The law of setoff, on the other hand, is presently controlled by General Statutes § 52-139, which provides in pertinent part that, "In any action brought for the recovery of a debt, if there are mutual debts between the plaintiff or plaintiffs, or any of them, and the defendant or defendants, or any of them, one debt may be setoff against the other." General Statutes § 52-139.
"The concept of setoff allows [parties] that owe each other money to apply their mutual debts against each other, thus avoiding the absurdity of making A pay B when B in fact owes A." (Internal qotation marks omitted.) Shapero v. Mercede, 77 Conn.App. 497, 509, (2003). "A condition precedent to the application of the setoff statute . . . is that the defendant's claim arises from a debt due from the plaintiff." Lind-Larsen v. Fleet National Bank of Connecticut, 84 Conn.App. 1, 22, cert. denied, 271 Conn. 940 (2004).
"[T]he debt must be a mutual one." General Consolidated, Ltd. v. Rudnick Sons, Inc., 4 Conn. Cir.Ct. 581, 586 (1967). "To constitute mutuality, the debts must be due to and from the same persons in the same capacity . . . Mutual debts . . . are cross debts in the same capacity and right and of the same kind and quality." (Internal quotation marks omitted.) Mariculture Products Ltd. v. Certain Underwriters at Lloyd's of London, 84 Conn.App. 688, 704, cert. denied, 272 Conn. 905 (2004).
"The policy of the law is always to prevent unnecessary litigation, and where . . . entire justice can be done to both of the parties before the court, by the ascertainment and set-off of their mutual claims against each other, without a violation of any of the settled rules or forms of law, such set-off ought always to be made . . ." (Internal quotation marks omitted.) 225 Association v. Connecticut Housing Finance Authority, 65 Conn.App. 112, 122 (2001). "It is the defendant's burden to demonstrate its right of setoff by affirmatively and adequately alleging such a claim in the pleadings." Petti v. Balance Rock Associates, 12 Conn.App. 353, 362 (1987).
III
Cases such as Godiksen v. Miller, 6 Conn.App. 106 (1986), applying § 52-139, have stressed the importance of the relationship between the parties when setoff is claimed. In Godiksen, the plaintiff sold the defendant land in exchange for a mortgage. Id., 107. Subsequently, the defendant obtained a second mortgage with a bank, which, unbeknownst to the plaintiff, was recorded as being the senior mortgage even though it was second in time to the mortgage the plaintiff held. Id. In a foreclosure action, the bank settled with the plaintiff when the plaintiff argued his mortgage was senior to the bank's mortgage. Id. The plaintiff then brought an action to seeking to enforce the note against the defendant. Id., 108. The defendant argued that "the amount the plaintiff recovered from the bank should serve as a setoff against any amount the plaintiff recovered from him." (Internal quotation marks omitted.) Id. The court found that the "settlement was not made by the defendant, that the defendant did not contribute to the settlement and that the settlement did not involve the defendant's debt to the plaintiff." Id., 109-10. Therefore, "the defendant was not entitled to a setoff." Id., 111.
The earliest case on subrogation is Ursini v. Piazza, 101 Conn. 736 (1925), wherein the court found in favor of a defendant who brought a setoff claim against the plaintiff subrogee. This case, however, was decided before the adoption of § 52-139.
Additionally, in Gallicchio Brothers, Inc. v. C S Oil Co., Inc., 191 Conn. 104, 108 (1983), the court was not persuaded that the defendant had shown a mutuality of debt. In Gallicchio, the plaintiff corporation had sold its oil distribution business to the defendant. Id., 104. In its action for breach of contract, the defendant sought a setoff for ten unpaid deliveries it had made to ten customers, who were related to the primary shareholder of the plaintiff corporation, arguing that the plaintiff corporation had authorized these deliveries. Id., 108-09. The court did not find that the plaintiff corporation had authorized these deliveries; therefore, there was no mutual debt between the defendant and the plaintiff, and setoff was improper. Id., 109.
The Superior Court is in accord. Where the defendant is sued individually "it is evident that a debt owed by [the defendant] to the plaintiffs cannot be set off against a debt assertedly owed by the plaintiffs to [the corporation of which the defendant is the majority shareholder] . The respective debts are not held `in the same capacity and right.'" (Internal quotation marks omitted.) Sloan v. Kubitsky, Superior Court, judicial district of New Haven, Docket No. 309828 (September 23, 1996) [ 17 Conn. L. Rptr. 645]. See Grieco v. Dalipovski, Superior Court, judicial district of New Britain, Docket No. CV 00 0502295 (May 10, 2002) ( 32 Conn. L. Rptr. 131) (Finding plaintiff's claims for medical expenses and lost earning capacity against two defendants not mutual to one defendant's claim for setoff of unpaid rent, cost of repair to the premises and legal fees); Diette v. Dental Group of Norwalk, Superior Court, judicial district of Stamford-Norwalk, Docket No. CV 97 0158747 (November 17, 1999) (Finding defendants' claims as individuals for dental expenses incurred as a result of the plaintiff's negligent and substandard work not mutual to the plaintiff's claim for compensation owed from the partnership the plaintiff and the defendants shared.)
More to the point, one Superior Court has found that, when a plaintiff is suing on another's behalf, that plaintiff does not take on that party's debts and obligations. "When the commissioner of labor exercises its statutory right to proceed against the defendant, it does not, in doing so, inherit any debts or obligations owed to the defendant by the employees on behalf of whom it sues." State Commissioner of Labor v. Bednaz, Superior Court, judicial district of Hartford, Docket No. CV 06 4020338 (October 24, 2006)
Similarly, this court holds that an insurer, suing on its insured's negligence claim, should not be forced to answer for the insured's obligations which are unrelated to that claim. Air Structures' claims for setoff against its contractual counterparty, Merritt, are for monies owed under the contract and, in the case of the goods and services allegedly supplied by Air Structures outside of the contract, a quasi-contract. Not only is there no mutuality of contract between Air Structures and OneBeacon, the former's claims are fundamentally different in nature than the negligence claims asserted by OneBeacon. While OneBeacon is now the plaintiff in this action, it did not enter into a contract with Air Structures. Air Structures chose to contract with Merritt and may seek recourse only against Merritt if it wishes to recover damages for Merritt's breach of that contract and for Merritt's alleged obligation to pay for goods and services provided outside of the contract.
"Generally, the obligation of contracts is limited to the parties making them, and, ordinarily, only those who are parties to contracts are liable for their breach." 17a Am.Jur.2d., contracts, § 412 (2004)
Indeed, Air Structures has done just that. The court takes judicial notice of the civil action pending in this judicial district, Merritt Contractors v. Air Structures, Docket No. CV 08 5014812, in which Merritt seeks damages from Air Structures for its alleged failure to perform certain of its contractual obligations. In that action Air Structures has alleged as counterclaims the exact claims it asserts here as setoffs to OneBeacon's negligence claim.
In so doing, Air Structures has demonstrated that setoffs are the functional equivalent of counterclaims, and several Superior Court decisions have held that counterclaims are not permissible in a subrogation action. For example, in Seaco Ins. Co. v. Devine Brothers, Inc., Superior Court, judicial district of Fairfield, Docket No. CV 00 0374721S (June 13, 2001) ( 27 Conn. L. Rptr. 742), the court held that
any defense which a wrongdoer has against the insured is good against the insurer subrogated to the rights of the insured . . . [Thus] [a] subrogee can obtain no greater rights against a third person than its subrogor had . . . A counterclaim is [however] not a defense . . .but is an independent cause of action and must be complete by itself . . . Thus, while a subrogee may stand in the place of the insured and is subject to any and all defenses which would have been available against the insured had the insured brought suit in its own name, a counterclaim is not one of these rights or defenses and, therefore, cannot be asserted against a nonparty to the action." (Citations omitted; internal quotation marks omitted.).
See also Royal Ins. Co. v. Prudential Residential Services, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 01 0185458 (February 13, 2003) ( 34 Conn. L. Rptr. 59); State Farm Mutual Auto Ins. v. Flores, Superior Court, judicial district of New Britain, Docket No. CV 09 5013453-S (October 1, 2009) ("The named defendant's counterclaim is based on acts and omissions of the plaintiff's subrogee . . . not acts and omissions of the plaintiff."); Allstate Ins. Co. v. Appell, 39 Conn.Sup. 85 (1983) (Allowing a counterclaim in a subrogation action because it is related to the transaction or occurrence at issue but ordering that the insured be cited into the action to answer for the counterclaim.)
Moreover, by making identical claims against OneBeacon and Merritt in separate actions, Air Structures has created the potential for double recovery on its part. Striking the setoff claims here eliminates that possibility while preserving Air Structures' opportunity to recover once from the only party which may be responsible to it, Merritt.
IV
Considering that the purpose of a claim for setoff is to consolidate disputes between two parties into one action, it would be improper to allow the setoff claims here to proceed against a third-party subrogee in a negligence action. The subrogee has agreed to take the subrogor's interest in recovering for the defendant's alleged negligence, but it has not agreed to pay the subrogor's debts. Accordingly, the motion to strike the two setoff claims is GRANTED.