Opinion
NO. 2010-CV-795
12-12-2012
Surge Resources, Inc. v. Liberty Mutual Insurance Co., et al
ORDER
The Plaintiff, Surge Resources, Inc. ("Surge"), brought this action against Liberty Mutual Group, Inc. and Liberty Mutual Insurance Company (collectively "Liberty"), alleging that it overpaid Liberty for workers compensation premiums in the amount of roughly $418,000.00. Liberty filed counterclaims alleging that Surge underpaid premiums from 2001 through 2008 by $2,163,773.oo. Surge has obtained summary judgment against Liberty on its counterclaims on the grounds that they are barred by the statute of limitations. However, Liberty now moves for partial summary judgment, alleging that its claim of underpayment is viable to the extent Surge seeks damages against it, under the doctrine of recoupment. Surge objects, and cross moves, alleging that, under the circumstances of this case, recoupment is not available to Liberty.
In the Court's prior order of August 22, 2012, the Court found that Cross-Motions for Summary Judgment could not be decided on the record before it and urged the parties to enter into an appropriate stipulation. The parties have done so and the Court is now able to act on the motions. Because the Court finds that the contracts entered into between Liberty and Surge from 2001 to 2010 for the purposes of recoupment constitute one integrated transaction, recoupment is available to Liberty, and Liberty's Motion for Summary Judgment is GRANTED and Surge's Motion for Summary Judgment is DENIED.
I
The relevant facts in this case were set forth in the Court's Order of August 22, 2012, and are hereby incorporated. Those facts are briefly summarized.
On May 23, 2012, the Court granted Surge's Motion for Summary Judgment on the ground that the statute of limitations barred certain counterclaims. The Court held, "the three-year statute of limitations bars all of Liberty's claims that are based upon policies in force between September 21, 2003 and October 1, 2006." Surge Resources Inc. v. Liberty Mutual Ins. Co., Merrimack County Court, 10-CV-795, at 7 (May 23, 2012) (Order, McNamara, J.).
Following the Court's decision, Liberty filed a motion for limited reconsideration. In its motion for limited reconsideration, Liberty argued, for the first time, that its counterclaims were not subject to the statute of limitations because they constituted "recoupment." Liberty argued that because the $2.1 million in overpayments arose out of the same transaction as Surge's claims, Liberty is entitled to recoup those funds. Surge objected and argued that the $2.1 million did not arise out of the same transaction or occurrence; instead, each policy year constituted a new, separate transaction. On July 20, 2012, Liberty requested that the Court consider the recoupment issue in conjunction with the parties' pending motions for summary judgment. The Court granted Liberty's request.
After the Court's Order of August 22, 2012 denying both parties' Motions for Summary Judgment, the parties submitted a Joint Stipulation of Facts. The stipulation explained that the National Council on Compensation Insurance ("NCII") selected and approved Liberty as the only carrier to issue workers' compensation policies to a given Professional Employee Organization ("PEO") in the assigned risk market in New Hampshire. Further, Liberty had no discretion to provide or not provide coverage—so long as the insured properly applied and met eligibility requirement, then NCCI directed Liberty to issue a policy. The NCCI regulations required that the policies Liberty issued to Surge and its client companies were issued on a multiple coordinated policy ("MCP") basis.
Based on the stipulated facts, the issue before the Court is whether Liberty is entitled to the defense of recoupment. For the following reasons, the Court finds that it is.
II
The distinction between set-off and recoupment is important because these are two interrelated theories that Liberty asserts. "Setoff is the process by which two contracting parties reduce mutual debts and credits to arrive at a net balance." Liquidation of Home Ins. Co., 158 N.H. 677, 680 (2009). "Setoff 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." Id. (quotation omitted). Importantly, setoff only refers to a counterclaim seeking to reduce debts arising from transactions or contracts separate from the transactions or contracts alleged by the plaintiff in his writ. U.S.A., Inc. v. G.R.G. Engineering, S.E., 9 F.3d 996, 998 (1st Cir. 1993).
Recoupment, on the other hand, refers to the defendant's right "to reduce or eliminate the plaintiff's claim, either because the plaintiff has not complied with some cross-obligation of the contract on which he or she sues or because the plaintiff has violated some legal duty in the making or performance of the contract. Beane v. Beane & Co., P.C., 160 N.H. 708, 716 (2010) (quoting 20 Am.Jur.2d Counterclaim, Recoupment, § 5 (2005)) (ellipsis and emphasis omitted). Unlike setoff, a claim of recoupment must arise out of the "same transaction or occurrence" asserted by the plaintiff. Lago & Sons Dairy, Inc. v. H.P. Hood, Inc., 892 F. Supp. 325, 337 (D.N.H. 1995). In New Hampshire, a party may assert recoupment affirmatively or defensively. See Zurback Steel Corp. v. Edgcomb, 120 N.H. 42, 44 (1980). When asserted affirmatively, recoupment allows a party to obtain full relief in excess of a plaintiff's demand. Id. When asserted defensively, a party may only defeat or diminish a plaintiff's recovery. Id.
Where a party asserts affirmative recoupment or setoff, his claim is subject to the applicable statute of limitations. Id.; Lago & Sons Dairy, Inc. v. H.P. Hood, Inc., 892 F. Supp. at 337. However, a defensive recoupment claim, such as the claim here, is not subject to the statute of limitations. Zurback Steel Corp., 120 N.H. at 44; see also Stone v. White, 301 U.S. 532, 539 (1937). The distinction rests in the affirmative nature of the relief sought. Courts have explained:
The purpose of statutes of limitation is to bar actions and not to suppress or deny matters of defense, whether legal or equitable; and it is a general rule that such statutes are not applicable to defenses, but only where affirmative relief is sought. Thus, so long as the courts will hear the plaintiff's case, time will not bar the defense which might be urged thereto, and which grew out of the transaction connected with the plaintiff's claim.Summers v. Connolly, 112 N.E.2d 391, 395 (Ohio 1953) (emphasis omitted). As outlined above, this case turns on whether Liberty's counterclaims are for setoff or recoupment; in other words, the question is whether the prior policy years constitute the "same transaction or occurrence."
In determining what constitutes the "same transaction" for recoupment purposes, many courts have used some variation of two different tests: the "logical relationship" test of the Ninth Circuit and the "integrated transaction" test of the Third Circuit. See In re Georgetown Steel Co., 318 B.R. 313, 330 (D.S.C. 2004). The "logical relationship" test allows for a loose meaning of "transaction," which may include "a series of many occurrences, depending not on their immediate connection so much as their logical relationship to each other." Newbury Corp. v. Fireman's Fund Ins. Co., 95 F.3d 1392, 1402, 1403 (9th Cir. 1996). The narrower "integrated transaction" test requires that the obligations at issue "arise out of a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of the transaction without also meeting its obligations." In re University Medical Center, 973 F.2d 1065, 1081 (3rd Cir. 1992).
As Liberty notes in its memorandum of law, there is little New Hampshire law regarding what constitutes a "transaction" for asserting recoupment. The New Hampshire Supreme Court stated over 100 years ago that "[t]he doctrine of recoupment is, in general, applicable whenever, in the trial of the plaintiff's action, an investigation of the facts on which the claim of the defendant depends is necessary." Johnson v. White Mountain Co-op. Creamery Ass'n, 68 N.H. 437, 437 (1896). More recently, the New Hampshire Supreme Court has stated:
Recoupment has traditionally been viewed as the right of a defendant to reduce or eliminate the plaintiff's demand either because the plaintiff has not complied with some cross obligation of the contract on which he sues or because he has violated some duty which the law imposes upon him in the making or performance of that contract.Zurback Steel, 120 N.H. at 44 (emphasis added). The emphasis in Zurback Steel on contract suggests that the New Hampshire Supreme Court may take the narrower "integrated transaction" approach of the Third Circuit.
However, Liberty directs the Court's attention to Hathorn v. Loftus, 143 N.H. 304, 309-10 (1999), a case decided after Zurback Steel, where the Supreme Court, although not discussing the concept of recoupment, allowed a counterclaim which arose out of a separate contract to be asserted because the nature of the contracts were interrelated. Liberty also notes that, although the Third Circuit's "integrated transaction" test and the Ninth Circuit's "logical relationship" test were developed in 1992 and 1996, the New Hampshire Supreme Court did not see a reason to adopt either test or even discuss either of the tests for their progeny in Hathorn. Defendant's Motion For Partial Summary Judgment On The Availability Of The Defense Of Recoupment ("Defendant's Motion for Partial Summary Judgment"), 2. Liberty further points out that the Third Circuit's narrow "integrated transaction" approach has not been adopted by any other court and has, in fact, been rejected by the First Circuit. In re Holyoke Nursing Home Inc., 372 F.3d 1, 4 (1st Cir. 2004).
Surge, on the other hand, maintains that whether the Court employs the "integrated transaction" or the "logical relationship" test, Liberty's claim fails because each of the 1,038 policies Liberty issued to Surge and its client companies between 2001 and 2010 was a separate contract. To support this assertion, Surge points to the following stipulated facts:
[Liberty], consistent with [NCCI] Rules, issued a separate policy for each new client company placed in the assigned risk market. The Liberty companies issued a separate policy number for each of these 1,038 policies. These policies had a finite series of 'root' numbers because, according to the NCCI rules, these policiesPlaintiff's Cross Motion for Summary Judgment, 3-4.
needed to be coordinated and linked to the policies issued to the Professional Employer Organization, or PEO.
...
Each of the 1,038 policies issued by [Liberty] was separately audited at the end of every policy period and, for each of the 1,038 policies, Liberty produced a final audit worksheet based upon, and reflecting, the payroll, coding and other premium elements for that individual client company.
Liberty's arguments concerning whether the New Hampshire Supreme Court would in fact adopt the "integrated transaction" test have some merit. However, the distinction between the two tests is not critical here. As explained infra, under the circumstances of this case, whether the Court utilizes the Third Circuit's "integrated transaction" or the broader "logical relationship" test, Liberty is entitled to recoupment.
III
As Liberty points out, there are several facts contained within the parties' stipulations that demonstrate a course of performance that illuminates the parties' understanding as to whether or not these policies were part of the same transaction or related. Defendant's Motion for Partial Summary Judgment, 6-7. First, the NCCI regulations require that all policies be coordinated and assigned to a specific carrier. Liberty directs the Court to the regulations, where each of the policies is referred to as being "coordinated:"
Item B-1276 [—Employee Leasing Arrangements—] required that coverage in the residual market for leased workers be issued on a multiple coordinated policy (MCP) basis. The MCP approach requires one policy to be issued in the name and Federal Employer Identification Number (FEIN) of the PEO, which provides coverage for the PEO's direct workers. In addition, separate policies are issued in the name and FEIN for each of the PEO's clients, which provide coverage for the client's leased workers. Endorsements are attached all policies to coordinate the coverage between the PEO and its clients.Joint Stipulation of Facts, Exh. A The PEO regulations further provide that:
The assigned carrier will arrange to have all policy notices sent to the PEO and to have a single itemized master invoice sent to the PEO for all policies covering the clients of the PEO.Id. at rule 4(B), 4(d) (1).
Liberty reasons, and the Court agrees, that the MCP approach, which requires that all policies coordinate the coverage between the PEO and its clients, means that each of the policies are closely related. As Liberty states:
[T]he regulations further provide that all coordinated policies be assigned to a single carrier; that all policies have the same ending and renewal dates, even if a new client is added in the middle of the year; that if a PEO is ineligible for coverage, each of its clients companies is similarly ineligible for coverage; that the carrier may combine all deposit premiums calculated at the time of renewal and bill a single deposit premium; and that the bills for all policies are sent to the PEO, who is responsible for making all payments.Defendant's Motion for Partial Summary Judgment, 5; Exh. A.
Surge submitted all applications for all the coordinated contracts; Surge sent all deposit premiums; Surge received and paid all bills; and all communications regarding billing and payment issues went through Surge. Joint Stipulation of Facts, ¶¶ 18, 22, 25-28; Exh. M-Q. From this, the conclusion can be reached that all of the coordinated contracts in a single year must be treated as one transaction. However, this does not necessarily lead to the conclusion that all of the contracts issued in one year must be considered part of the transactions involving a new master contract in the next year.
IV
Surge's principal argument that because each year's contract is discrete, each must be treated as a separate transaction. Surge relies on In re Georgetown Steel Co., LLC, 318 B.R. 313, and In Re Camellia Food Stores, Inc., 287 B.R. 52, 60 (ED Va. 2002), where the court found that every time an insurance contract for workers' compensation was renewed, it became a new contract.
In Georgetown Steel, the United States District Court for the District of South Carolina, under circumstances similar to those here, adopted the "integrated transaction" test. 318 B.R. at 330. Ultimately, the court held that workers' compensation insurance policies were not "integrated transactions," despite the fact that the parties renewed the policies over multiple years. Id. The court explained:
the Policies specifically contemplate negotiation of new terms, including a new premium amount, every year. It is undisputed that the Prior Policy and Current Policy had different premium amounts and different policy numbers. The Policies also had different experience modification and other rating terms.Id. at 331. Thus, because the contract terms changed from year to year, the prior policy was not considered the "same transaction" for recoupment purposes. See id.
Similarly, in In re Camellia Food Stores, Inc., the court held that recoupment was not available where Camellia and its insurer had a relationship from 1995 to 2001, because each new insurance contract was distinct. Id. at 60. The court reasoned that, under applicable Virginia law, a renewal contract of insurance requires the same requirements as any insurance contract, such as mutual assent and consideration. Id. The policy before the court indicated that every policy would last for only one year, and apparently could be terminated after that point. Id. at 61.
Both Georgetown Steel and Camellia Food cannot be considered wholly on point. First, both cases involved pre-petition bankruptcy claims. It is well settled that "a petition for bankruptcy operates as a 'cleavage' in time.... Any recoupment exception to this general principle perhaps should be narrowly construed." In re B&L Oil Co., 782 F.2d 155, 158 (10th Cir. 1986).
More importantly, though, even if the reasoning of Georgetown Steel and Camellia Foods was applicable to this case, Surge cannot succeed. The fundamental difference in this case is that Liberty was bound to provide services to Surge from the time NCCI directed it to issue a policy. The parties have stipulated to the following:
Liberty had no discretion to provide or not provide such coverage: if the insured submitted a proper application and met the eligibility criteria, Liberty was directed by the NCCI to issue a policy.Joint Stipulation of Facts, ¶¶ 6, 22.
...
Liberty was required by NCCI regulations, and did in fact, automatically issue renewal quotes for Surge's Master Policy and each Client Policy at the conclusion of each such policy. Liberty would do so using the payroll figures and codes from each of the prior year's Client Policies, with the New Year's premium rates and experience modifier, if any. After such quotes were sent out to Surge, a renewal policy would be issued to each Client Company upon receipt of the deposit premium from Surge.
Under these circumstances, each renewal cannot be considered a new contract. A contract requires mutually enforceable promises. Here, once Liberty was assigned Surge, Liberty had no choice but to continue to renew if Surge sought coverage. There was no bargained-for-exchange at each renewal date, and without one, there is no consideration and no new contract. See Say Pease IV, LLC v. N.H. Dept. of Revenue Admin., 163 N.H. 415, 418 (2012) (noting "that a bargained-for-exchange is an element of consideration . . . ."); Restatement (Second) of Contracts, § 71(2), at 172 (1981) ("A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promise in exchange for that promise.").
Here, pursuant to NCCI regulations, at each new policy Surge simply decided to exercise or not exercise its option to require Liberty to renew. Under these circumstances, whether the narrow "integrated transaction" test of Georgetown Steel is applied or the broader "logical relationship" test is applied, the transactions between the parties between 2001 and 2009 constituted one contract. Compare: Morgan Stanley Group Inc. v. New England Ins. Co., 225 F.3d 270, 280 (2d Cir. 2000) (holding that the lower court "erred by analyzing [] policies as separate, independent contracts" where evidence indicated that the intention of the parties was for the renewed policy to function as "merely a continuation or extension of the original contract.") with Webb v. South Carolina Ins. Co., 407 S.E.2d 635, 636 (1991) (holding that where "(1) the expiring policy mandates the same terms shall remain in effect and (2) the terms of the policy do not change upon renewal," the renewal is not a new contract).
V
Finally, recoupment is an equitable doctrine. In re Holyoke Nursing, Inc., 372 F.3d at 4. Its rationale is that it "would be inequitable for [a] debtor to enjoy the benefits of [a] transaction without also meeting its obligations" under the same transaction. In re University Medical Center, 973 F.2d 1065, 1081 (3d Cir. 1992); see also In re Terry, 687 F.3d 961, 964 (8th Cir. 2012) (highlighting "the equitable nature of recoupment to acknowledge the unfairness of requiring recoupment when the same-transaction test is not met); Westinghouse Credit Corp. v. D'Urso, 278 F.3d 138, 148 (2d Cir. 2002) (noting that "the principle that recoupment may not be applied to obligations arising from discrete and independent units is derived from equity); Yim K. Cheung v. Wing Ki Wu, 955 A.2d 746, 747 (Me. 2008) (stating that recoupment is a doctrine "founded upon an equitable reason").
If Liberty is not allowed to assert its claim, Surge will receive an extraordinary windfall; it will not be required to pay $2,163,773.00 for benefits resulting from the relationship it had with it for many years because of Liberty's failure to timely pursue its claim, but will be able to recover $418,000.00 it overpaid Liberty in recent years, all as a result of the same transaction. Such a result would not be consistent with equitable principles.
Therefore, Liberty's Motion for Partial Summary Judgment must be GRANTED and Surge's Cross Motion DENIED.
SO ORDERED.
______________________
Richard B. McNamara
Presiding Justice
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