Surge Res. Inc. v. Liberty Mut. Ins. Co.

Richard B. McNamara

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. Because the Court finds that genuine issues of material fact exist, both motions for partial summary judgment are DENIED.

I

Surge is an employee-leasing company that supplies employees to businesses. Liberty provided workers' compensation to Surge from 2001 to 2010. Workers' compen- sation premiums were based primarily on the remuneration of employees in their various job classifications. At the inception of the parties' relationship, Surge provided an estimated remuneration to Liberty for each job and paid an "estimated premium." At the conclusion of the policy period, Liberty adjusted the premium based upon an audit of Surge's books and records. The policies at issue allowed Liberty to audit Surge's records any time up to three years after the policy period ended.

Effective January 1, 2010, Liberty lost the contract to provide assigned risk workers' compensation coverage in New Hampshire. Thereafter, Surge contends that it began the process of reconciliation and learned that it had overpaid Liberty for policies with an inception of October 1, 2006, October 1, 2007, and October 1, 2008. Surge claims that between October 1, 2006 and October 1, 2009, it overpaid Liberty by approximately $418,220.00. Surge brought suit against Liberty on November 4, 2010.

On February 1, 2011, Liberty filed its "answer and counterclaim," alleging that Surge had disputed the result of an audit conducted in 2002, and that in accordance with applicable law, the dispute was referred to the National Council on Compensation Insurance ("NCCI") for resolution. Liberty further claims that the dispute "largely concerned the appropriate expense modification to be applied to the policies" and that the dispute "affected all subsequent policies." Defendant's Answer, Counterclaims, Setoff & Recoup., ¶ 9. Liberty also claims:

10. While this dispute was pending, Surge made estimated premium payments based upon its own calculations of what it believed it was due. Even putting aside the dispute regarding the experience modification, Surge's calculations were often inconsistent with Liberty Mutual's calculations.
11. As a result of the foregoing, the parties agreed that Surge would continue to make estimated payments until the dispute was re-
solved and a full reconciliation of all policy years could be completed.
12. On January 14, 2010, Liberty Mutual received notice that NCCI had ruled upon the parties' dispute regarding experience modifications. Apparently, NCCI had resolved this dispute years ago but Liberty Mutual never received notice of that decision.

Id. at ¶¶ 10-12. Liberty's setoff and recoupment counterclaims sought reimbursement in the amount of $2.1 million.

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.

II

First, 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 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."

As Liberty notes in its memorandum of law, there is little New Hampshire law regarding what constitutes a transaction for asserting the defense of recoupment. The New Hampshire Supreme Court stated over 100 years ago that "the doctrine of recoupment is applicable whenever, in the trial of the plaintiff's action, an investigation of the facts, upon which the claim of the defendant depends is necessary." Johnson v. White Mountain Creamery, Inc., 68 N.H. 437, 437 (1896). More recently, the New Hampshire Supreme Court has stated:

Recoupment has traditionally been viewed as the right of the 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 on him in the making or performance of that contract."

Zurback Steel v. Edgecomb, 120 N.H. 42, 44 (1980) (emphasis supplied).

In determining what constitutes the "same transaction" for recoupment pur- poses, 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." University Medical Center v. Sullivan, 973 F.2d 1065, 1081 (3d Cir. 1992).

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, reasoning that, although the Fourth Circuit had not explicitly adopted either the "logical relationship" test or the "integrated transaction" test, it had often referred to recoupment as applicable to "claims arising out of the same contract." 318 B.R. at 330. Thus, 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. Thus, because the contract terms changed from year to year, the prior policy was not considered the "same transaction" for recoupment purposes. See id.

Other than those mentioned, there are few cases that discuss the concept of a "transaction" in the context of recoupment. However, based on previous case language, the New Hampshire Supreme Court would likely adopt the narrower "integrated transaction" approach of the Third Circuit in analyzing this issue. In Zurback Steel Co., the New Hampshire Supreme Court emphasized that recoupment may only be used to "reduce or eliminate the plaintiff's demand either because the plaintiff has not complied with some cross obligation of the contract... or because he has violated some duty... in the making or performance of the contract." 120 N.H. at 44 (emphasis added). The Court's emphasis on contract suggests that it would take the narrower view of when a claim arises from a transaction. However, determining the appropriate legal standard to apply is not enough to resolve the motions.

III

To prevail on a motion for summary judgment, the moving party must "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." RSA 491:8-a, III (2005). In order to defeat summary judgment, the non-moving party "must put forth contradictory evidence under oath, 'sufficient . . . to indicate that a genuine issue of fact exists so that the party should have the opportunity to prove the fact at trial . . .'" Phillips v. Verax, 138 N.H. 240, 243 (1994) (quoting Dolan v. Maple Leaf Health Care Ctr., Inc., 119 N.H. 424, 425 (1979)). A fact is material if it affects the outcome of the litigation under the applicable substantive law. Palmer v. Nan King Rest., Inc., 147 N.H. 681, 683 (2002). In considering a party's motion for summary judgment, the evidence must be considered in the light most favorable to the non-moving party, together with all reasonable inferences therefrom. Sintros v. Hamon, 148 N.H. 478, 480 (2002).

Liberty takes the position that Surge's pleadings in this case, Surge's requests to the NCCI, and the historical practice of the parties relative to the policies at issue all establish that, for purposes of applying the defense of recoupment, each of the Surge client company policies were not individual "transactions," but rather, were part of a single transaction pursuant to which Surge produced workers' compensation insurance policies for it and its client companies from Liberty in the assigned risk market. Defendant's Reply To Objection To Defendant's Limited Motion for Reconsideration of Order Granting Surge's Motion for Summary Judgment, 4. Liberty also argues that applicable NCCI rules governing the issuance of workers' compensation insurance for employers who require that multiple policies issued to a single professional employee organization, such as Surge, are linked. Id. Finally, Liberty argues that Surge's position is inconsistent with its request to the NCCI, and more broadly, with the historical practice of the parties. If there some ambiguity in a contract, then the course of performance of the parties to the contract is relevant to the meaning of the contract. Birch Broadcasting v. Capitol Broadcasting Corp. et al, 161 N.H. 192, 197 (2010). The issue of whether any contract between the parties is ambiguous has not been briefed by either party.

For its part, Surge not only disputes Liberty's claims, but argues that Liberty's summary of billings and payments from 2001 through 2010 are inaccurate, and for that reason Liberty is not entitled to defeat Surge's claim based on defensive recoupment. Plaintiff's Objection to Defendant's Motion for Summary Judgment as to Plaintiff's Claims, 2-3.

Under the circumstances, the Court cannot find that there are no genuine issues of material fact, and, thus, cannot find that any party is entitled to summary judgment on the issue of whether or not Liberty may assert a recoupment claim. Accordingly, both Liberty's motion for summary judgment and Surge's cross-motion must be denied. The Court recognizes that summary judgment may still be appropriate on a more developed record. Therefore, the Clerk shall schedule this matter for a status conference. Prior to the conference, the parties shall meet and confer and determine the extent to which they can agree on whether this matter can be addressed on summary judgment and, if not, whether they can enter into a stipulation of facts in order to narrow the scope of any trial in this matter.

SO ORDERED.

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Richard B. McNamara,

Presiding Justice
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