Use of Equitable Recoupment to Revive Time-Barred Claims In Nevada Business Litigation
Use of Equitable Recoupment to
Revive Time-Barred Claims
By G. Mark Albright, Esq.
As we all know, many clients often forego filing a legal action or complaint in an effort to preserve business relationships, particularly while those relationships remain profitable. In so doing, they may often unwittingly allow statutes of limitations to expire, thereby barring certain claims. Then when the relationship finally breaks down to the point where litigation is absolutely necessary, some clients are stunned to discover that past wrongs and disputes with the opposing party are now-time barred. This can be especially frustrating when the plaintiff intentionally waits to file certain claims knowing that the defendant has waited too long to file a counter-claim for past grievances. This article illustrates and describes how it may be possible to revive (at least defensively) such time-barred claims using the powerful equitable doctrine known as equitable recoupment.
It is well settled law throughout the United States and in Nevada, that the statute of limitations does not apply to an affirmative defense or an affirmative counterclaim of equitable recoupment. This principle of law is universally recognized and is typically quoted in almost identical terms in major treatises and cases that discuss it. A few examples are the following:
Recoupment, being in the nature of the defense arising out of some feature of the transaction upon the which the Plaintiff’s action is grounded, survives the expiration of the period provided by a statute of limitation that otherwise would bar the recoupment claim as an independent cause of action. In other words, if the Plaintiff’s action is timely, the defense of recoupment may be asserted even if the same claim, as an independent cause of action, would be barred by a statute of limitations.
51 Am. Jur. 2D Limitation of Actions, §123 (2000).
Likewise, another nationally recognized treatise, explains the doctrine as follows:
The defense of reduction or recoupment which arises out of the same transaction as the note or claim sued on, survives as long as the cause of action on the note or claim exists, even though an affirmative action on the subject of it may be barred by the statute of limitations. However, if the amount due Defendant exceeds the amount due plaintiff, and affirmative action on Defendant’s claim is barred by limitations, the Defendant cannot recover the excess by way of recoupment, but as to this point, there is some authority to the contrary (emphasis added).
54 CJS, Limitations of Actions, § 37 (1987).
Similarly, in 3 Moore’s Federal Practice § 13.93, 13-88 (3rd ed. 2007), we read that “if the main action is timely, a claim of recoupment arising out of the same transaction or occurrence as the main claim, and not seeking affirmative relief nor relief different than that sought in the main claim, relates back to the filing of the plaintiff’s claim and is not time barred.” See, also 6 C. Wright & Miller, Federal Practice and Procedure, § 1419 (2nd Edition 1990) (courts have properly held that notwithstanding the statute of limitations, a Defendant may assert a counterclaim to the extent that it defeats or diminishes the plaintiff’s recovery.)
The United States Supreme Court has explained and relied upon this important legal principle on numerous occasions. In Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), the Supreme Court stated that “as a general matter, a Defendant’s right to plead recoupment, a defense arising out of some feature of the transaction upon which the plaintiff’s action is grounded, survives the expiration of the period provided by the statute of limitations that would otherwise bar the recoupment claim as an independent cause of action.” Id. at 415 (see also the numerous other cases cited thereat for this legal principle).
The Ninth Circuit has also relied upon this equitable legal doctrine in Klemens v. Airline Pilots, 736 F.2d 491, 501 (9th Cir. 1984), stating that “a claim for recoupment that would otherwise be barred by the statute of limitation may be brought to defeat a claim arising out of the same transaction.”
Likewise, the United States District Court for the District of Nevada relied upon equitable recoupment in Vari-Build v. City of Reno, 622 F.Supp. 97 (D.Nev. 1985) stating that “on the other hand, where the Defendant’s claim is for recoupment, the statute of limitations is not a bar; it may be availed of defensively so long as the Plaintiff’s cause of action exist.” Id. at 100.
The Nevada Supreme Court in Nevada State Bank v. Jameson Family Partnership, 106 Nev. 792, 801 P.2d 1377 (1990) cited Vari-Build in support of the proposition that, “generally the doctrine of equitable recoupment reduces or extinguishes any judgment the Plaintiff is awarded, but does not allow the Defendant to pursue damages in excess of the Plaintiff’s judgment award.” Id. at 797. The Nevada State Supreme Court in the Jameson Family Partnership case further noted that “recoupment is a common law remedy designed to avoid the harsh results of a statute of limitations.” The Nevada Supreme Court went on to affirm the District Court’s ruling that the statute of limitations did not bar the Defendant from asserting its counterclaim as an affirmative defense of recoupment.”
In light of the foregoing, it is abundantly evident that the doctrine of equitable recoupment is a universally recognized exception to the statute of limitations. Although the Nevada State Bank v. Jameson case does not allow the “tolling” of the statute of limitations (which would allow the affirmative use of the claim to recover damages), it did allow counterclaims to be brought for all of the affirmative relief that the Defendant might seek pursuant to the counterclaim by way of defensive relief only.
It is interesting to note that 51 Am. Jur. 2nd Limitations of Actions; 123 cites to the Nevada State Bank v. Jameson case in support of the proposition that claims for recoupment survive the expiration period provided by a statute of limitations that otherwise would bar the claim as an independent cause of action. The Am. Jur. article notes that under the Nevada Supreme Court’s holding in Nevada State Bank, “although a bank’s deficiency claims were time barred, the bank could assert those claims as the affirmative defense of equitable recoupment.” Id. at 529, note 2.
It should be noted here by way of clarification that recoupment involves a claim by the Defendant, that grows out of the same transaction giving rise to the Plaintiff’s claim. On the other hand, an equitable offset does not necessarily need to be related to the Plaintiff’s claim and is defined as “a means by which a debtor may satisfy in whole or in part a judgment or claim held against him out of a judgment or claim which he has subsequently acquired against his judgment creditor.” Muije v. North Las Vegas Cab, 106 Nev. 664, 666, 749 P.2d 559 (1990).
One of the most significant distinctions between setoff and recoupment is that a claim of recoupment is immune from the effects of an expired limitations period. Properly asserted, recoupment serves as a judicial device employed to avoid the strict and sometimes egregious results stemming from the application of a limitations statute. Hence a counterclaim, setting forth recoupment as an affirmative defense, is permissible even if it would have been precluded by a statute of limitations in an independent action. One court explained the rationale for this equitable principle as follows:
[R]ecoupment seeks the reduction of a claim because of an offsetting claim arising out of the same transaction, … (a setoff seeks a reduction because of an offsetting claim arising out of a totally unrelated transaction). To hold differently, would be to permit the inequity of one party to a transaction, demanding full performance from the other, while refusing to perform fully itself.
See, Gibbins v. Kosuga, 121 N.J. Super. 252, 257 (Law Div. 1972).
Similarly, in Mid-Atlantic National Bank v. George & Ltd., the sword vs shield application was aptly explained. Mid-Atlantic Bank brought an action to recover monies loaned to the defendant. The defendant set forth a counterclaim for recoupment based upon forged checks that had been drawn on their account at Mid-Atlantic. Mid-Atlantic filed a motion for summary judgment seeking to dismiss the counterclaim as being time-barred, due to the expiration of the one year statute of limitation period. In denying Mid-Atlantic’s motion, the Court established that “although the defendants may not raise this cause of action as a sword against Mid-Atlantic, they may raise it as a shield by way of counterclaim if the counterclaim sets forth a cause of action in equitable recoupment.” 233 N.J. Super. 621, 626 (Law Div. 1989).
In summary, the policy of equitable recoupment allows the Court to examine all aspects of a particular business transaction, and to then render judgment in light of the entire business transaction considered as a whole, including time barred counterclaims. In other words, “recoupment goes to the justice of the Plaintiff’s claim.” McGurdy, 136 F.2d 615 (quoting Grand Rapids, 121 N.J. Super at 256, 6th Cir. 1943). This contributes to judicial efficiency and fairness by equitably reconciling the demands of the competing parties whose claims are based upon the same legal transactions. Recoupment may then be employed by the court to decrease or extinguish a plaintiff’s demand (as compared to set-off which allows the court to make a monetary award.)
About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on construction related litigation, including lien law and construction defect law.
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