United States of America, for the use and benefit of Ash Equipment Co., Inc. et al v. Morris, Inc. et al
ORDER granting 231 Defendant Morris' Motion for Leave to Amend Answer. Signed by US Magistrate Judge Veronica L. Duffy on 5/12/2017. (CG)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
UNITED STATES OF AMERICA, FOR
THE USE AND BENEFIT OF ASH
EQUIPMENT CO., INC. D/B/A
AMERICAN HYDRO; AND ASH
EQUIPMENT CO., INC., A MARYLAND
DEFENDANT MORRIS, INC.'S
MOTION TO AMEND ITS ANSWER
DOCKET NO. 231
MORRIS, INC., A SOUTH DAKOTA
CORPORATION; UNITED FIRE AND
CASUALTY COMPANY, AN IOWA
CORPORATION; AND RED WILK
CONSTRUCTION, INC., A SOUTH
This is a Miller Act action (40 U.S.C. § 3133(b)(3)(B)), brought by the
United States of America for the use and benefit of Ash Equipment Company,
Inc., doing business as American Hydro (“Hydro”). Defendants are the general
contractor on the project, Morris, Inc. (“Morris”); the company that issued the
payment bond, United Fire and Casualty Company (“UF&CC”); and
hydrodemolition subcontractor Red Wilk Construction, Inc. (Red Wilk).
Pending before the court is a motion filed by Morris seeking to amend its
answer to Hydro's complaint to assert the affirmative defense of recoupment.
See Docket No. 231. This matter is before this court on the consent of all
parties pursuant to 28 U.S.C. § 636(c).
Defendant Morris contracted with the United States Army Corps of
Engineers (“the Corps”) to do work on the Fort Randall Dam spillway at
Pickstown, South Dakota, in September, 2013. Morris obtained a Miller Act
payment bond on the project from defendant UF&CC in the amount of
$7,472,670.25. The payment bond obligated Morris and UF&CC jointly and
severally to guarantee payment to any subcontractor of Morris’ who furnished
labor and materials on the project as well as to persons who had a direct
contractual relationship with Morris on the project.
The project plans and specifications of the Corps required concrete
removal using hydrodemolition methods. Morris subcontracted this work to
Red Wilk in October, 2013. Red Wilk in turn subcontracted with Hydro in
April, 2014. Red Wilk promised to pay Hydro for Hydro’s work on the project
within 10 working days after Morris paid Red Wilk on monthly progress
Hydro began work on the project in May, 2014. It removed its equipment
and labor from the project work site on August 25, 2014. Hydro brought suit
on August 22, 2014, after Red Wilk allegedly failed to pay for certain claims
made by Hydro for completed work on the project. Hydro gave notice to Morris
that it had not been paid. In its complaint, Hydro asserts a breach of contract
claim against Red Wilk, an equitable claim in quantum meruit against Morris,
and claim against the UF&CC bond. Work on the project, including the
hydrodemolition work, was not completed at the time Hydro filed suit.
Morris responded to this lawsuit by filing a crossclaim for indemnity
against Red Wilk, asserting that Red Wilk must indemnify Morris for any
monies Morris must pay to Hydro. Red Wilk asserted a compulsory
counterclaim against Hydro, asserting that the prime contract was part and
parcel of the contract between Red Wilk and Hydro. Red Wilk further asserted
that Hydro did defective and/or incomplete work pursuant to its contract with
Red Wilk. Red Wilk alleges it incurred expenses because it had to hire others
to complete Hydro's contract and to correct improper work done by Hydro.
The first Rule 16 scheduling order issued by the district court (prior to
the parties consenting to this court's handling of this case), established
February 6, 2015, as the deadline for the parties to move to join additional
parties and to amend their pleadings. See Docket No. 35 at p. 1, ¶ 2. The
parties jointly stipulated to an extension of the court's scheduling deadlines on
October 12, 2015, and several times thereafter. See, e.g. Docket No. 40.
Because all of these motions to extend the scheduling order deadlines were
made after the deadline for amending pleadings had expired, none of the new
scheduling orders included any deadlines for amending pleadings. See e.g.
Docket No. 42.
Morris alleges it incurred the damages it seeks to assert in recoupment
during a 20-day period in July-August, 2015, a year after Hydro filed suit and
five months after the deadline to amend pleadings had passed. Morris' alleged
recoupment damages arose from the fact that Hydro abandoned the project
before it was completed and Morris had to both hire another party to finish
Hydro's work, as well as fix work Hydro did that was not in conformity with the
Corps' plans and specifications. Morris notified Hydro in writing in December,
2015, of its intent to assert a claim for recoupment. It provided documents to
Hydro containing an explanation of its calculation of Morris' recoupment
damages as well as supporting documents. Morris' agent was subject to
extensive examination on these documents regarding recoupment at a
deposition on May 18, 2016. Morris has provided an expert report to Hydro
concerning its recoupment damages and Hydro has provided a rebuttal expert
opinion as to that issue.
Morris now moves to amend its answer so as to assert the affirmative
defense of recoupment. Hydro objects on the basis that the motion is untimely
and that Morris has not demonstrated good cause for missing the deadline.
Hydro also asserts it would be futile to allow the amendment because the
defense is without merit.
Three rules are implicated by Morris' motion: FED. R. CIV. P. 8, 15 and
16. Rule 8 requires a party to plead affirmative defenses in its answer. See
FED. R. CIV. P. 8(c). The general rule is that failure to plead an affirmative
defense results in waiver of that defense. Sherman v. Winco Fireworks, Inc.,
532 F.3d 709, 714-15 (8th Cir. 2008) (citing First Union Nat'l Bank v. Pictet
Overseas Trust Corp., 477 F.3d 616, 622 (8th Cir. 2007)). However, if the
defense is raised in such a way that the opposing party is not unfairly
surprised, failure to comply with Rule 8(c) does not waive the defense. Id.
Here, Rule 8 does not bar Morris from asserting the recoupment defense. The
facts giving rise to the defense had not occurred as of the date the pleadings
amendment deadline passed. Furthermore, Morris timely notified Hydro of the
recoupment defense and Hydro has been able to conduct extensive discovery
regarding that issue. The court concludes that Morris did not waive the
recoupment defense by failing to assert it in its original answer or by failing to
amend its answer prior to the February, 2015, pleadings amendment deadline.
Rule 15 governs amendments of pleadings. See FED. R. CIV. P. 15(a).
Under the rule, a party may amend a pleading once as a matter of right within
21 days after serving the pleading. Id. Thereafter, the party may amend only
with the written consent of the opposing party or the court's permission. Id.
"The court should freely give leave [to amend] when justice so requires." See
FED. R. CIV. P. 15(a)(2). Rule 15 also contemplates that pleadings may be
amended during trial. See FED. R. CIV. P. 15(b). Even then, leave to amend
should be "freely" permitted "when doing so will aid in presenting the merits
and the objecting party fails to satisfy the court that the evidence would
prejudice that party's action or defense on the merits." Id. Even under this
generous standard, a court may deny a request to amend for "compelling
reasons such as undue delay, bad faith, or dilatory motive, repeated failure to
cure deficiencies by [previously allowed] amendments, undue prejudice to the
non-moving party, or futility of the amendment." Sherman, 532 F.3d at 715
(quoting Moses.com Sec., Inc. v. Comprehensive Software Sys., Inc., 406 F.3d
1052, 1065 (8th Cir. 2005)).
Rule 16 of the Federal Rules of Civil Procedure requires the court to issue
a scheduling order. See FED. R. CIV. P. 16(b). The deadlines in a Rule 16
scheduling order can be modified for good cause and with the judge's consent.
Id. at (b)(4). Clearly, Morris' motion to amend is untimely. The question, then,
is whether there is good cause to allow a de facto amendment of the scheduling
order and allow the amendment to Morris' answer.
The settled Eighth Circuit law concerning the interplay between Rules 15
and 16 is that a party who moves to amend a pleading after the expiration of
the scheduling order deadline must show "good cause." Sherman, 532 F.3d at
716. Failure of a trial court to apply the Rule 16 "good cause" standard to an
untimely motion to amend may be grounds for reversal. Id.
The primary measure of "good cause" is whether the movant acted with
diligence in attempting to meet the Rule 16 deadline. Id. Prejudice to the
nonmoving party is also a secondary consideration, behind the issue of
diligence. Id. In the Sherman case, the defendant's delay from May until the
following January in seeking to amend its answer was not diligent and did not
demonstrate "good cause." In that case, the affirmative defense preempted the
plaintiff's claim and there was nothing in the record indicating the plaintiff had
any foreknowledge of the defense, tacit or explicit, prior to the time the
defendant moved to amend its answer to assert it. Id.
Here, Morris did not know and could not know of its recoupment
damages until July-August 2015, a year after Hydro filed suit and five months
after the Rule 16 scheduling order deadline. This is the time when the facts
emerged concerning Hydro's partial performance allegedly not complying with
the Corps' plans and specifications. The fact that Morris was unable to comply
with the February, 2015, deadline for amending is a direct result of Hydro
preemptively filing its lawsuit so quickly before the project was completed, even
before Hydro's own portion of the overall project was completed. Thus, Morris
has good cause for missing the court's February, 2015, deadline to move to
Morris notified Hydro of its recoupment damages in December, 2015,
and Hydro extensively deposed Morris' agent regarding recoupment in May,
2016. It is questionable whether Morris was duly diligent in formally filing its
motion to amend in March, 2017, 15 months after it knew of the defense.
Nevertheless, Morris notified Hydro of the recoupment issue in December,
2015, just over three months after the facts establishing that issue arose in
July-August of the same year. This was duly diligent. Furthermore, the
parties have been able to fully discover the facts surrounding this issue,
including expert opinion concerning recoupment. Therefore, the court
concludes that, under these specific facts, Morris has established good cause
for extending the scheduling order deadline to allow the amendment.
Hydro asserts it would be futile to allow Morris to assert the defense of
recoupment because that defense is inapplicable to Hydro. Hydro asserts there
must be contractual privity between parties before recoupment applies.
Because Hydro contracted with Red Wilk, not directly with Morris, Hydro
asserts there is no privity of contract between Hydro and Morris. There is a
split of authority among the circuits as to whether privity of contract is
required for a recoupment defense under the Miller Act.
The Ninth Circuit has held that "setoff" is not available under the Miller
Act unless there is privity of contract. See United States ex rel Martin Steel
Constructors, Inc. v. Avanti Constructors, Inc., 750 F.2d 759, 762 (9th Cir.
1985). The First Circuit disagreed, holding the Miller Act did not require privity
of contract before a general contractor could assert recoupment against a
subcontractor under the Miller Act. See United Structures of Amer., Inc. v.
G.R.G. Eng'g, S.E. and New Hampshire Ins. Co., 9 F.3d 996, 997-98 (1st Cir.
In reaching its conclusion, the First Circuit distinguished between
"setoff" and "recoupment." Id. at 998-1000. Setoff is a "counter-claim demand
which defendant holds against plaintiff, arising out of a transaction extrinsic of
plaintiff's cause of action," while recoupment is "a reduction or rebate by the
defendant of part of the plaintiff's claim because of a right in the defendant
arising out of the same transaction." Id. at 998. Recoupment ensures that the
"judgment to be rendered [ ] does justice in view of the one transaction as a
whole." Id. at 999. The First Circuit concluded the Ninth Circuit failed to
acknowledge the distinction between setoff and recoupment. Id. at 998-1000.
The First Circuit further supported its conclusion by relying on the language of
the Miller Act itself, which stated a plaintiff was entitled to "sums justly due
him," not "sums due under the contract." Id. at 999. The court concluded that
the full contract price was not "justly due" where the subcontractor supplied
defective work. Id. The District of Columbia district court agrees with the First
Circuit. See United States ex rel. Tennessee Valley Marble Holding Co. v.
Grunley Constr., 433 F. Supp. 2d 104, 116 (D.D.C. 2006).
The Eighth Circuit has not addressed this issue. However, a district
court within the circuit has agreed with the position set forth by the First
Circuit and the District of Columbia district court. See United States ex rel.
Butler Supply, Inc. v. Power & Data, LLC, 2014 WL 7271986 at *2 (E.D. Mo.
Dec. 18, 2014). In addition, the Eighth Circuit has held in an appeal from this
district that "recoupment is a defensive action that operates to diminish the
plaintiff's recovery rather than to assert affirmative relief." Rosebud Sioux
Tribe v. Val-U Const. Co. of South Dakota, Inc., 50 F.3d 560, 562 (8th Cir.
This court concludes that the First Circuit and the district courts of the
Eastern District of Missouri and the District of Columbia have the more
persuasive interpretation of the Miller Act. Morris’ claim is for recoupment, not
setoff, because it arises out of the same transaction as Hydro’s claims.
Recoupment is really a defensive action rather than an affirmative claim.
Rosebud Sioux Tribe, 50 F.3d at 562. The court finds contractual privity is not
required under the Miller Act for recoupment. Accordingly, the court allows
Morris to amend its answer to assert recoupment and finds that such
amendment is not futile.
CONCLUSION AND ORDER
Good cause appearing, it is hereby
ORDERED that Morris' motion to amend its answer [Docket No. 231] is
granted. Morris must file its amended answer and serve it on the other parties
within 7 (seven) days of the date of this order.
DATED May 12, 2017.
BY THE COURT:
VERONICA L. DUFFY
United States Magistrate Judge
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