" Use of Equitable Recoupment to Revive Time-Barred Claims

As we all know, many clients often forego filing a legal action or complaint in
an effort to preserve business relationships, particularly while those relations
hips remain profitable. In so doing, they may often unwittingly allow statutes
of limitations to expire, thereby barring certain claims. Then when the relatio
nship finally breaks down to the point where litigation is absolutely necessary,
some clients are stunned to discover that past wrongs and disputes with the opp
osing party are now-time barred. This can be especially frustrating when the pl
aintiff intentionally waits to file certain claims knowing that the defendant ha
s waited too long to file a counter-claim for past grievances. This article ill
ustrates and describes how it may be possible to revive (at least defensively) s
uch 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 stat
ute of limitations does not apply to an affirmative defense or an affirmative co
unterclaim of equitable recoupment. This principle of law is universally recogn
ized and is typically quoted in almost identical terms in major treatises and ca
ses that discuss it. A few examples are the following:
Recoupment, being in the nature of the defense arising out of some feature of th
e transaction upon the which the Plaintiff s action is grounded, survives the expi
ration of the period provided by a statute of limitation that otherwise would ba
r 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 t
he same claim, as an independent cause of action, would be barred by a statute o
f limitations.
51 Am. Jur. 2D Limitation of Actions, 123 (2000).
Likewise, another nationally recognized treatise, explains the doctrine as follo
ws:
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 not
e 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 exce
eds the amount due plaintiff, and affirmative action on Defendant s claim is barre
d 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 tran
saction 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, Fe
deral Practice and Procedure, 1419 (2nd Edition 1990) (courts have properly held
that notwithstanding the statute of limitations, a Defendant may assert a count
erclaim to the extent that it defeats or diminishes the plaintiff s recovery.)
The United States Supreme Court has explained and relied upon this important leg
al 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 pr
ovided by the statute of limitations that would otherwise bar the recoupment cla

im as an independent cause of action. Id. at 415 (see also the numerous other cas
es 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 re
coupment that would otherwise be barred by the statute of limitation may be brou
ght to defeat a claim arising out of the same transaction.
Likewise, the United States District Court for the District of Nevada relied upo
n equitable recoupment in Vari-Build v. City of Reno, 622 F.Supp. 97 (D.Nev. 198
5) stating that on the other hand, where the Defendant s claim is for recoupment, t
he 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 t
hat, generally the doctrine of equitable recoupment reduces or extinguishes any j
udgment the Plaintiff is awarded, but does not allow the Defendant to pursue dam
ages in excess of the Plaintiff s judgment award. Id. at 797. The Nevada State Supr
eme 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 limitat
ions. The Nevada Supreme Court went on to affirm the District Court s ruling that t
he statute of limitations did not bar the Defendant from asserting its countercl
aim as an affirmative defense of recoupment.
In light of the foregoing, it is abundantly evident that the doctrine of equitab
le recoupment is a universally recognized exception to the statute of limitation
s. Although the Nevada State Bank v. Jameson case does not allow the tolling of th
e 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 affirm
ative relief that the Defendant might seek pursuant to the counterclaim by way o
f 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 cla
ims for recoupment survive the expiration period provided by a statute of limita
tions 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 Sta
te Bank, although a bank s deficiency claims were time barred, the bank could asser
t those claims as the affirmative defense of equitable recoupment. Id. at 529, no
te 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 Pla
intiff s claim. On the other hand, an equitable offset does not necessarily need t
o be related to the Plaintiff s claim and is defined as a means by which a debtor m
ay satisfy in whole or in part a judgment or claim held against him out of a jud
gment 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 th
e strict and sometimes egregious results stemming from the application of a limi
tations statute. Hence a counterclaim, setting forth recoupment as an affirmativ
e defense, is permissible even if it would have been precluded by a statute of l
imitations 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 arisi

ng out of the same transaction,
(a setoff seeks a reduction because of an offset
ting 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 p
erformance 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 a
pplication was aptly explained. Mid-Atlantic Bank brought an action to recover m
onies loaned to the defendant. The defendant set forth a counterclaim for recoup
ment based upon forged checks that had been drawn on their account at Mid-Atlant
ic. Mid-Atlantic filed a motion for summary judgment seeking to dismiss the coun
terclaim 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 alt
hough the defendants may not raise this cause of action as a sword against Mid-A
tlantic, they may raise it as a shield by way of counterclaim if the counterclai
m 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 a
spects of a particular business transaction, and to then render judgment in ligh
t of the entire business transaction considered as a whole, including time barre
d 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 r
econciling the demands of the competing parties whose claims are based upon the
same legal transactions. Recoupment may then be employed by the court to decreas
e or extinguish a plaintiff s demand (as compared to set-off which allows the cour
t to make a monetary award.)
* * * * * * * *
"67. Setoff and Recoupment
See, e.g., In re Alpco, 62 B.R. 184, 188 (Bankr. S.D. Ohio 1986) (quoting In re
Maine, 32 B.R. 452, 455 (Bankr. W.D.N.Y. 1983)); accord In re Flagstaff Realty A
ssocs., 60 F.3d 1031 (3d Cir. 1995) (where the creditor's claim for repair costs
and the debtor's claim to rent payment arise from the lease relationship they ar
ise from the same transaction and are subject to recoupment);
Matter of Coxson, 43 F.3d 189, 193-94 (5th Cir. 1995) (where creditor's and debt
or's obligations arise out of the same contract recoupment is appropriate); Dist
ribution Servs. Ltd. v. Eddie Parker Interests Inc., 897 F.2d 811, 812 (5th Cir.
1990)
("Recoupment is a defense that goes to the foundation of plaintiff's claim by de
ducting from plaintiff's recovery all just allowances or demands accruing to the
defendant with respect to the same contract or transaction."); First Nat'l Bank
v. Master Auto Serv. Corp., 693 F.2d 308, 310 n.1 (4th Cir. 1982)
("Recoupment is the right of a defendant to have the plaintiff's monetary claim
reduced by reason of some claim the defendant has against the plaintiff arising
out
of the very contract giving rise to the plaintiff's claim."); Speakman v. Bernst
ein, 59 F.2d 520, 522 (5th Cir. 1932) ("[Defendant]'s defensive right of recoupm
ent under the contract remains so long as any right under that same contract is
urged against him offensively"); FSLIC v. Smith, 721 F. Supp. 1039, 1042 (E.D. A
rk. 1989)
(recoupment is "the right of a defendant to have the plaintiff's monetary claim
reduced by reason of some claim the defendant has against the plaintiff arising

out of the very contract giving rise to the plaintiff's claim."); In re Midwest
Serv.
and Supply Co., 44 B.R. 262, 266 (D. Utah 1983) ("A single contract must be cons
idered one transaction."); Waldschmidt v. CBS, Inc., 14 B.R. 309, 314 (M.D. Tenn
. 1981) (in case under the Bankruptcy Act, court holds that where both obligatio
ns "grow out of the [same] contract," the obligations "unquestionably arise
from the same transaction"); In re Bram, 179 B.R. 824 (Bankr. E.D. Tex. 1995) (w
here
prepetition overpayments and postpetition payments arise by the terms of the sam
e
contract, they arise from the "same transaction"); In re LaPierre, 180 B.R. 95 (
Bankr. D.S.C. 1994) (Reduction of ongoing payments is properly characterized as
recoupment where the ongoing payments arise out of same contactual relationship
as prior overpayments.); In re Izaguirre, 166 B.R. 484, 493 (Bankr. N.D. Ga. 199
4)
("[R]ecoupment speaks not simply to the net amount due from one party to the oth
er computed by subtracting one claim from the other, but rather to the amount of
the plaintiff's claim alone on a particular contract, transaction or event.");
In re Northeast Exp. Regional Airlines, Inc., 169 B.R. 258 (Bankr. D. Me. 1994)
(Obligations "arising from" and "directly related" to contractual relationship a
re subject to recoupment.); In re Bob Brest Buick, Inc., 136 B.R. 322, 323 (Bank
r. D. Me. 1991) (A business relationship is a "continuous one which permits reco
upment.");
In re Tidewater Memorial Hospital, 106 B.R. 876, 881-82 (Bankr. E.D. Va. 1989) (
"Recoupment rests on the principle that it is just and equitable to settle in on
e action all claims growing out of the same contract or transaction."); In re Hi
ler, 99 B.R. 238, 242 (Bankr. D.N.J. 1989) (A defendant "clearly has a right of
recoupment" where "all the claims arise out of the same contract."); see genera
lly
Cecile Indus. Inc. v. Cheney, 995 F.2d 1052, 1054 (Fed. Cir. 1993) ("Indisputabl
y, the Government has long enjoyed the right to offset contract debts to the Uni
ted States against contract payments due to the debtor."); In re Mohawk Indus.,
82 B.R. 174 (Bankr. D. Mass. 1987); In re American Cent. Airlines, Inc., 60 B.R.
587 (Bankr.
N.D. Iowa 1986). Contra University Medical Ctr. v. Sullivan, 973 F.2d 1065, 1081
-82 (3d Cir. 1992) ("same transaction" requirement for recoupment must be narrow
ly
construed); In re Thompson, 182 B.R. 140, 147-49 (Bankr. E.D. Va. 1995) ("One co
ntract alone, however, is not sufficient to establish a single transaction, sinc
e separate transactions may occur within the confines of the contract."); In re
California Canners and Growers, 62 B.R. 18 (Bankr. 9th Cir. 1986)."
* * * * * * *
jg: Many if not all these cases are in regard to bk, but recoupment is in no way
limited to bk cases. Recoupment is clearly available in judicial foreclosure,
but there may be a battle in regard to non-j because there's argument, accepted,
that non-j is not an "action (and recoupment defenses and claims are responses,
essentially, to an action against one. That 'non-j is not an action' is due for
its own argument that it is, no matter how high one must go. If non-j is not a
n action (and one to which recoupment applies), it's clearly discriminatory, pre
judicial, and patently unfair to all who entered into agreements where non-j is
allowed. One set of peoples can't be made to relinquish rights others enjoy. Len
ders lobbied for non-j for their own benefit and got it: Non-j has clearly becom
e highly prejudiciaL itself to borrowers if for no other reason than the trustee
is the servant of (and often owned by the law firm actually bringing the forecl
osure )or of the alleged beneficiary and not the unbiased party it was meant to
be.

One internet blogger says tila claims and defenses are available in recoupment,
meaning the st of limitations is up, at least in judicial foreclosure cases. I h
aven't been able to confirm that, but common claims (non-tila) may readily be ma
de past their st of limitations in recoupment.
As to the defenses needing to be made in the first responsive pleading, there m
ay be argument to be made that the defenses weren't apparent at the time of the
complaint but have become apparent as the case has evolved and new info was garn
ered. Might be worth a shot...?