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 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.)

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 construct
ion related litigation, including lien law and construction defect law.