AMERICAN MOTORISTS INSURANCE COMPANY v. NORTH PLAINFIELD BOARD OF EDUCATION

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3.

 

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-4680-14T4

AMERICAN MOTORISTS INSURANCE

COMPANY,

Plaintiff-Respondent,

v.

NORTH PLAINFIELD BOARD OF

EDUCATION,

Defendant-Appellant.

___________________________________

October 20, 2016

 

Argued September 27, 2016 Decided

Before Judges Yannotti, Fasciale and Kennedy.

On appeal from Superior Court of New Jersey, Law Division, Somerset County, Docket No. L-0543-05.

Robert C. Epstein argued the cause for appellant (Greenberg Traurig, L.L.P., attorneys; Mr. Epstein, of counsel and on the briefs).

John F. Casey argued the cause for respondent (Chiesa Shahinian & Giantomasi, P.C., attorneys; Mr. Casey, of counsel and on the brief; Darren Grzyb, on the brief).

PER CURIAM

Defendant, North Plainfield Board of Education (the Board), appeals from a May 19, 2015 order entered on stipulated facts awarding plaintiff, American Motorists Insurance Company (AMICO), a total of $2,647,115.37. We affirm.

I.

In 2001, the Board advertised for bids pertaining to a construction project to renovate and expand five of its schools. The Board awarded D&D Associates, Inc. (D&D) three construction contracts,1 which comprised the entire project. Pursuant to the New Jersey Bonds of Contractors on Public Works and Improvements Act (Bond Act), N.J.S.A. 2A:44-143 to -147, D&D posted payment and performance bonds for each of the three projects. AMICOexecuted the bonds in favor of the Board as obligee. After the work began, disputes arose between the Board and D&D.

In March 2003, the Board notified D&D and AMICO it was terminating Contract 1C, and demanded AMICO complete the work pursuant to the performance bond. D&D brought a lawsuit against the Board in federal court. To minimize potential exposure, AMICO entered into a takeover agreement with the Board, and agreed to arrange for completion "upon the condition that it is assured that in so doing it will receive payment . . . of the Contract Balance. . . ." Another provision of the takeover agreement for Contract 1C was that the Board would not withhold payment of the contract balance by reason of the Board's disputed claims against D&D. AMICO completed the work on the project, and received an architect's Certificate of Substantial Completion. On the date the takeover agreement for Contract 1C was executed, the contract balance was $3,023,637.94, not including $341,029.56 for mechanics' liens. The Board paid various payment applications to AMICO, totaling $1,812,347.64. However, the Board ceased making further payments due to AMICO's alleged breach of its obligation to achieve substantial completion by December 2003, and because of mechanics' liens filed against the project by D&D's subcontractors, who the Board claims also filed lawsuits against it.

In June 2003, the United States Department of Treasury terminated AMICO's Certificate of Authority to qualify as an acceptable surety on federal bonds. In July 2003, the Board notified D&D and AMICO of the termination of the remaining two contracts, 1A and 1B, and demanded AMICO complete the remaining work on the project. In May 2004, the Board and AMICO entered into two separate takeover agreements for Contracts 1A and 1B, requiring AMICO to complete the work subject to full reservation of AMICO's and D&D's rights and claims. AMICO performed the work, and the Board admitted that the projects were substantially complete by December 2004.

After the agreement was executed, the Board paid AMICO $14,634.67, and thereafter ceased making payments, citing AMICO's alleged breach of its obligation to attain substantial completion by July 15, 2004. As to Contract 1B specifically, the architect requested that AMICO perform additional work on a parking lot, and in December 2004 issued a change order (Change Order 1b.007) totaling $96,584.70, which AMICO performed.

In June 2004, to comply with the takeover agreements and have the Board release the withheld payments, AMICO tendered self-issued lien-release bonds to the Board. Later that month, the Board learned that AMICO had withdrawn from the surety bonding business. The Board questioned whether AMICO was "legally authorized to issue the Discharge of Lien Bonds and also whether the company [was] financially solvent." Thereafter, in a July 2004 letter, AMICO's counsel provided a copy of its Certificate of Authority from the New Jersey Department of Banking and Insurance (NJDBI), along with its March 31, 2004 Quarterly Statement. The Board rejected AMICO's lien-release bonds on the grounds that AMICO's deteriorated financial condition violated the Bond Act, but stated it would make contractually-mandated payments when adequate security was provided.

Despite the Board withholding payments, AMICO obtained substantial completion of the construction work. Thereafter, the architect discovered defective work at the schools, namely "failed paving at the East End School tennis courts and parking lot," and decertified the work to zero percent complete as of January 2005. The architect certified that the total value of the decertified work was "approximately $256,000." The architect further certified that AMICO never completed the work, failed to complete "punch list" work, and failed to provide many deliverables required by the contracts, such as "warranties, operation and maintenance manuals, insurance certificates and record documents." The architect certified that AMICO "removed its forces from the Project without satisfying the requirements for Final Completion as defined in the contract, in effect abandoning the Project." The Board contended that AMICO never submitted several progress-payment applications and never submitted an application for final payment.

In April 2005, AMICO filed a complaint against the Board alleging that it breached the takeover agreements and the covenant of good faith and fair dealing. While the litigation was pending, in August 2012, a state-court judge in Illinois entered an Agreed Order of Rehabilitation, and ultimately, in May 2013, an Order of Liquidation with a Finding of Insolvency, enjoining any claim against AMICO outside the Illinois insolvency proceeding.

Meanwhile, in the New Jersey litigation, in December 2012, the court entered an order dismissing defendant's counterclaim without prejudice due to the Illinois insolvency proceeding, allowing the Board to re-file its claims against AMICO in the rehabilitation proceeding. The Board appealed the court's ruling, and we affirmed. Am. Motorists Ins. Co. v. N. Plainfield Bd. of Educ., No. A-2234-12 (App. Div. Nov. 12, 2013). The Board simultaneously filed a petition in an Illinois rehabilitation proceeding for relief from the injunction, which was denied.

In May 2014, the court granted partial summary judgment in favor of AMICO as to liability on the breach of contract claims. The court rendered a series of rulings on motions in limine limiting the issues and proofs at trial. The parties waived a jury trial and submitted the case to the court for final disposition on stipulated facts. The judge then entered the judgment under review.

II.

On appeal, the Board asserts that the court erred by concluding it breached the contract by withholding payment from AMICO; relying on the substantial performance doctrine to enter judgment against the Board for the contract balances; granting judgment in favor of AMICO for extra work unsupported by change orders; selectively enforcing the contract and usurping the architect's and construction manager's decision-making power; determining AMICO's insolvency excused performance; dismissing its recoupment defense; and by ruling that AMICO could recover in quasi-contract.

A.

We begin by addressing the Board's argument that the judge erroneously ruled it breached the contract by withholding payments based on delayed completion. The Board contends the "irrefutable record" demonstrates that it actually withheld payments due to mechanics' liens filed against D&D. Although the Board raised the issue of the mechanics' liens in its answer, it never mentioned or argued that it withheld payment on this basis in its response to AMICO's statement of material facts, opposition to AMICO's motion for summary judgment, or at oral argument on the summary judgment motion. At oral argument on the summary judgment motion, the Board argued that it withheld payment because of AMICO's delay

The only performance that was due from us was to pay. We did exactly what the cases say we[ are] supposed to do. We stopped performing. And that, according to all of the case law, bespeaks an intent, and is consistent with an intent to rely on the time of the essence clause.

. . . .

What happened was, as I said, they missed the deadline, we immediately stopped paying.

[(Emphasis added).]

The Board then argued it should be entitled to raise a recoupment defense,2 and that AMICO's insolvency represented a failure of consideration. The Board did not mention mechanics' liens. The judge accepted these arguments, but nevertheless found that the Board materially breached the takeover agreements. The judge found that although AMICO materially breached the contract by failing to adhere to the contractually-mandated completion dates, the Board chose not to terminate the contract, and was required to perform, subject to any claim it may have for delay damages, which must be brought in the Illinois insolvency proceedings.

After summary judgment as to "liability" on the takeover agreements was granted in favor of AMICO, both parties filed motions in limine. In determining whether the Board had a basis for disputing the Contract 1C balance, the judge noted that $341,029.56 was deducted for the value of the mechanics' liens. The judge concluded that the amount would be added back to the contract balance because the Board admitted it was never the subject of a lien-foreclosure action, and was not required to make payments to any person or entity that filed a mechanics' lien.

The Board later filed a motion for partial reconsideration of the in limine decisions. The Board argued it had expended money in defense costs as a result of the lien-foreclosure actions. The judge denied the motion, concluding that "[t]he facts constituting [the mechanics' liens] contentions were known, but [not raised] at the time the motions in limine were filed and therefore the Board's arguments are not properly the subject of a motion for reconsideration." The judge also noted that the Board's report on damages did not disclose any claim for alleged lien charges, and there was no evidence that the Board was required to expend any money to lien claimants.

We review the denial of a motion for reconsideration to determine whether the trial court abused its discretionary authority. Cummings v. Bahr, 295 N.J. Super. 374, 389 (App. Div. 1996). Reconsideration should only be used "'for those cases which fall into that narrow corridor in which either 1) the [c]ourt has expressed its decision based upon a palpably incorrect or irrational basis, or 2) it is obvious that the [c]ourt either did not consider, or failed to appreciate the significance of probative, competent evidence . . . .'" Id. at 384 (quoting D Atria v. D Atria, 242 N.J. Super. 392, 401 (Ch. Div. 1990)). Additionally, the decision to deny a motion for reconsideration falls "'within the sound discretion of the [trial court], to be exercised in the interest of justice.'" Ibid. (quoting D Atria, supra, 242 N.J. Super. at 401).

The Board did not raise the issue of the Board's defense costs from lien-foreclosure actions during either the summary judgment proceeding or the motions in limine proceeding, but waited until its motion for partial reconsideration of the motions in limine decision to raise the argument. The only reference to the mechanics' liens in the in limine motions was the withholding of $341,029.56, not the entire contract balance, and not alleged defense costs. The judge was not required, on reconsideration, to consider assertions that were known to the Board since the summary judgment stage, but were not raised. Palombi v. Palombi, 414 N.J. Super. 274, 289 (App. Div. 2010); see also Fusco v. Bd. of Educ. of City of Newark, 349 N.J. Super. 455, 462-63 (App. Div.) (explaining that evidence available but either tactically withheld or overlooked is not properly considered on a motion for reconsideration because it allows attorneys to withhold evidence and attain a second bite at the apple should their adversary prevail on the initial motion), certif. denied, 174 N.J. 544 (2002).

As to the Board's general argument that it was entitled to withhold the entire contract balance for filed mechanics' liens, AMICO's posting of the lien-release bond was sufficient to satisfy its obligations under the takeover agreements. Paragraph four of the takeover agreements state that "[s]o long as the [s]urety is in compliance with the [c]ontract and this [t]akeover [a]greement, Owner will apply the [c]ontract [b]alance to completion of the [w]ork pursuant to this [t]akeover [a]greement."

The agreement reflects that the Board "may withhold payment from [s]urety in accordance with the New Jersey Municipal Mechanics['] Lien Law (MMLL), N.J.S.A. 2A:44-125 [to -142], for any lien claims filed after execution of this [t]akeover [a]greement, but shall release such withheld funds to [s]urety upon the posting of a sufficient bond in accordance with that statute or upon discharge of the lien in accordance with that statute." (Emphasis added). Thus, under the takeover agreements, funds being withheld as a result of mechanics' liens had to have been released when AMICO either posted a sufficient bond under the MMLL or had discharged the lien.

AMICO posted a self-issued lien-release bond for the funds to be released. The Board rejected the bonds, citing AMICO's financial deterioration and potential insolvency. We have previously held, in Republic Ins. Co. v. South Plainfield, 179 N.J. Super. 116, 120 (App. Div.), certif. denied, 87 N.J. 427 (1981), that a municipality or board may not "condition acceptance of a performance or maintenance bond upon its approval of the surety," as "N.J.S.A.17:31-1 clearly bars a municipality from exercising its discretion in determining whether to approve properly executed bonds given by foreign insurance companies . . . which are authorized by statute to conduct business in New Jersey pursuant to N.J.S.A.17:17-1(g)." (Emphasis added).

Here, when challenged as to the validity of the lien-release bonds, AMICO provided the Board with a copy of its Certificate of Authority from the NJDBI, which listed its authority to do business in municipal bond insurance under N.J.S.A. 17:17-1(g). The Board was not authorized to reject the otherwise lawfully issued bonds due to its suspicion that AMICO may not be able to fulfill its obligations prospectively.

Further, the Board admits it has never been required to pay any lien claims and that the claims were eventually discharged. The Board argues only that it had a basis in 2003-2004 to withhold payment based on these potential claims. As the judge recognized during the in limine proceedings, even if the Board had a basis to withhold a fixed sum (not the entire contract balance) for lien claims, those claims have been discharged and the contract balance should not be withheld.

B.

The judge applied the substantial performance doctrine and concluded that because the Board now has the benefit of five completed schools, and has nevertheless withheld payment, AMICO was entitled to the contract balances less the cost to correct any defects in the construction work.

The substantial performance doctrine is well settled in New Jersey. "[W]here there is substantial performance of a building contract, even though attended by minor shortcomings, the contract price may be recovered, less a fair allowance to the owner to make good the defects." Winfield Mut. Hous. Corp. v. Middlesex Concrete Prods. & Excavating Corp., 39 N.J. Super. 92, 97 (App. Div. 1956).

Substantial performance is compliance in good faith with all important particulars of the contract. "[T]here is substantial performance of such a contract where all the essentials necessary to the full accomplishment of the purposes for which the thing contracted for has been constructed are performed with such an approximation to complete performance that the owner obtains substantially what is called for by the contract." A builder's default should not be willful, nor the defects so serious as to deprive the property of its value for the intended use, nor so pervade the whole work that a deduction in damages will not be fair compensation.

[Jardine Estates, Inc. v. Donna Brook Corp., 42 N.J. Super. 332, 337-38 (App. Div. 1956)(citations omitted) (emphasis added).]

Once substantial performance is achieved, "[t]he burden of establishing the amount of the allowance for defective work . . . falls upon the owner." Winfield, supra, 39 N.J. Super. at 97.

Here, the Board's architect and project manager certified that the project was substantially complete in 2004. However, he also certified that after issuing certificates for substantial completion, he discovered certain defective work, specifically the paving of the East End School tennis courts and parking lot and various punch list items. He also did not review the project for final payment. By the time the work was brought to substantial completion, the Board had already ceased paying AMICO. Thus, upon achieving substantial completion, AMICO brought suit for the work performed.

Under the original construction contracts, Article 5.1.6., the Board was responsible to make certain progress payments. Article 5.1.7 states

The progress payment amount determined in accordance with Subparagraph 5.1.6. shall be further modified under the following circumstances

1. Add, upon Substantial Completion of the Work, a sum sufficient to increase the total payments to the full amount of the Contract Sum, less such amounts as the Architect shall determine for incomplete Work, retainage applicable to such work and unsettled claims;

. . . .

[(Emphasis added.)]

Moreover, Article 5.2.1 states

Final payment, constituting the entire unpaid balance of the Contract Sum, shall be made by the Owner to the Contractor when . . . the Contractor has fully performed the Contract except for the Contractor's responsibility to correct Work . . . and a final Certificate for Payment has been issued by the Architect.

The judge's application of the substantial performance doctrine is supported by the contracts and by the law. The construction contracts stated that once substantial completion was achieved, which the Board concedes, AMICO was entitled to the contract balance, less any deductions for incomplete work. The Board's architect issued a Certificate of Substantial Completion, certifying that the Board was able to use the schools for their intended use. Thus, AMICO was entitled to the contract balances less the value of any incomplete work.

The Board concedes that by the time the projects reached substantial completion, it had already begun withholding payment from AMICO. Nevertheless, the Board argues that when it withheld payment, AMICO could have stopped performing pursuant to Article 9.7.1 of the construction contract, which states: "If within thirty (30) calendar days from the date of the Payment Date, the Owner, without good faith cause or basis hereunder, fails to pay the Contractor amounts due and payable, the Contractor shall have the right to cease performance of Work until receipt of proper payment. . . ." (Emphasis added).

This argument contradicts the Board's previous contention that it was justifiably withholding payment, and also, as the judge noted, placed AMICO in the unenviable predicament of either stopping performance and exposing itself to suit, or continuing work despite the Board's failure to pay. AMICO continued to perform, and the Board allowed it to do so. The Board now argues that it owes no money to AMICO because AMICO performed at its own risk. Under these circumstances, the judge's application of the substantial performance doctrine was proper.

As to the Board's claim that AMICO abandoned the projects, AMICO was not being paid at the time it brought the contracts to substantial completion. AMICO did not willfully abandon the projects. The Board had ceased paying and had not rescinded or terminated the takeover agreements, placing AMICO in a position to either keep performing or risk suit for breach of the takeover agreements. "[S]ubstantial performance is the antithesis of material breach," meaning that the two concepts are mutually exclusive. 15 Richard A. Lord, Williston on Contracts 44:55 (4th ed. 2000). Thus, once AMICO substantially completed the project, the Board could no longer assert material breach by virtue of abandonment.

The Board next asserts that AMICO did not comply with a panoply of contract provisions, thereby relieving the Board of any obligation to pay amounts due under the contracts. First, the Board argues that AMICO failed to comply with the contract provisions requiring the architect and construction manager to approve AMICO's application for final payment.

The substantial performance doctrine recognizes that not all contractual obligations will be followed. See, e.g., Hardin, Rodriguez & Boivin Anesthesiologists, Ltd. v. Paradigm Ins. Co., 962 F.2d 628, 636 (7th Cir. 1992) (stating that "[t]he doctrine of substantial performance . . . provides that when a party performs the essential, material parts of a contract in good faith, the other party will be required to pay or perform even though there has not been strict compliance with the terms of the contract"). If that were not the case, there would be no need for the doctrine in the first instance.

Instead, the substantial performance doctrine allows a party to recover, in equity, despite certain contractual preconditions being unmet, including a condition requiring an architect's final approval. See MacDonnell v. Vitille, 111 N.J. Eq. 502, 509-10 (1932) (emphasis added) (finding that the owner "was chargeable with the amount of the unpaid balance of the contract price notwithstanding the denial of the architect's final certificate" because there was evidence of substantial performance including the architect's testimony that the building had been substantially completed).

Here, certain preconditions to final payment were not met. However, there is no dispute that AMICO substantially completed the projects, and that the Board has had the benefit of occupied schools for approximately a decade. The Board has not alleged any defects in the work, and by all accounts has received the essential benefit of its bargain, except for certain alleged punch list items and decertification of the paving of the 0parking lot and tennis courts, which it was allowed to deduct from AMICO's recovery had it provided proof of damages.3 This case arose because the Board refused payment to AMICO, even when the architect and construction manager approved the payments, based on AMICO's delay and insolvency and alleged lien claims, which, as discussed previously, was improper. The Board cannot now disclaim responsibility for all payments under the contract simply because, under the circumstances, AMICO did not comply to the utmost degree with the terms of the contract.

The Board similarly argues that AMICO failed to provide contractually-mandated insurance, and therefore it is not entitled to payment.4 AMICO, in opposition to the Board's motion, provided a certification from an authorized agent of AMICO, who provided proof of insurance and applicable warranties, including certificates of liability insurance through 2006, thereby rebutting the Board's claims. Moreover, the agent certified that "[n]ever once during [his] extended tenure as project manager for the Contract 1C takeover agreement did the Board ever complain that AMICO had failed to procure the relevant insurance, and the Board never stated that it was withholding payment to AMICO by reason of this alleged failure to maintain insurance." The agent also certified that adequate insurance was provided for Contracts 1A and 1B, supported by attached documentation. As to the insurance due upon final completion of the project, the judge, correctly, applied the substantial performance doctrine to award AMICO the contract balances, notwithstanding the lack of insurance.

III.

In addition to the contract balances, the court granted judgment to AMICO for $373,3425 for extra work performed at the direction of the architect, who ordered the work done on behalf of the Board. Because the judge's determination was based on stipulated facts, we review that decision de novo. Manalapan Realty, L.P. v. Twp. Comm., 140 N.J. 366, 378 (1995).

The extra work at issue involves claims for work AMICO performed as a result of field or letter directives issued by the architect. It is undisputed that the architect directed the work to be done and that AMICO performed the work; there is also no dispute as to the value of the work. The disputed claims involve investigation and remediation work relating to a leak in one of the schools caused by an HVAC contractor, paving work, and costs resulting from a directive to perform certain work out of order. Even though the architect had directed AMICO to perform the work, the Board did not execute change orders for these claims.

The contracts make clear that the architect was acting as an agent for the Board. Article 4.6.1 states: "The Construction Manager and Architect will provide administration of the Contract as described in the Contract Documents, and will be the Owner's representatives (1) during construction, (2) until final payment is due. . . ." (Emphasis added). Further, in issuing the directives to perform the work at issue, the letters from the architect explicitly stated that the instruction was on behalf of the Board.

In addition, AMICO submitted the claims to the Board via the architect "at the time [it] was directed by the Project architect to perform the items of extra work. . . ." While the contracts required any changes to be approved by the Board through a change order or CCD, the judge found clear and convincing evidence to support the Board's waiver of the contractual requirement for a change order or CCD.

Establishing waiver is a high hurdle

It is fundamental that waiver involves the intentional relinquishment of a known right and, thus, it must be shown that the party charged with the waiver knew of his or her legal rights and deliberately intended to relinquish them. Waiver must be evidenced by a clear, unequivocal and decisive act from which an intention to relinquish the right can be based. Waiver implies an election by the party to dispense with something of value or to forego some advantage which that party might have demanded and insisted upon. It must be supported by either an agreement with adequate consideration, or by such conduct as to estop the waiving party from denying the intent to waive.

 
[Petrillo v. Bachenberg, 263 N.J. Super. 472, 479-80 (App. Div. 1993) (citations omitted), aff'd, 139 N.J. 472 (1995).]

The "mere performance of extra work does not give rise to the waiver of a construction contract provision requiring that the authority for the extra work be in writing. . . ." Home Owners Constr. Co. v. Glen Rock, 34 N.J. 305, 316 (1961) (citing Guizzette v. Katrek, 124 N.J.L. 461, 464 (Sup. Ct. 1940)). However, "the writing requirement may be expressly or impliedly waived by the clear conduct or agreement of the parties or their duly authorized representatives." Ibid. (citing Headley v. Cavileer, 82 N.J.L. 635, 637 (E. & A. 1912)).

The evident danger of imposition must, of course, be carefully guarded against and the burden of proof must rest firmly on the plaintiff; however, if there is clear and convincing evidence at the trial supporting the plaintiff's assertions, the jury may be permitted to find that, under the particular circumstances presented, the plaintiff is fairly and justly entitled to recover. . . .

[Id. at 317 (citations omitted) (emphasis added).]

The judge did not err in finding, under these unique circumstances, that the Board waived the requirement for a change order or CCD. By the time this work was performed, the Board had already ceased paying AMICO, even on fully executed payment applications. The Board's argument on appeal is essentially that AMICO was not required to perform the work it specifically demanded through the architect because there was not a formal change order or CCD. AMICO was given a directive from the Board through the architect, which it then was charged under the contract with carrying out under Article 4.7.7.1.6 AMICO complied with the contract by submitting the claim to the Board through the architect, and the Board did not act by either submitting a change order or CCD or telling AMICO not to proceed with the work. AMICO, at this point not being paid for any work by the Board and seeking to complete the project, performed the work.

At its core, the waiver doctrine is an equitable device designed to allow a party that relied to its detriment to recover in spite of contractual obstacles. See Home Owners Constr. Co., supra, 34 N.J. at 316. Here, the Board had notice of these claims, but failed to act. The Board received the benefit of the extra work. The trial court correctly found that, under the circumstances, the Board was not relieved of its obligation to pay AMICO's claims for extra work.

IV.

The Board argues that the judge selectively enforced the terms of the contract in favor of AMICO because of the judge's "view that AMICO should be compensated for work performed." The Board also argues the judge usurped the architect's and construction manager's decision-making authority. We conclude these arguments are without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). We add the following brief remarks.

The judge's decision does not conflict with Ingrassia Constr. Co., Inc. v. Vernon Twp. Bd. of Educ., 345 N.J. Super. 130, 137-38 (App. Div. 2001). The judge did not usurp the decision-making authority of the architect, in fact the court relied on many of the architect's determinations, such as certifying the project as substantially complete. The judge simply concluded that the Board acted unjustly by withholding payment from AMICO (even when the payment applications were signed by the architect and construction manager) because of AMICO's alleged breach, not terminating the contract, and then failing to perform on the contract and asserting that AMICO was performing at its own risk. Given that AMICO substantially completed the work, the judge correctly awarded the contract balances to AMICO, despite its failure to meet certain prerequisites to completion.

V.

The Board argues that AMICO's insolvency resulted in a material breach of the takeover agreements and warranted its non-payment of the contract sum. The Board raises two issues: (1) whether AMICO's financial deterioration breached the performance and payment bonds when it lost its authorization to issue surety bonds from the United States Department of Treasury; and (2) whether AMICO's entry into insolvency proceedings in 2012 created a supervening failure of consideration relieving the Board from any responsibility to pay for the completed work.

As previously indicated, Republic, supra, 179 N.J. Super. at 120, a municipality or board may not "condition acceptance of a performance or maintenance bond upon its approval of the surety," as "N.J.S.A. 17:31-1 clearly bars a municipality from exercising its discretion in determining whether to approve properly executed bonds given by foreign insurance companies . . . which are authorized by statute to conduct business in New Jersey pursuant to N.J.S.A. 17:17-1(g)." As to the performance and payment bonds, the Board concedes that when the bonds were initially issued, they complied with the Bond Act requirements. Nevertheless, the Board argues that compliance with the Bond Act is an ongoing requirement that must be satisfied until the completion of the project, and that "the Bond Act and N.J.S.A. 17:31-1 must be read together to impose complementary requirements for insurance companies issuing bonds in New Jersey."

The pertinent provision of the Bond Act, N.J.S.A. 2A:44-143(a)(1), states

When public buildings or other public works or improvements are about to be constructed, erected, altered or repaired under contract, at the expense of the State or any contracting unit, . . . the board, officer or agent contracting on behalf of the State . . . shall require delivery of the payment and performance bond issued in accordance with N.J.S.[A.] 2A:44-147 and otherwise, as provided for by law, with an obligation for the performance of the contract and for the payment by the contractor for all labor performed or materials, provisions, provender or other supplies, teams, fuels, oils, implements or machinery used or consumed in, upon, for or about the construction, erection, alteration or repair of such buildings, works or improvements provided by subcontractors or material suppliers in contract with the contractor, or subcontractors or material suppliers in contract with a subcontractor to the contractor, which class of persons shall be the beneficiaries of the payment and performance bond. The board, officer or agent shall also require that all payment and performance bonds be issued by a surety which meets the following standards

(a) The surety shall have the minimum surplus and capital stock or net cash assets required by [N.J.S.A.] 17:17-6 or [N.J.S.A.] 17:17-7, whichever is appropriate, at the time the invitation to bid is issued; and

(b) With respect to all payment and performance bonds . . . (ii) if the amount of the bond is more than $3.5 million, then the surety shall hold a current certificate of authority, issued by the United States Secretary of the Treasury pursuant to 31 U.S.C. 9305, that is valid in the State of New Jersey as listed annually in the United States Treasury Circular 570 and, if the surety has been operational for a period in excess of five years, shall be rated in one of the three highest categories by an independent, nationally recognized United States rating company that determines the financial stability of insurance companies . . . .

[Emphasis added.]

The judge concluded that even accepting the Board's argument that the statutory requirements of the Bond Act are an implied obligation in the bonds, and that AMICO failed to fulfill its requirements under the Bond Act, the Board had the opportunity to terminate AMICO for this alleged breach, and failed to do so. The Board alleged that AMICO became unauthorized to issue bonds in June 2003, and, nevertheless, entered into two subsequent takeover agreements with AMICO despite apparent knowledge that it was unable to issue bonds. Thus, the judge concluded that the Board could not claim material breach for a condition that had already existed prior to entering into these agreements.

The judge did not err in this legal determination. The Board's interpretation of the Bond Act does not comport with the text of the statute. N.J.S.A. 2A:44-143(a)(1), on its face, refers only to the issuing of the bond, namely "all payment and performance bonds be issued by a surety which meets the following standards . . . ." (Emphasis added). Moreover, the Bond Act speaks in terms of what the Board must do, it does not impose obligations on the surety. Based on a plain reading of the Bond Act, it was met in this case. There is no dispute that when the payment and performance bonds were issued, AMICO met the requirements of the statute, which itself only speaks to the issuance of the bond.

The Board challenges any finding by the judge that it had actual knowledge prior to entering into the takeover agreements.7 Assuming it did not, the record reflects that the Board knew about AMICO's condition as early as June 14, 2004, approximately one month after entering into the takeover agreements for Contracts 1A and 1B. However, the Board did not rescind the contract for material breach or lack of consideration; instead, it allowed AMICO to keep working on the projects to bring them to substantial completion, and then alleged that AMICO's breach of the bonds vindicated any responsibility by the Board to pay for the work performed. The Board, therefore, is not entitled to relief.8

As to AMICO's 2012 insolvency, the Board alleges that it represented a failure of consideration the Board was to receive under the performance bonds. See In re Integrity Ins. Co., 147 N.J. 128, 135-36 (1996) ("On the date of liquidation, Integrity breached its contract with every policyholder, because it repudiated its prior promise to provide insurance and bear future losses."). However, the record is clear that AMICO substantially completed the projects in late 2004. Thus, by the time AMICO became insolvent, the work had already been done, and the lawsuit was ongoing. The Board cannot claim that the 2012 insolvency was a supervening failure of consideration for work performed eight years earlier. Thus, Integrity is inapposite.

VI.

The Board asserts that AMICO is liable for liquidated and actual damages for delayed performance by D&D prior to termination, and by AMICO after it took over the projects. Originally, the Board argued it was entitled to a set-off as a "mutual debt" under the Uniform Insurers Liquidation Act (the Act), N.J.S.A. 17:30C-1 to -31. The judge rejected that argument and, as noted previously, we affirmed. The Illinois Circuit Court reached the same conclusion. At the summary judgment stage, the Board argued that the prior decisions only barred its affirmative counterclaim for a set-off, not its defense for recoupment. Plaintiff argued below, and the judge agreed, that allowing the Board to assert essentially the same claim couched as an affirmative defense would defeat the purpose of the Act, namely centralizing all claims in one forum. The judge granted summary judgment to AMICO on the issue.

It is well established that summary judgment may be granted when, considering the evidence in the light most favorable to the non-moving party, there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. R. 4:46-2(c); see also Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). When reviewing an order granting summary judgment, we apply the same standards that the trial court applies when ruling on the motion. Oyola v. Xing Lan Liu, 431 N.J. Super. 493, 497 (App. Div.), certif. denied, 216 N.J. 86 (2013).

Recoupment is an equitable defense that allows a party with an otherwise barred claim to assert it as a defense against a party bringing suit, so long as it arises from the same transaction. Beneficial Fin. Co. v. Swaggerty, 86 N.J. 602, 608-09 (1981) (citing Bull v. United States, 295 U.S. 247, 262, 55 S. Ct. 695, 700-01, 79 L. Ed. 2d 1421, 1428 (1935)). The Supreme Court explained

Inherent in the concept of recoupment is the notion of fundamental fairness. Rothensies v. Electric Battery Co., 329 U.S. 296, 299, 67 S. Ct. 271, 272, 91 L. Ed. 296 (1946). The underlying policy is "to permit a transaction which is made the subject of suit by a plaintiff to be examined in all its aspects, and judgment to be rendered that does justice in view of the one transaction as a whole." [Ibid.] New Jersey similarly defines recoupment as "the reduction of a claim because of an offsetting claim arising out of exactly the same transaction . . . ." Gibbins v. Kosuga, 121 N.J. Super. 252, 258 (Law Div. 1972). In Atlantic City Hospital v. Finkle, 110 N.J. Super. 435 (Cty. Ct. 1970), a hospital sued a former patient within two years of the date of his hospitalization to recover the cost of services. A counterclaim filed by the patient after expiration of the two-year statute of limitations for personal injury actions sought recovery for injuries allegedly sustained during the patient's hospital stay. In denying the hospital's motion for summary judgment, the court stated that "[r]ecoupment is never barred by the statute of limitations so long as the main action is timely." Id. at 439.

Recoupment is distinguishable from setoff in that the latter involves an affirmative recovery on a claim that may be independent of the transaction upon which the plaintiff's claim is based. While recoupment may be utilized only to reduce or extinguish the plaintiff's recovery, setoff may be awarded for any amount to which the defendant is entitled. Gibbins[], supra, 121 N.J. Super. at 257; Household Fin. Corp. v. Pugh, Minn., 288 N.W.2d 701, 704 (Sup. Ct. 1980). To the extent that the court in []Finkle,supra, indicated that recoupment may exceed the plaintiff's claim, that case is disapproved. See generally 20 Am.Jur.2d, Counterclaim, Recoupment, and Setoff, 11 (1965).

[Swaggerty, supra, 86 N.J. at 609 (alterations in original).]

Recoupment has three essential elements: "(1) [a] single transaction, as opposed to related or connected transactions; (2) [a]n identity of interests among parties; and (3) [a] need to balance the equities." Midlantic Nat. Bank v. Georgian, Ltd., 233 N.J. Super. 621, 626 (Law Div. 1989) (citation omitted).

The Board is correct that the Act does not explicitly address defenses. N.J.S.A. 17:30C-5(b) states

The court may, at any time during a proceeding under this act, issue such other injunctions or orders as may be deemed necessary to prevent interference with the commissioner or the proceeding, or waste of the assets of the insurer, or the commencement or prosecution of any actions, or the obtaining of preferences, judgments, attachments or other liens, or the making of any levy against the insurer or against its assets or any part thereof.

[see also 215 Ill. Comp. Stat. 5/189.]

The Board argues that allowing a recoupment defense is equitable because it simply allows it to offset AMICO's recovery, as it cannot recoup more than any recovery by AMICO, and that any recoupment can be reduced from its recovery in the insolvency proceeding in Illinois, where its claim for damages will be adjudicated. Thus, the Board claims, it was error to bar its recoupment defense.

We are unpersuaded by this argument. Allowing a recoupment defense will, in practice if not in theory, create a preference. This means that it is unfair to AMICO's other potential creditors that the Board will be able to reduce or perhaps wholly eliminate AMICO's claim, which is money that could have then become part of the assets to be distributed in the Illinois insolvency proceedings. And a recoupment defense essentially allows the Board to recover for its otherwise barred counterclaim, and thereby elevate itself above other creditors. This is not what was contemplated by the Act. See Superintendent of Ins. of State of N.Y. v. Int l Equip. Leasing, Inc., 247 N.J. Super. 119, 121 (App. Div.), (stating that "[t]he Act provides for a uniform, orderly and equitable method of making and processing claims against defunct insurers and provides for a fair procedure to distribute the assets of defunct insurers") (citation omitted), certif. denied, 126 N.J. 389 (1991).

The Board's remaining arguments on this issue are "without sufficient merit to warrant discussion in a written opinion." R. 2:11-3(e)(1)(E).

VII.

Because we conclude that the trial court correctly determined that AMICO is entitled to the contract balances under the substantial performance doctrine, we need not address whether AMICO is entitled to recovery in quasi-contract.

Affirmed.

1 The contracts were designated as Contracts 1A, 1B, and 1C. Contract 1A involved "East End and West End School Additions and Alterations/General Construction in the amount of $4,340,000." Contract 1B involved "Middle/High and Stonybrook Schools/General Construction in the amount of $3,950,000." And Contract 1C involved "Somerset School/General Construction in the amount of $7,230,000."

2 The merits of the Board's recoupment defense will be addressed, infra.

3 We note that the Board has had use of both the paved tennis courts and parking lot, with no proven remediation costs to date.

4 The Board's arguments that AMICO failed to satisfy these contractual preconditions was not raised until the motions in limine stage, after partial summary judgment was granted.

5 This figure represents the total extra work, $417,153, less $43,811, which was supported by Construction Change Directives (CCD) and therefore not challenged by the Board.

6 Article 4.7.7.1 states, in pertinent part

If Contractor disputes a decision (i) that a change has occurred; (ii) whether a change in the work will result in adjustment of its compensation or applicable schedules; or (iii) the amount of any adjustment of compensation or applicable schedules, the Contractor shall nevertheless carry out the change if directed to do so by Owner.

7 The Board alleges that it had no actual knowledge that AMICO became unauthorized to issue any new bonds as a result of its financial condition prior to entering into the takeover agreements for Contracts 1A and 1B. However, if the Bond Act is indeed an ongoing requirement, as the Board contends, then the Board was charged under the Bond Act to know whether AMICO met the statutory requirements, as it is the Board's duty to ensure that the bonds meet the listed criteria in the Act.

8 As to the Board's argument that common law principles require AMICO to remain solvent, we conclude it lacks sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).