Newbery Corp. v. Fireman's Fund Insurance Co.

We examine the application of the doctrine of recoupment in a breach of contract action brought by the debtor in a bankruptcy proceeding.

I

In early 1987, Newbery Electric, Inc. was a large electrical subcontractor with numerous projects pending. 1 For a number of those projects, including the one at issue in the present appeal, Newbery obtained performance and payment bonds from its surety Fireman’s Fund. The bonds guaranteed that Newbery’s work would be completed and its employees and suppliers paid. In exchange, Newbery entered into a “General Indemnity Agreement,” by which it promised to indemnify Fireman’s Fund against all losses which Fireman’s Fund might sustain because of claims on the bonds.

On or about June 2, 1987, Newbery abandoned all of the projects which Fireman’s Fund had bonded and defaulted on the bonds. On June 4, 1987, Newbery, its primary lender Citibank (Arizona), 2 and Fireman’s Fund entered an agreement (the “June 4, 1987 Agreement”). Pursuant to that agreement, Newbery transferred its bonded projects to Fireman’s Fund and allowed Fireman’s Fund to use Newbery’s equipment to complete the projects. Fireman’s Fund promised to pay rent for its use…