Commercial Division Blog
Posted: July 26, 2016 / Categories Commercial, Res Judicata/Collateral Estoppel/Entire Controversy Doctrine
Res Judicata Bars Assertion of Claim That Was Compulsory Counterclaim in Prior Federal Action
On July 21, 2016, the First Department issued a decision in Paramount Pictures Corp. v. Allianz Risk Transfer AG, 2016 NY Slip Op 05618, holding that res judicata barred a claim that should have been, but was not, brought as a compulsory counterclaim in a prior federal court action, explaining:
Under the doctrine of res judicata, a final judgment on the merits of an action by a court of competent jurisdiction is binding upon the parties and their privies in all other actions or suits on points and matters litigated and adjudicated in the first suit or which might have been litigated therein. . . . Additionally, under New York's transactional analysis approach to res judicata, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy.
Notwithstanding the foregoing, we must consider the fact that New York is a permissive counterclaim jurisdiction (CPLR 3011).
Our permissive counterclaim rule may save from the bar of res judicata those claims for separate or different relief that could have been, but were not interposed in the parties' prior action. It does not, however, permit a party to remain silent in the first action and then bring a second one on the basis of a preexisting claim for relief that would impair the rights or interests established in the first action.
In Classic Autos. v Oxford Resources Corp., the doctrine of res judicata did not bar plaintiff's right to sue for return of its payment where it had failed to include a counterclaim for money damages in a prior lawsuit involving the same transaction and allowing plaintiff's claim to proceed to disposition on the merits will not upset any right or interest of either party. While we agree with plaintiff that the relief it seeks in this action (i.e., attorneys' fees incurred in the federal action) would not impair the rights or interests established in the federal action, meaning that New York's permissive counterclaim rule would save it from the traditional bar of res judicata, the inquiry does not end there where the prior action was adjudicated in a compulsory counterclaim jurisdiction.
Despite the parties' arguments to the contrary, we find that plaintiff's claim for breach of the covenant not to sue is a compulsory counterclaim under the Federal Rules of Civil Procedure (FRCP) Rule 13(a). It existed at the time plaintiff served its answer to the complaint in the federal action and arises out of the transaction or occurrence that is the subject matter of defendants' federal claim(s). To litigate it in the federal action would not have required adding another party over whom the district court could not acquire jurisdiction (FRCP rule 13[a][B]). Moreover, none of the exceptions to the rule apply (id. rule 13[a]).
While there is no binding precedent which holds that state courts must apply FRCP 13(a), the district court held that when the forum in which the prior litigation occurred was a compulsory counterclaim jurisdiction notions of judicial economy and fairness require that a party be precluded from bringing all claims that it earlier had the opportunity - exercised or not - to assert as counterclaims.
Further, the Court of Appeals has provided clear guidance on this issue in Gargiulo v Oppenheim, stating in dicta, For purposes of the disposition of this appeal we assume, without deciding, that under the procedural compulsory counterclaim rule in the Federal Courts (FRCP rule 13[a] [in 28 USC, Appendix]) claim and issue preclusion would extend to bar the later assertion in the present State court action of a contention which could have been raised by way of a counterclaim."
Based on the foregoing, we conclude that the later assertion in a state court action of a contention that constituted a compulsory counterclaim (FRCP rule 13[a]) in a prior federal action between the same parties is barred under the doctrine of res judicata.
(Internal quotations and citations omitted) (emphasis added).