Commercial Division Blog

Posted: March 1, 2018 / Categories Commercial, Res Judicata/Collateral Estoppel/Entire Controversy Doctrine

Court Of Appeals Holds That Res Judicata Effect Of Federal Judgment Extends To Unasserted Compulsory Counterclaims

On February 20, 2018, a divided Court of Appeals decided Paramount Pictures Corp. v. Allianz Risk Transfer AG, 2018 NY Slip Op 01150, affirming the First Department’s ruling that res judicata bars a party from asserting a claim in state court that constituted a compulsory counterclaim in a prior federal action.

In the prior action, the Allianz defendants had sued Paramount on various federal-law and state-law tort claims arising from their investment in a special purpose vehicle set up by Paramount. The federal action was dismissed based upon, inter alia, a covenant in the relevant agreements barring suits against Paramount. Then, Paramount filed its own action in New York County Supreme Court seeking damages from the investors arising from their breach of the covenant not to sue. The investors moved to dismiss on the grounds of res judicata, arguing that Paramount’s new claim was barred because it should have been raised in the federal action as a compulsory counterclaim under FRCP 13(a).

The Supreme Court (Oing, J.) denied the motion, ruling that New York was a permissive counterclaim jurisdiction counterclaims were not covered by res judicata. The First Department reversed, holding that the res judicata effect of federal judgement extended to compulsory counterclaims. The Court of Appeals granted leave to appeal and affirmed the First Department.

Judge Garcia, writing for a three-judge plurality, held that federal common law would determine the res judicata effect of the federal judgment, because the federal action contained both federal-law and state-law claims. The plurality then held that, under federal common law, the investors’ claims and Paramount’s counterclaim were the same “claim” for res judicata purposes, because they arose from “the same transaction or series of transactions . . . the same evidence [was] needed to support both claims, and [ ] the facts essential to the second were present in the first.”

Judge Rivera, in a two-judge concurrence, rejected as unnecessary the plurality’s decision to hold that federal common law determined the res judicata effect of a federal judgment addressing both federal-law and state-law claims. The concurrence noted that New York’s res judicata rules would result in the same outcome—res judicata is determined by the judgment’s effect in its home jurisdiction; the permissive-counterclaim rule only applies to New York judgments, not to judgments from mandatory counterclaim jurisdictions. In other words, “because the federal court would bar Paramount from filing a second action to pursue its breach of contract claim, that same claim is barred under res judicata in our New York courts.”

Finally, Judge Wilson dissented, arguing that two analyses should be performed—the state-law claims should have the res judicata effect of a forum-state judgment, and the federal-law claims should have the res judicata effect prescribed by common law, and if res judicata applied under either rule, res judicata would bar the subsequent action. Judge Wilson diverted from the plurality in his analysis of the federal common-law res judicata effects of the federal securities claim—for him, the proper question was whether a second judgment on the breach of contract claim would “nullify th[e] federal judgment or impair the rights established in the first action.” He rejected the “same transaction” analysis on the grounds that it would effectively subsume FRCP 13(a) into the common law of res judicata. Instead, he would hold that federal res judicata was narrower than FRCP 13(a), and that a second action arising from the same transaction could proceed in state court as long as it would not “nullify th[e] federal judgment or impair the rights established in the first action.” Because Paramount’s second lawsuit would not attack the first judgment, it should be allowed to proceed (regardless of whether it would be barred by FRCP 13(a) if it were filed in federal court).

Although the decision is divided and intricate, it does seem clear that—regardless of the method used—the res judicata effect of federal judgments extends to FRCP 13(a) compulsory counterclaims. Under the plurality’s reasoning, federal res judicata is functionally co-extensive with FRCP 13(a)’s mandatory counterclaim rule, and under the concurrence’s reasoning, New York would automatically follow federal res judicata, including FRCP 13(a).