Summary
noting that applicability of section 13 to this type of situation is an open question in the Ninth Circuit
Summary of this case from United Pac. Energy Operations Consulting, Inc. v. Gas & Oil Techs. Inc.Opinion
NO. CIV. S-08-1732 LKK/DAD.
November 25, 2008
ORDER
Plaintiffs in this case are two entities owned by the Platner family: MRW, a California corporation, and 500 Luther Road ("500 Luther"), a California limited liability company. Plaintiffs claim that defendants Big-O Tires ("Big-O") and CIT Small Business Lending Corporation ("CIT") used inaccurate market data and appraisal methods to induce plaintiffs to enter into an unprofitable Big-O Tire Franchise Agreement.
The complaint includes four causes of action: three against CIT, for (1) Intentional misrepresentation of the viability of the Big-O franchise; (2) Negligent misrepresentation of the viability of the Big-O franchise; and (3) Breach of fiduciary duty; and a fourth against Big-O, for unfair competition in violation of California Business and Professions Code § 17200. Defendants filed separate motions to dismiss, which together encompass all of plaintiffs' claims. These motions are currently before the court.
I. BACKGROUND
The allegations are taken from the complaint, unless otherwise noted, and are taken as true for the purpose of pending motions only.
Defendant Big-O requests the court take judicial notice of court files relating to prior litigation and various documents relating to the franchise agreement.
Because the court files are matters of public record, the court must grant Big-O's request for judicial notice of them. Fed.R.Evid. 201. A court may properly consider such records in evaluating a motion to dismiss brought under Fed.R.Civ.Pro. 12(b)(6). Mack v. South Bay Beer Distributors, 798 F.2d 1279, 1282 (9th Cir. 1986), abrogated on other grounds by Astoria Federal Savings and Loan Ass'n v. Solimino, 501 U.S. 104 (1991).
The court may also consider the documents related to the franchise agreement, because they are referred to in plaintiff's complaint.
In 1999, Big-O purchased the property located at 500 Luther Road in Red Bluff, California. (Compl. ¶ 13.) Over the next three years, Big-O was unable to secure a franchisee and decided to divide the property into two parcels (Parcel A and Parcel B). (Id. ¶ 14.) Big-O obtained pre-approval from the City of Red Bluff to build a "Quick Lube" on Parcel B. (Id.) In September 2002, Wayne Platner, a member of MRW and 500 Luther, contacted Big-O regarding establishing the franchise in Red Bluff. (Id. ¶ 16.) Mr. Platner, on behalf of plaintiffs, submitted an application for the Big-O franchise in Red Bluff, which was approved in December 2002. (Id. ¶ 20.) Big-O referred plaintiffs to JSM Accounting (for franchisee accounting services) and CIT for an SBA loan. (Id. ¶¶ 21-22.)
The franchise agreement was accompanied by a loan that would enable MRW to begin operations. Big-O informed MRW that if financing the SBA loan posed any problems, Big-O would finance a separate five-year loan for tires in the amount of fifty thousand dollars, thereby reducing the total amount that would need to be requested in the SBA loan application. (Id. ¶ 23.) Big-O and CIT allegedly determined that leasing the property to plaintiffs was not financially feasible, so proposed that plaintiffs acquire the real property and equipment in a blended loan. (Id. ¶ 24.) Big-O and CIT represented that this loan would include the acquisition of (1) improvements on the property (including the building on the site), (2) fee title for the entire property, (3) seventy-five thousand dollars ($75,000) for working capital, tires, signs, and equipment, and (4) a construction loan to build the Quick Lube. (Id. ¶ 25.)
Plaintiffs entered into the Big-O Tires Franchise Agreement for the Red Bluff property in March 2003. The terms of the approved loan fell short of the originally proposed loan; the loan did not include funds for construction of the Quick Lube, it provided only half of the funding designated for signs and equipment, and it provided only fifteen thousand dollars for working capital. (Id. ¶ 26.) On or about July 2003, the loan closed. (Id. ¶ 28.)
Plaintiffs allege various acts of misconduct by CIT in this process. According to the allegations, CIT falsely represented that this loan was obtained pursuant to SBA guidelines, when CIT knew or should have known that the underlying appraisal of the property was defective, and that the guidelines were therefore violated. (Id. ¶ 42, 48.) Furthermore, CIT made the false representations with the intent to deceive and induce plaintiffs into purchasing the Red Bluff property and entering into the franchise agreement with Big-O. (Id. ¶ 44.) Plaintiffs relied on CIT's representations and would not have purchased the property or entered into the franchise agreement if they had not relied on the defendants representations. (Id. ¶ 45.) Plaintiffs also allege that CIT, as its lender, breached its fiduciary duties by deliberately using inaccurate data that did not reflect the fair market value of the interests being purchased. Id. ¶ 52. However, plaintiff did not learn of these problems until years later.
After entering the franchise agreement, plaintiffs operated the Big-O franchise for two and one-half years. They were unable to turn a profit. (Id. ¶ 29.) Plaintiffs allege that Big-O knew or should have known that the franchise would not succeed, because it knew the market data was inaccurate and that the business plan was faulty, (Id. ¶¶ 58-60) but that Big-O nonetheless intentionally lured plaintiffs, along with other small business owners, into franchise agreements. (Id. ¶¶ 62-63.)
By late 2005, the business was facing troubles. In October 2005, plaintiffs retained a consultant to help re-finance or renegotiate the loan. (Id. ¶ 29.) The consultant recommended, among other things, that plaintiffs retain Coldwell Banker to place the Big-O franchise and the Red Bluff property on the market. (Id. ¶¶ 29-30.) Plaintiffs allege that Coldwell Banker placed an initial value of one million seven hundred thousand dollars ($1,700,000) on the combined business and property. (Id. ¶ 30.)
Plaintiff's problems came to a head in two ways. In December 2005, plaintiffs failed to pay the mortgage, and CIT began foreclosure proceedings. (Id. ¶ 31.) Sometime between December 2005 and February 2006, Big-O began the process of terminating the franchise with plaintiffs. (Compl. ¶ 32, Def. Big-O's Mot. Dismiss Ex. A-3.)
Two prior suits dealt with plaintiff's conduct after termination of the franchise agreement. Pursuant to the Franchise Agreement, upon termination plaintiff was required to, among other things, cease acting as a Big-O franchise, and to discontinue the use of all Big-O copyrights, trademarks, trade names, trade dress, products, and services. (Def. Big-O's Mot. Dismiss Ex. A-1 at ¶ 20.01.) Nonetheless, Big-O contended that following the Notice of Termination, plaintiff continued to operate its franchise using the Big-O name, trademarks, and trade dress.
On June 5, 2006, Big-O filed suit against MRW in the United States District Court for the Eastern District of California seeking to enjoin MRW's continued use of defendant's copyrights, trademarks, and trade dress. (Mot. Dismiss Ex. A-4.) Big-O's complaint also included a claim alleging breach of contract. (Id.) In February 2007, the parties settled. (Id., Ex. A-6.) This settlement was adopted before plaintiff's answer was due. (Id., Ex. A-5.) The court entered the stipulated Judgment and Permanent Injunction on March 8, 2007, which prohibited plaintiff's use of the Big-O name, trade dress, etc. (Id., Ex. A-7.) The stipulated Judgment did not discuss Big-O's breach of contract claim, or any other monetary damages to which Big-O may have been entitled. (Id. Ex. A-6).
On May 25, 2007, Big-O filed a subsequent lawsuit against MRW in the District Court for the City and County of Denver, Colorado seeking money damages. (Id., Ex. A-8.) MRW moved to dismiss the complaint on the grounds that defendant's claims were barred by the previous lawsuit, wherein defendant sought recovery of the unpaid debt via the breach of contract claim. (Id., Ex. A-9.) On November 8, 2007, the Denver District Court entered an Order finding that Big-O's claims for relief in the second lawsuit should have been raised and resolved in the first lawsuit, and were therefore barred by the doctrine of res judicata. (Id., Ex. A-10.) Apparently separate from Big-O's lawsuits, in June 2006, plaintiffs and CIT entered into a forbearance to make the mortgage current by November 2006. (Id. ¶ 33.) The mortgage was eventually made current, but CIT claimed that its attorneys' fees were immediately due, requiring the parties to enter into a second forbearance. (Id.) In August 2006, in response to plaintiffs' request, CIT provided the 2005 appraisal that was taken when foreclosure proceedings were initiated on the franchise. (Id.) The 2005 appraisal concluded that the property was worth approximately seven hundred thousand dollars with a viable business and approximately five hundred thousand dollars without a viable business. (Id. ¶ 36.) In March 2007, CIT finally produced the original 2003 loan appraisal. (Id. ¶ 37.)
In August 2007, while attempting to refinance the loan with a different SBA broker, plaintiffs allege that they discovered serious defects in the methodology used and conclusions made in the 2003 loan appraisal. Specifically, plaintiffs allege that the appraisal used inappropriate market data based on real estate in Phoenix, Arizona, and significantly overstated the value of the Red Bluff property. (Id. ¶ 39.)
II. STANDARD
In order to survive a motion to dismiss for failure to state a claim, plaintiffs must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007). While a complaint need not plead "detailed factual allegations," the factual allegations it does include "must be enough to raise a right to relief above the speculative level." Id. at 1964-65.
The Supreme Court recently held that Federal Rule of Civil Procedure 8(a)(2) requires a "showing" that the plaintiff is entitled to relief, "rather than a blanket assertion" of entitlement to relief. Id. at 1965 n. 3. Though such assertions may provide a defendant with the requisite "fair notice" of the nature of a plaintiff's claim, the Court opined that only factual allegations can clarify the "grounds" on which that claim rests.Id. "The pleading must contain something more . . . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of action." Id. at 1965, quoting 5 C. Wright A. Miller, Federal Practice and Procedure, § 1216, pp. 235-36 (3d ed. 2004).
The holding in Twombly explicitly abrogates the well established holding in Conley v. Gibson that, "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." 355 U.S. 41, 45-46 (1957); Twombly, 127 S. Ct. at 1968.
On a motion to dismiss, the allegations of the complaint must be accepted as true. See Cruz v. Beto, 405 U.S. 319, 322 (1972). The court is bound to give the plaintiff the benefit of every reasonable inference to be drawn from the "well-pleaded" allegations of the complaint. See Retail Clerks Int'l Ass'n v. Schermerhorn, 373 U.S. 746, 753 n. 6 (1963). In general, the Complaint is construed favorably to the pleader. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Harlow v. Fitzgerald, 457 U.S. 800 (1982). Nevertheless, the court does not accept as true unreasonable inferences or conclusory legal allegations cast in the form of factual allegations. W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).
III. ANALYSIS
A) Defendant CIT's Motions (Plaintiff's First, Second and Third Claims)
1) Plaintiffs' Fraud Claims (First and Second)Defendant seeks to dismiss plaintiffs' first two claims, both alleging fraud, on the grounds that plaintiffs fail to plead with sufficient particularity the circumstances constituting fraud.
Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.Pro. 9(b). The Ninth Circuit has held that "a pleading is sufficient under Rule 9(b) if it identifies the circumstances constituting fraud" including "the times, dates, places, benefits received, and other details of the alleged fraudulent activity." Neubronner v. Milken, 6 F.3d 666, 671-672 (9th Cir. 1993) (internal citations omitted). The purpose of this standard is to ensure that defendants are given "notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." Id.
Plaintiffs' first cause of action, for intentional misrepresentation, alleges that CIT "falsely represented to Plaintiff that the Loan was obtained pursuant to SBA guidelines" when CIT "knew . . . that these representations were false." (Compl. ¶¶ 42, 44.) Plaintiffs' argument is apparently that the appraisal underlying the underwriting process was known to be defective. However, it is not clear to the court that this allegation sufficiently identifies a particular fraudulent representation, when or where this representation took place, or other facts necessary to put CIT on notice of the conduct which is alleged to constitute fraud. Plaintiff's discussion of defendant's obstinance, in 2005, in providing a copy of the earlier appraisal, while it might e the basis of an inference, does not meet Rule 9's particularity requirement. Indeed, it is unclear how, or even whether, the faulty appraisal or some consequence thereof was communicated to plaintiffs.
Plaintiff's second cause of action, for negligent misrepresentation, alleges "[CIT] made these representations concerning the Loan to Plaintiff [without] reasonable ground for believing that the representations were true," and with the intent to induce plaintiffs to enter the franchise agreement. (Compl. ¶ 48.) This cause of action does not identify any particular representations, but it incorporates by reference all preceding paragraphs. This allegation is also insufficient.
For the reasons set forth above, plaintiffs' first and second causes of action are dismissed with leave to amend.
2) Plaintiffs' Breach of Fiduciary Duty (Third) Claim
Defendant CIT moves to dismiss plaintiffs' third cause of action, for breach of fiduciary duty, on the ground that defendant did not owe such a duty.
California does not impose a fiduciary duty on lending institutions with respect to borrowers:
The relationship between a lending institution and its borrower-client is not fiduciary in nature. A commercial lender is entitled to pursue its own economic interests in a loan transaction. This right is inconsistent with the obligations of a fiduciary which require that the fiduciary knowingly agree to subordinate its interests to act on behalf of and for the benefit of another.Nymark v. Heart Fed. Sav. Loan Association, 231 Cal. App. 3d 1089, 1093 fn. 1 (1991) (citations omitted).
Plaintiffs seek to rely on a later passage in Nymark, arguing that the case articulates a five-part test for when a fiduciary duty is owed. This test, however, determines when a general duty of care exists sufficient to support a claim for negligence, and not a fiduciary duty. Id. at 1095. Therefore, plaintiff's third cause of action is dismissed. Because a lender does not ordinarily have a fiduciary duty, the court is inclined to dismiss with prejudice. Nonetheless, because it is conceivable, even if unlikely, that other facts would support a fiduciary claim, this too will be dismissed without prejudice.
B) Defendant Big-O's Motion (Plaintiffs' Fourth Claim)
Defendant Big-O argues that plaintiffs' claims are barred by the prior litigation between MRW and Big-O. Defendant packages this argument in two ways: (1) claim preclusion, and (2) plaintiffs' current claims were compulsory counterclaims plaintiff MRW failed to bring in the prior suit, pursuant to Fed.R.Civ.Pro. 13(a). As explained below, both of these arguments fail. 1) Claim Preclusion
This court uses the term "claim preclusion" rather than the less precise term "res judicata." "The preclusive effect of a judgment is defined by claim preclusion and issue preclusion, which are collectively referred to as res judicata." Taylor v. Sturgell, ___ U.S. ___, 128 S. Ct. 2161, 2171 (2008) (internal quotations and citations omitted). See also People v. Barrangan, 32 Cal. 4th 236, 252-253 (Cal. 2004). The parties agree that claim preclusion, rather than issue preclusion, is at issue in this case.
Defendant Big-O's argument for claim preclusion has a superficial appeal. Not only have MRW and Big-O already litigated two cases related to the franchise, but MRW successfully asserted claim preclusion against MRW in the second of those cases. However, the fact that some claims between two parties are precluded does not mean that all claims between them are so barred. Therefore, the court turns to application of the relevant test for claim preclusion.
The inquiry begins with a question of choice of law. When sitting in diversity, a Federal court must apply the claim preclusion law of the state in which it sits. Taylor v. Sturgell, ___ U.S. ___, 128 S. Ct. 2161, 2171 n. 4 (2008), see also Costantini v. Trans World Airlines, 681 F.2d 1199, 1201 (9th Cir. 1982). Thus, this federal court must ask what effect a California court would give to the prior judgment. California courts determine the preclusive effect of prior federal judgments by following federal preclusion rules. Costantini, 681 F.2d at 1201. Thus, the federal standards for claim preclusion are applicable in the present case to determine the preclusive effect of the prior federal judgment. Id.
Under federal law, claim preclusion applies if there is (a) an identity of claims; (b) a final judgment on the merits; and (c) identity or privity between parties. FTC v. Garvey, 383 F.3d 891, 897 (9th Cir. 2004).
a) Identity of the Claims
The crucial question is whether plaintiff has stated in the instant suit a cause of action different from those raised in the first suit. Costantini, 681 F.2d at 1201; see also Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 322 F.3d 1064, 1077 (9th Cir. 2003). The Ninth Circuit determines the identity of claims by applying the following criteria:
(1) whether rights or interest established in the prior judgment would be destroyed or impaired by prosecution of the second action; (2) whether substantially the same evidence is presented in two actions; (3) whether the two suits involve infringement of the same right; and (4) whether the two suits arise out of the same transactional nucleus of facts.Costantini, 681 F.2d at 1201-1202. The last of these criteria is the most important. Id.; see also Cent. Delta Water Agency v. United States, 306 F.3d 938, 952 (9th Cir. 2002). Accordingly, the court begins with this criterion.
i) Transactional Nucleus of Facts
Two events are part of the same transaction if they are related to the same set of facts and could conveniently be tried together. Western Systems, Inc. v. Ulloa, 958 F.2d 864, 872 (9th Cir. 1992). In applying this test, the court must construe the scope of the earlier action narrowly. Cent. Delta Water Agency, 306 F.3d at 952; see also United States v. Oregon, 470 F.3d 809, 816 (9th Cir. 2006).
In addressing the nucleus of facts test, the court in Central Delta Water Agency explained that a series of prior actions, each challenging small releases of water from a variety of release points under the then current water management plan, did not arise out of the same nucleus facts as the subsequent case, which challenged a different release point, different quantities of water to be released, and a new management plan. Id. at 952. As such, the court held that the prior actions did not preclude the subsequent lawsuit, although the cases shared many similarities.Id. Central Delta Water Agency drew support from Fund for Animals v. Lujan, 962 F.2d 1391, 1398 (9th Cir. 1992). In Fund for Animals, plaintiffs challenged the bison management practices of the federal government. Id. The court held that "an action challenging bison management practices five years earlier did not have preclusive effect, because the earlier action challenged different governmental conduct than that involved in the later action, even though the harm alleged was the same." Id. at 1398.
Defendant Big-O's initial lawsuit against plaintiff MRW sought to enforce the franchise agreement and to enjoin use of defendant's trademarks (based on the franchise agreement and independent theories, such as the Lanham Act). (Def's Mot. to Dismiss 11:13; see also Ex. A-4.) One element implicit in these claims was the validity and enforceability of the franchise agreement. However, the allegations in that suit centered on the parties' conduct after the franchise was established, and facts calling the agreement into question were not implicated. See Big O Tires, Inc. v. MRW, Inc., 2006 U.S. Dist. LEXIS 54507 (E.D. Cal. 2006).
The present lawsuit arises out of the relationship between plaintiffs and the defendant leading up to the initiation and negotiation of the Franchise Agreement and the alleged misrepresentations made to induce plaintiffs into entering the Franchise Agreement. Specifically, the Complaint alleges that the defendant recommended that plaintiff use JSM and CIT for their accounting and lending needs, respectively. (Compl. ¶¶ 21-22.) Furthermore, plaintiffs have alleged that the defendant represented: (1) that if financing the SBA loan presented any problems it would finance a five year loan for tires in the amount of $50,000; (2) that the traditional lease of the property was not financially feasible and recommended that plaintiff buy the property, which plaintiff subsequently did; and (3) that defendant was working with CIT to ensure that plaintiff's loan would be approved. (Id. ¶¶ 23-25.) Plaintiffs allege that these representations were false, because defendant knowingly used inaccurate market data, loan appraisals, and faulty business plans to sell Big-O Tire franchises to the public that it knew or should have known would not succeed. (Id. ¶¶ 58-63.) However, plaintiff, in this suit, does not challenge the validity of the agreement itself. Rather, plaintiff seeks damages for having been falsely induced to enter the agreement.
In sum, although the past and present claims share the same players, the operative facts underlying the particular claims differ. For the most part, the past and present claims concern conduct that occurred at different times, separated by the adoption of the franchise agreement. The separation is less than what was found in Fund for Animals and Central Delta Water Agency: those cases considered the effect of a past suit considering similar issues, but without a common thread analogous to the single franchise agreement here. Nonetheless, mindful ofCentral Delta Water Agency's command to construe past actions narrowly, the court concludes that this factor indicates against finding identity of claims.
ii) Remaining Factors in Determining Identity of Claims
Although the first factor (transactional nucleus of facts) is the most important, courts have not held that it is clearly dispositive as to whether claims are identical for purposes of preclusion. Therefore, this court must address the remaining factors considered by Ninth Circuit cases. These factors also suggest against finding identity between the two suits' claims.
First, the current suit is unlikely to destroy or impair the rights established in the prior suit. Costantini, 681 F.2d at 1201-1202. The previous case established a right for defendant to not have plaintiff use defendants' trademarks. The injunction establishing this right would not be impaired by a finding that defendant had engaged in unfair business practices within the scope of Cal. Bus. and Professions Code § 17200. More generally, because the remedies available to a private party bringing an unfair competition claim are limited to injunctive relief and restitution, this claim could not result in rescission of the franchise agreement itself, and will not effect the results of a previous adjudication based on that agreement.
Second, the current litigation is unlikely to involve substantially the same evidence. Id. It is likely that the Franchise Agreement would be admitted to give context to the relationship between the plaintiffs and the defendant. However, plaintiffs' claim does not rely on the content of the Franchise Agreement or any provisions contained therein.
Third, the current litigation does not involve the infringement of the same right as the previous action. Id. This factor is difficult to apply when the party against whom preclusion is sought was the defendant in the prior action. Nonetheless, the rights involved plainly differ. In the present action, plaintiffs brought suit to protect against defendant's alleged deceitful behavior and violation of California Unfair Trade Practices Act. In contrast, the First Lawsuit dealt with federal and state protections of defendant's trademarks.
iii) Together, These Factors Indicate Against Identity of Claims, and Therefore Against Claim Preclusion
Although there are some connections between the current and past suits, these connections are weak enough that each of the factors traditionally considered in evaluating the identity of claims indicates against finding such an identity. Therefore, defendant cannot satisfy the first element necessary for claim preclusion; plaintiffs' current claim is not barred by claim preclusion.
b) Final Judgment on the Merits and Identity or Privity of Parties
Because defendant has failed to show identify of claims, the court need not analyze whether these prongs have been satisfied.
2) Failure to Plead a Compulsory Counterclaim under Fed.R.Civ.Pro. 13(a)
Defendant Big-O's second argument for dismissal is that that plaintiffs' claim should have been brought as a compulsory counterclaim in the prior suit, and is therefore barred by Federal Rule of Civil Procedure 13(a). FRCP 13(a) provides that
a pleading must state as a counterclaim any claim that — at the time its service — the pleader has against the opposing party if the claim:
(A) arises out of the transaction or occurrence that is the subject matter of the opposing party's claim; and
(B) does not require adding another party over whom the court cannot acquire jurisdiction.
Defendant's argument raises three issues. The first is whether plaintiff's current claims were compulsory counterclaims in the prior suit. The second is what consequence, if any, follows from failure to raise counterclaims in a suit that is resolved before any responsive pleading is filed. The final issue is whether MRW's failure to raise a compulsory counterclaim could bar 500 Luther's claim in the present suit.
a) Whether The Current Claims Would Have Been A Compulsory Counterclaim
In the Ninth Circuit, whether two claims "arise out of the [same] transaction or occurrence" (under FRCP 13(a)) is not the same question as whether they "arise out of the same transactional nucleus of facts" (for purposes of claim preclusion). A claim satisfies the first description, and is thus a compulsory counterclaim, if it has a "logical relationship" with the primary claim. In re Pinkstaff, 974 F.2d 113, 115 (9th Cir. 1992) (citing Pochiro v. Prudential Ins. Co. of America, 827 F.2d 1246, 1249 (9th Cir. 1987)); see also In re Pegasus Gold Corp., 394 F.3d 1189, 1195-1196 (9th Cir. 2005).
It is unclear what the difference, if any, is between these two tests. Although the language used to describe them suggests that they reach the same issues, and should therefore produce the same result, this court is not aware of any decisions discussing their relation to one another. Wright Miller's treatise suggests that the test under FRCP 13(a) is broader than the test for identity of claims under claim preclusion. Wright Miller § 1410 ("Rule 13(a) [applies] to any counterclaim that from an economy or efficiency perspective could be profitably tried with the main claim."). Absent any authority indicating whether these tests are the same, or the relationship between the tests, this court simply conducts a separate analysis of the cases interpreting FRCP 13(a), and does not reach a conclusion on the relation between these tests.
One reason for this confusion may be that most cases interpreting FRCP 13(a) do so in the context of determining whether a counterclaim is compulsory and therefore eligible for federal subject matter jurisdiction, rather than to determine the effect of past failure to raise a counterclaim (when preclusion might also be an issue).
"A logical relationship exists when the counterclaim arises from the same aggregate set of operative facts as the initial claim, in that the same operative facts serve as the basis of both claims or the aggregate core of facts upon which the claim rests activates additional legal rights otherwise dormant in the defendant." In re Pegasus Gold Corp., 394 F.3d at 1196 (internal citation omitted).
Courts applying this test have found a logical relationship between claims sharing only a few facts. In Pochiro, the plaintiff had previously been sued by Prudential Insurance for breach of an employment contract, unfair competition, and interference with business relations. 827 F.2d at 1250. These claims in the first suit centered on allegations that the plaintiff, "when employed by Prudential as an agent, was given confidential records about Prudential's present and prospective policyholders. Then, after resigning from Prudential, [he] failed to return the records to Prudential and instead used them in soliciting business in competition with Prudential." Id. The plaintiff (defendant in the earlier suit) then filed a second suit against Prudential for "unlawful restraint of trade, unfair business practices, intentional interference with contractual advantage, defamation, abuse of process, intentional infliction of emotional distress, and tortious breach of employment contract." Id. The court held that all of his claims bore a logical relation to the claims in the earlier suit, and should have been raised as compulsory counterclaims. The court reached this holding even for the plaintiff's claim for defamation, which bore only an attenuated connection to the facts in the earlier suit — plaintiff complained that Prudential had called him a "crook," which the court held was related to the fact that plaintiff stole records.Id. See also Albright v. Gates, 362 F.2d 928, 929 (9th Cir. 1966) (defendant's counterclaim, seeking to recover the price defendant paid for allegedly worthless oil securities, was logically related to plaintiff's claim that defendant had slandered him regarding sales of oil securities), Wright Miller § 1410 ("In most of the cases in which a counterclaim has been held not to be compulsory it appears that the claim and counterclaim were entirely unrelated.").
Based on the minimal level of shared facts found sufficient to establish a logical relationship in Pochiro, the court concludes that in this case, plaintiffs' claims against Big-O bear a logical relationship with the claims in Big-O's earlier suit against plaintiff MRW, and were therefore compulsory counterclaims. Both claims share a relation to the franchise agreement, and Big-O's claim rested upon the validity of the franchise agreement, a "fact" that "activates additional legal rights otherwise dormant," i.e., MRW's right to challenge the agreement as the result of an unfair business practice. In re Pegasus Gold Corp., 394 F.3d at 1196.
b) Effect of Failure to Raise A Compulsory Counterclaim When No Responsive Pleading Was Filed
The Federal Rules are silent on the consequences of failing to raise a "compulsory" counterclaim. Nonetheless, courts have uniformly held that a defendant who fails to raise a compulsory counterclaim in compliance with FRCP 13(a) is unable to bring that claim in a future separate suit. See Pochiro, 827 F.2d at 1249. "The purpose and design of Rule 13(a) is to prevent multiplicity of litigation and to bring about prompt resolution of all disputes arising from common matters." International Brotherhood of Electrical Workers v. G. P. Thompson Electric, Inc., 363 F.2d 181, 184 (9th Cir. 1966) (citing Southern Constr. Co. v. United States ex rel. Pickard, 371 U.S. 57 (1962)); see also Wright Miller §§ 1409, 1407.
However, several courts have held that the bar to future suit does not arise if the defendant in the prior action did not file a responsive pleading. The Ninth Circuit is silent on this issue. However, the Fifth, Sixth, and Seventh Circuits have held that "Rule 13(a) only requires a compulsory counterclaim if the party who desires to assert a claim has served a pleading. The Rule requires the party to state such a claim 'at the time of serving a pleading.'" U.S. v. Snider, 779 F.2d 1151, 1157 (6th Cir. 1985) (citing Lawhorn v. Atlantic Refining Co., 299 F.2d 353, 356-357 (5th Cir. 1962), Martino v. McDonald's System, Inc., 598 F.2d 1079 (7th Cir. 1979). See also Mutual Fire, Marine Inland Ins. Co. v. Adler, 726 F. Supp. 478, 482-483 (S.D.N.Y. 1989) (applying this rule to claim preclusion, holding no claim preclusion against defendant in prior suit when that suit was dismissed prior to responsive pleading).
This rule is consistent with the purposes of FRCP 13(a). The contrary rule would delay settlement of issues and thereby encourage waste of judicial resources. Therefore, this court follows the rule established by the circuits that have considered this issue.
Here, both of the parties' prior suits concluded without a responsive pleading. Defendant and plaintiff MRW settled the first case by stipulated judgment prior to the time when plaintiff would have been required to file an answer. (Def. Big-O's Mot. to Dismiss, Ex. A-4, A-5, A-6, A-7.) Similarly, in the second lawsuit, MRW successfully filed for a motion to dismiss Big-O Tires claims and was never required to serve an answer. (Id., Ex. A-9, A-10.) Because there was no responsive pleading in either of the earlier cases, failure to plead a compulsory counterclaim in those cases does not bar plaintiff's claim in the instant suit.
V. CONCLUSION
For the reasons above, the court ORDERS as follows:
1. Defendant CIT's motions to dismiss Plaintiffs' First, Second and Third causes of action are GRANTED. 2. Defendant Big-O's motion to dismiss Plaintiffs' Fourth cause of action is DENIED. 3. Plaintiff is granted leave to file an amended complaint within 30 days of the date of this order. IT IS SO ORDERED.