Opinion
No. ED77624
OPINION FILED: September 4, 2001
Appeal from the Circuit Court of St. Louis County, Honorable James R. Hartenbach.
Michael A. Campbell, 7777 Bonhomme Ave., 15th Floore, St. Louis, MO 63105, for appellant.
Thomas M. Blumenthal, 165 N. Meramec Ave., 6th Floor, St. Louis, MO 63105, for respondents.
William S. Daniel, 454 Pasadena Avenue, Suite #E, St. Louis, MO 63119-3127, Intervenor.
Meramec Valley Bank (Bank) raises several points of error on appeal stemming from a jury verdict in favor of Joel Bianco Kawasaki Plus, Inc. (JBKP) and Joel Bianco (Bianco) (collectively, Dealer) in Dealer's fraud action against Bank. But we shall only address a single point because it is dispositive of the appeal. Because we find that Dealer improperly filed this fraud action as a separate suit, even though its claim was a compulsory counterclaim to an earlier-filed replevin action by the Bank, the trial court had no jurisdiction to enter the judgment on the jury verdict. Thus, we vacate the judgment entered on the jury verdict, and remand the cause for dismissal without prejudice. Dealer may seek leave of court to assert its fraud claim as a counterclaim in the still pending replevin action.
Upon review of Dealer's motion to strike portions of the record on appeal, the motion is granted.
FACTS
Dealer operated a motorcycle and sports equipment dealership in St. Louis County. Bank provided financial assistance to Dealer through the grant of two loans and two letters of credit, one loan that was secured by Bianco and the other loan that was secured by JBKP. The notes were secured by security agreements pledging Dealer's equipment, inventory, furniture, fixtures, and accounts receivable.
On October 3, 1997, Bank filed a petition against Dealer, alleging that Dealer had breached the promissory notes and therefore Bank was entitled to both judgment on the notes and to replevin the property secured by the notes. On October 6, 1997, Bianco, on behalf of himself and as president of JBKP, was served with the petition and summons in that action, which we refer to as the replevin action.
On that same day, October 6, 1997, county sheriffs began seizing Dealer's property pursuant to an order of delivery. Then, to forestall the replevin, intensive and highly contentious negotiations ensued among Bank, Dealer, and others. The parties reached an agreement that the replevin would cease. But when negotiations broke down two days later, the replevin was completed.
Counsel for Dealer reviewed the court file on November 17, 1997, to determine whether service of process of the petition and summons in Bank's replevin action had been accomplished. However, because a sheriff's return for service of the summons and petition had not yet been filed, Dealer's attorney erroneously concluded that service had not occurred. Thereafter, on November 24, 1997, Bank filed the sheriff's return of service in the replevin action evidencing service of process on Dealer on October 6, 1997. Also on November 24, 1997, Bank sought and received an interlocutory order of default in its replevin action.
On December 10, 1997, Dealer and Frances Love, Bianco's mother, filed a separate suit against Bank. In this suit, they pleaded and submitted to the jury a fraud claim, on which they received a jury verdict. This we shall refer to as the fraud action, which is the subject of this appeal. Their petition averred that Bank made tortious misrepresentations in the agreement to forestall the original replevin. Dealer claimed that Bank misrepresented that (1) it would negotiate in good faith and work with suppliers to keep Dealer in business until a sale of the business was completed, (2) Bank would only make demand for amounts actually due and owing, (3) Bank would not interfere with the sale of Dealer's business, and (4) Bank would halt all efforts to seize property from Dealer and would not recommence the replevin without notifying Dealer. The Bank filed its answer to the fraud action on February 18, 1998, but raised no assertion that the fraud action should have been filed as a compulsory counterclaim in the replevin action.
Ultimately on March 4, 1999, some fifteen months after the interlocutory order, a default judgment against Dealer was granted in the replevin action. Dealer became aware of the default on March 23, 1999, and, on the following day, filed a verified motion to set aside the default judgment pursuant to Rule 75.01. Although Dealer did not dispute that service had occurred, it did claim that, due to the traumatic events occurring at the time of service, it was unaware that it had been served. Further, Dealer claimed that neither it nor its counsel had received notice of any pleadings in the replevin case, including the interlocutory order of default. The trial court denied the motion to vacate judgment, and Dealer appealed. On appeal, this court set aside the default judgment in the replevin action and the case was remanded.Meramec Valley Bank v. Joel Bianco Kawasaki Plus, Inc., and Joel Bianco, 14 S.W.3d 684 (Mo.App.E.D. 2000).
While the replevin action was on appeal, Dealer filed an amended petition in its fraud action. Bank then filed an amended answer, raising for the first time its assertion that Dealer's fraud claim arose from the same transaction as Bank's replevin action and should have been asserted as a compulsory counterclaim in the earlier filed replevin action. In the fraud action, the jury returned a verdict in favor of Dealer in the amount of $675,000.00. Bank filed this timely appeal.
ANALYSIS
A reviewing court has a duty to determine questions of jurisdiction sua sponte. Chromalloy American Corp. v. Elyria Foundry Co., 955 S.W.2d 1, 3 (Mo.banc 1997). Moreover, a court is not restricted to the pleadings in determining whether dismissal is warranted due to a lack of jurisdiction. Rell v. Burlington Northern R. Co., 976 S.W.2d 518, 520 (Mo.App.E.D. 1998).
In order to determine whether the trial court in this fraud action had jurisdiction to enter judgment we must determine: (1) whether this fraud action was required to be asserted as a compulsory counterclaim in the earlier-filed replevin action, and (2) whether the Bank's tardy assertion that the fraud action was a compulsory counterclaim caused a waiver of the compulsory counterclaim rule's preclusive effect.
THE COMPULSORY COUNTERCLAIM RULE
The compulsory counterclaim Rule 55.32(a) states that:
A pleading shall state as a counterclaim any claim which at the time of serving the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction.
In short, Rule 55.32 compels a party to state any claim it has against its adversary that arises out of the transaction or occurrence that is the subject matter of the suit. Meyers v. Clayco State Bank, 687 S.W.2d 256, 260 (Mo.App.W.D. 1985). The rule's purpose is to discourage separate litigation covering the same subject matter, and require the adjudication in the same action. Cantrell v. City of Caruthersville, 221 S.W.2d 471, 474 (Mo. 1949). The compulsory counterclaim rule is a means of bringing together all logically-related claims into a single litigation, through the penalty of precluding the later assertion of omitted claims. Evergreen Nat'l Corp. v. Killian Constr. Co., 876 S.W.2d 633, 635 (Mo.App.W.D. 1994), citing Clayco, 687 S.W.2d at 260-261; Cantrell, 221 S.W.2d at 474. The transaction element of the rule is to be "applied `in its broadest sense,' to encompass all claimed claims connected by a logical nexus." Clayco, 687 S.W.2d at 261, citing State ex rel. J.E. Dunn, Fr. Assoc., Inc. v. Schoenlaub, 668 S.W.2d 72, 75 (Mo.banc 1984).
In Cantrell, the Missouri Supreme Court explained that "transaction" imports a flexible meaning, may encompass a series of occurrences, and depends in application not so much upon the immediacy of connection as upon logical relationship. 221 S.W.2d at 474. Thus, "transaction" extends to include "all of the facts and circumstances which constitute the foundation of a claim" or "all the facts and circumstances out of which the injury complained of arose." Id. at 474. Moreover, "claim" refers not to the form of the action, but "to the underlying facts combined with the law giving a party a right to a remedy of one form or another based on the claim." Id. Further, "subject matter" of the claim does not equate merely with the cause of action, nor the object of the action, but rather describes the composite of "physical facts, the things real or personal, the money, lands, chattels, and the like, in the relation to which the suit is prosecuted." Id. at 475.
The compulsory counterclaim rule thus compels Dealer to state any claim it has against Bank that arises out of the transaction or occurrence which is the subject matter of the replevin action. The "transaction," broadly applied, may encompass a series of occurrences and must include all logically-related claims. Again, the "subject matter" embraces not merely the cause of action and the object of the action, but also the composite of physical facts, the things real or personal, the money, land, chattels and the like, in relation to which the suit is prosecuted. Here then, the subject matter of the replevin action, which was a suit on notes and security agreements, fully embraced the Dealer's stock-in-trade pledged as security. Given the gist of the fraud action — that the Bank made misrepresentations in the course of negotiating a "standstill agreement" as to the pending replevin action — it should be obvious that the fraud claim is a compulsory counterclaim to the earlier-filed replevin action.
This conclusion is supported by a remarkably analagous case, Myers v. Clayco State Bank. There, the Western District addressed whether the guarantors' suit for fraudulent misrepresentation arose out of the same transaction or occurrence as a bank's suit against guarantors for wrongful action on a promissory note guarantee. 687 S.W.2d 256. The court found the guarantors' fraud action constituted a compulsory counterclaim to bank's suit on the promissory note guarantee. In reaching its result, the court defined the transaction or occurrence to include both the bank's right to sue on the promissory note guarantees and any suit giving remedy to such right. In other words, the "transaction" encompasses "the claims of the guarantors of injury from the wrongful motive to suit ." Clayco, 687 S.W.2d at 261.
Similarly, here Bank filed an action based upon promissory notes and security agreements entered into with Dealer, and Dealer then filed a petition for fraud against Bank. In applying the principles enunciated inClayco and other Missouri cases, we must define the transaction of the Bank's suit broadly to include not only the right to sue on the promissory notes and security agreements, but also to encompass Dealer's right to a remedy for Bank's allegedly wrongful replevin action. Therefore, we hold that Dealer's fraud claim was a compulsory counterclaim to Bank's replevin action.
That the misrepresentations alleged in the fraud action occurred after Bank's petition in the replevin action was filed does not change the result. Rule 55.32(a) contains no such safe harbor. In requiring the filing of all counterclaims extant "at the time of serving the pleading," the Rule mandates the filing of all counterclaims that have "matured" by the time the responsive pleading is due. Port v. Maple Tree Investments, Inc., 900 S.W.2d 3, 5 (Mo.App.W.D. 1995); Beasley v. Mirotuck, 877 S.W.2d 653, 655 (Mo.App.E.D. 1994). A counterclaim has "matured" when the damage resulting therefrom is sustained and capable of ascertainment. Port, 900 S.W.2d at 5; Clayco, 687 S.W.2d at 263. Here, by the due date of the answer to the replevin action, all damage resulting from the fraud claim was capable of ascertainment.
Nor is the consequence altered by the fact that the judgment in the replevin action, until set aside, was by default. We perceive no reason to "save" a defaulting party's compulsory counterclaim for later litigation as a separate suit. To do so would reward the defaulting party and help defeat the purposes of the compulsory counterclaim rule. Federal authorities, interpreting Rule 13(a), the model for our Rule 55.32(a), are in accord. Carteret Savs. Loan Ass'n. v. Jackson, 812 F.2d 36 (1st Cir. 1987); Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155 (2nd Cir. 1992).
Lastly, the force of the compulsory counterclaim rule is not lessened by the circumstance that Dealer claims to have been unaware of its being served in the replevin action. In State v. Moss, 392 S.W.2d 260 (Mo. 1965), the Missouri Supreme Court provided a lengthy explanation of the purpose and construction of Rule 55.45(a), the predecessor to Rule 55.32. There, the court stated that "[a] party can no longer avoid the impact of the compulsory counterclaim rule by bringing an independent action in another court after the commencement of the original action but before such party files his responsive pleading." Id. at 262. Instead, the court held that jurisdiction lies with the court where the petition was first filed, and whether a party is served with the petition prior to filing its second action is immaterial and would nullify the clear language of the rule. Id at 263. Therefore, the rule prevents the party, who has filed a later lawsuit, from avoiding the compulsory counterclaim rule by hurrying to file his own suit and then hiding out or persuading the officer to serve process in his suit first. Id.; Kincannon v. Schoenlaub, 521 S.W.2d 391, 393 (Mo. 1975).
Although Dealer claimed that he was entitled to have the default judgment set aside in the replevin action because he was unaware that service of process occurred, this was because he needed only to demonstrate "good cause" under the liberal standard of Rule 75.01. But our circumstances are different here. The law does not favor justice by default; it does, however, favor justice from a single trial. Dealer cannot claim to have been unaware of the pendency of the replevin action, even if he does claim to have been unaware of service of process. In fact, counsel for Dealer reviewed the court file in the replevin action on November 17, 1997. Then, in remarkable disregard of the compulsory counterclaim rule, filed this fraud action as a separate suit against the Bank some three weeks later. There is no claim that whatever amnesia afflicted the Dealer as to service of process also dimmed his counsel's memory as to the pendency of the replevin action. Under the clear holding of Moss, it is the first-filed action that takes precedence. Dealer's filing of the fraud action as a separate action violated the dictate of the compulsory counterclaim rule.
The consequence of the rule's violation is dire. A failure to plead a compulsory counterclaim bars a party from bringing a later independent action on that claim. Clayco, 687 S.W.2d at 261, citing Cantrell, 221 S.W.2d at 474. Or as our Supreme Court has concisely characterized the preclusive effect of the rule's violation — use it or lose it.Becker Glove Int'l v. Jack Dubinsky Sons, et al., 41 S.W.3d 885 (Mo.banc 2001). Of course, if the sanction imposed for the rule's violation was not preclusion of the omitted compulsory counterclaim, there would be scant reason to refer to the counterclaim as compulsory.
WAIVER
Dealer next urges that the Bank's tardy assertion that the fraud action was a compulsory counterclaim to the replevin action has caused a waiver of the compulsory counterclaim's preclusive effect.
Missouri courts have held that when a barred compulsory counterclaims is filed as a separate suit, the trial court in the barred action "has no power or authority to proceed while the action first begun is pending."State ex rel. Buchanan v. Jensen, 379 S.W.2d 529, 531 (Mo. 1964); see Kincannon, 521 S.W.2d at 393. It has also been said that the court in the barred action "lacks jurisdiction." Evergreen Nat'l, 876 S.W.2d at 634. In addition, we held in Rell that the trial court in the barred action lacked subject-matter jurisdiction which, as such, is not subject to waiver. 976 S.W.2d at 520. Moreover, there is no authority for the proposition that parties may waive compulsory counterclaims or other procedural matters that affect judicial economy rather than the parties' due-process rights. Evergreen Nat'l, 876 S.W.2d at 635. We therefore conclude that the compulsory counterclaim's preclusive effect is not subject to waiver.
CONCLUSION
It is unfortunate that a judgment after a four-day jury trial before an eminent trial judge must be vacated. But the mischief here is of Dealer's own making. Although certainly Bank did the court no favor by its tardy invocation of the compulsory counterclaim rule, the original sin was Dealer's in its separate filing of an obvious counterclaim. The tragic waste of judicial resources witnessed here is among the evils the compulsory counterclaim rule is designed to avoid. Had Dealer heeded the rule's injunction, it would not now be bereft of its vanishing verdict. The harsh effects of the rule are somewhat ameliorated under the unusual circumstances of this case. Because the replevin action is still pending, Dealer may seek leave to file this fraud claim as a counterclaim in the replevin action, where it belonged all along.
The judgment entered on the jury verdict is vacated and the cause is remanded for dismissal without prejudice due to the court's lack of jurisdiction. Dealer may seek leave of court to assert its fraud claim as a counterclaim in the pending replevin action.
PAUL J. SIMON, J., and SHERRI B. SULLIVAN, J., concur.