Pomfret Farms Ltd. v. Pomfret Associates

Pomfret Farms Ltd. v. Pomfret Associates (2001-160); 174 Vt. 280;
811 A.2d 655

[File 23-Aug-2002]
[Motion for Reargument Denied 11-Oct-2002]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                                No. 2001-160


  Pomfret Farms Limited Partnership	         Supreme Court
       
                                                 On Appeal from
       v.	                                 Windsor Superior Court


  Pomfret Associates, James Monahan and 	 May Term, 2002 
  Michael Giuliano

  Alan W. Cheever, J.
      
  Richard I. Rubin and Kerry B. DeWolfe of Rubin, Kidney, Myer &
    DeWolfe, Barre, for Plaintiff-Appellee.

  Anthony Z. Roisman and C. Daniel Hershenson of Hershenson, Carter,
    Scott & McGee, P.C., Norwich, and James C. Gallagher and Carrie J. 
    Legus of Downs, Rachlin & Martin, PLLC, St. Johnsbury, for 
    Defendants-Appellants.


  PRESENT:  Amestoy, C.J., Dooley, Morse, Johnson, JJ., and Kupersmith, D.J.,
            Specially Assigned


       MORSE, J.   Third-party defendants Pomfret Associates (PA), James
  Monahan and Michael Giuliano appeal from a jury verdict in favor of Pomfret
  Farms Limited Partnership (PFLP), finding them liable for negligent
  misrepresentation in the course of the sale of land.  We reverse the
  judgment on the grounds that PFLP's claim is barred by the doctrine of res
  judicata. 
   
       This suit arises out of the sale of a parcel of land in Pomfret. 
  James Monahan and Michael Giuliano are the managing partners of PA.  Robert
  Sarvis is the general partner of PFLP and an experienced real estate
  developer.  On December 19, 1988, PA, as seller, entered into a purchase
  and 

 

  sale agreement with Robert Sarvis with respect to 423 acres of land in
  Pomfret. Sarvis subsequently assigned the purchase and sale agreement to
  PFLP.  The closing of the sale occurred on February 27, 1989, and PFLP paid
  $1.25 million for the property.

       Sarvis stated that he intended to immediately develop the property
  into twenty-one residential lots.  Sarvis admits that he knew there was no
  electricity available at the site at the time of closing.  He assumed,
  however, that electricity would be available shortly and claimed that he
  would not have purchased the property otherwise.

       In furtherance of the development, PFLP obtained a $2.3 million loan
  from the Proctor Bank.  It also executed a real estate promissory note and
  mortgage in the amount of $350,000 to PA.  PFLP subsequently defaulted upon
  its obligations under the note to PA.	

       On July 3, 1990, PA filed suit against PFLP to foreclose on the
  mortgage and to recover on the promissory note.  PFLP did not file a
  responsive pleading despite being represented by counsel.  On November 20,
  1990, PA was granted a judgment of foreclosure on the mortgage, and awarded
  $411,528 on the note.

       On March 6, 1991, Proctor Bank brought a separate foreclosure action
  against PFLP, joining PA as a party.  On September 30, 1992, PFLP filed a
  cross-claim against PA, and Monahan and Giuliano individually, which forms
  the basis of this appeal.  PFLP charged PA, Monahan and Giuliano with fraud
  and negligent misrepresentation regarding the availability of electricity
  to the Pomfret property. 	
   
       Third-party defendants PA, Monahan and Guiliano filed a motion to
  dismiss PFLP's cross-claim on the grounds that it had been a compulsory
  counterclaim in the previous suit, and was barred under the doctrine of res
  judicata.  The trial court denied the motion and allowed PFLP's claims to

 

  proceed.  It reasoned that since the foreclosure was an action in rem,
  which lies only against the property, and did not subject PFLP to further
  liability, the counterclaim was not compulsory.  After trial, the jury
  returned a verdict finding PA, Monahan and Giuliano liable to PFLP for
  negligent misrepresentation, but not for fraud.

       On appeal defendants argue that PFLP's claims of fraud and negligent
  misrepresentation were compulsory counterclaims under V.R.C.P. 13(a), and
  are now barred by the doctrine of res judicata.  We agree and reverse.	

       We first address the trial court's basis for denying defendants'
  motion to dismiss.  Counterclaims are not compulsory under Rule 13(a) if
  "the opposing party brought suit upon the claim by attachment or other
  process by which the court did not acquire jurisdiction to render a
  personal judgment on [the] claim."  V.R.C.P. 13(a).  The court was correct
  in stating that a foreclosure is an action in rem which does not impose
  personal liability on a defendant.  See Lafarr v. Scribner, 150 Vt. 159,
  160-61, 549 A.2d 651, 652-53 (1988) (holding that the defendant in a
  foreclosure action was not barred from raising affirmative defenses in a
  subsequent suit on the underlying note).  The mortgage and the note are
  distinct, however, and, while the mortgage does not impose any personal
  liability on the defendant, a personal obligation is imposed on the
  underlying note.  Id. at 161, 549 A.2d  at 652-53.  Here, PA sued on the
  note as well as the mortgage.  It was not strictly a foreclosure action. 
  Because the suit was also on the note, it subjected PFLP to personal
  liability, and, thus, the trial court erroneously denied defendants' motion
  by treating PA's suit solely as one of foreclosure.  Accordingly, res
  judicata may bar PFLP's claims if they were compulsory counterclaims to the
  action on the note under Rule 13(a).

 
        
       V.R.C.P. 13(a) states that, "[a] pleading shall state as a
  counterclaim any claim which at the time of serving the pleading 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." 
  This Court has adopted the "logical relation test" to determine what
  constitutes the same transaction or occurrence.  Stratton v. Steele, 144
  Vt. 31, 35, 472 A.2d 1237, 1239 (1984).

    [A] claim has a logical relationship to the original claim if it
    arises out of the same aggregate of operative facts as the
    original claim in two senses: (1) that the same aggregate of
    operative facts serves as the basis of both claims; or (2) that
    the aggregate core of facts upon which the original claim rests
    activates additional legal rights in a party defendant that would
    otherwise remain dormant.

  Id. (quoting Revere Copper & Brass Inc. v. Aetna Cas. & Sur. Co., 426 F.2d 709, 715 (5th Cir. 1970)) (alteration and emphasis in original); see also
  Letourneau v. Hickey, No. 01-403, slip op. at 2 (Vt. July 16, 2002)
  (holding plaintiff's claim for legal malpractice was compulsory
  counterclaim that should have been brought when defendant attorney brought
  earlier action to collect unpaid legal fees stemming from representation
  giving rise to malpractice claim).  Courts have noted that the words
  "transaction or occurrence" should be interpreted liberally.  See, e.g.,
  Warshawsky & Co. v. Arcata Nat'l Corp., 552 F.2d 1257, 1261 (7th Cir. 1977)
  ("As a word of flexible meaning, 'transaction' may comprehend a series of
  many occurrences, depending not so much upon the immediateness of their
  connection as upon their logical relationship.").	
   
       PFLP argues that its misrepresentation claim is not compulsory because
  it fails the "logical relation" test.  We find this argument unpersuasive. 
  PFLP's misrepresentation claim is logically related to PA's action to
  recover upon the promissory note.  A single transaction serves as the basis
  for both suits; the mortgage and note sued on by PA secured the Pomfret
  property which PFLP 

 

  claims to have purchased in reliance upon misrepresentations made by PA. 
  This single transaction provides the basis for both claims, and gives rise
  to potential liabilities on both sides.  As such, the claims satisfy the
  logical relation test, and PFLP's claim was compulsory under V.R.C.P.
  13(a).  See Wursthaus, Inc. v. Cerreta, 149 Vt. 54, 55-57, 539 A.2d 534,
  536 (1987) (counterclaim alleging fraud was compulsory in a suit for
  payment of a promissory note); see also Nat'l Equip. Rental, Ltd. v.
  Fowler, 287 F.2d 43, 45-46 (2d Cir. 1961) (fraudulent inducement
  counterclaim in suit for breach of equipment lease was compulsory).	

       Despite there being a compulsory counterclaim, PFLP failed to assert
  claims for fraud or negligent misrepresentation, or even to raise them as
  affirmative defenses to PA's suit.  A failure to raise a compulsory
  counterclaim will result in a bar to future litigation of the claim. 
  Stratton, 144 Vt. at 34-35, 472 A.2d  at 1239.  Res judicata bars the
  litigation of a claim or defense if there exists a final judgment in former
  litigation in which the "parties, subject matter and causes of action are
  identical or substantially identical."  In re CVPS, 172 Vt. 14, 20, 769 A.2d 668, 673 (2001) (internal quotation marks and citation omitted).  The
  doctrine applies both to affirmative defenses that could have been raised
  before, and to compulsory claims that should have been raised.  Id.  The
  purpose of the res judicata doctrine is to promote the finality of
  judgments and conserve the resources of courts and litigants. 
  "[I]nvocation of res judicata . . . relieves parties of the cost and
  vexation of multiple lawsuits, conserves judicial resources, and, by
  preventing inconsistent decisions, encourages reliance on adjudication." 
  Kremer v. Chem. Constr. Corp., 456 U.S. 461, 467 n. 6 (1982) (internal
  quotation marks and citation omitted).  As such, PFLP's present claims are
  barred.
   
       Nevertheless, PFLP argues that Monahan and Giuliano were not parties
  to the first action, which was brought by PA in its capacity as a
  partnership, and thus no counterclaim could have been 

 

  filed against them individually.  This Court has held that identity of
  parties exists where the parties or their privies are involved in both
  actions.  Lamb v. Geovjian, 165 Vt. 375, 380, 683 A.2d 731, 735 (1996).  A
  privity relationship generally involves a party so identified in interest
  with the other party that they represent one legal right.  First Wisconsin
  Mortgage Trust v. Wymans, Inc., 139 Vt. 350, 358-59, 428 A.2d 1119, 1124
  (1981).	

       Traditionally, when a plaintiff brings suit in one capacity, the
  defendant may not counterclaim against the plaintiff in a different
  capacity than that in which plaintiff sued.  3 Moore's Federal Practice 
  13.90 [2][d] (2002).  Courts have noted two exceptions to the traditional
  rule, however.

    First, if a plaintiff sued in a representative capacity but will
    benefit individually from any recovery, a counterclaim may be made
    against the plaintiff in his individual capacity.  Second, a
    counterclaim may be made against a plaintiff in a capacity
    different than that in which he sued if principles of equity and
    judicial economy support such a counterclaim.

  Blanchard v. Katz, 117 F.R.D. 527, 528-29 (S.D.N.Y. 1987).  Monahan and
  Giuliano, as general partners of PA, were entitled to share in its profits
  and losses, and were jointly liable for its actions.  11 V.S.A. §§ 3226 &
  3231; see Scott v. United States, 354 F.2d 292, 300-01 (Ct. Cl. 1965)
  (allowing counterclaim against individual members of partnership, and
  noting that "judgments rendered on partnership demands result in an
  immediate pro rata gain to the individual partners, since they actually own
  the claim in most senses"). 	
   
       To find that Monahan and Giuliano, as partners, are somehow distinct
  from the partnership, and not parties to the first suit, would frustrate
  the purposes of finality and economy behind the res judicata doctrine. 
  Further, such a distinction allows an individual partner to "veto the
  maintenance of an individual counterclaim against him . . . and affords
  partners a technical, artificial device for 

 

  proliferating litigation and possibly escaping demands against them." 
  Scott, 354 F.2d  at 300 (rules should not be read as "permitting partners to
  avoid individual counterclaims by the simple expedient of bringing the
  action in the name of the partnership and omitting their own names
  entirely").	

       This Court has traditionally looked past nominal differences in
  determining the identity of parties.  "Whenever in these cases the identity
  of the parties is the question, the court will look into the situation far
  enough to ascertain who are the real parties, and give effect to the former
  judgment accordingly."  Cutler v. Jenkins, 99 Vt. 85, 90, 130 A. 583, 584
  (1925).  Here, Monahan and Giuliano together form the partnership that sued
  PFLP.  Their potential to share in the benefits, and losses, of the
  partnership identifies them and PA as parties in privity.  We have stated
  that, "[i]f the parties are really and substantially in interest the same,
  though nominally different, the judgment binds them."  Id.; see also Scott,
  354 F.2d  at 299 ("The salutary objectives of the counterclaim rules should
  not turn on the sequence of the names in the pleadings . . . .").  Monahan
  and Giuliano are in privity with the partnership and qualify as opposing
  parties under V.R.C.P.13(a). 

       PFLP's reliance on Leon Templesman & Son v. TECC Corp., 107 F.R.D. 384
  (N.D. Tex. 1985), for a holding to the contrary is misplaced.  In
  Templesman, the court did not allow a permissive counterclaim against an
  individual suing in the capacity of a limited partnership.  Id. at 385. 
  The court distinguished Scott on the grounds that it had involved a general
  partnership, not a limited one, and furthermore found that the asserted
  counterclaim would involve issues and parties unrelated to the original
  suit.  Id.  In this case, we have a compulsory counterclaim which does not
  raise issues unrelated to the sale of the Pomfret property, and is against
  a general, not limited, partnership.

 

       PFLP next argues that, because PA's action resulted in a default
  judgment against PFLP, it can be no bar to the present suit.  PFLP relies
  heavily upon the reporter's notes to Rule 13(a) which state that a
  defendant who defaults prior to filing an answer is not barred from
  bringing a later independent action.  Reporter's Notes, V.R.C.P. 13. 
  Nevertheless, we have recently held that, "[c]ourts have given default
  judgments full effect and have held that a compulsory counterclaim omitted
  from an action that terminates in a default judgment will be barred from
  any subsequent suits."  Letourneau, slip op. at 3 (internal quotation marks
  and citation omitted).  In Letourneau, the plaintiffs failed to file a
  responsive pleading on a collection action brought by their attorney for
  unpaid legal fees, and suffered a default judgment.  Id.  Twenty-one months
  later, the plaintiffs brought a malpractice suit against their attorney. 
  Id.  We held that, under those circumstances, the default judgment in the
  previous action barred their malpractice claim under res judicata.  Id.  We
  also declined to follow the reporter's note to the extent that it was
  inconsistent with that holding.  Id.
   
       Further, the purposes behind the res judicata doctrine are served by
  allowing a default judgment to bar a later suit.  To hold otherwise would
  render a default judgment "of uncertain value, and represent simply one
  step toward resolving the dispute between the parties."  Carteret Sav. &
  Loan Ass'n v. Jackson, 812 F.2d 36, 38 (1st Cir. 1987) ("Instead of having
  a truly final judgment, the judgment creditor would remain faced with a
  prospect of litigating other aspects of the same transaction or occurrence
  at some later time, and in a forum of the defendant's choosing.").  Given
  our recent stand on this issue, the default judgment suffered by PFLP
  suffices to bar the present suit.  Like the judgment against the
  defendants-turned-plaintiffs in Letourneau, the judgment in the prior suit
  against PFLP resulted from its failure to respond, as opposed to a consent
  decree or stipulation.  

 

  See Cianciolo v. Lauer, 819 S.W.2d 726, 727 (Ky. Ct. App. 1991) ("when one
  is duly summonsed and suffers a default, he not only loses his right to
  defend in that litigation, but also his right to assert in an independent
  action a claim deemed to have been a compulsory counterclaim" under Rule
  13), cited in Letourneau, slip op. at 3.

       PFLP's final contention is that Sarvis was unaware of the facts giving
  rise to his claim at the time of PA's suit, and since he had not discovered
  his cause of action he could not bring a counterclaim.  Sarvis admits,
  however, that by the middle of 1989 he knew that electricity was not
  immediately available to the property.  He represents himself as an
  experienced real estate developer, and had purchased the Pomfret property
  with the intention of immediately developing it into residential lots. 
  Given Sarvis's experience and intentions, we hold that Sarvis was on
  inquiry notice as to the availability of electricity, and as such "he is
  chargeable with notice of all such facts as his inquiry, had it been made,
  would have revealed."  Tomasi v. Kelley, 100 Vt. 318, 323, 137 A. 196,
  198-99 (1927); see also Richart v. Jackson, 171 Vt. 94, 98-100, 758 A.2d 319, 322 (2000) (existence of dock at time defendants purchased beach front
  property put them on inquiry notice as to interests of neighboring property
  owners).  The duty imposed by inquiry notice arises "when such information
  is known which would prompt a person exercising reasonable care to acquire
  knowledge of the fact in question."  Amjems, Inc. v. F.R. Orr Constr. Co.,
  617 F. Supp. 273, 278 (S.D. Fla. 1985). 	

       Sarvis knew at the time of purchase that there was no electric power
  immediately available to the site.  At the time of PA's suit in July 1990,
  over a year after closing, PFLP had every opportunity to ascertain the
  facts underlying its claims of fraud and negligent misrepresentation. 
   
 

       Since we hold that PFLP's claims of fraud and misrepresentation are
  barred by res judicata, (FN1) we need not reach defendants' other arguments
  on appeal.		

       Reversed.

                                       FOR THE COURT:



                                       _______________________________________
                                       Associate Justice


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                                  Footnotes


FN1.  PFLP attempts to argue that - despite PA's arguments in its motion to
  dismiss regarding res judicata, its interlocutory appeal on the issue of
  whether res judicata barred the current suit, and the present appeal - PA's
  attorney affirmatively waived this issue at trial when he stated in the
  course of oral arguments that it was "a judgment call by the court."  We
  find no merit to this argument.