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Campbell v. Castle Stone Homes, Inc. - No. 2:09-CV-250 TS, 2009 U.S. Dist. LEXIS 105809 (D. Utah Nov. 10, 2009)

Rule:

Under Fed.R.Civ.P. 13(a) a counterclaim is compulsory if it "(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." The Utah rule is essentially the same and states that a claim is compulsory 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.

Facts:

Plaintiffs were among the plaintiffs who filed a securities fraud and breach of contract against defendants. Defendants moved to dismiss the case on the ground that the claims in this case were compulsory counterclaims in an earlier state court action. Defendants also argued that the filing of the complaint in the present case multiplied  the legal proceedings with the possibility of multiple or contradictory judgments. Plaintiffs argue that because the dismissal of the 2008 securities fraud case was without prejudice, they are not free to assert those claims in the present case.

Issue:

Where an earlier state court action was dismissed without prejudice and there was no judgment of the present plaintiffs' contract-related claims, is there a preclusive effect of the earlier action such that the compulsory counterclaim rule applies?

Answer:

No.

Conclusion:

The United States District Court found that the claims in the state court action involve two distinct sets of transactions and occurrences. The first set--the fraud and misrepresentation and breach of contract claims (the contract-related claims)--are centered on the formation of the contracts and their subsequent alleged breaches. The Court found that plaintiff's current claims for state and federal securities law violation, negligent misrepresentation, breach of contract, breach of covenant of good faith and fair dealing, and quiet title were compulsory counterclaims to the state court action's contract-related claims.

Next, the Court addressed the effect of the state court action's dismissal without prejudice on the compulsory counterclaim rule. Ordinarily, under the compulsory counterclaim rule, the Court's finding that Campbell's and Vera's instant claims against the Castle Stone Defendants were compulsory counterclaims in the state court action would require that those claims be dismissed in the present case. However, the dismissal of the state court action without prejudice changes that result. Because that earlier case is now dismissed without prejudice, there is no judgment or other binding resolution of plaintiffs Campbell's and Vera's contract-related claims. Under these circumstances, where there can be no preclusive effect of the earlier action, and thus the compulsory counterclaim rule does not apply. Accordingly, the Court denied defendants' motion to dismiss as to plaintiffs Campbell and Vera.

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