Carnation Co. v. T.U. Parks Const. Co.

• Decision Date: 21 April 1987
• Docket Number: No. 86-5237,86-5237
• Citation: 816 F.2d 1099
• Parties: CARNATION COMPANY, Plaintiff-Appellant, v. T.U. PARKS CONSTRUCTION COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1099

816 F.2d 1099

7 Fed.R.Serv.3d 357

CARNATION COMPANY, Plaintiff-Appellant, v. T.U. PARKS CONSTRUCTION COMPANY, Defendant-Appellee.

No. 86-5237.

United States Court of Appeals, Sixth Circuit.

Argued Jan. 26, 1987.

Decided April 21, 1987.

R.R. Ruth, Jr., James W. Milam (argued), Luther, Anderson, Cleary and Ruth, William T. Alt, Chattanooga, Tenn., for plaintiff-appellant.

George Derryberry (argued), Miller and Martin, Chattanooga, Tenn., Virginia Anne Sharber, for defendant-appellee.

Before RYAN and BOGGS, Circuit Judges, and BROWN, Senior Circuit Judge.

BAILEY BROWN, Senior Circuit Judge.

This appeal presents two questions. The first is whether, in a diversity case, a claim is barred in federal district court if it would be barred by the state's compulsory counterclaim rule if asserted in a state court of the state in which the district court sits. If the answer to this question is that the claim would be barred in federal court, the second question is whether this appellant's claim would be barred by the state's compulsory counterclaim rule if asserted in a Tennessee court. The district court answered both questions in the affirmative and dismissed appellant's action. We agree with the district court and therefore affirm.

Plaintiff-appellant, Carnation Company (Carnation), filed a diversity suit against defendant-appellee, T.U. Parks Construction Company (Parks), in the Chancery Court of Hamilton County, Tennessee in Chattanooga on July 21, 1983, alleging breach of contract by Parks in constructing an office building and warehouse there for Carnation and seeking damages of $175,000.00. On August 11, 1983, Parks filed an answer denying Carnation's claim and asserting a counterclaim against Carnation for failure to pay retainage in the amount of $5,214.00. On February 25, 1985, Carnation entered a voluntary dismissal without prejudice of its suit against Parks, and the same day it filed the instant action asserting the same claim, this time for $500,000.00, in the federal district court for the Eastern District of Tennessee. Parks' counterclaim, however, remained pending in the Chancery Court.

On April 1, 1985, Parks filed its answer in the district court in which it pleaded, inter alia, that its claim against Carnation to recover retainage was pending in the Chancery Court and that its claim "will give rise to the affirmative defenses of res judicata or collateral estoppel" which defenses Parks asserted. Parks also counterclaimed for the retainage in the federal court action but expressly pleaded that it continued to rely on and intended to enforce its claim for retainage pending in the Chancery Court.

On May 15, 1985, the day before Parks' claim for retainage was to go to trial in the Chancery Court, an agreed judgment was entered in favor of Parks and against Carnation for the full amount for which Parks had sued, $5,214.00, plus interest and costs and such judgment became final.

Thereafter, on July 31, 1985, Parks filed in district court a motion for summary judgment, supported by the record in the Chancery Court, asserting that because Carnation's claim against Parks was a compulsory counterclaim to Parks' claim against Carnation in the Chancery Court and because Parks' judgment against Carnation was now final, Carnation's claim against Parks in district court was barred. The district court agreed and dismissed the action.

I

The first question we must answer is whether, assuming Parks is correct that Carnation's claim would be barred if it were asserted in a Tennessee court by the state's compulsory counterclaim rule, Carnation's claim is barred in the federal district court sitting in diversity in Tennessee.

This question takes us back, of course, to Erie Railroad Company v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), overruling Swift v. Tyson, 16 Pet. 1, 10 L.Ed. 865 (1842), which had held that federal courts sitting in diversity were free to apply "general" law as conceived by federal courts in resolving questions of substance as distinguished from questions of procedure. In Erie Railroad, the Court held that the federal district court was required, under a proper interpretation of the Judiciary Act of 1789 and, indeed, by the Constitution, to apply the law of the state in which it sits in resolving questions of substantive law.

The Court in Guaranty Trust Company v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945), applying the doctrine of Erie Railroad, held that, although the diversity action in the district court in New York sought equitable relief and therefore was on the "equity side" of the court, the court must apply the same statute of limitations as would a New York state court. In reaching this conclusion, the Court stated:

And so the question is not whether a statute of limitations is deemed a matter of "procedure" in some sense. The question is whether such a statute concerns merely the manner and the means by which a right to recover, as recognized by the State, is enforced, or whether such statutory limitation is a matter of substance in the aspect that alone is relevant to our problem, namely, does it significantly affect the result of a litigation for a federal court to disregard a law of a State that would be controlling in an action upon the same claim by the same parties in a State court?

It is therefore immaterial whether statutes of limitation are characterized either as "substantive" or "procedural" in State court opinions in any use of those terms unrelated to the specific issue before us. Erie R. Co. v. Tompkins was not an endeavor to formulate scientific legal terminology. It expressed a policy that touches vitally the proper distribution of judicial power between State and federal courts. In essence, the intent of that decision was to insure that, in all cases where a federal court is exercising jurisdiction solely because of the diversity of citizenship of the parties, the outcome of the litigation in the federal court should be substantially the same, so far as legal rules determine the outcome of a litigation, as it would be if tried in a State court. The nub of the policy that underlies Erie R. Co. v. Tompkins is that for the same transaction the accident of a suit by a non-resident litigant in a federal court instead of in a State court a block away should not lead to a substantially different result.

Id. at 108-09, 65 S.Ct. at 1470.

See also Angel v. Bullington, 330 U.S. 183, 186-87, 67 S.Ct. 657, 659, 91 L.Ed. 832 (1947).

In Woods v. Interstate Realty Company, 337 U.S. 535, 69 S.Ct. 1235, 93 L.Ed. 1524 (1949), the Court of Appeals for the Fifth Circuit had held that, in a diversity case, where the contract sued on was not void under state law but was only unenforceable in state courts, the contract could be enforced in a federal court in that state. The Supreme Court reversed, stating again that, where a federal court's jurisdiction is based on diversity, it is in effect another court of the state.

Carnation argues strenuously that because Tennessee has never held its compulsory counterclaim rule to be other than a rule of procedure and indeed is included in the state's Rules of Procedure, it should be so treated in applying the Erie Railroad doctrine. But as demonstrated by the holding in Guaranty Trust, it is immaterial for present purposes even if Tennessee labels the rule as "procedural"; it is the effect that a Tennessee court would give to the rule if Carnation were seeking to assert its claim in state court that is determinative.

This point is best illustrated by Sampson v. Channell, 110 F.2d 754 (1st Cir.), ¹ cert. denied, 310 U.S. 650, 60 S.Ct. 1099, 84 L.Ed. 1415 (1940), an opinion written shortly after Erie Railroad and cited with approval by Guaranty Trust, 326 U.S. at 110, 65 S.Ct. at 1470. A diversity action was brought in the federal district court in Massachusetts growing out of an automobile accident in Maine. Under Maine law, the plaintiff had the burden of proving no contributory negligence, but under Massachusetts law the defendant had the burden of proving contributory negligence. The district court, over plaintiff's objection, applied Maine law and charged the jury that plaintiff had the burden. The verdict and judgment were for the defendant.

On appeal, the First Circuit first determined that, for Erie Railroad purposes, the question as to where to place the burden of proof with respect to contributory negligence was a question of substantive law because the allocation of the burden could well determine the outcome of the case. The court pointed out that the theory of Erie Railroad was that the federal court sitting in diversity was in effect another state court and therefore the result should be the same whether the case is tried in federal or state court. Accordingly, the federal court should apply Massachusetts law rather than federal law. Under Massachusetts law, however, particularly its conflict of laws rule, the allocation of the burden of proof was labelled a rule of "procedure" and a Massachusetts court would, as a rule of procedure, apply its rule placing the burden on the defendant rather than the Maine rule, where the accident occurred, placing the burden on the plaintiff. Nevertheless, the First Circuit held that the district court was required by Erie Railroad to apply the Massachusetts rule placing the burden on the defendant since this would enforce the policy of obtaining the same result whether the case was tried in federal court or state court in Massachusetts.

Accordingly, in determining whether we must give effect to the Tennessee compulsory counterclaim rule, it is immaterial whether Tennessee considers its rule to be procedural or substantive.

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