Conopco, Inc. v. Roll Int'l and Paramount Farms

Decision Date01 August 1999
Docket NumberDocket No. 00-7012
Parties(2nd Cir. 2000) CONOPCO, INC., Plaintiff-Appellant, v. ROLL INTERNATIONAL and PARAMOUNT FARMS, INC., Defendants-Appellees
CourtU.S. Court of Appeals — Second Circuit

Appeal from a judgment of the United States District Court for the Southern District of New York (Chin, J.), dismissing appellant's complaint for failure to state a claim upon which relief may be granted.


[Copyrighted Material Omitted] ROBERT F. SERIO, Gibson Dunn & Crutcher, LLP, New York, NY (Thomas C. Sheehan, of counsel), for Plaintiff-Appellant.

ANDREW S. CLARE, Loeb & Loeb, LLP, Los Angeles, CA (Lawrence B. Gutcho, of counsel, P. Gregory Schwed and Maria L. Zanfini, Loeb & Loeb, New York, NY, of counsel, Hillel Chodos, Los Angeles, CA, of counsel), for Defendants-Appellees.

Before: McLAUGHLIN, PARKER, Circuit Judges, and DORSEY, District Judge.*

Judge Dorsey dissents in a separate opinion.

McLAUGHLIN, Circuit Judge:


This civil procedure morass arises from the sale by Conopco, Inc. d/b/a Lipton ("Conopco") of its Sunkist brand fruit roll snack business to Roll International Corporation ("Roll") and Roll's wholly-owned subsidiary Paramount Farms, Inc. ("Paramount"). Under a purchase agreement signed in June 1995 (the "Purchase Agreement"), Conopco agreed to transfer its existing fruit roll inventory (the "Inventory") to Roll at a closing date one month later. When the Purchase Agreement was signed, the book value of the Inventory was $3,060,000, but this figure was stale because it had not been updated since December 1994. The parties therefore agreed that the purchase price would be adjusted at the closing to reflect any subsequent change in the Inventory's value.

Section 2.5 of the Purchase Agreement entitled "Post Closing Inventory Adjustment," also provided that, within 30 days after the closing, Conopco would deliver to Roll a statement of the book value of the Inventory confirming that a physical count of the Inventory had been conducted by Conopco on the closing date (the "Closing Date Inventory Statement"). Unless Roll then notified Conopco of any objections within 30 days of receipt of the statement, in writing, the Closing Date Inventory Statement would become final and binding. If Roll did object within the 30 days, and the parties were unable to resolve their differences, § 2.5 required them to submit to binding arbitration.

The sale closed successfully on July 28, 1995. But the parties' relationship soured when Conopco delivered a Closing Date Inventory Statement to Roll claiming that Roll owed an additional $2,452,634 based on the value of the Inventory at closing (the "Inventory Adjustment Claim"). Roll challenged this claim and settlement negotiations ensued.

In early 1997, Roll and Paramount notified Conopco that they would neither arbitrate nor settle the Inventory Adjustment Claim. Roll never paid Conopco any portion of the $2,452,634, and the parties never submitted the claim to an arbitrator.

As it turned out, the Inventory Adjustment Claim was the least of Conopco's problems. In December 1996, Roll and Paramount had already sued Conopco and its parent company, Unilever United States, Inc., in California Superior Court (the "California Action") seeking to rescind the Purchase Agreement. The plaintiffs there alleged that Conopco and Unilever had breached numerous representations and warranties in the Purchase Agreement and had fraudulently misrepresented the fruit roll business's sales and expense figures.

Most significantly, in its answer in the California Action, Conopco did not assert its Inventory Adjustment Claim as a set-off to any claims raised by Roll or Paramount. Nor did it file a cross complaint.1 Indeed, Conopco failed to raise the issue until May 1998 - almost 1½ years later and only 3 months before the trial was scheduled to start - when it moved to compel arbitration of the Inventory Adjustment Claim or, in the alternative, for leave to file an untimely cross complaint.

The next month, the California Superior Court denied both prongs of Conopco's motion. The trial court held that Conopco had waived its right to arbitrate; and it rejected Conopco's contention that its failure to plead its Inventory Adjustment Claim had been in good faith. Commenting acidly that, "to say that the defendant has been dilatory in asserting the cross-complaint . . . is an understatement," the California court refused to grant Conopco leave to file an untimely cross-complaint in light of the "substantial prejudice to the court and the plaintiff."

Conopco appealed the denial of its motion to compel arbitration. In the alternative, it sought a "writ of mandate" from the California Court of Appeal compelling the trial court to allow the filing of its untimely cross-complaint.2 The Court of Appeal: (1) affirmed the denial of Conopco's motion to compel arbitration; and (2) refused to issue the writ of mandate, declining to hear the appeal of the cross complaint ruling until a final judgment was entered by the trial court.

Needless to say, Conopco was not pleased. It filed the instant diversity action against Roll and Paramount in the Southern District of New York in March 1999, alleging breach of contract and unjust enrichment. The defendants moved under Fed. R. Civ. P. 12(b)(6) to dismiss the complaint. They argued that: (1) California Code of Civil Procedure § 426.30 (the compulsory cross-complaint provision) barred Conopco from asserting its Inventory Adjustment Claim in this action; (2) Conopco's waiver of its right to arbitrate its Inventory Adjustment Claim barred it from asserting that claim here; and (3) the action should be dismissed or stayed in deference to the pending California Action.

Conopco opposed the motion, maintaining that the California compulsory cross-complaint statute has no extraterritorial effect and, even if it did, it would not operate to bar Conopco from asserting its Inventory Adjustment Claim in a subsequent action until a final non-appealable judgment was entered in California.

On November 16, 1999, the district court granted the defendants' motion to dismiss. See Conopco, Inc. v. Roll Int'l Corp., 75 F. Supp. 2d 196 (S.D.N.Y. 1999). Giving full faith and credit to the order of the California Superior Court, see 28 U.S.C. § 1738, the district court held that: (1) Conopco's Inventory Adjustment Claim should have been asserted as a compulsory cross-complaint in the California Action pursuant to Cal. Civ. P. Code § 426.30; and (2) that, by failing to file a timely cross-complaint, or to successfully obtain leave to file an untimely cross-complaint, Conopco was precluded from raising the claim in a subsequent action, whether or not a final non-appealable judgment had been entered in the California Action. See id., at 198-201.

In the meantime, about three months before the district court order, Conopco, Roll and Paramount had entered into a settlement agreement in the California Action on August 3, 1999. That settlement agreement provided that: (1) Roll and Paramount's claims, other than their claim for rescission of the Purchase Agreement, were settled for $22 million; (2) if the California court held, after a bench trial, that Roll and Paramount were entitled to rescission, they would be paid an additional $18 million subject to a reversal on appeal; (3) if the California court held that Roll and Paramount were not entitled to rescind the Purchase Agreement, no further money would be paid; and (4) the parties agreed to cooperate in the sale of the fruit roll business and to split the proceeds equally.

Thereafter, the California Superior Court held that Roll and Paramount were entitled to rescind the Purchase Agreement as a result of Conopco's fraudulent representations and warranties. On November 29, 1999, a final judgment in favor of Roll and Paramount, incorporating the settlement agreement by reference, was entered by the California trial court. On January 19, 2000, Conopco filed a notice of appeal, appealing the final judgment and also the June 11, 1995 order denying its motion for leave to file an untimely cross-complaint.3 Conopco's state court appeal is still pending before the California Court of Appeal.

Back in the federal arena, Conopco now appeals from the district court's dismissal of its complaint. It contends that: (1) the district court erred by applying Cal. Civ. P. Code § 426.30 because Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), and its progeny require federal courts sitting in diversity to apply federal procedural rules; and (2) even if it were proper to apply the California statute, the district court erroneously held that Conopco was barred from asserting its Inventory Adjustment Claim absent a final non-appealable judgment in the California Action.

For the reasons set forth below, we affirm.


We review a district court's dismissal of a complaint for failure to state a claim de novo. See Lee v. Bankers Trust Co., 166 F.3d 540, 543 (2d Cir. 1999). Dismissal under Fed. R. Civ. P. 12(b)(6) is appropriate when a defendant raises claim preclusion or, as here, statutory waiver and bar as an affirmative defense and it is clear from the face of the complaint, and matters of which the court may take judicial notice, that the plaintiff's claims are barred as a matter of law. See Day v. Moscow, 955 F.2d 807, 811 (2d Cir. 1992) (claim barred by res judicata); United States v. Eastport S.S. Corp., 255 F.2d 795, 802 (2d Cir. 1958) (claim barred by compulsory counterclaim statute).

All parties agree that Conopco's Inventory Adjustment Claim should have been raised as a compulsory cross-complaint in the California Action. Therefore, the only issues before us are: (1) whether we are required to apply Fed. R. Civ. P. 13(a) or the California compulsory cross-complaint statute in determining the viability of Conopco's claims;...

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