HL Peterson Company v. Applewhite

• Decision Date: 03 November 1967
• Docket Number: No. 23907.,23907.
• Citation: 383 F.2d 430
• Parties: H. L. PETERSON COMPANY, Appellant, v. S. W. APPLEWHITE, II, et ux., et al., Appellees. S. W. APPLEWHITE, II, et ux., et al., Appellants, v. A. O. SMITH CORPORATION and H. L. Peterson Company, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

383 F.2d 430 (1967)

H. L. PETERSON COMPANY, Appellant, v. S. W. APPLEWHITE, II, et ux., et al., Appellees.

S. W. APPLEWHITE, II, et ux., et al., Appellants, v. A. O. SMITH CORPORATION and H. L. Peterson Company, Appellees.

No. 23907.

United States Court of Appeals Fifth Circuit.

September 1, 1967.

Rehearing Denied November 3, 1967.

Royal H. Brin, Jr., Cedric G. Hamlin, Dallas, Tex., for appellant.

Walter E. Workman, for S. W. Applewhite, II, and others, appellees and protective counter-appellants. Baker, Botts, Shepherd & Coates, Houston, Tex., of counsel.

James Greenwood, III, of Vinson, Elkins, Weems & Searls, Houston, Tex., for A. O. Smith Corporation, appellees.

Before BELL, GODBOLD, and DYER, Circuit Judges.

GRIFFIN B. BELL, Circuit Judge:

The background of this appeal is a suit which arose out of the sale by Peterson, a dealer, of a new type silo and related equipment manufactured by A. O. Smith Corporation to the Applewhites, father and son, who were dairy operators. Smith sued the Applewhites on a note representing the balance due on the purchase price. The note was secured by a chattel mortgage on the silo and related equipment. The Applewhites, in turn, asserted a claim against Smith and Peterson based on alleged false representations on their part in procuring the sale and purchase. Judgment was rendered in favor of Smith against the Applewhites for the balance due on the note and for foreclosure of the mortgage; and for the Applewhites against Peterson in the same amount for legal fraud. The case was tried to the District Court without a jury and the decision of the court, including its findings and conclusions, is reported as A. O. Smith Corporation v. Applewhite, S.D.Tex., 1965, 255 F.Supp. 785. We affirm.

The facts are set out fully in the opinion of the District Court to which reference is made. For some time prior to 1959 the A. O. Smith Corporation, a Wisconsin corporation, engaged in the manufacture of a new type of silo which is called a "Harvestore" and which was sold as a part of a program called "Vertical Farming". The basic idea behind the new system was that a complete feeding program would be accomplished by use of the Harvestore and its air tight storage through preserving the nutrient value in the ensiled feed. Much waste in the traditional method of raising livestock could be thus avoided. There would be savings in time, labor, feed, fencing and farm equipment. The program as advertised would enable the farmer to support twice the herd on the same acreage, and supposedly the Harvestore would pay for itself through increased profits. It was advertised as the "Glass-Lined Gold Mine."

Appellant H. L. Peterson Company, a Texas partnership, had engaged in selling A. O. Smith products since 1956. The District Court, however, found that it was not authorized to bind Smith and was not Smith's agent; hence the representations made by Peterson to the Applewhites which we have for consideration are not binding on Smith and no issue is presented on this score.

In December 1959, Hugh Peterson of the Peterson Company sold the Applewhites the Harvestore silo in question along with other accessory equipment. As part of the sale, Peterson made numerous representations to the Applewhites which were purportedly based on his experience in the silo field. In consummation of the sale and purchase, the Applewhites executed a sales contract, made a down payment, signed a promissory note payable to Peterson for the balance due on the purchase price and executed a chattel mortgage covering the silo and equipment. The note was then endorsed and the chattel mortgage assigned to the A. O. Smith Corporation.¹

The Applewhites almost doubled the size of their dairy herd in reliance on the representations of Peterson as to the effectiveness of the Harvestore. It proved to be ineffective and within a year almost half of their dairy herd went dry. The Applewhites were by this time disillusioned with their purchase, defaulted on the note, and offered to return the Harvestore and related equipment to Peterson. Tender was refused. On May 31, 1961 timely suit was filed by the Applewhites in state court based on allegations of fraud in the inducement of the transaction, and breach of warranties. They sought cancellation and rescission of the note and chattel mortgage, and, in the alternative, damages suffered through the use of the silo and equipment. Both Peterson and Smith answered in the state court; neither objected to jurisdiction nor did they file counterclaims.

Much later, in fact in August of 1962, Smith filed suit against the Applewhites in the federal district court, alleging diversity jurisdiction, setting up the the note and mortgage and seeking judgment for the balance due on the note. The Applewhites responded by filing a plea in abatement and motion to stay on the basis that suit was pending in the state court. They urged that the claim brought by Smith in federal court constituted a compulsory counterclaim under Texas law, and also that they were being put to a duplication of expense. The plea and motion were overruled; the Applewhites then filed a counterclaim against Smith and Peterson, designating themselves as counter-plaintiffs and Smith and Peterson as counter-defendants. Peterson's motion to dismiss based on lack of diversity was overruled.

Peterson contends that the district court erred in holding: (1) that it was subject to the jurisdiction of the federal court; (2) that the statute of limitations did not bar the counterclaim based on fraud and (3) that it committed legal fraud. Peterson also urges that an incorrect measure of damages was applied.²

With respect to the question of jurisdiction, the Applewhites and Peterson are residents of Texas and Peterson contends that the court lacks jurisdiction over it because of the absence of diversity of citizenship. Peterson styles itself on appeal as a third party defendant under Rule 14, F.R.Civ.P., and not as an additional party under Rule 13, F.R.Civ.P., governing counterclaims. The claim is that a third party action under Rule 14 is permissive in nature and therefore, as under the permissive counterclaim rule, an additional party may not be brought in under the ancillary jurisdiction of the court. The court had jurisdiction over Peterson whether it be styled a third party defendant or an additional party under the counterclaim rule. This is for the reason that under Rule 14, the court has ancillary jurisdiction over a third party defendant even absent diversity of citizenship. Southern Milling Company v. United States, 5 Cir., 1959, 270 F.2d 80; Agrashell, Inc. v. Bernard Sirotta Company, 2 Cir., 1965, 344 F.2d 583; Barron & Holtzoff (Wright Ed., 1960) § 424, pp. 650-651; 3 Moore, Federal Practice, par. 14.26, p. 707; and Fraser, Ancillary Jurisdiction and the Joinder of Claims in the Federal Courts, 33 F.R.D. 27, 38-39 (1964).

The district court treated Peterson as an additional party under the counterclaim rule. This followed the premise of the Applewhites' counterclaim and, as such, the court also had jurisdiction. This is because the counterclaim was compulsory.³ See Rule 13(a), supra. The counterclaim arises directly out of the sales contract and note and meets even the strict definition of a compulsory counterclaim such as where the Supreme Court said "So close is the connection between the case sought to be stated in the bill and that set up in the counterclaim, that it only needs the failure of the former to establish a foundation for the latter * * *". Moore v. New York Cotton Exchange, 1926, 270 U.S. 593, 610, 46 S.Ct. 367, 371, 70 L.Ed. 750.⁴ It is settled that where as here the counterclaim is compulsory against Smith, no independent jurisdictional ground need exist where an additional party such as Peterson is brought into the case by the counterclaimant. See Dery v. Wyer, 2 Cir., 1959, 265 F.2d 804; United Artists Corporation v. Masterpiece Productions, 2 Cir., 1955, 221 F.2d 213; Lesnik v. Public Industrials Corporation, 2 Cir., 1944, 144 F.2d 968; Barron & Holtzoff (Wright Ed., 1960) § 392, pp. 556-557. Our own case of Reynolds v. Maples, 5 Cir., 1954, 214 F.2d 395 is not to the contrary for the counterclaim there was permissive rather than compulsory. See Comment, Barron & Holtzoff (Wright Ed., 1960) § 392, p. 556, Footnote 41.

Peterson's argument that the counterclaim is barred by the Texas two year statute of limitations, Art. 5526, Tex. Rev.Civ.Stat., presents a novel, close and narrow question. The district court ruled to the contrary on two grounds. First, the court was of the opinion that the cause of action was saved by Art. 5539a, Tex.Rev.Civ.Stat., which applies only to causes of action which have been dismissed for lack of jurisdiction and which are refiled in a court of proper jurisdiction within sixty days. See Scurlock Oil Company v. Three States Contracting Company, 5 Cir., 1959, 272 F.2d 169, and the Texas cases cited therein. Here the Applewhites' claim was not filed in a state court lacking jurisdiction nor had it been dismissed and thus this statute is not applicable to the instant situation.

The second ground for rejecting Peterson's argument was that the filing in the state court tolled the statute of limitations for the purposes of bringing the counterclaim in another court. The court cited no direct authority for this proposition and there apparently is none one way or the other where the counterclaimant is the plaintiff in the earlier filed action. Peterson relies on authorities to the contrary where the plaintiff in the first filed action refiles his suit in another court after the period of limitation has expired. Griffith v. Associated Employers' Reciprocal, Tex.Civ.App., 1928, 10 S.W. 2d 129; Welner v. Stearns, 1911, 40 Utah 185, 120 P. 490; Falsetti v. Local Union No. 2026, United Mine Workers, 3 Cir., 1966, 355 F.2d 658. This, however, is not the point. Here we deal with a...