Joel Bianco Kawasaki v. Meramec Valley Bank

• Decision Date: 23 July 2002
• Docket Number: No. SC 84046.,SC 84046.
• Citation: 81 S.W.3d 528
• Parties: JOEL BIANCO KAWASAKI PLUS, et al., Respondents, v. MERAMEC VALLEY BANK, Appellant.
• Court: Missouri Supreme Court

81 S.W.3d 528

JOEL BIANCO KAWASAKI PLUS, et al., Respondents, v. MERAMEC VALLEY BANK, Appellant.

No. SC 84046.

Supreme Court of Missouri, En Banc.

July 23, 2002.

Rehearing Denied August 27, 2002.

COPYRIGHT MATERIAL OMITTED

Michael A. Campbell, Paula Colman, Polsinelli Shalton & Welte, St. Louis, for Appellant.

Thomas M. Blumenthal, St. Louis, for Respondents.

William S. Daniel, St. Louis, for Intervenor.

LAURA DENVIR STITH, Judge.

Meramec Valley Bank ("Bank") appeals a $675,000 judgment entered on a jury verdict against it and in favor of Joel C. Bianco and Joel Bianco Kawasaki Plus, Inc. ("Bianco") on Bianco's claim that the Bank made fraudulent representations in the course of its negotiations over the Bank's replevin of Bianco's motorcycle dealership inventory and receivables. The Bank argues that the trial court had no subject matter jurisdiction over the fraud claim because it should have been brought as a compulsory counterclaim in the Bank's replevin action filed two months before the fraud action was filed. The Bank also argues that Bianco failed to prove its claim of fraudulent misrepresentation.

A court does not lack subject matter jurisdiction over a claim merely because it should have been raised as a compulsory counterclaim in a prior-filed lawsuit. Rather, the compulsory counterclaim rule is an affirmative defense, in the nature of res judicata, that is barred if not timely raised. It is not a stealth defense, and a party cannot sit on its rights under this rule. The trial court did not err in rejecting the Bank's assertion of this affirmative defense, for the Bank failed to assert the defense in the second action until the first action had proceeded to judgment. This was too late on the facts of this case. The Bank's alternative claim that the evidence did not support submission of Bianco's fraud claim is also rejected. Affirmed.

I. FACTUAL BACKGROUND

Bianco operated a motorcycle and sports equipment dealership in St. Louis County. It borrowed money from the Bank to finance its operations, giving the Bank two promissory notes and putting up its business receivables inventory, furniture and other property as collateral. In 1997, it fell behind in its payments to the Bank and other creditors and sought to sell the business. Although negotiations were still pending, the Bank decided not to wait to assert its claims. On October 3, 1997, it filed an action seeking to recover on the notes and to replevin the collateral (the "replevin action").

On October 6, 1997, the sheriff, a moving company and bank representatives began replevin of Bianco's property. Bianco tried to win a delay from the Bank so that it could consummate the sale of its business and repay the Bank and other creditors from the proceeds. Bianco ultimately agreed to provide additional collateral in order to win two days delay on the replevin. In return, according to Bianco's evidence, the Bank agreed in a "Standstill Agreement" to halt the replevin so that Bianco and its creditors and the motorcycle manufacturers could arrange a deal for sale of the business. The Bank also agreed to take part in the negotiations and make a substantial effort to resolve the sale of the business. The negotiations were unsuccessful, and the replevin continued. The business was ultimately sold, but not on favorable terms.

The Bank blamed Bianco, but Bianco blamed the Bank and sued it for fraud in December 1997 (the "fraud action"). It presented evidence that the failure to sell the business prior to replevin was due to the Bank's failure to act in good faith, including its decision to proceed with the replevin while negotiations were pending, and that the Bank had not acted in good faith or intended to keep its promises at the time it made them.

The Bank asserted various defenses to this fraud action in its answer filed in February 1998, but it did not assert that the claim was barred by the compulsory counterclaim rule, although it was aware that its replevin action was pending at the time that Bianco filed the fraud action. It also was aware that Bianco did not file any answer to the replevin claim that was pending so that the Bank could obtain the deficiency left after replevining the property at the motorcycle dealership. Due to this failure, Bianco was in default, and on November 24, 1997, the Bank requested and the court entered an interlocutory order of default in the replevin action.

Bianco had not answered in the replevin action because its attorneys were unaware that service had even been made in that action as no return of service had been filed when Bianco's attorney checked the file. Accordingly, it did not receive notice of the order of default. As the Bank alerted no one to the fact that two cases were pending, both remained on file for over a year, until February 1999, when, still without notice to Bianco, a hearing was held in the replevin action on the interlocutory order of default. On March 4, 1999, the court entered a final judgment of default against Bianco in the replevin action. Only then did Bianco receive notice of the prior entry of an interlocutory order of default in the replevin action, and of the entry of the judgment of default. Bianco's motion to set aside the default was denied, and it appealed.

While Bianco's appeal of the replevin action default judgment was still pending, the fraud case was set for trial. Bianco filed an amended complaint, and the Bank filed an amended answer and, for the first time, filed a motion to dismiss raising the issues of collateral estoppel, res judicata and compulsory counterclaim. The trial court rejected the motion and the case went to trial. On November 18, 1999, Bianco received a $675,000 judgment on its fraud claim against the Bank. Four months later, the appellate court reversed the trial court's denial of Bianco's motion to set aside the default judgment in the replevin action and remanded it for hearing. Meramec Valley Bank v. Joel Bianco Kawasaki Plus, Inc., 14 S.W.3d 684 (Mo.App. E.D.2000). The Bank here appeals the jury verdict against it in the fraud action.

II. COMPULSORY COUNTERCLAIM

Bank argues that the trial court was without subject matter jurisdiction over Bianco's fraud claim against it because it arose out of the transaction or occurrence that is the subject matter of the replevin action and, therefore, was required to be brought as a compulsory counterclaim in that action under Rule 55.32(a), which states:

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 and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction.

This Court need not reach the issue whether the fraud claim was a compulsory counterclaim to the replevin action. Assuming that it was, we reject the Bank's contention that Bianco's failure to assert it in the replevin action deprived the court in the fraud action of subject matter jurisdiction over the fraud claim. The Bank cites no cases of this Court holding that a compulsory counterclaim is a matter of subject matter jurisdiction. To the contrary, this Court's cases have repeatedly recognized that the clear purpose of Rule 55.32 and its predecessors is "to serve as `a means of bringing all logically related claims into a single litigation, through the penalty of precluding the later assertion of omitted claims.'" State ex rel. J.E. Dunn, Jr. & Associates, Inc. v. Schoenlaub, 668 S.W.2d 72, 75 (Mo. banc 1984), quoting, Cantrell v. City of Caruthersville, 359 Mo. 282, 221 S.W.2d 471, 474 (1949) (emphasis added).

As discussed further below, this is analogous to the basis for the doctrine of res judicata. For this reason, this Court has often spoken of the underpinnings of the compulsory counterclaim rule utilizing terms usually associated with res judicata, noting that a particular claim was "barred" by the failure to assert it as a counterclaim.¹ As the court of appeals stated in taking this approach in Beasley v. Mironuck, 877 S.W.2d 653, 656 (Mo.App. E.D. 1994):

The compulsory counterclaim rule is simply the codification of the principles of res judicata and collateral estoppel. Claims and issues which could have been litigated in a prior adjudicated action are precluded in a later action between the same parties or those in privity with them.

Id. at 656. See also Elam v. City of St. Ann, 784 S.W.2d 330, 333 (Mo.App. E.D. 1990) (res judicata and compulsory counterclaim, although not identical, "overlap to the extent that one commentator refers to the compulsory counterclaim as a form of `claim preclusion by rule'"). Even the Bank uses this terminology ("the Compulsory Counterclaim Rule requires that parties bring all related claims before a single court at the same time barring them in any subsequent action ...") (emphasis added).²

Missouri is by no means alone in treating the compulsory counterclaim rule as a special application of the principles of res judicata. Rule 55.32 is based on Federal Rule 13(a). See Cantrell, 221 S.W.2d at 474 (1949) (construing former Section 73, now Rule 55.32); Fed.R.Civ.P. 13(a). Where, as here, the Missouri and federal rules are essentially the same, federal precedents constitute persuasive, although not binding, authority. Giddens v. Kansas City Southern Ry. Co., 29 S.W.3d 813, 820 (Mo. banc 2000); Kingsley v. Burack, 536 S.W.2d 7, 11 (Mo. banc 1976). Many federal courts have noted that the principles behind the compulsory counterclaim rule are those that are behind the doctrine of res judicata, that both serve as means of avoiding piecemeal litigation, and that both can be waived. As the Seventh Circuit aptly noted in discussing the interplay between these two fundamental doctrines of modern federal procedure:

Despite the impression one might get...