POMFRET FARMS LTD. v. Pomfret Associates, 01-160.

• Decision Date: 23 August 2002
• Docket Number: No. 01-160.,01-160.
• Citation: 811 A.2d 655
• Parties: POMFRET FARMS LIMITED PARTNERSHIP v. POMFRET ASSOCIATES, James Monahan and Michael Giuliano
• Court: Vermont Supreme Court

811 A.2d 655

POMFRET FARMS LIMITED PARTNERSHIP v. POMFRET ASSOCIATES, James Monahan and Michael Giuliano

No. 01-160.

Supreme Court of Vermont.

August 23, 2002.

Motion for Reargument Denied October 11, 2002.

Richard I. Rubin and Kerry B. DeWolfe of Rubin, Kidney, Myer & DeWolfe, Barre, for Plaintiff-Appellee.

Anthony Z. Roisman and C. Daniel Hershenson of Hershenson, Carter, Scott & McGee, P.C., Norwich, and James C. Gallagher and Carrie J. Legus of Downs, Rachlin & Martin, PLLC, St. Johnsbury, for Defendants-Appellants.

Present: AMESTOY, C.J., DOOLEY, MORSE and JOHNSON, JJ., and KUPERSMITH, D.J., Specially Assigned.

MORSE, J.

Third-party defendants Pomfret Associates (PA), James Monahan and Michael Giuliano appeal from a jury verdict in favor of Pomfret Farms Limited Partnership (PFLP), finding them liable for negligent misrepresentation in the course of the sale of land. We reverse the judgment on the grounds that PFLP's claim is barred by the doctrine of res judicata.

This suit arises out of the sale of a parcel of land in Pomfret. James Monahan and Michael Giuliano are the managing partners of PA. Robert Sarvis is the general partner of PFLP and an experienced real estate developer. On December 19, 1988, PA, as seller, entered into a purchase and sale agreement with Robert Sarvis with respect to 423 acres of land in Pomfret. Sarvis subsequently assigned the purchase and sale agreement to PFLP. The closing of the sale occurred on February 27, 1989, and PFLP paid $1.25 million for the property.

Sarvis stated that he intended to immediately develop the property into twenty-one residential lots. Sarvis admits that he knew there was no electricity available at the site at the time of closing. He assumed, however, that electricity would be available shortly and claimed that he would not have purchased the property otherwise.

In furtherance of the development, PFLP obtained a $2.3 million loan from the Proctor Bank. It also executed a real estate promissory note and mortgage in the amount of $350,000 to PA. PFLP subsequently defaulted upon its obligations under the note to PA.

On July 3, 1990, PA filed suit against PFLP to foreclose on the mortgage and to recover on the promissory note. PFLP did not file a responsive pleading despite being represented by counsel. On November 20, 1990, PA was granted a judgment of foreclosure on the mortgage, and awarded $411,528 on the note.

On March 6, 1991, Proctor Bank brought a separate foreclosure action against PFLP, joining PA as a party. On September 30, 1992, PFLP filed a cross-claim against PA, and Monahan and Giuliano individually, which forms the basis of this appeal. PFLP charged PA, Monahan and Giuliano with fraud and negligent misrepresentation regarding the availability of electricity to the Pomfret property.

Third-party defendants PA, Monahan and Giuliano filed a motion to dismiss PFLP's cross-claim on the grounds that it had been a compulsory counterclaim in the previous suit, and was barred under the doctrine of res judicata. The trial court denied the motion and allowed PFLP's claims to proceed. It reasoned that since the foreclosure was an action in rem, which lies only against the property, and did not subject PFLP to further liability, the counterclaim was not compulsory. After trial, the jury returned a verdict finding PA, Monahan and Giuliano liable to PFLP for negligent misrepresentation, but not for fraud.

On appeal defendants argue that PFLP's claims of fraud and negligent misrepresentation were compulsory counterclaims under V.R.C.P. 13(a), and are now barred by the doctrine of res judicata. We agree and reverse.

We first address the trial court's basis for denying defendants' motion to dismiss. Counterclaims are not compulsory under Rule 13(a) if "the opposing party brought suit upon the claim by attachment or other process by which the court did not acquire jurisdiction to render a personal judgment on [the] claim." V.R.C.P. 13(a). The court was correct in stating that a foreclosure is an action in rem which does not impose personal liability on a defendant. See LaFarr v. Scribner, 150 Vt. 159, 160-61, 549 A.2d 651, 652-53 (1988) (holding that the defendant in a foreclosure action was not barred from raising affirmative defenses in a subsequent suit on the underlying note). The mortgage and the note are distinct, however, and, while the mortgage does not impose any personal liability on the defendant, a personal obligation is imposed on the underlying note. Id. at 161, 549 A.2d at 652-53. Here, PA sued on the note as well as the mortgage. It was not strictly a foreclosure action. Because the suit was also on the note, it subjected PFLP to personal liability, and, thus, the trial court erroneously denied defendants' motion by treating PA's suit solely as one of foreclosure. Accordingly, res judicata may bar PFLP's claims if they were compulsory counterclaims to the action on the note under Rule 13(a).

V.R.C.P. 13(a) states that "[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." This Court has adopted the "logical relation test" to determine what constitutes the same transaction or occurrence. Stratton v. Steele, 144 Vt. 31, 35, 472 A.2d 1237, 1239 (1984).

"[A] claim has a logical relationship to the original claim if it arises out of the same aggregate of operative facts as the original claim in two senses: (1) that the same aggregate of operative facts serves as the basis of both claims; or (2) that the aggregate core of facts upon which the original claim rests activates additional legal rights in a party defendant that would otherwise remain dormant."

Id. (quoting Revere Copper & Brass Inc. v. Aetna Cas. & Sur. Co., 426 F.2d 709, 715 (5th Cir.1970)) (alteration and emphasis in original); see also Letourneau v. Hickey, ___ Vt. ___, ___, 807 A.2d 437, 440 (2002) (mem.) (holding plaintiff's claim for legal malpractice was compulsory counterclaim that should have been brought when defendant attorney brought earlier action to collect unpaid legal fees stemming from representation giving rise to malpractice claim). Courts have noted that the words "transaction or occurrence" should be interpreted liberally. See, e.g., Warshawsky & Co. v. Arcata Nat'l Corp., 552 F.2d 1257, 1261 (7th Cir.1977) ("As a word of flexible meaning, `transaction' may comprehend a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship.").

PFLP argues that its misrepresentation claim is not compulsory because it fails the "logical relation" test. We find this argument unpersuasive. PFLP's misrepresentation claim is logically related to PA's action to recover upon the promissory note. A single transaction serves as the basis for both suits; the mortgage and note sued on by PA secured the Pomfret property which PFLP claims to have purchased in reliance upon misrepresentations made by PA. This single transaction provides the basis for both claims, and gives rise to potential liabilities on both sides. As such, the claims satisfy the logical relation test, and PFLP's claim was compulsory under V.R.C.P. 13(a). See Wursthaus, Inc. v. Cerreta, 149 Vt. 54, 55-57, 539 A.2d 534, 536 (1987) (counterclaim alleging fraud was compulsory in a suit for payment of a promissory note); see also Nat'l Equip. Rental, Ltd. v. Fowler, 287 F.2d 43, 45-46 (2d Cir.1961) (fraudulent inducement counterclaim in suit for breach of equipment lease was compulsory).

Despite there being a compulsory counterclaim, PFLP failed to assert claims for fraud or negligent misrepresentation, or even to raise them as affirmative defenses to PA's suit. A failure to raise a compulsory counterclaim will result in a bar to future litigation of the claim. Stratton, 144 Vt. at 34-35, 472 A.2d at 1239. Res judicata bars the litigation of a claim or defense if there exists a final judgment in former litigation in which the "parties, subject matter and causes of action are identical or substantially identical." In re CVPS, 172 Vt. 14, 20, 769 A.2d 668, 673 (2001) (internal quotation marks and citation omitted). The doctrine applies both to affirmative defenses that could have been raised before, and to compulsory claims that should have been raised. Id. The purpose of the res judicata doctrine is to promote the finality of judgments and conserve the resources of courts and litigants. "[I]nvocation of res judicata ... relieves parties of the cost and vexation of multiple lawsuits, conserves judicial resources, and, by preventing inconsistent decisions, encourages reliance on adjudication." Kremer v. Chem. Constr. Corp., 456 U.S. 461, 467 n. 6, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982) (internal quotation marks and citation omitted). As such, PFLP's present claims are barred.

Nevertheless, PFLP argues that Monahan and Giuliano were not parties to the first action, which was brought by PA in its capacity as a partnership, and thus no counterclaim could have been filed against them individually. This Court has held that identity of parties exists where the parties or their privies are involved in both actions. Lamb v. Geovjian, 165 Vt. 375, 380, 683 A.2d 731, 735 (1996). A privity relationship generally involves a party so identified in interest with the other party that they represent one legal right. First Wisconsin Mortgage Trust v. Wyman's, Inc., 139 Vt. 350, 358-59, 428 A.2d 1119, 1124 (1981).

Traditionally, when a plaintiff brings suit in one capacity, the defendant may not counterclaim against the plaintiff in a different capacity than that in which plaintiff sued. 3 Moore's Federal Practice ¶ 13.90[2][d] (2002). Courts have noted two exceptions to the traditional rule, however.

First, if a plaintiff has sued in a representative capacity

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