United States District Court, W.D. Virginia, Charlottesville Division
HON. GLEN E. CONRAD, CHIEF UNITED STATES DISTRICT JUDGE
Plaintiffs Crossroads Equity Partners, LLC ("CEP") and Charles Lunsford filed this declaratory judgment action against defendants Dogmatic Products, Inc. ("DPI") and Reynolds E. Moulton, III. This case is presently before the court on plaintiffs' motion for judgment on the pleadings. For the reasons set forth below, the court will deny the motion.
CEP was the holder of a promissory note made by DPI in the amount of $150, 000.00 (the "Note"). Moulton personally guaranteed both DPI's payment of the Note and the performance of its obligations under the Note. DPI and Moulton subsequently defaulted on both the Note and the guaranty. After the defaults, CEP filed a two-count complaint in this court against DPI and Moulton for breach of contract. See Crossroads Equity Partners, LLC v. Dogmatic Products. Inc., No. 3:1 l-CV-00069 (W.D. Va.). In this prior federal action, Moulton, proceeding pro se, filed four counterclaims against CEP in which he alleged, inter alia, that Lunsford breached certain duties to DPI and wrongfully used the Note "as leverage to take the assets" of DPI. Compl. ¶ 18. Moulton later withdrew these counterclaims after he retained counsel to represent both him and DPI.
After DPI and Moulton failed to oppose CEP's motion for summary judgment, the court entered judgment against them on May 8, 2012 for the principal amount of $150, 000.00, plus interest, late fees, and attorney's fees and costs; the total judgment exceeded $200, 000.00. On May 8, 2013, DPI and Moulton filed a motion for relief from the court's judgment, arguing that they received ineffective assistance of counsel as to the motion for summary judgment. Specifically, DPI and Moulton argued that their attorney convinced them not to oppose the motion or file any counterclaims. They alleged that this advice severely prejudiced and penalized them. On November 11, 2013, Moulton filed an affidavit in which he represented that counsel failed to advise him and DPI that certain counterclaims were compulsory and, thus, deprived them of their right to assert these counterclaims. On February 24, 2014, the court denied the motion for relief from judgment. The final proceeding in the prior federal action occurred on July 22, 2014 when the court awarded CEP its attorney's fees and costs.
On November 6, 2014, DPI and Moulton filed a complaint in the Circuit Court for the County of Albemarle, asserting claims of conspiracy, tortious interference, and breach of contract against CEP and Lunsford. On January 15, 2015, CEP and Lunsford filed the instant action, seeking a declaration that Rule 13 of the Federal Rules of Civil Procedure bars DPI and Moulton from pursuing the claims in the state action because those claims were compulsory counterclaims in the prior federal action. Specifically, CEP and Lunsford allege that the state action claims arose out of the same transaction or occurrence that was the basis of the claims in the prior federal action and, thus, are barred by the federal compulsory counterclaim rule. On March 26, 2015, DPI and Moulton filed a motion to dismiss the instant action. In that motion, they argued that the complaint failed to state a proper claim for declaratory relief, or, in the alternative, that the court should decline to entertain the declaratory judgment action. On October 14, 2015, the court denied the motion to dismiss and held that it would exercise its discretion to entertain the action. Thereafter, DPI and Moulton filed an answer in the instant action in which they denied the allegations in the complaint and raised various affirmative defenses, including that the state action claims were not compulsory counterclaims. On November 20, 2015, plaintiffs filed a motion for judgment on the pleadings. The court held a hearing on the motion on March 3, 2016. The motion has been fully briefed and is now ripe for disposition.
Standard of Review
Rule 12 of the Federal Rules of Civil Procedure provides that "[a]fter the pleadings are closed-but early enough not to delay trial-a party may move for judgment on the pleadings." Fed.R.Civ.P. 12(c). A motion for judgment on the pleadings is appropriate when there are no genuine issues of material fact and "only questions of law remain." Va. Imports v. Kirin Brewery of Am., 296 F.Supp.2d 691, 695 (E.D. Va. 2003); see also O'Rvan v. Dehler Mfg. Co., 99 F.Supp.2d 714, 718 (E.D. Va. 2000) ("Judgment should be entered when the pleadings, construing the facts in the light most favorable to the non-moving party, fail to state any cognizable claim for relief, and the matter can, therefore, be decided as a matter of law."). Such motions are "designed to dispose of cases when the material facts are not in dispute and the court can judge the case on its merits by considering the pleadings." Preston v. Leake, 629 F.Supp.2d 517, 521 (E.D. N.C. 2009). However, the court should not grant a Rule 12(c) motion "unless the movant clearly establishes that no material issue of fact remains to be resolved and that he is entitled to judgment as a matter of law." Quality Props. Asset Mgmt. Co. v. Trump Va. Acquisitions, LLC, No. 3:11-CV-00053, 2012 WL 3542527, at *2 (W.D. Va. Aug. 16, 2012). The court must view the facts presented in the pleadings and the inferences drawn therefrom in the light most favorable to the non-moving party. Edwards v. City of Goldsboro, 178 F.3d 231, 248 (4th Cir. 1999). Thus, in reviewing a Rule 12(c) motion, district courts apply the same standard that would apply to a Rule 12(b)(6) motion to dismiss for failure to state a claim, Independence News, Inc. v. City of Charlotte, 568 F.3d 148, 154 (4th Cir. 2009), and may consider exhibits attached to the pleadings, Massev v. Oianiit. 759 F.3d 343, 347 (4th Cir. 2014).
CEP and Lunsford believe that they are entitled to judgment as a matter of law that the claims in the state action were compulsory counterclaims in the prior federal action. DPI and Moulton oppose the motion and ask that the court find that their state action claims are not barred by the compulsory counterclaim rule.
Reviewing the pleadings in the instant action, the court concludes that CEP and Lunsford have failed to demonstrate that they are entitled to judgment on the pleadings. As an initial matter, the court believes that there is no material issue of fact that remains to be resolved as to the limited question before this court. Although there are certainly factual disputes as to the merits of the state action claims, this court is not tasked with deciding the merits of those allegations. Moreover, the court also believes that CEP and Lunsford have not clearly established the merits of their legal arguments in order for them to be entitled to judgment as a matter of law. See JP Morgan Chase Bank. NA. v. Sampson, No.
1:10-cv-1666, 2012 WL 949698, at *7 (N.D.Ga. Mar. 20, 2012) ("[P]laintiff has failed to demonstrate its entitlement to judgment on the pleadings, not because of a disputed issue of fact, but because its claims fail as a matter of law."). Although DPI and Moulton have not filed a cross-motion for judgment on the pleadings in their favor, they dispute whether CEP and Lunsford are entitled to judgment as a matter of law and, instead, argue that they are entitled to judgment as a matter of law.
In the instant action, CEP and Lunsford contend that the claims in the state action arose out of the same transaction or occurrence as the claims in the prior federal action and, therefore, were compulsory counterclaims. Rule 13 of the Federal Rules of Civil Procedure provides that "[a] pleading must state as a counterclaim any claim that... the pleader has against an opposing party if the claim ... arises out of the transaction or occurrence that is the subject matter of the opposing party's claim[.]" Fed.R.Civ.P. 13(a)(1). "Although the rule does not explicitly so state, the effect of a defendant's failure to assert a counterclaim made compulsory by [Rule 13(a)] is to preclude its assertion in a later action against the former plaintiff." Mesker Bros. Iron Co. v. Donata Corp.. 401 F.2d 275, 279 (4th Cir. 1968).
In the Fourth Circuit, there are four inquiries that district courts consider in determining whether a counterclaim is compulsory: "(1) Are the issues of fact and law raised in the claim and counterclaim largely the same? (2) Would res judicata bar a subsequent suit on the party's counterclaim, absent the compulsory counterclaim rule? (3) Will substantially the same evidence support or refute the claim as well as the counterclaim? and (4) Is there any logical relationship between the claim and counterclaim?" Painter v. Harvey, 863 F.2d 329, 331 (4th Cir. 1988). A court need not answer every question in the affirmative for a counterclaim to be compulsory. Id. The "underlying thread" to each inquiry is "evidentiary similarity." 14. at 332. If "the same evidence will support or refute the claim and counterclaim, the counterclaim will almost always be compulsory." Id. However, the "same evidence test" is not the "exclusive determinant of compulsoriness ... because it is too narrow a definition of a single transaction or occurrence." Id As such, a counterclaim may be compulsory as a "logically related claim even though the evidence needed to prove the opposing claims may be quite different." IcL; see also 6 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1410 (3d. ed. 2010) ("[LJogical relationship ... is the preferred approach for determining what claims arise out of the same transaction or occurrence.")
Applying these principles, the court concludes that CEP and Lunsford are not entitled to judgment as a matter of law as DPI and Moulton's claims in the state action were not compulsory counterclaims in the prior federal action under either the "same evidence" or the "logical relationship" tests.In the prior federal action, CEP asserted claims for breach of contract against DPI and Moulton. Under Count I, CEP claimed that DPI failed to make quarterly payments on the Note and failed to pay the accelerated sum once CEP demanded repayment, thereby breaching the terms of the Note. Under Count II, CEP alleged that Moulton personally guaranteed the Note and failed to pay the accelerated sum upon DPI's default, thereby breaching the terms of the guaranty. In the state action, filed by DPI and Moulton, the ...