Opinion ID: 1291829
Heading Depth: 2
Heading Rank: 1

Heading: B.C.G. Enters., 184 Wis. 2d at 480-81.

Text: ¶31 Menard argues that the two suits here do not arise out of the same transaction because Liteway's original suit was a contract action based on nonpayment of invoices, whereas Menard's suit is based on a breach of obligations under the UCC. Menard states that it is seeking to enforce separate and distinct rights under the UCC and takes issue with the court of appeals' conclusion that in the realm of the sale of goods, shipment by the seller and acceptance or return by the buyer deserve `treatment as a unit[.]' Menard, 273 Wis. 2d 439, ¶18. Although we do not agree with the bright-line rule established by the court of appeals, we nonetheless conclude that the claims in Liteway's original suit and Menard's present suit are part of the same transaction. ¶32 Under the transactional analysis, it is irrelevant that the legal theories, remedies sought, and evidence used may be different between the first and second actions. The concept of a transaction connotes a common nucleus of operative facts. Kruckenberg, ___ Wis. 2d ___, ¶26. Thus, the fact that Menard is asserting different substantive legal theories arising from rights and obligations under the UCC in its suit is not dispositive. See Restatement (Second) of Judgments § 24 cmt c. (1982). [7] The goal in the transactional approach is to see a claim in factual terms and to make a claim coterminous with the transaction, regardless of the claimant's substantive theories or forms of relief, regardless of the primary rights invaded, and regardless of the evidence needed to support the theories or rights. Kruckenberg, ___ Wis. 2d ___, ¶26 (emphasis added). [8] ¶33 Furthermore, the fact that the sale of goods and the return of those goods may be considered separate financial transactions in common parlance is not dispositive. [T]he concept of a transaction is here used in the broad sense it has come to acquire in the interpretation of statutes and rules governing pleading and other aspects of civil procedure. Thus the overtones of voluntary interchange often associated with the term in normal speech do not obtain. Restatement (Second) of Judgments § 24 cmt b. (1982). [9] Therefore, the fact that [in] everyday business, the sale, delivery and responsibility on invoices is commonly understood to be one transaction and the subsequent return . . . a separate transaction[,] Resp't Br. at 18, is irrelevant for purposes of a claim preclusion analysis. In sum, the transactional approach views claims under a pragmatic standard that focuses on whether the two causes of action arise out of the same common set of material facts. See Restatement (Second) of Judgments § 24 cmt b. (1982). ¶34 An additional consideration applies in the present case because Liteway's original suit resulted in a default judgment. For purposes of claim preclusion: The conclusiveness of a default judgment . . . `is limited to the material issuable facts which are well pleaded in the declaration or complaint. The judgment does not extend to issues which were not raised in the pleadings.' A.B.C.G. Enters., 184 Wis. 2d at 481 (quoting Klaus v. Vander Heyden, 106 Wis. 2d 353, 359-60, 316 N.W.2d 664 (1982)). ¶35 Liteway's original complaint alleged, in part, as follows: Breach of Contract 3. From time to time, Menards requested Liteway sell Menards certain Lighting Fixtures, supplies and equipment . . . on credit. Liteway sold and shipped the Lighting Fixtures to Menards on credit. 4. Liteway sent invoices for payment of the purchase price of the Lighting Fixtures . . . to Menards. Copies of Liteway's accounting records showing the dates and amounts of the Invoices sent to Menards are attached as Exhibit A. 5. Despite demand, Menards has failed and refused to pay the Invoices. 6. The unpaid balance on the Invoices as of September 1, 2000, is $354,954.77. 7. Failure of Menards to pay for the Lighting Fixtures constitutes a breach of contract with Liteway. Liteway also alleged causes of action for Open Account, Goods Sold, and Bad Faith based on these facts and demanded a judgment in the sum of $354,954.77, plus interest and incidental damages. ¶36 In the present suit, Menard sought a judgment of $315,345.54 for goods returned to Liteway. According to Menard's complaint, it purchased goods from Liteway beginning around 1994 until December of 1999. It is undisputed that the parties stopped doing business after December 1999. Liteway commenced its original action on October 19, 2000, for unpaid invoices as of September 1 of that year. It is also undisputed that Menard purchased these products from Liteway on credit. Further, Menard has conceded that all the allegedly defective goods that it returned to Liteway were returned before Liteway instituted its original action. [10] An affidavit filed by one of Menard's attorneys clearly states that the parties began disputing how much money Menard's owed Liteway as of August 18, 1999, and that while Menard conceded it owed some money to Liteway for the goods it purchased on credit, it disputed the sum claimed by Liteway. ¶37 Moreover, an internal memorandum from one of Menard's attorneys that was filed as an exhibit plainly states that Menard disputed the sum claimed by Liteway because of the amount it took as an offset for damaged and returned goods: Bottom linewe stopped purchasing product from Liteway in mid-December. We have held back payment in order to cover future customer returns. . . . . . . The difference between their numbers and our numbers are most likely customer returns. There was a history of customer return discrepancies with Liteway that we always worked out after providing proofs of deliveries, etc. They have always claimed that they did not receive back the same amount of product that we deducted for. (Emphasis added.) ¶38 Therefore, it is clear that all the facts giving rise to Menard's suit were in existence at the time Liteway filed its original action. More importantly, it is obvious that these facts formed the foundation of both lawsuits. Liteway sold goods to Menard on credit. Menard returned some of the goods as allegedly defective and took a credit for these and future customer returns. Liteway demanded payment on the open accounts. The parties stopped doing business and Menard did not pay the sum demanded by Liteway for the invoices because it disputed the amount of credit to which it was entitled for the returned goods. The claims Menard asserts in its second suit are not based on a separate series of underlying events; rather, they are defenses and counterclaims to Liteway's original claims and are premised on the same common nucleus of operative facts. That a number of different legal theories casting liability on an actor may apply to a given episode does not create multiple transactions and hence multiple claims. This remains true although the several legal theories depend on different shadings of the facts, or would emphasize different elements of the facts, or would call for different measurements of liability or different kinds of relief. Restatement (Second) of Judgments § 24 cmt. c (1982). ¶39 Thus, we conclude that the two causes of action constituted a single transaction for purposes of claim preclusion. [11] Such a conclusion does not expand the conclusiveness of Liteway's default judgment beyond the material issuable facts that were well pleaded in Liteway's complaint because Liteway's original complaint plainly raised the issue of the amount of money Menard owed on the open invoices. Menard disputed the amount claimed by Liteway because of the credit it took for customer returns of allegedly defective products. The reasons why Menard asserts it does not owe as much as Liteway originally claimed are not unpleaded issues or new transactions; they are merely defenses and/or counterclaims to Liteway's original claims based on the same set of facts as Liteway's claims. See A.B.C.G. Enters., 184 Wis. 2d at 482. [12] Despite the different substantive theories asserted by Menard, its position has always been that Liteway was not entitled to as much money as it claimed because Menard was entitled to an offset for defective products that were returned. See N. States Power, 189 Wis. 2d at 555. In the end, both suits raise the single issue of how much money Menard owed Liteway for the goods Liteway sold to Menard on credit. [13] ¶40 However, we do not go as far as the court of appeals' conclusion that in the realm of the sale of goods, shipment by the seller and acceptance or return by the buyer deserve `treatment as a unit[.]' Menard, 273 Wis. 2d 439, ¶18. The UCC expressly provides the buyer of goods with a reasonable time to reject nonconforming goods and seasonably notify the seller, Wis. Stat. § 402.606(1), and allows a buyer to revoke acceptance of nonconforming goods within a reasonable time after the buyer discovers or should have discovered the nonconformity. Wis. Stat. § 402.608. It is entirely plausible that in some cases, a buyer may not in fact discover the nonconformity, or legally be required to discover the nonconformity, until after the seller has obtained a judgment in a suit for the price of the goods. The court of appeals' decision would hold that any subsequent action based on the return of the goods was part of the same transaction as the original suit. Such a conclusion would clearly interfere with a buyer's rights under the UCC in some circumstances. ¶41 Under a correct application of the transactional analysis, this result would be avoided. The Restatement (Second) of Judgments § 24 cmt f. (1982) provides: Material operative facts occurring after the decision of an action with respect to the same subject matter may in themselves, or taken in conjunction with the antecedent facts, comprise a transaction which may be the basis of a second action not precluded by the first. This exception is consistent with the pragmatic view of what constitutes a transaction, in that it takes into account whether the operative facts are separated by time. See A.B.C.G. Enters., 184 Wis. 2d at 481. ¶42 Had Menard not discovered that Liteway's goods were defective and nonconforming until after Liteway's default judgment, it would have a good argument that the separation in time between the facts in the two suits was sufficient to render its return of the defective goods a separate transaction. However, here, Menard has conceded that all of the allegedly defective goods for which it seeks credit were discovered and returned to Liteway prior to Liteway's original suit. It is uncontested that the parties stopped doing business almost a year prior to Liteway's original suit and that the issue of customer returns of defective products was the root of their dispute. Thus, Menard's claims could clearly have been raised in Liteway's prior suit. See N. States Power, 189 Wis. 2d at 555 ([T]he transactional view of claim preclusion requires `the presentation in the action of all material relevant to the transaction without artificial confinement to any substantive theory or kind of relief . . . .')(quoting DePratt, 113 Wis. 2d at 311-12). ¶43 The fact that all of the allegedly defective goods were returned prior to Liteway's original suit is precisely what distinguishes this case from National Operating. In that case, a debtor, National Operating, borrowed a substantial sum of money from MONY to purchase commercial real estate. Nat'l Operating, 244 Wis. 2d 839, ¶¶4-7. The loan was secured by a mortgage note. Id., ¶7. Later, the debtor sold the property to another company, Bridgeview, in exchange for a wrap-around note, which required monthly payments in excess of National Operating's monthly obligation to MONY. Id., ¶8. The parties renegotiated the loan after MONY called the loan. Id., ¶¶9-11. As part of the renegotiation, National Operating assigned certain rights in the Bridgeview wrap-note to MONY. Id., ¶11. National Operating eventually defaulted, and MONY instituted a declaratory judgment action seeking to confirm its assumption of the wrap-note and the extinguishment of National Operating's rights under the note and mortgage. Id., ¶¶13, 15. ¶44 National Operating failed to answer, and a default judgment was entered. Id., ¶¶13, 17. As a result of the declaratory judgment, MONY stepped into National Operating's shoes, took over the wrap-note and the mortgage, and began to receive monthly payments from Bridgeview. Id., ¶18. Subsequently, MONY and Bridgeview entered into an agreement whereby Bridgeview would satisfy the total amount outstanding on the wrap-note for less than the total amount due, but for more than the total amount due on National Operating's underlying note. Id., ¶19. When National Operating became aware that MONY intended to keep the difference, it filed suit against MONY, contending that MONY was unlawfully disposing National Operating's collateral in violation of Article 9 of the UCC. Id., ¶¶20-21. ¶45 Thus, National Operating's suit was based on a different transactionMONY's alleged unlawful conversion of collateralthan MONY's original suitNational Operating's default on its loan. Further, National Operating's suit was based on facts that did not exist at the time of MONY's original suit. See Restatement (Second) of Judgments § 24 cmt. f & illus. 10 (1982). Therefore, National Operating is factually distinguishable from the present case. ¶46 Having concluded that Menard's claims in this case are part of the same transaction that gave rise to Liteway's claims, we now turn and address the final element of the common-law compulsory counterclaim rulewhether a judgment in favor of Menard in its suit would undermine Liteway's judgment or impair the rights of Liteway that were established in the previous action. ¶47 We begin by again emphasizing that Wisconsin, by statute, is a permissive counterclaim state. See Wis. Stat. § (Rule) 802.07(1). In A.B.C.G. Enterprises, 184 Wis. 2d at 480, this court carved out a narrow exception to our permissive counterclaim statute by adopting the common-law compulsory counterclaim rule as set forth in the Restatement (Second) of Judgments § 22(2)(b)(1982). The rule applies only where a favorable verdict to the plaintiff in the second suit would undermine the judgment in the first suit or impair legal rights established in the first suit. Id. at 477, 480-82. ¶48 However, we note that the Restatement's formulation of the common-law compulsory counterclaim rule applies whether or not the prior judgment was by default. The rule indeed is especially important because it works to guarantee that even default judgments mean something and cannot normally be undone by later litigation. Elegant Res Judicata Doctrine at 1753. Further, the common-law compulsory counterclaim rule emerged as a specific aspect of the broad principle whereby a valid and final judgment generally precludes the defendant from later asserting mere defenses to the claim. Id. at 1756. Thus, the Restatement's view of the common-law compulsory counterclaim rule indicates at least that the application of the rule to a judgment should not `be affected by the course of the first case' in terms of default, dismissal, or the like. Id. ¶49 Examining the facts of this case, it is clear that the present case is governed by the reasoning of this court in A.B.C.G. Enterprises. In that case, First Bank, the mortgagee, sued ABCG, seeking to foreclose its interests in certain properties pursuant to mortgage assumption agreements. A.B.C.G. Enters., 184 Wis. 2d at 471. ABCG did not defend, and First Bank obtained a default judgment. Id. Later, ABCG filed suit against First Bank, asserting that First Bank's breach of contract, misrepresentations, and failure to properly manage the properties and collect rental payments caused ABCG to default on its mortgage obligations and lose its interest in the properties. Id. at 471-72. ¶50 After concluding that both suits arose from the same transaction, id. at 481-82, this court concluded that a judgment favorable to ABCG would nullify the default judgment entered in First Bank's prior foreclosure action: Essentially, ABCG alleges that the original foreclosure was improper. First Bank established the validity of ABCG's mortgage obligation; ABCG claims that its obligation was not valid because of misrepresentations by First Bank. First Bank established that ABCG was in default; ABCG alleges that absent the Bank's action, it would not be in default. Finally, First Bank established the amount at issue in the mortgages; ABCG attempts to put the amount at issue again by alleging that payments were not properly received and applied to the mortgage debt. A judgment in favor of ABCG would thus directly undermine the original default judgment in which the court held that under the circumstances, foreclosure was proper. If we were to allow ABCG to recover damages from First Bank, or if we were to grant other equitable remedies (as ABCG requests), the judgment awarding First Bank the amounts due on the properties and additional costs would be rendered meaningless. If a court found the mortgages invalid or First Bank to have caused the default, First Bank could be essentially forced to return its previous recovery. In the interest of equity and finality, we hold that ABCG is barred from raising its present claims against First Bank. Id. at 482-83. ¶51 Likewise, here, Liteway established the amount due and owing on its open invoices for the goods it sold to Menard in the first action. Now, Menard essentially challenges that amount by claiming that some of the goods for which it did not pay were defective and nonconforming. Menard attempts to put the amount of the judgment in issue by claiming that Liteway did not properly credit it for returned goods that were allegedly defective and was thus unjustly enriched. As evidenced by the Menard internal memorandum discussed supra, Menard's claims for credit for defective products were always integrally related to Liteway's demand for payment on open invoices and were always the means by which Menard contested the amount claimed by Liteway on those invoices. As counsel for Menard stated in an affidavit: Menard, Inc. has consistently disputed the amount of damages as requested in [Liteway's] Complaint and as set forth in the default judgment. Further, Menard admitted during the course of its lawsuit that Liteway did provide some credit to Menard for returned goods, although Menard claimed it was entitled to a greater amount. Both suits involve the amount of money Menard owed Liteway. [14] ¶52 Moreover, as discussed supra, a recovery for the price of goods sold under the UCC is dependent upon those goods being accepted or conforming. See Wis. Stat. § 402.709(1)(a). By claiming that some of the products Liteway sold were defective, Menard is necessarily attacking the legitimacy of Liteway's original judgment. A seller in an action for price of goods sold may recover only the price of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer. Wis. Stat. § 402.709(1)(a). Liteway could therefore not have recovered the price of goods that were nonconforming or whose acceptance was lawfully revoked. By now alleging that some of these goods were defective and that it is entitled to credit for these goods, Menard is necessarily challenging the very premise of Liteway's original suit: that Liteway sold conforming goods for which it was not paid. A judgment in favor of Menard based on returns of defective products would thus directly undermine the original default judgment. Were we to allow Menard to enforce its judgment in the second action, Liteway would essentially be forced to return a portion of its previous recovery. Menard's suit is merely an attempt to collaterally attack the original judgment by raising defenses and counterclaims to Liteway's original suit and avoid the circuit court's determination that the failure to raise these claims in a timely fashion did not constitute excusable neglect. ¶53 Again, Menard argues that this case should be governed by National Operating and not A.B.C.G. Enterprises. However, National Operating is again distinguishable. First, the prior judgment in National Operating arose from a declaratory judgment action, the preclusive effect of which is limited to those matters pled with sufficient clarity. Nat'l Operating, 244 Wis. 2d 839, ¶¶17, 93. The court in National Operating concluded that the claims in National Operating's subsequent suit raised issues concerning certain rights that National Operating possessed in the wrap-note, which rights were not implicated in MONY's prior declaratory judgment complaint. Id., ¶¶94-96. While, as discussed supra, the preclusive effect of a default judgment is limited to those matters actually litigated, we have already determined that Liteway's prior suit raised the issue of how much Menard owed on the open invoices and that Menard's present suit is simply a means of collaterally challenging this amount. ¶54 Thus, we conclude that all the prerequisites to the application of claim preclusion and the common-law compulsory counterclaim rule are present in this case. [15] Therefore, we conclude that Menard is barred from maintaining its present suit against Liteway. [16]