Court Opinion

ID: 1053341
Source: CourtListenerOpinion
Date Created: 2013-10-08 20:39:33.370023+00
Date Added: 2024-06-11T13:13:44.505492
License: Public Domain

IN THE COURT OF APPEALS OF TENNESSEE
                             AT NASHVILLE
                          Assigned on Briefs September 14, 2005

      BILLY SUDDARTH, JR, ET AL. v. HOUSEHOLD COMMERCIAL
                FINANCIAL SERVICES, INC., ET AL.

                     Appeal from the Circuit Court for Davidson County
                          No. 03C-80    Hamilton Gayden, Judge

                  No. M2004-01664-COA-R3-CV - Filed February 13, 2006

Billy Suddarth, Jr. and Angela Suddarth appeal the summary dismissal of their action, which was
dismissed on the grounds of res judicata, collateral estoppel, the Full Faith and Credit Clause, and
the compulsory counterclaim rule of the Federal Rules of Civil Procedure. In the former action in
the United States District Court for the Northern District of Illinois wherein the Suddarths were
defendants, Household Commercial Financial Services, Inc. alleged the Suddarths breached a
guaranty agreement by failing to pay a deficiency owing on the underlying credit agreement they had
guaranteed. Household prevailed on the merits in the former action against the Suddarths. In the
present action in the Circuit Court of Davidson County the Suddarths allege fraud, fraudulent
inducement and civil conspiracy against Household and two other defendants concerning the
guaranty agreement that was the subject of the former action in the United States District Court. The
present claims by the Suddarths arose out of the same transaction or occurrence that was the subject
of Household’s action in the United States District Court; therefore, it was compulsory that the
Suddarths’ claims be presented in the former action. The Suddarths failed to do so. Therefore, we
affirm the dismissal of this action.

      Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed

FRANK G. CLEMENT , JR., J., delivered the opinion of the court, in which WILLIAM C. KOCH , JR., P.J.,
M.S., and PATRICIA J. COTTRELL, J., joined.

G. Kline Preston, Nashville, Tennessee, for the appellants, Billy Suddarth, Jr., and Angela Suddarth.

Neal H. Levin, Chicago, Illinois, and D. Alexander Fardon, Nashville, Tennessee, for the appellee,
Household Commercial Financial Services, Inc.

                                            OPINION

      This is the second action between the Suddarths and Household. The former action was filed
on November 16, 2001. In that action Household alleged that the Suddarths had breached a guaranty
agreement they had executed in favor of Household and sought the remaining debt from a credit
agreement between Household and American National Home Mortgage, Inc. The Suddarths were
principals of American National, and the credit agreement was the subject of the guaranty upon
which Household sued the Suddarths. The Suddarths filed an answer to Household’s complaint and
alleged, inter alia, that the guaranty was procured by fraud and therefore was voidable and
unenforceable; however, they did not file any counterclaims against Household. The Suddarths’
fraud defense was based upon the allegation that Household made an oral promise to extend a new
line of credit to American National in exchange for the Suddarths’ guaranty. Household denied that
any promise was made to extend additional credit, and asserted that no such claim or defense could
be maintained pursuant to the Illinois Credit Agreement Act unless the alleged credit agreement was
in writing and signed by both the creditor and debtor.

        The former action involved two counts: the alleged breach of the personal guaranty
agreement and a conversion claim. Both parties filed motions for summary judgment in respect to
the breach of the guaranty agreement. Household prevailed on its motion for summary judgment and
was awarded a judgment against the Suddarths in the amount of $1,241,013.20.1 The final judgment
in the former action was entered on October 7, 2002, and the Suddarths did not appeal from that
judgment.

        Three months later, on January 8, 2003, the Suddarths filed this action in the Circuit Court
of Davidson County, Tennessee against Household and two individual defendants, Joseph Cleghorn,
Jr. and Amy Fagan, alleging fraud, fraud in the inducement, and civil conspiracy by and among the
three defendants. All of the allegations in the present action pertain to the same guaranty agreement
and the underlying credit agreement upon which Household sued the Suddarths and to Household’s
alleged oral promise to provide a new line of credit in exchange for the Suddarths’ guaranty.
Specifically, the Suddarths allege they were not informed of the conditions of the loans, they relied
upon misrepresentations by representatives of Household, Household made intentional and
knowingly false representations, and the defendants conspired to fraudulently induce the Suddarths
to enter into the guaranty agreement.

        In its answer to the present action in the Circuit Court, Household contended the Suddarths’
claims were barred by res judicata, collateral estoppel, the Full Faith and Credit Clause of the United
States Constitution, and Federal Rule of Civil Procedure 13(a) regarding compulsory counterclaims.
Household filed a motion for summary judgment, which the trial court granted. The Suddarths now
appeal contending that this second suit concerns issues and parties that were not before and could
not have been properly brought before the court in Illinois.

                                             STANDARD OF REVIEW

        The issues were resolved in the trial court upon summary judgment. Summary judgments
do not enjoy a presumption of correctness on appeal. BellSouth Adver. & Publ’g Co. v. Johnson, 100

         1
         The District Court found that the Suddarths’ defense of fraud was barred by the Illinois Credit Agreements Act,
which bars actions for fraud that relate to credit agreements not in writing.

                                                          -2-
S.W.3d 202, 205 (Tenn. 2003). This court must make a fresh determination that the requirements
of Tenn. R. Civ. P. 56 have been satisfied. Hunter v. Brown, 955 S.W.2d 49, 50-51 (Tenn. 1997).
We consider the evidence in the light most favorable to the non-moving party and resolve all
inferences in that party's favor. Godfrey v. Ruiz, 90 S.W.3d 692, 695 (Tenn. 2002). When reviewing
the evidence, we first determine whether factual disputes exist. If a factual dispute exists, we then
determine whether the fact is material to the claim or defense upon which the summary judgment
is predicated and whether the disputed fact creates a genuine issue for trial. Byrd v. Hall, 847
S.W.2d 208, 214 (Tenn. 1993); Rutherford v. Polar Tank Trailer, Inc., 978 S.W.2d 102, 104 (Tenn.
Ct. App. 1998).

        Summary judgments are proper in virtually all civil cases that can be resolved on the basis
of legal issues alone, Byrd, 847 S.W.2d at 210; Pendleton v. Mills, 73 S.W.3d 115, 121 (Tenn. Ct.
App. 2001); however, they are not appropriate when genuine disputes regarding material facts exist.
Tenn. R. Civ. P. 56.04. The party seeking a summary judgment bears the burden of demonstrating
that no genuine disputes of material fact exist and that party is entitled to judgment as a matter of
law. Godfrey v. Ruiz, 90 S.W.3d at 695. Summary judgment should be granted at the trial court
level when the undisputed facts, and the inferences reasonably drawn from the undisputed facts,
support one conclusion, which is the party seeking the summary judgment is entitled to a judgment
as a matter of law. Pero's Steak & Spaghetti House v. Lee, 90 S.W.3d 614, 620 (Tenn. 2002);
Webber v. State Farm Mut. Auto. Ins. Co., 49 S.W.3d 265, 269 (Tenn. 2001). The court must take
the strongest legitimate view of the evidence in favor of the non-moving party, allow all reasonable
inferences in favor of that party, discard all countervailing evidence, and, if there is a dispute as to
any material fact or if there is any doubt as to the existence of a material fact, summary judgment
cannot be granted. Byrd, 847 S.W.2d at 210; EVCO Corp. v. Ross, 528 S.W.2d 20 (Tenn. 1975).
To be entitled to summary judgment, the moving party must affirmatively negate an essential
element of the non-moving party's claim or establish an affirmative defense that conclusively defeats
the non-moving party's claim. Cherry v. Williams, 36 S.W.3d 78, 82-83 (Tenn. Ct. App. 2000).

                                                  ANALYSIS

       The Circuit Court of Davidson County summarily dismissed the Suddarths’ complaint on
multiple grounds: res judicata, collateral estoppel, the Full Faith and Credit Clause, and the
compulsory counterclaim rule of the Federal Rules of Civil Procedure. We have concluded the
dismissal was properly based on the failure of the Suddarths to assert the present claim as a
compulsory counterclaim in the federal court action.2

      In the former action, Household sued the Suddarths on a guaranty agreement for a deficiency
owed by American National Home Mortgage, Inc. Household had entered into a credit agreement
with American National and additionally a guaranty agreement with the Suddarths. The guaranty
agreement provided that the Suddarths would be personally liable to Household for the obligations

        2
          Finding the dismissal was proper on this ground renders it unnecessary that we discuss the appellant’s
contentions as to the other grounds for dismissal.

                                                      -3-
of American National in the event American National defaulted on the credit agreement. American
National defaulted on the loans and went out of business owing a substantial debt to Household. As
a consequence, Household filed suit against the Suddarths to hold them personally liable on the
guaranty agreement for the obligations of American National. The Suddarths asserted several
defenses to Household’s action, including the defense that Household fraudulently induced them to
sign the guaranty agreement by promising a new line of credit to American National in exchange for
their guaranty signature; however, the Suddarths did not assert a counterclaim for fraud. Household
filed a motion for summary judgment and was awarded a judgment on the merits against the
Suddarths on the basis of the guaranty agreement.

        The former action between the Suddarths and Household was commenced and maintained
in the United States District Court for the Northern District of Illinois.3 Accordingly, the parties
were obligated to comply with the Federal Rules of Civil Procedure in that action. Fed. R. Civ. P.
13(a) sets forth a mandatory provision for a defendant to state as a counterclaim any claim the
defendant has against the plaintiff, “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.” (emphasis added).4

        “[A] compulsory counterclaim arises out of the same transaction or occurrence that is the
subject matter of the opposing party’s claim.” Sanders v. First Nat’l Bank and Trust Co. in Great
Bend, 936 F.2d 273, 277 (6th Cir. 1991) (citing Maddox v. Kentucky Fin. Co., Inc., 736 F.2d 380,
382 (6th Cir. 1984)). To determine whether the claims alleged in a second action were compulsory
counterclaims in the first action, it must determined whether they are logically related. See Sanders,
936 F.2d at 277; see also Inforizons, Inc. v. VED Software Servs., Inc., 204 F.R.D. 116, 119 (N.D.
Ill. 2001). “Federal law does not impose a formalistic test to determine whether suits are logically
related so as to equate one suit a compulsory counterclaim of the other.” Inforizons, 204 F.R.D. at
119 (citations omitted). We look to the issues of law and facts raised by the claims to see if they are
largely the same. See generally Sanders, 936 F.2d at 277.

       It is undisputed the former action arose out of the same business relationship between the
Suddarths and Household at issue in the present action, and specifically out of the guaranty
agreement sued on in the former action. Because both the first suit and the second suit arose out of
the same transaction or occurrence, the guaranty agreement between the Suddarths and Household,

         3
           The guaranty agreement provided that any disputes involving the agreement would be brought in the courts
of Illinois or in the United States District Court for the Northern District of Illinois. The federal court properly had
jurisdiction over the parties on the basis of diversity of citizenship because Household was a Delaware corporation with
its principal place of business in Illinois, and the Suddarths were Tennessee residents.

         4
           It should be noted that Tenn. R. Civ. P. 13.01, which is very similar to Fed. R. Civ. P. 13(a), is dissimilar in
one important respect, the Tennessee rule includes an exception not found in the federal rule, that is the exception
pertaining to tort claims. Tenn. R. Civ. P. 13.01 reads in part, “A pleading shall state as a counterclaim any claim, other
than a tort claim, which at the time of serving the pleading the pleader has against any opposing party . . .” Fed. R. Civ.
P. 13(a) reads in part, “A pleading shall state as a counterclaim any claim which at the time of serving the pleading the
pleader has against any opposing party, . . .”

                                                           -4-
we find the two actions are logically related. Therefore, the Suddarths would have been required to
assert their present claim in the former action as a compulsory counterclaim assuming doing so did
not “require for its adjudication the presence of third parties of whom the court [could not] acquire
jurisdiction,” as Fed. R. Civ. P. 13(a) provides.

        The Suddarths contend they could not have asserted the counterclaim in the federal court
action because adjudication of the counterclaim required the addition of Joseph Cleghorn and Amy
Fagan, both of whom are Tennessee residents. The Suddarths contend the addition of Cleghorn and
Fagan would have deprived the federal court of its jurisdiction, which was based on diversity of
citizenship, because the Suddarths are also Tennessee residents. We find the Suddarths’ reliance on
the exception to the compulsory counterclaim rule without merit because it fails to recognize the
federal court’s ancillary jurisdiction.

        The Federal Rules of Civil Procedure require a party to be joined in an existing action “when
nonjoinder would prevent complete relief from being accorded the existing parties or would have
a prejudicial effect on the nonparty’s ability to protect his own interests.” Baltimore & Ohio R.R. Co.
v. Cent. Ry. Servs., Inc., 636 F.Supp 782, 786-787 (E.D. Penn. June 9, 1986) (quoting 7 C. Wright
& A. Miller, Federal Practice & Procedure § 1604 (Supp. 1985); Fed. R. Civ. P. 19(a)). In the
complaint in Circuit Court, the Suddarths allege that Cleghorn and Fagon conspired with Household
to commit a fraud upon them. Under such circumstances, Cleghorn and Fagon were parties that
should have been joined as necessary parties under Rule 19 of the Federal Rules of Civil Procedure.

        Contrary to the contentions of the Suddarths, the joinder of Cleghorn and Fagon would not
have defeated the federal court’s jurisdiction over the counterclaim. This is due to the federal court’s
ancillary jurisdiction, which would have permitted the joinder of Cleghorn and Fagon without
destroying diversity jurisdiction. See Alfa Ins. Corp. v. Word of Faith Ministries, 139 F.R.D. 350,
353 (S.D. Mississippi Sept. 23, 1991)(where counterclaims were compulsory counterclaims, they
were deemed auxiliary to the main claim, and no independent jurisdictional grounds were needed
to support them, and lack of diversity did not defeat them)(citing Moore v. New York Cotton Exch.,
270 U.S. 593, 46 S. Ct. 367, 70 L. Ed. 750 (1926)). Accordingly, the fact Cleghorn and Fagon are
Tennessee residents would not have prevented the Suddarths from asserting “compulsory
counterclaims against a new non-diverse party under the court’s ancillary jurisdiction and the
procedure outlined in Fed. R. Civ P. 13(h).” Int’l Surplus Lines Ins. Co. v. City of Crystal River,
Florida, 674 F. Supp. 1455, 1457 (M.D. Fla. Dec. 14, 1987)(other citations omitted).

       The Suddarths additionally assert the novel, yet meritless theory that they were precluded
from asserting a counterclaim for fraud in the federal court action. They point to the Illinois Credit
Agreement Act, 815 Ill. Comp. Stat. 160/1 et seq., which provides in pertinent part:

       A debtor may not maintain an action on or in any way related to a credit agreement
       unless the credit agreement is in writing, expresses an agreement or commitment to
       lend money or extend credit or delay or forbear repayment of money, sets forth the
       relevant terms and conditions, and is signed by the creditor and the debtor.

                                                  -5-
815 Ill. Comp. Stat. 160/2. The defense the Suddarths asserted, and thus the counterclaim they
would have asserted was based upon an alleged oral agreement to extend credit, which the Illinois
Credit Agreement Act provides cannot be maintained. Thus, the Suddarths argue they could not
have asserted a counterclaim for fraud in the federal court action because they would have lost on
the merits.

         The obligation to assert a counterclaim is not dependent upon nor excused by the fact the
claim has no merit. The point missed by the Suddarths is that Fed. R. Civ. P. 13(a) mandated that
they assert the counterclaim in the interest of judicial economy, not in the likelihood they would
prevail. The only relevant question is whether the Suddarths’ claim, whether asserted or not, arose
out of the same transaction or occurrence as the claim in federal court.5 The answer to the question
is in the affirmative.

         The Suddarths’ claims for fraud and conspiracy to commit fraud in the present action arose
out of the same transaction or occurrence as Household’s initial claim and, therefore, pursuant to
Fed. R. Civ. P. 13(a) the Suddarths were required to assert it as a counterclaim in the former action,
and having failed to do so are forever barred from raising the claim in another action, including the
present action. See Sanders, 936 F.2d at 277 (citing Baker v. Golden Seal Liquors, Inc., 417 U.S.
467, 469 n.1, 94 S. Ct. 2504, 2506 n.1, 41 L. Ed. 2d 243 (1974)(holding that “an opposing party’s
failure to plead a compulsory counterclaim forever bars that party from raising the claim in another
action).

                                                   IN CONCLUSION

       The judgment of the trial court is affirmed, and this matter is remanded with costs of appeal
assessed against the Suddarths.

                                                                   ___________________________________
                                                                   FRANK G. CLEMENT, JR., JUDGE

         5
          Pursuant to Fed. R. Civ. P. 13(a) it is also necessary that the federal court could have obtained jurisdiction over
necessary additional parties. The Suddarths did not establish that the federal court could not have acquired jurisdiction
over Cleghorn and Fagon.

                                                            -6-