Should the Raising of Transactionally-Related Counterclaims Be a Required Part of Defendant's Answer in Virginia Practice

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1 TO: The Bench and Bar of Virginia FROM: Advisory Committee on Rules of Court DATE: October 1, 2007 Should the Raising of Transactionally-Related Counterclaims Be a Required Part of Defendant's Answer in Virginia Practice The Advisory Committee on Rules of Court is seeking public comment on the question whether, in light of the developments in law and equity and the new res judicata Rule of 2006, a Rule of Court should be created requiring that those counterclaims which arise from the same conduct, transaction or occurrence as the claims of the plaintiff must be raised in the pending lawsuit, rather than remaining available for a subsequent lawsuit later. This concept has not been approved by the Advisory Committee or recommended to the Judicial Council of Virginia. Rather, the Advisory Committee has resolved that it desires input from the Bench and Bar, and the general public, on the question. A draft Rule is included below to indicate the general nature of the similar rules that exist in federal practice and in about 4/5ths of all the States. To encourage consideration of the relevant issues, the Advisory Committee provides the following short explanatory essay. A longer report is available from Steven DalleMura, in the Office of the Executive Secretary of the Supreme Court of Virginia, and may be obtained by e- mailing him at: sdallemura@courts.state.va.us. Brief Background Report on Pleading Counterclaims The historical practice in Virginia has treated all counterclaims as "permissive," that is, a defendant has had no obligation to plead counterclaims against a plaintiff even if the possible counterclaims arise from the same conduct, transaction or occurrence that the plaintiff will be litigating in the plaintiff's case. This doctrine has now been abandoned in 42 other states, the District of Columbia, and the federal courts. Recent adoption by the Court of Rule 1:6 makes continued adherence to the "all counterclaims are permissive" doctrine a dramatic anomaly, and 1

2 arguably invites abuse of the judicial system by a defendant in precipitating multiple lawsuits over the same events. A. What Other States Do The rules in 42 states, the District of Columbia, and the 95 federal district courts reflect the judgment of almost all American jurisdictions, which have decided in the last 70 years that a defendant should bring any counterclaim available against the plaintiff as part of the original lawsuit if the counterclaim arises out of the same conduct, transaction or occurrence as the plaintiff's claim. Several of the states that have not adopted a broad-scale compulsory counterclaim rule consider a defendant's later claim barred "by res judicata" if the effect would be to nullify or undermine the effect of the judgment in plaintiff's prior case against that defendant. Illinois, New York and Wisconsin appear to apply this "common law" compulsory counterclaim principle, even though they have not codified a compulsory counterclaim Rule of Court. B. The Conduct Transaction or Occurrence Test is Widely Used in Virginia Law and Procedure to Determine What a Claim Is. Legislative Wave of Change. In 1977, the Virginia General Assembly enacted Code and , permitting the joinder of tort and contract claims and authorizing the pleading of alternative theories of recovery in a single action. See Powers v. Cherin, 249 Va. 33, 37, 452 S.E.2d 666, 668 (1995) (recognizing that overruled the long-standing prohibition against joinder of tort and contract claims found in Virginia case law ). Basic Pleading for Plaintiffs and Defendants. These two fundamental statutes govern all of the basic forms of legal claims in Virginia: A plaintiff's claims against a defendant are addressed by Code , which is structured to allow any and all claims or legal theories "provided that all claims so joined arise out of the same transaction or occurrence." Claims by defendants whether as counterclaims against the plaintiff, or as cross-claims against co-party defendants are controlled by Code , which allows the pleading of "alternative facts and theories of recovery against alternative parties, provided that such claims, defenses, or demands for relief so joined arise out of the same transaction or occurrence." Thus, these two statutes address the broad 2

3 range of claims in Virginia litigation today, and both have applied the central "transaction" test since These statutes represented a radical departure from the common law by clearly recognizing the propriety of litigating multiple diverse claims in a single proceeding. The Supreme Court remarked on the great difference between the restrictions of the common law and the current Virginia statutes in Fox v. Deese, 234 Va. 412, 362 S.E.2d 699 (1987). Later Claims and Amendment. Numerous other statutes in Virginia use the concept of the same transaction or occurrence to determine what the "same claim" actually is in Virginia today. Perhaps the most important of these are the amendment statutes passed by the General Assembly. These two provisions, Code and , deal with the common situation where a party pleads a different legal theory or different "cause of action" later in a case, and the question arises whether it is the "same claim" as originally advanced the issue is important because if the claim is "the same" then the statute of limitations was tolled upon the filing of the original suit. These statutes control whether a claim is forever barred. Thus the amendment statutes apply in a core aspect of Virginia law a definition of exactly what is the "same claim." In these enactments, the General Assembly has twice taken the position that the defining question is whether the same conduct or transaction was raised in the original action. Code , in addressing the amending of pleadings and the "relation back" of a later claim to the "original pleading," provides that the very first issue and the bedrock test is whether "the claim asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth in the original pleading." More recently, the General Assembly again used this test in a section specifically addressing the situation where a party comes up with new versions of the claim months or years after the first claim was brought. Code , dealing with pleadings "changing or adding a claim or defense" requires that the first and fundamental issue to be determined is whether "(i) the claim or defense asserted in the amended pleading arose out of the conduct, transaction or occurrence set forth in the original pleading." Thus, in the view of the General Assembly, by previously bringing any claim on the same transaction, the party has made the core grievance a part of the litigation, and any variation on the cause of action, legal theory or elements of a specific claim for recovery are merely variants of the 3

4 way to demand relief for the underlying injury-in-fact, the plaintiff's actual damage or loss. If the transaction is the same, it's the same claim. Other Virginia laws, including several statutes of limitations, provisions on joinder of multiple claimants in mass tort cases, the nonsuit statute and a broad range of non-litigation Virginia statutes (such as the corporation code), use the transaction, conduct or occurrence test as a measure of a unified claim. Rules of Court. The most basic Rule of Court addressing the nature and content of pleadings, Rule 1:4, uses the concept of the conduct or transaction in framing its provision on the appropriate range of matters that can be pled in a single case, allowing: "alternative facts and theories of recovery against alternative parties, provided that such claims, defenses, or demands for relief so joined arise out of the same transaction or occurrence." Other Rules of Court use the same concept. See, e.g., Rule 3:13, which allows third-party claims to be added to an ongoing litigation so long as the new claim arises "out of the transaction or occurrence that is the subject matter of the plaintiff's claim against the third-party plaintiff." Every step of the third-party practice in Virginia is similarly limited, such that other claims between the defendant and third-party may be litigated in the action if they are claims "arising out of the transaction or occurrence that is the subject matter of the plaintiff's claim against the third-party plaintiff." C. Implications of Rule 1:6 and the Policies of Finality for Continued Adherence to the "All Counterclaims are Permissive" Doctrine On February 28, 2006, the Supreme Court of Virginia adopted and promulgated Rule 1:6, which defines what a claim is for res judicata purposes. This provision is now effective and applies to all civil actions that have been commenced after July 1, Rule 1:6(a) provides: Rule 1:6. Res Judicata Claim Preclusion. (a) Definition of Cause of Action. A party whose claim for relief arising from identified conduct, a transaction, or an occurrence, is decided on the merits by a final judgment, shall be forever barred from prosecuting any second or subsequent civil action against the same opposing party or parties on any claim or cause of action that arises from that same conduct, transaction or occurrence, whether or not the legal theory or rights asserted in the second or subsequent action were raised in the prior lawsuit, and regardless of the legal elements or the evidence upon which any claims in the prior proceeding depended, or the particular remedies 4

5 sought. A claim for relief pursuant to this rule includes those set forth in a complaint, counterclaim, cross-claim or third-party pleading. The new res judicata Rule uses the concept of the "conduct, transaction or occurrence" litigated in the first case as the definition of the essence of the prior claim for res judicata purposes. This accords with the Bar study group reports and was found to be the most practical distillation of the governing principles. The same policies which counsel in favor of requiring a plaintiff to bring all claims relating to a given transaction in a single lawsuit support the judgment that the vast majority of states have made that if the defendant has any claims against the plaintiff arising from that same event, the defendant should bring those claims in the first lawsuit, not in a second, separate lawsuit. A large number of the States have adopted a provision along the lines of Federal Rule 13. That language is not directly appropriate for Virginia practice in a number of respects. However, the concept of resolving all claims arising out of the same transaction could easily be implemented within the framework of existing Virginia law. The current counterclaim Rule in Virginia practice is set forth in Rule 3:9, which is the subject of a minor timing amendment that is also pending. In its current form, Rule 3:9 could be adapted to embody the compulsory counterclaim principle, if that is ultimately determined to be best for the operation of the litigation system in Virginia, in the form shown here: DRAFT RULE FOR DISCUSSION PURPOSES ONLY Rule 3:9. Counterclaims. (a) Scope. A defendant may, at that defendant's option, plead as a counterclaim any cause of action that the defendant has against the plaintiff or all plaintiffs jointly, whether or not it grows out of any transaction mentioned in the complaint, whether or not it is for liquidated damages, whether it is in tort or contract, and whether or not the amount demanded in the counterclaim is greater than the amount demanded in the complaint. (b) Compulsory and Permissive Counterclaims. (i) A defendant shall state as a counterclaim any claim that arises out of the transaction or occurrence that is the subject matter of the claim set forth in the complaint. A counterclaim need not be pled if a party necessary for its adjudication is not subject to the jurisdiction of the court, or if the claim is already the subject of another pending action. (ii). At the defendant's option, any claim not arising out of the transaction or occurrence that is the subject matter set forth in the complaint may be pled as a counterclaim. 5

6 (iii) A claim which either matured or was acquired by the defendant after serving a pleading may, with the permission of the court, be presented as a counterclaim by supplemental pleading. (iv) When a defendant fails to set up a counterclaim through oversight, inadvertence, or excusable neglect, or when justice requires, the defendant may by leave of court set up the counterclaim by amendment. (c) Time for initiation. A counterclaim shall, subject to the provisions of Rule 1:9, be filed within 21 days after service of the summons and complaint upon the defendant asserting the counterclaim, or if service of the summons has been timely waived on request under Code , within 60 days after the date when the request for waiver was sent, or within 90 days after that date if the defendant was addressed outside the Commonwealth. (d) Response to counterclaim. The plaintiff shall file pleadings in response to such counterclaim within 21 days after it is served. (e) Separate trials. The court in its discretion may order a separate trial of any cause of action asserted in a counterclaim. Comments are requested from the bench and bar on the wisdom of moving forward with an amendment to the Rules of Court of this nature. Please note that the Advisory Committee at its September, 2007 meeting decided to place the "opt out" provision in the first paragraph of the rule to elicit discussion in comments submitted on whether that option for party agreement would be beneficial in avoiding the unnecessary pleading of counterclaims in cases where they would ordinarily not be pled. Other jurisdictions have not experienced problems making that provision necessary, and it is not in the federal Rule. However, the Advisory Committee seeks comments from plaintiffs and defense practitioners as to whether that safety valve would be helpful. Please send comments on the possible Rule change set forth above to Karl Hade, Executive Secretary, Supreme Court of Virginia, 100 North Ninth Street, Richmond, Virginia 23219, by March 15,