Schwabe v. Chantilly, Inc

Brief Fact Summary.

After successfully raising fraud as an affirmative defense in Chantilly, Inc.’s (Defendant) suit against him, Schwabe (Plaintiff) filed a separate action seeking damages for the fraud.

Synopsis of Rule of Law.

When a party successfully raises an affirmative defense in an earlier action, but does not file a permissive counterclaim seeking damages on the same grounds as the affirmative defense, that party is not precluded from bringing an action for damages in subsequent litigation.

Facts.

In a suit filed by Defendant against Plaintiff alleging unpaid rent, Plaintiff successfully raised the affirmative defense of fraud. Plaintiff then brought a separate action against Defendant seeking damages as a result of the same fraud. Defendant argued that this new action was barred because Plaintiff did not raise it as a counterclaim in the earlier action. The controlling statute made such a counterclaim permissive. The court found for Defendant and Plaintiff appealed.

Issue.

When a party raises an affirmative defense, but does not file a permissive counterclaim for damages on the same grounds, is that party precluded from bringing an action for damages in a later suit?

Held.

(Wilkie, C.J.) No. When a party successfully raises an affirmative defense in an earlier action, but does not file a permissive counterclaim seeking damages on the same grounds as the affirmative defense, that party is not precluded from bringing an action for damages in subsequent litigation. Claims that could be raised as a permissive counterclaim in the initial suit are not barred from future litigation on the basis that the counterclaim was not filed. If the issue was decided against the defendant in the initial suit, res judicata would prevent that defendant from then filing a claim on those grounds in later litigation, however. Here, Plaintiff had prevailed in his assertion of the affirmative defense in the earlier action, so res judicata would not bar the subsequent action. Reversed and remanded.

Discussion.

Certain counterclaims may be made compulsory by legislation or by common law. Compulsory counterclaims must be raised in the initial action or are lost. In Horne v. Woolever, 163 N.E.2d 378 (Ohio 1959), a defendant filed suit in state court while litigation in federal court was pending. The claim filed in state court was such that it would have been a compulsory counterclaim in federal court, but was never raised in that litigation. The federal action settled and the state court dismissed the state claim, holding that failure to raise the counterclaim in federal court operated as res judicata on the state action.