Paramount Pictures Corporation, Appellant,v.Allianz Risk Transfer AG, et al., Respondents, et al., Defendant.BriefN.Y.January 10, 2018APL-2016-00221 To Be Argued By: RICHARD B. KENDALL Time Requested 30 Mirrutes New York County Clerk's Index No. 653708/14 Olnurt nf J\pp.eals STATE OF NEW YORK .... PARAMOUNT PICTURES CORPORATION, Plaintiff-Appellant, -against- ALLIANZ RISK TRANSFER AG, MARATHON STRUCTURED FINANCE FUND, L.P., NEWSTAR FINANCIAL, INC. and MUNICH RE CAPITAL MARKETS NEW YORK, INC., Defendants-Respondents. REPLY BRIEF FOR PLAINTIFF-APPELLANT E. LEO MILONAS, ESQ. EDWARD FLANDERS, ESQ. PILLSBURY WINTHROP SHAW PITTMAN LLP 1540 Broadway New York, New York 10036 Telephone: (212) 858-1000 Facsimile: (212) 858-15 00 RICHARD B. KENDALL, ESQ. (pro hac vice) KENDALL BRILL & KELLY LLP 10100 Santa Monica BoulevaTd, Suite 1725 Los Angeles, Califomia 90067 Telephone: (31 0) 5 56-2700 Facsimile: (310) 556-2705 Attorneys for Plaintiff-Appellant Paramount Pictures Corporation MaTch 23, 2017 i TABLE OF CONTENTS Page PRELIMINARY STATEMENT ............................................................................... 1 ARGUMENT ............................................................................................................. 3 POINT I ...................................................................................................................... 3 PARAMOUNT’S LAWSUIT IS NOT BARRED BY NEW YORK’S LAW OF RES JUDICATA .................................................................................................. 3 A. New York is a permissive counterclaim jurisdiction which expressly authorizes litigants to pursue claims that were not asserted as counterclaims in a related prior action .................................................................................................. 3 B. Principles of federalism, including as reflected by the Rules Enabling Act of 1934, prohibit the incorporation of the federal procedural compulsory counterclaim rule into New York’s law of res judicata ......................................... 9 C. Paramount’s lawsuit has not been brought for any improper purpose, and the New York court system will not be “overwhelmed” if Paramount’s lawsuit is allowed to proceed ................................................................................................ 15 POINT II .................................................................................................................. 18 PARAMOUNT’S LAWSUIT IS NOT BARRED BECAUSE IT WAS NOT A “COMPULSORY” COUNTERCLAIM TO THE FEDERAL ACTION ........... 18 CONCLUSION ........................................................................................................ 21 ii TABLE OF AUTHORITIES Page(s) Cases 67-25 Dartmouth Street Corp. v. Syllman, 29 A.D.3d 888 (2d Dep’t 2006) ............................................................................ 3 Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002 (2d Cir. 1966) ............................................................................... 7 Batavia Kill Watershed Dist. in Greene County v. Charles O. Desch, Inc., 83 A.D.2d 97 (N.Y. App. Div. 1981), aff’d 57 N.Y.2d 796 (1982) ................... 17 Britt v. Buffalo Mun. Housing Auth., 48 A.D.3d 1181 (4th Dep’t 2008) ....................................................................... 10 Cefali v. Buffalo Brass Co., 748 F. Supp. 1011 (W.D.N.Y. 1990) .................................................................... 7 People v. Chestnut, 19 N.Y.3d 606 (2012) ........................................................................................... 9 Chrysler Corp. v. Fedders Corp., 540 F. Supp. 706 (S.D.N.Y. 1982) ..................................................................... 18 Citimortgage, Inc. v. Samuel, 986 N.Y.S.2d 864 (Sup. Ct. 2014) ........................................................................ 6 Clawson v. GMAC Mortgage, LLC, 2013 WL 1948128 (S.D. Tex. May 9, 2013) ..................................................... 12 Columbia Corrugated Container Corp. v. Skyway Container Corp., 37 A.D.2d 845 (2d Dep’t 1971) ............................................................................ 5 In re Cty. of Orange, 784 F.3d 520 (9th Cir. 2015) .............................................................................. 13 Cummings v. Dresher, 18 N.Y.2d 105 (1966) ........................................................................................... 6 iii Desroches v Ryder Truck Rental, Inc., 429 So.2d 1010 (Ala. 1983) ................................................................................ 18 Dolan v. Select Portfolio Serv., Inc., 2014 WL 4662247 (E.D.N.Y. Sept. 18, 2014) ..................................................... 7 Douglas v. NCNB Texas Nat’l Bank, 979 F.2d 1128 (5th Cir. 1992) ...................................................................... 12, 13 Gargiulo v. Oppenheim, 63 N.Y.2d 843 (1984) ...................................................................................... 5, 6 Grendene USA, Inc. v. Brady, 2015 WL 1499229 (S.D. Cal. Apr. 1, 2015) ...................................................... 18 People v. Harding, 37 N.Y.2d 130 (1975) ......................................................................................... 10 Harris v. Steinem, 571 F.2d 119 (2d Cir. 1978) ................................................................... 18, 19, 20 Hartigan v. Manhattan Embassy Co., 306 A.D.2d 135 (1st Dep’t 2003) ......................................................................... 5 Henry Modell & Co. v. Minister, Elders & Deacons of Reformed Protestant Dutch Church of the City of New York, 68 N.Y.2d 456 (1986) ........................................................................................... 6 In re Hunter, 4 N.Y.3d 260 (2005) ............................................................................................. 4 Loschiavo v. Miranda, 1997 WL 446217 (Conn. Super. Ct. Aug. 1, 1997) ............................................ 14 Mali v. Federal Ins. Co., 720 F.3d 387 (2d Cir. 2013) ............................................................................... 19 Mason Tenders Dist. Council Pension Fund v. Messera, 1996 WL 351250 (S.D.N.Y. June 26, 1996) ...................................................... 14 Metro Communications, Inc. v. Detroit SMSA Ltd. Partnership, 2005 WL 1224683 (Mich. Ct. App. May 24, 2005) ........................................... 15 iv Nottingham v. Weld, 377 S.E.2d 621 (Va. 1989) ................................................................................ 14 Persky v. Bank of Am. Nat’l Ass'n, 261 N.Y. 212 (1933) ....................................................................................... 9, 10 Schine v. Schine, 254 F. Supp. 986 (S.D.N.Y. 1966) ..................................................................... 20 Semtek International, Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001) ................................................................................ 11, 14, 15 Wright v. Wright, 226 N.Y. 578 (1919) ........................................................................................... 10 Rules CPLR § 3011 ........................................................................................................ 1, 2, 4, 8 § 3019 ........................................................................................................ 1, 2, 4, 8 Federal Rule of Civil Procedure 13(a) ..............................................................passim 1 PRELIMINARY STATEMENT Respondents’ central argument on appeal is that Federal Rule of Civil Procedure 13(a) displaces New York’s permissive counterclaim rule when the prior action occurred in federal court. That argument is wrong. First, ever since the New York legislature enacted CPLR §§ 3011 and 3019, the New York courts have broadly and uniformly applied the state’s permissive counterclaim rule, and have held that there are no compulsory counterclaims in this state. The legislature made a deliberate and considered choice not to follow the compulsory counterclaim rule embodied in Rule 13(a). Instead, the legislature chose to establish New York as a permissive counterclaim jurisdiction, which means that New York’s substantive res judicata (i.e., claim preclusion) law does not prevent a defendant from withholding counterclaims while defending a lawsuit and then asserting them in a later action. The legislature did not limit the state’s permissive counterclaim rule and its effect on res judicata to cases in which a first-filed action was litigated in the New York state courts. Nor did the legislature limit its considered choice to cases in which the earlier action was litigated in a permissive counterclaim forum. The legislature placed no such limits, and the First Department erred in failing to abide by that judgment. 2 Second, the First Department’s holding runs afoul of the Rules Enabling Act of 1934, by which Congress delegated to the U.S. Supreme Court the authority to enact the Federal Rules of Civil Procedure, including Rule 13(a). The act forbids any rule of procedure from abridging, enlarging, or modifying any substantive question of law. Yet the First Department has done just that, by modifying New York’s law of res judicata to incorporate Rule 13(a)’s compulsory counterclaim rule. Third, although Respondents contend that the New York court system will become overwhelmed with “afterthought claims” if this Court declines to import Rule 13(a) into New York law, this is not so. The New York courts have already persisted for decades without a compulsory counterclaim rule, and it has had no material impact on judicial resources because issue preclusion prohibits the relitigation of most issues in a subsequent litigation. In the instant case, once this lawsuit is remanded, Paramount will be immediately entitled to a ruling—based on the district court’s findings in the Federal Action—that Respondents breached the Subscription Agreement’s covenant not to sue as a matter of law. Once Respondents’ liability is established, the remainder of this action will be limited to the quantum of damages owed to Paramount. Fourth, even if this Court were inclined to restrict the effect of CPLR §§ 3011 and 3019 by incorporating Rule 13(a) into New York’s res judicata 3 jurisprudence, Paramount’s lawsuit would not be barred, because Paramount’s claim stems solely from the filing and prosecution of an underlying action. The Second Circuit has held that such claims are permissive within the meaning of Rule 13(a). Therefore, Paramount respectfully requests that the Court vacate the Decision and Order of the First Department. ARGUMENT POINT I PARAMOUNT’S LAWSUIT IS NOT BARRED BY NEW YORK’S LAW OF RES JUDICATA A. New York is a permissive counterclaim jurisdiction which expressly authorizes litigants to pursue claims that were not asserted as counterclaims in a related prior action Paramount’s lawsuit is not subject to dismissal under New York’s law of res judicata. The reason for this is straightforward: “[i]n New York[,] there are no compulsory counterclaims.” 67-25 Dartmouth Street Corp. v. Syllman, 29 A.D.3d 888, 889 (2d Dep’t 2006). Respondents contend that “[t]he effect of res judicata is determined by whether the prior action between the parties occurred in a compulsory counterclaim or a permissive counterclaim jurisdiction.” Respondents’ Brief (“Resp. Br.”) at 4. Thus, Respondents conclude that New York’s law of res judicata incorporates the compulsory counterclaim mandate imposed by Federal 4 Rule of Civil Procedure 13(a), and therefore bars Paramount’s lawsuit, which they claim was compulsory to the Federal Action. The case law that Respondents cite for this proposition is inapposite, and their argument finds no support in the legislative text or history of CPLR §§ 3011 or 3019, or in the drafting history of the Federal Rules of Civil Procedure. Respondents first point to In re Hunter, 4 N.Y.3d 260, 269-70 (2005), as well as other non-counterclaim decisions, for the proposition that New York typically applies a broad “transactional” approach to res judicata. See Resp. Br. at 16-17, 28 (citing cases). Paramount agrees, of course, that “once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred.” Id. at 16 (quoting Hunter). But Hunter and its progeny do not apply to counterclaims. As the New York courts have repeatedly held, a counterclaim may be omitted, and will not be barred in a subsequent action, even if it stems from the very same transaction at issue in a prior litigation. See Paramount’s Opening Brief (“Par. Br.”) at 17-18 (citing cases). Were it otherwise, res judicata would nullify the legislature’s permissive 5 counterclaim rule by transmuting statutorily-defined permissive counterclaims into compulsory counterclaims. Id. at 17 n.5.1 Respondents next assert that this Court’s decision in Gargiulo mandates the dismissal of Paramount’s lawsuit. Respondents claim that Gargiulo predicted, in dicta, “that under the procedural compulsory counterclaim rule in the Federal courts [Fed. R. Civ. P. 13(a)], claim and issue preclusion would extend to bar the later assertion in the present State court action of a contention which could have been raised by way of a counterclaim in the prior Federal action between the same parties.” Resp. Br. at 1, 6, 8, 18, 23, 45. In fact, however, the Court cautioned in Gargiulo that it was making no “prediction” regarding the potential applicability of Rule 13(a), by prefacing the above-quoted statement with the phrase, “[f]or purposes of the disposition of this appeal we assume, without deciding.” Gargiulo v. Oppenheim, 63 N.Y.2d 843, 845 (1984) (emphasis added). The Court merely held that, even assuming arguendo that Rule 13(a) applied to the action, the claim at issue was not “compulsory.” The 1 There are courts that have held that a party cannot assert a claim in a second lawsuit to the extent it arises out of the same transaction as one or more counterclaims that the party actually litigated in a prior action. See Hartigan v. Manhattan Embassy Co., 306 A.D.2d 135, 135-36 (1st Dep’t 2003) (“Inasmuch as plaintiff’s present claims arise from the same transactions that were the subject of her counterclaims in the previously concluded nonpayment proceeding, they are barred under the doctrine of res judicata.”). See also Resp. Br. at 35 (citing Columbia Corrugated Container Corp. v. Skyway Container Corp., 37 A.D.2d 845, 846 (2d Dep’t 1971) (dismissing claim for attorneys’ fees that was related to counterclaim asserted in prior action). However, Paramount did not assert any counterclaims in the Federal Action. See e.g., R.106- 126. 6 Court did not forecast, one way or the other, whether Rule 13(a) might thereafter be enforced by the New York courts.2 Respondents also maintain that Paramount’s claim should be barred as a matter of res judicata because it seeks “relief that would impair the rights or interests established in the first action.” Henry Modell & Co. v. Minister, Elders & Deacons of Reformed Protestant Dutch Church of the City of New York, 68 N.Y.2d 456, 462 n.2 (1986). In this regard, Respondents argue that their “interests” will be harmed because this lawsuit will necessitate the evaluation of “whether or not the [Respondents] brought their federal court claims in good or bad faith,” and that this “would require the State courts to re-examine all of the facts, law and merits of the [Respondents’] claims.” Resp. Br. at 39. Respondents’ premise is wrong. Paramount will not be required to demonstrate 2 Respondents cite to two additional New York decisions that allegedly support Gargiulo’s dicta, but both are of no assistance. First, Respondents refer to Judge Fuld’s concurrence in Cummings v. Dresher, 18 N.Y.2d 105 (1966), in which he indicated that “because the claim [at issue] was a compulsory counterclaim in a prior federal action,” it was “barred by res judicata.” See Resp. Br. at 25-26 (characterizing Judge Fuld’s concurrence). However, the majority in Cummings held that “[i]t [was] unnecessary to deal with Federal Rule 13 (subd. [a]) which was not briefed by the parties or considered by either court below.” 18 N.Y.2d at 108. Second, Respondents contend that, in Citimortgage, Inc. v. Samuel, 986 N.Y.S.2d 864 (Sup. Ct. 2014), the trial court “favorably restat[ed] Gargiulo’s assumption.” Resp. Br. at 26. To the contrary, the court referred skeptically to the “so-called federal bar of compulsory counterclaims” before holding (nearly identically to Gargiulo) that, even “assuming arguendo” that Rule 13(a) was applicable, it would serve as no bar. Id. at *2. Consistent with Gargiulo and Citimortgage, Inc., this Court can also reverse the First Department’s decision by holding, even assuming that Rule 13(a) applies, that Paramount’s lawsuit was not “compulsory” to the Federal Action. See infra Point II. 7 that Respondents’ breach of their covenant not to sue was motivated by bad faith. As an initial matter, the case on which Respondents rest this argument, Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002 (2d Cir. 1966), was ambiguous as to whether its ruling was premised on federal or state law, and the decision has never been adopted by the New York courts. Par. Br. at 36-37. Furthermore, even if Respondents’ breach of the Subscription Agreement’s covenant not to sue was governed by Artvale, Paramount would still prevail if it shows that Respondents’ breach was “obvious”—which would not require proof of bad faith. 363 F.2d at 1008. See also Cefali v. Buffalo Brass Co., 748 F. Supp. 1011, 1027- 28 (W.D.N.Y. 1990) (“The suit against Brass by the Niles plaintiffs clearly fell within the terms of the covenant….The suit was based on allegations of discrimination arising out of plaintiff's termination by Brass, and was thus in obvious breach of the covenant.”). On remand, Respondents’ obvious breach will be established as a matter of law by the district court’s findings in the Federal Action, which Respondents will be precluded from challenging. See infra note 6. Respondents’ additional argument that Paramount’s covenant not to sue claim would “impair results obtained in the [Federal Action]” is equally specious. Resp. Br. at 4. As the First Department held, Paramount’s covenant not to sue claim cannot possibly impair the outcome of the Federal Action, because Paramount is seeking only to enforce rights that were established in its favor. See 8 R.170-71. See also Dolan v. Select Portfolio Serv., Inc., 2014 WL 4662247, at *4 (E.D.N.Y. Sept. 18, 2014) (“Here, of course, Dolan is not attacking the judgment of the state court—Dolan prevailed in the state court action against TMS, the mortgagee to Dolan’s mortgage. Dolan’s cause of action here would in no way impair the rights established between the parties in the prior action. Accordingly, it is plain that the New York law of res judicata…does not bar Dolan’s claims here.”) (emphasis in original). Finally, the importation of Rule 13(a) into New York law would be contrary to the legislature’s intention to fashion this state as a permissive counterclaim jurisdiction. This intent is evidenced by both the language of CPLR §§ 3011 and 3019, as well as the legislative history preceding the CPLR’s enactment. See Par. Br. at 15-17. While Respondents argue that the legislature’s permissive counterclaim rule is limited to those cases in which the first-filed action was litigated in a permissive counterclaim forum, they have not identified any legislative text or history supporting their position. Nor has the legislature amended CPLR §§ 3011 or 3019 at any time in the last fifty-five years to memorialize this claimed limit. If Respondents believe the state’s permissive counterclaim rule should be modified to enforce Rule 13(a), they should seek redress from the legislature and not from the courts. 9 In sum, because New York is a permissive counterclaim jurisdiction, and as none of Respondents’ rights will be impaired by this action, Paramount’s lawsuit must be allowed to proceed. B. Principles of federalism, including as reflected by the Rules Enabling Act of 1934, prohibit the incorporation of the federal procedural compulsory counterclaim rule into New York’s law of res judicata Rule 13(a) cannot be incorporated into New York’s law of res judicata for an additional reason: any such decision would impermissibly encroach upon state sovereignty, in violation of the Rules Enabling Act of 1934, by allowing a federal procedural rule to modify the meaning of state substantive law. As a threshold matter, Respondents argue that Paramount failed to preserve its Rules Enabling Act argument because the statute was not expressly identified before the Supreme Court. Resp. Br. at 42-43. However, the preservation doctrine does not demand perfect congruence between the presentation of issues in the trial court and before this Court. See Par. Br. at 21 n.7 (citing, inter alia, People v. Chestnut, 19 N.Y.3d 606, 608-11 & n.2 (2012) (appellant’s argument that his trial should have been severed from co-defendant for good cause was sufficient to preserve separate argument that severance was required as a matter of law). Litigants are entitled to sharpen and supplement their arguments as a case proceeds on appeal. See id. (quoting Persky v. Bank of Am. Nat’l Ass'n, 261 N.Y. 212, 218 (1933) (an issue may be considered on appeal regardless of 10 “‘whether the case was well presented to the court below’”)). See also Wright v. Wright, 226 N.Y. 578, 579 (1919) (issue preserved even if addressed in a “perfunctory way” below and not “argued in a thorough or efficient manner”). Indeed, as reflected by case law dating back more than eighty years, even a new “argument” can be considered on appeal as long as it relates to a “question” (or “issue”) that was submitted below. See Par. Br. at 21 n.7 (citing Persky, 261 N.Y. at 218). See also People v. Harding, 37 N.Y.2d 130, 137 (1975) (Cooke, J., concurring) (stating that, because the admissibility of certain testimony had been generally questioned below, the Court had the authority to consider whether the “declaration against interest” exception to the hearsay rule applied). Thus, Paramount preserved its Rules Enabling Act argument because, at an absolute minimum, it is directly related to an issue that was posed to the Supreme Court (namely, that Rule 13(a) is inapplicable to New York’s law of res judicata). Additionally, even an unpreserved issue of law may be considered by the Court so long as it “could not have been avoided by factual showings or legal countersteps had it been raised below.” See Par. Br. at 21 n.7. Here, there is no action that Respondents could have taken in the Supreme Court to avoid the Rules Enabling Act, as this lawsuit has yet to proceed beyond a pre-answer motion to dismiss. See, e.g., Britt v. Buffalo Mun. Housing Auth., 48 A.D.3d 1181 (4th Dep’t 2008) (reversing order granting motion to dismiss based on new 11 contention raised on appeal because it could not have been avoided below). Respondents effectively concede this point: instead of identifying any step that could have been taken to render the Rules Enabling Act irrelevant, they respond with the non sequitur that Paramount’s argument lacks merit. See Resp. Br. at 43-44 n.8. Respondents are wrong that Paramount’s argument is without merit, as the Rules Enabling Act is dispositive of this appeal. The statute unequivocally prohibits the use of a federal rule of civil procedure to modify any question of substantive law. Par. Br. at 22-25. Likewise, and as indicated by the U.S. Supreme Court’s decision in Semtek International, Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001) and the original advisory committee that drafted the Federal Rules of Civil Procedure, because res judicata is a substantive legal doctrine, the Rules Enabling Act prohibits its scope from being modified by any federal procedural rule. Par. Br. at 26-33. Respondents argue that “Rule 13(a) is not being invoked … to supersede New York’s substantive right to decide whether or not Paramount’s ‘covenant not to sue’ claim” should be barred. Resp. Br. at 45. This assertion is belied by Respondents’ briefing. Respondents’ primary contention on appeal is that the content of New York’s law of res judicata hinges on the counterclaim rules applicable to the original action (here, the Federal Action). Respondents 12 essentially concede that if Rule 13(a) did not contain a compulsory counterclaim provision, New York’s permissive counterclaim rule would apply and Paramount would be allowed to litigate this action. Id. at 4. However, because Rule 13(a) imposes a compulsory counterclaim rule in federal court, Respondents assert that the substantive effect of res judicata in the state courts of New York must be altered so as to bar Paramount’s covenant not to sue claim. See id. There can be no legitimate doubt that applying Rule 13(a) in this manner would violate the Rules Enabling Act. As discussed in Paramount’s opening brief, this limitation on Rule 13(a) is well-illustrated by the Fifth Circuit’s decision in Douglas v. NCNB Texas Nat’l Bank, 979 F.2d 1128 (5th Cir. 1992). Respondents attempt to distinguish Douglas on the basis that Rule 13(a) would have abridged the lender’s right to delay a judicial foreclosure remedy by first pursuing a nonjudicial foreclosure, whereas “[t]here is no comparable New York substantive law at issue in this case” because New York’s permissive counterclaim rule is only “procedural.” Resp. Br. at 46-47. In fact, Douglas and this action involve precisely the same substantive interest. In Douglas, the plaintiff had the option, under Texas’ res judicata jurisprudence, to exercise its substantive right to seek a judicial foreclosure (which is permissive under Texas law) even if it was transactionally- related to claims previously litigated in federal court. See also Clawson v. GMAC 13 Mortgage, LLC, 2013 WL 1948128, at *4-5 (S.D. Tex. May 9, 2013) (rejecting argument that Texas judicial foreclosure claim was barred as res judicata). Likewise, in this case, Paramount had the option, under New York’s res judicata jurisprudence, to exercise its substantive right to seek redress for breach of a covenant not to sue, even if that claim was transactionally-related to the Federal Action. In Douglas, it was argued (as Respondents do here) that a state’s law of res judicata must yield to Rule 13(a)’s procedural compulsory counterclaim rule, and that the counterclaim in question should be barred notwithstanding the fact that it was permissive under state law. Par. Br. at 31-33. In rejecting this argument, the Douglas Court concluded, under the Rules Enabling Act, that Rule 13(a) could not be used to expand state res judicata principles. Douglas’ rationale is equally applicable here, as Respondents also seek to expand New York’s law of res judicata based on Rule 13(a).3 For this same reason, the Court should not rely on the handful of out-of- state decisions that Respondents claim have enforced Rule 13(a)’s counterclaim rule in permissive counterclaim jurisdictions. Resp. Br. at 24-25. These decisions are unpersuasive for multiple reasons. First, none of these decisions 3 Furthermore, even a purely “procedural” state rule must be given effect if it is inextricably tied to state substantive law. See In re Cty. of Orange, 784 F.3d 520, 530 (9th Cir. 2015) (courts “must give full effect to state procedural rules [applicable to state law claims] when those rules are ‘intimately bound up with the state’s substantive decision making’ or ‘serve substantive state policies.’”). 14 evidences any consideration of the Rules Enabling Act. See Par. Br. at 33 n.11. Second, it is apparent that these state courts mistakenly believed that they were required, with respect to state law claims, to give “full faith and credit” to Rule 13(a). See, e.g., Loschiavo v. Miranda, 1997 WL 446217, at *4 (Conn. Super. Ct. Aug. 1, 1997) (“The preclusive effect of the failure to file a compulsory counterclaim pursuant to Rule 13(a) of the Federal Rules of Civil Procedure is entitled to full faith and credit and bars the present claim asserted by the plaintiff.”); Nottingham v. Weld, 377 S.E.2d 621, 622-23 (Va. 1989) (same). But as the U.S. Supreme Court has held, “[n]either the Full Faith and Credit Clause, nor the full faith and credit statute, addresses the [effect to be given to a federal judgment disposing of state law claims]. By their terms they govern the effects to be given only to state-court judgments.” Semtek, 531 U.S. at 506-07.4 In fact, the 4 Thus, Respondents’ reliance on Mason Tenders Dist. Council Pension Fund v. Messera, 1996 WL 351250, at *10 (S.D.N.Y. June 26, 1996), is misplaced. In Mason, a federal court applied New York’s law of res judicata to determine the effect of an earlier New York court action. Respondents argue that, by analogy, Mason demonstrates that a New York court must apply the federal compulsory counterclaim rule in determining the effect of a first-filed federal action. Resp. Br. at 21-23. Respondents’ assertion is incorrect because, while federal courts must give full faith and credit to state court proceedings, state courts—as explained in the text above—do not have the same obligation with respect to a prior federal court proceeding. 15 res judicata effect of a state law claim, in connection with a federal court proceeding, is determined by state law. See Par. Br. at 14 n.3.5 Accordingly, and consistent with the Rules Enabling Act, the Court should reject Respondents’ invitation to incorporate Rule 13(a) into New York’s law of res judicata. C. Paramount’s lawsuit has not been brought for any improper purpose, and the New York court system will not be “overwhelmed” if Paramount’s lawsuit is allowed to proceed Respondents argue that this lawsuit must be dismissed to ensure that future litigants do not engage in improper litigation splitting and forum shopping. Respondents claim that a decision to the contrary “would overwhelm the New York courts with afterthought or strategically delayed claims, and would regularly pit the New York court system against other courts around the nation.” Resp. Br. at 26. These assertions are meritless. First, Respondents confuse “litigation splitting” with “claim splitting” Paramount agrees that a party cannot “split” the same claim across multiple 5 It is also noteworthy that four of the five state court decisions that were allegedly adjudicated in permissive counterclaim jurisdictions (Resp. Br. at 24-25) were issued prior to Semtek, and therefore could not consider the U.S. Supreme Court’s discussion of the Rules Enabling Act and the Full Faith and Credit Clause of the Constitution (and its related statute), or its determination that state law governs the res judicata effect of state law claims as related to a prior federal action. And as to the fifth decision, Semtek was simply ignored. See Metro Communications, Inc. v. Detroit SMSA Ltd. Partnership, 2005 WL 1224683 (Mich. Ct. App. May 24, 2005). 16 actions. See Resp. Br. at 34-35 (citing cases). But since Paramount did not assert any claims (or counterclaims) in the Federal Action, it has not split any claims. Unlike claim splitting, New York expressly authorizes litigation splitting: that is precisely the effect of New York’s permissive counterclaim rule, which entitles a defendant to withhold transactionally-related counterclaims from an initial litigation, and to assert them as a plaintiff in a new and later litigation. Second, Paramount has not engaged in forum shopping. As Paramount has explained, the Erie doctrine requires that the same principles of New York law be applied to a New York state law cause of action regardless of whether the claim is litigated in federal or state court. Par. Br. at 34-35. In their brief, Respondents argue at length that this lawsuit will ultimately fail on the merits, which, obviously, Paramount will dispute once this case is remanded. Resp. Br. at 36- 38. See also Par. Br. at 35-37. Respondents’ merits arguments are, of course, not before this Court. For the purposes of the present appeal, it suffices to say that Respondents cannot identify any advantage of law (as none exists) that would accrue to Paramount if this lawsuit is adjudicated in state, as opposed to federal, court. Finally, there is no risk that the New York court system will become “overwhelmed” if Rule 13(a)’s compulsory counterclaim rule is not applied to this action. New York has been a permissive counterclaim jurisdiction for more 17 than fifty years. Yet, the absence of a compulsory counterclaim rule has had no meaningful impact on judicial economy or resources. See, e.g., Batavia Kill Watershed Dist. in Greene County v. Charles O. Desch, Inc., 83 A.D.2d 97, 100 (N.Y. App. Div. 1981), aff’d 57 N.Y.2d 796 (1982). This is due to the fact that “[t]he use of summary judgment procedures effectively precludes relitigation of issues and, from a pragmatic view, proceeding to a jury with liability established is not likely except in extraordinary cases.” Id. This principle will also ensure that no judicial resources are wasted in this case. Upon remand, Paramount will promptly obtain an order establishing, based on principles of issue preclusion, that Respondents breached their covenant not to sue as a matter of law.6 After that decision is rendered, this action will be limited to calculating the amount of damages owed to Paramount. Consequently, none of Respondents’ alarmist contentions have merit, and they provide no basis for enforcing Rule 13(a) in contravention of New York law and the Rules Enabling Act. 6 In the Federal Action, the district court held that Respondents had unequivocally waived their claims as a matter of law. See R.132 at Tr. 1602:8-1604:7 (“[T]here is no legal reason why that claim waiver would not apply as a matter of law. There is no basis for disregarding the [S]ubscription [A]greement.”). Since the Subscription Agreement’s waiver and covenant not to sue provisions are, as relevant to this action, identical in scope, Respondents will also be held to have breached their covenant not to sue by filing and prosecuting the Federal Action. See R.89 at ¶ 4(t). 18 POINT II PARAMOUNT’S LAWSUIT IS NOT BARRED BECAUSE IT WAS NOT A “COMPULSORY” COUNTERCLAIM TO THE FEDERAL ACTION In any event, Paramount’s covenant not to sue claim was not “compulsory” to the Federal Action under Rule 13(a). As the Second Circuit held in Harris v. Steinem, 571 F.2d 119 (2d Cir. 1978), claims that stem from the filing and prosecution of an underlying action are permissive. Par. Br. at 39. While Respondents characterize Steinem as having “narrow” application (Resp. Br. at 30), its rule has been applied widely to claims that arise under tort or contract, including defamation, malicious prosecution, abuse of process, and the breach of a covenant not to sue. See Par. Br. at 40-42 (citing cases). See also Desroches v Ryder Truck Rental, Inc., 429 So.2d 1010, 1012-13 (Ala. 1983) (holding that, under state rule equivalent of Rule 13(a), the breach of a covenant not to sue was not compulsory to underlying wrongful death action). Similarly, Respondents argue that Steinem is limited to counterclaims that do not accrue until a prior action is terminated. Resp. Br. at 30. This assertion is inaccurate. See, e.g., Grendene USA, Inc. v. Brady, 2015 WL 1499229 (S.D. Cal. Apr. 1, 2015) (covenant not to sue claim in second action not barred by Rule 13(a), and could proceed even though the underlying action remained pending); Chrysler Corp. v. Fedders Corp., 540 F. Supp. 706, 713 n.2 (S.D.N.Y. 1982) (holding that abuse of process claim was not compulsory under Rule 13(a), and 19 noting that “[t]he claim of abuse of process … does not require a showing of a favorable determination”). And despite their protestations, Respondents fail to identify a single case in which a court held, notwithstanding Steinem, that a claim premised on the filing of an underlying action was compulsory. In their brief, Respondents rely solely on the Second Circuit’s decision in Mali v. Federal Ins. Co., 720 F.3d 387 (2d Cir. 2013). But in Mali, the unasserted counterclaim at issue did not arise from the filing of a lawsuit, and was instead founded on a pre-litigation fraud committed by the plaintiffs. Id. at 389-90, 394-95. Mali nowhere cited or purported to construe Steinem, and is plainly inapt. Respondents further claim that this lawsuit should be dismissed because Paramount had no “reasonable expectation” or belief that it could withhold its covenant not to sue claim in the Federal Action. See Resp. Br. at 20. However, a party’s subjective belief has no bearing on whether a counterclaim is compulsory or permissive. Thus, Respondents’ related contention that Paramount should have understood that the “point of a covenant not to sue” is to obtain an “injunction” against an underlying action is not only wrong, but irrelevant. Id. at 20 31.7 The only pertinent consideration to the Rule 13(a) analysis is whether Paramount’s decision to file this lawsuit complies with Steinem. As demonstrated above, it does. Therefore, Paramount’s covenant not to sue claim was permissive to the Federal Action, and cannot be barred by Rule 13(a). 7 Respondents cite no authority holding that a covenant not to sue, or any other purported affirmative defense, could be invoked by a defendant to enjoin claims asserted by a plaintiff. The available case law indicates that no such injunction could issue. Schine v. Schine, 254 F. Supp. 986, 988 (S.D.N.Y. 1966) (rejecting defendants’ argument that counterclaim for breach of release and covenant not to sue can be transformed into a separate claim for injunctive relief). CONCLUSION The First Department's Decision and Order should be reversed. Dated: March 23, 2017 R ICHARD B. K ENDALL. ESQ. (PRO HAC VICE) KENDALL BRILL & K ELLY LLP 10100 Santa Monica Blvd., Suite 1725. Los Angeles, CA 9:0067 Telephone: 310.556.2700 · FacsimHe: 31 0.556.2705 rkendall@kbkfirm. com Respectfully submitted, 0 MILONAS, ESQ. EJ:?W ARD F LANDERS, E SQ. P ILLSBURY WINTHROP SHAW PITTMAN LLP 1540 Broadway New York, New York 10036 Telephone:-(212) 858-1000 eleo. milonas@pillsburylaw. com edward.jlanders@pills bury law. com Attorneys for Plaintiff-Appellant Para.mountPic4u'es Corporation 21 CERTIFICATION I certify pursuant to 500.13(c)(1) that the total word count for all printed text in the body of the. brief, . exclusive of the statement of the status of related litigation; the corporate disclosure statement; the table of contents, the table of cases and authorities and the statement of questions presented required by subsection (a) of ... this section; and any addendum containing material required by subsection 500.l(h) ofthjs Part is 4,939 words. Dated: March 23, 2017 . --'!" WARD FLANDERS, ESQ. PILLSBURY WINTHROP SHAW PITTMAN LLP 1540 Broadway New York, New York 10036 Telephone:(212) 858~1000