Paramount Pictures Corporation, Appellant,v.Allianz Risk Transfer AG, et al., Respondents, et al., Defendant.

Brief

N.Y.January 10, 2018

To be Argued by: JAMES A. JANOWITZ (Time Requested: 20 Minutes) APL-2016-00221 New York County Clerk’s Index No. 653708/14 Court of Appeals of the 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. BRIEF FOR DEFENDANTS-RESPONDENTS VICTORIA A. GRAFFEO HARRIS BEACH PLLC 677 Broadway, Suite 1101 Albany, New York 12207 Tel.: (518) 427-9700 Fax: (518) 427-0235 JAMES A. JANOWITZ WILLIAM L. CHARRON BRYAN T. MOHLER BENJAMIN S. AKLEY PRYOR CASHMAN LLP Seven Times Square New York, New York 10036 Tel.: (212) 421-4100 Fax: (212) 326-0806 Attorneys for Defendants-Respondents Date Completed: March 8, 2017 DISCLOSURE STATEMENT PURSUANT TO 22 NYCRR § 500.1(f) Defendants-Respondents hereby certify that: 1. Allianz Risk Transfer AG is wholly owned by Allianz Global Corporate & Specialty SE, a wholly owned entity of Allianz SE. Allianz SE is a publicly traded corporation. No publicly held corporation owns more than 10% of the outstanding stock of Allianz SE. 2. NewStar Financial, Inc. does not have a parent corporation and no publicly held corporation owns 10% or more of its membership interest. 3. Munich Re Capital Markets New York, Inc. is wholly owned by Munich Reinsurance Company AG ("Munich Re") (through Munich American Holding Corporation). More than 10% of Munich Re is owned by the Harvey Investment Trust, the sole beneficiary of which is National Indemnity Company, which in turn is wholly owned by Berkshire Hathaway, Inc. Dated: New York, New York March 8, 2017 PRYOR CASHMAN LLP James A. Janowitz William L. Charron Bryan T. Mohler Benjamin S. Akley 7 Times Square New York, New York 10036 (212) 421-4100 HARRIS BEACH PLLC Victoria A. Graffeo 100 Wall Street New York, New York 10005 (212) 687-0100 Attorneys for Defendants- Respondents i TABLE OF CONTENTS TABLE OF AUTHORITIES ............................................................................... ii COUNTERSTATEMENT OF QUESTION PRESENTED FOR REVIEW ....... 1 PRELIMINARY STATEMENT .......................................................................... 1 Background ...................................................................................................... 1 The Appellate Division Correctly Applied Res Judicata To Dismiss Paramount’s Claim ................................................. 3 Paramount’s “Covenant Not To Sue” Claim Was Transactionally Related To The Subject Matter Of The Prior Federal Action ......................... 5 Paramount’s New Argument Concerning The Federal Rules Enabling Act Was Not Preserved Before The Supreme Court And, In Any Event, Is Meritless ..................................... 7 STATEMENT OF FACTS ................................................................................... 9 Background Description of the Federal Action ............................................... 9 The Significance of Section 4(t) of the Subscription Agreement to the Federal Action ............................................. 10 Procedural History of This State Action ....................................................... 13 STANDARD OF APPELLATE REVIEW ........................................................ 15 ARGUMENT ...................................................................................................... 15 I. THE APPELLATE DIVISION PROPERLY HELD THAT RES JUDICATA BARRED PARAMOUNT’S ACTION ............ 15 A. The Appellate Division’s Decision Is Supported By Prior Dictum From This Court ..................................... 16 ii TABLE OF CONTENTS, Continued 1. Res Judicata Is Not Limited In This Case Because Paramount Was Required In The First Action To Assert All Of Its Transactionally- Related Theories For Relief As Compulsory Counterclaims ........ 20 B. Under Res Judicata, Courts Invariably Dismiss Claims That Should Have Been Asserted In Prior Actions As Compulsory Counterclaims ................................ 23 C. Paramount’s “Covenant Not To Sue” Claim Was Part Of The Same Transaction That Was The Subject Of The Prior Action ... 27 1. Paramount’s Authorities Are All Inapt .......................................... 29 D. Paramount Is Asking This Court To Invite Strategic Litigation-Splitting And Forum-Shopping .......................... 34 1. Paramount Strategically Sought To Avoid Controlling Federal Law That Would Have Barred Its Covenant Not To Sue Claim ................................ 36 2. Paramount Could Not Demonstrate “Bad Faith” ........................... 39 II. THE FEDERAL RULES ENABLING ACT IS IMMATERIAL TO THIS APPEAL .......................................... 40 A. Paramount Failed To Preserve Its Rules Enabling Act Argument Before The Supreme Court .......................... 41 B. Paramount’s Rules Enabling Act Argument Is Meritless ................... 44 CONCLUSION ................................................................................................... 48 iii TABLE OF AUTHORITIES CASES PAGE(s) 67-25 Dartmouth St. Corp. v. Syllman, 29 A.D.3d 888 (2d Dep’t 2006) .............................................................. 39, 40 930 Fifth Corp. v. King, 42 N.Y.2d 886 (1977) .............................................................................. 34, 35 Altshuler Shaham Provident Funds, Ltd. v. GML Tower, LLC, 21 N.Y.3d 352 (2013) .....................................................................................43 Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002 (2d Cir. 1966) ............................................................ 31, 37, 38 Associated Fin. Corp. v. Kleckner, No. 09 Civ. 3895 (JGK), 2010 U.S. Dist. LEXIS 78398 (S.D.N.Y. Aug. 2, 2010), aff’d, 480 F. App’x 89 (2d Cir. 2012) .....................................37 Baker v. Health Mgmt. Sys., 98 N.Y.2d 80 (2002) .......................................................................................38 Bannon v. Bannon, 270 N.Y. 484 (1936) .......................................................................................15 Bingham v. New York City Transit Auth., 99 N.Y.2d 355 (2003) .....................................................................................43 Bogoni v. Friedlander, 197 A.D.2d 281 (1st Dep’t 1994) ...................................................................27 Bottom v. Annucci, 26 N.Y.3d 983 (2015) .....................................................................................42 Chrysler Corp. v. Fedders Corp., 540 F. Supp. 706 (S.D.N.Y. 1982) .................................................................30 iv CASES PAGE(s) Citimortgage, Inc. v. Samuel, 42 Misc. 3d 1236(A), 2014 N.Y. Misc. LEXIS 1101 (Sup. Ct. Mar. 17, 2014) .................................................................................26 Columbia Corrugated Container Corp. v. Skyway Container Corp., 37 A.D.2d 845 (2d Dep’t 1971), aff’d for reasons stated below, 32 N.Y.2d 818, 819 (1973).............................................................................35 Critical-Vac Filtration Corp. v. Minuteman Int’l Inc., 233 F.3d 697 (2d Cir. 2000) ........................................................ 29, 32, 35, 36 Cummings v. Dresher, 18 N.Y.2d 105 (1966) .....................................................................................26 Douglas v. NCNB Texas Nat’l Bank, 979 F.2d 1128 (5th Cir. 1992) ........................................................................46 Emery Roth & Sons v. National Kinney Corp., 44 N.Y.2d 912 (1978) .............................................................................. 34, 35 Fifty CPW Tenants Corp. v. Epstein, 16 A.D.3d 292 (1st Dep’t 2005) .............................................................. 16, 28 Fischer v. Zepa Consulting A.G., 95 N.Y.2d 66 (2000) .......................................................................................43 Gargiulo v. Oppenheim, 63 N.Y.2d 843 (1984) ............................................................................. passim Grendene USA, Inc. v. Brady, No. 14-CV-2955-GPC-KSC, 2015 U.S. Dist. LEXIS 43425 (S.D. Cal. April 1, 2015) ................................................................................33 Harris v. Steinem, 571 F.2d 119 (2d Cir. 1978) .................................................................... 30, 33 Hecker v. State, 20 N.Y.3d 1087 (2013)...................................................................................43 v CASES PAGE(s) Henry Modell & Co. v. Minister, Elders & Deacons, 68 N.Y.2d 456 (1986) ............................................................................. passim Horne v. Woolever, 163 N.E.2d 378 (Ohio 1959) ..........................................................................25 In re Hunter, 4 N.Y.3d 260 (2005) ............................................................................... passim Israel v. Wood Dolson Co., 1 N.Y.2d 116 (1956) .......................................................................................16 London v. City of Philadelphia, 194 A.2d 901 (Pa. 1963) ................................................................................24 Loschiavo v. Miranda, No. CV 950325575 (WBR), 1997 Conn. Super. LEXIS 2069 (Conn. Super. Ct. July 31, 1997) ...................................................................24 Mali v. Federal Ins. Co., 720 F.3d 387 (2d Cir. 2013) .................................................................... 31, 32 Marathon Structured Fin. Fund, LP v. Paramount Pictures Corp., 622 Fed. Appx. 85 (2d Cir. 2015) ..................................................................12 Mason Tenders Dist. Council Pension Fund v. Messera, No. 95 Civ. 9341 (RWS), 1996 WL 351250 (S.D.N.Y. June 26, 1996) .................................................................. 21, 22, 23 McDonald’s Corp. v. Levine, 439 N.E.2d 475 (Ill. App. Ct. 1982) ...............................................................24 McKinney v. New York, 78 A.D.2d 884 (2d Dep’t 1980) .....................................................................28 McMahan & Co. v. Bass, 250 A.D.2d 460 (1st Dep’t 1998) ...................................................................38 vi CASES PAGE(s) Meacham v. Haley, 270 S.W.2d 503 (Tenn. Ct. App. 1954) .........................................................25 Metro Commcn’s v. Detroit SMSA P’Ship, No. 249171, 2005 Mich. App. LEXIS 1284 (Mich. Ct. App. May 24, 2005) ......................................................................24 Metroplex Props. L.L.C. v. Oral Roberts Univ., 956 P.2d 926 (Okla. Civ. App. 1998) .............................................................25 Misicki v. Caradonna, 12 N.Y.3d 511 (2009) .....................................................................................43 Mount Everest Ski Shops, Inc. v. Nordica USA, Inc., 736 F. Supp. 523 (D. Vt. 1989) ......................................................................30 Nottingham v. Weld, 377 S.E.2d 621 (Va. 1989) .............................................................................24 Nunnery v. Ocwen Loan Servicing, LLC, 641 Fed. App’x 430 (5th Cir. 2016) ...............................................................47 Parker v. Blauvelt Volunteer Fire Co., 93 N.Y.2d 343 (1999) .....................................................................................36 Petrie Method, Inc. v. Petrie, No. 88 3289, 1989 WL 47709 (E.D.N.Y. Apr. 26, 1989) ....................... 32, 33 R.G. Barry Corp. v. Mushroom Makers, Inc., 108 Misc. 2d 113 (Sup. Ct. 1981), aff’d, 85 A.D.2d 544 (1st Dep’t 1981) ..............................................................................................17 RA Global Servs. v. Avicenna Overseas Corp., 843 F. Supp. 2d 386 (S.D.N.Y. 2012) ..................................................... 15, 26 Reach Music Publ’g, Inc. v. Warner/ Chappell Music, Inc., No. 09 Civ. 5580 (KBF), 2014 U.S. Dist. LEXIS 15913925 (S.D.N.Y. Nov. 10, 2014) ...............................................................................37 vii CASES PAGE(s) Robinson v. Robinson, 303 A.D.2d 234 (1st Dep’t 2003) ...................................................................15 Sands v. Reimers, No. 93-56250, 1995 U.S. App. LEXIS 5515 (9th Cir. Mar. 17, 1995) .........22 Schoeman v. New York Life Ins. Co., 726 P.2d 1 (Wash. 1986) ................................................................................25 Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001) ................................................................................ 44, 45 State ex rel. Small v. Clawges, 745 S.E.2d 192 (W. Va. 2013) .......................................................................25 Soumayah v. Minnelli, 41 A.D.3d 390 (1st Dep’t 2007) .....................................................................15 Thompson v. The Andy Warhol Found. For the Visual Arts, Inc., 103 A.D.3d 528 (1st Dep’t 2013) ............................................................ 31, 32 UBS Sec. LLC v. Highland Capital Mgmt., L.P., 86 A.D.3d 469 (1st Dep’t 2011) .....................................................................28 Wild v. Catholic Health Sys., 21 N.Y.3d 951 (2013) .....................................................................................42 Wilson v. Galicia Contracting & Restoration Corp., 10 N.Y.3d 827 (2008) .....................................................................................42 Zarcone v. Perry, 78 A.D.2d 70 (2d Dep’t 1980), aff’d, 55 N.Y.2d 782 (1981) ............................28 STATUTES Fed. R. Civ. P. 8(c) .............................................................................................35 viii STATUTES PAGE(s) Fed. R. Civ. P. 13(a) ................................................................................... passim Fed. R. Civ. P. 41(b) ...........................................................................................44 N.Y. CPLR § 3011 ...................................................................................... passim N.Y. CPLR § 3211(a)(7) .....................................................................................45 N.Y. C.L.S. CPLR. R. 3211 (2014) ....................................................................18 28 U.S.C. § 2072 .................................................................................................40 28 U.S.C. § 2072(a) ............................................................................................40 28 U.S.C. § 2072(b) ............................................................................................40 TREATISES 6 Charles A. Wright, et al., Federal Practice and Procedure: Jurisdiction § 1410 (1990) ..............................................................................22 Arthur Karger and Henry Cohen, The Powers of the New York Court of Appeals, § 14:1 (Sept. 2016 Update) .......................................................... 7, 42 1 COUNTERSTATEMENT OF QUESTION PRESENTED FOR REVIEW Did the Appellate Division correctly dismiss this forum-shopped State action for attorneys’ fees under New York’s doctrine of res judicata where such a claim was required to be asserted as a compulsory counterclaim in a prior federal litigation between the same parties on transactionally-related issues? Answer: Yes. PRELIMINARY STATEMENT In Gargiulo v. Oppenheim, 63 N.Y.2d 843, 845 (1984), this Court conducted a nationwide survey of authorities dealing with the doctrine of res judicata and stated in clear and considered dictum 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 answer in the prior Federal action between the same parties.” This Court now has occasion to convert Gargiulo’s well-supported dictum into law. Background The parties in this action were embroiled in a federal securities fraud action for six years in federal court: the plaintiff-appellant in this action (“Paramount”) was the defendant in the federal action, and the defendants-respondents in this 2 action (the “Investors”) were the plaintiffs (aggrieved investors) in the federal action. At issue in the federal action was the effect of “waiver” language found in “Section 4(t)” of the parties’ securities Subscription Agreement. Paramount argued that the Investors waived their right to sue Paramount for fraud under Section 4(t). Ultimately, Paramount prevailed at trial in the federal district court on that argument. Although Paramount raised the waiver issue in the federal action, immediately following that provision in Section 4(t) is a clause containing a “covenant not to sue.” Section 4(t) provides that each investor: waives and releases all claims against Paramount, Viacom Inc. [Paramount’s parent] or any of their affiliates arising out of, or in connection with, the offering of the Securities…. The Investor waives and releases Paramount, Viacom Inc. and their affiliates from liability arising out of the matters described in paragraph (s) above, and agrees that in no event shall it assert any claim or bring any action contradicting the acknowledgements and agreements in this paragraph or in Paragraph (s) above. (R.89.) Paramount did not assert this “covenant not to sue” theory as a counterclaim in the federal action, notwithstanding that Federal Rule of Civil Procedure 13(a) is a compulsory counterclaim rule that required Paramount to interpose its “covenant not to sue” claim in that action. 3 Based on the “covenant not to sue” provision, Paramount claims in this state action that the Investors should be held liable for Paramount’s attorneys’ fees incurred in the first-filed federal action (approximately $8 million) because the Investors’ federal lawsuit violated the covenant not to sue. Because Section 4(t) of the Subscription Agreement was a main issue in the federal action, and Paramount’s counsel made it abundantly clear in federal court that Paramount was aware of the covenant not to sue, Paramount deliberately did not pursue that theory as a counterclaim because controlling Second Circuit law plainly bars Paramount’s entitlement to recover attorneys’ fees for breach of a covenant not to sue. Paramount instead waited until conclusion of the federal action and forum-shopped its covenant not to sue claim in the New York State courts instead. The Appellate Division Correctly Applied Res Judicata To Dismiss Paramount’s Claim The Appellate Division properly dismissed Paramount’s “covenant not to sue” claim with prejudice under the doctrine of res judicata. Res judicata follows a “transactional analysis,” meaning 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, even if based upon different theories or if seeking a different remedy.” In re Hunter, 4 N.Y.3d 260, 269-70 (2005) (citation & quotations omitted). Res judicata recognizes that “considerations of judicial 4 economy as well as fairness to the parties mandate, at some point, an end to litigation.” Id. (citation & quotations omitted). The effect of res judicata is determined by whether the prior action between the parties occurred in a compulsory counterclaim or a permissive counterclaim jurisdiction. If the prior action was determined in a compulsory counterclaim forum that required a party to assert all logically-related theories as counterclaims, then res judicata, acting independently and according to the same “transactional analysis,” bars the later assertion of those logically-related claims that were not brought in the prior action. If the prior action occurred in a permissive counterclaim jurisdiction that did not require a party to assert its related theories as counterclaims, then res judicata still applies but in a more limited manner since the litigants were permitted in the first action to withhold certain claims, even if logically-related. Nevertheless, claims that could impair results obtained in the prior action remain barred by res judicata notwithstanding the prior forum’s permissive counterclaim rule. In both scenarios, the res judicata doctrine is an independent and controlling force on what claims may be asserted in secondary actions. Res judicata does not “import” the pleading rule governing the first action into New York’s civil procedure; it merely gives recognition to the significance of that 5 pleading rule and to what the defendant in the first action reasonably could have expected its counterclaim pleading requirement to have been. Here, the first action between the Investors and Paramount was in a compulsory counterclaim forum: the U.S. District Court for the Southern District of New York. Therefore, the res judicata doctrine in this case is not limited by any right of Paramount to have thought it could withhold its logically-related claims from the prior, compulsory counterclaim action. Paramount’s “Covenant Not To Sue” Claim Was Transactionally Related To The Subject Matter Of The Prior Federal Action Indisputably, Paramount’s “covenant not to sue” claim asserted in this second-filed state action was transactionally-related to Paramount’s “waiver” defense in the first-filed federal action. Indeed, the “waiver” and “covenant not to sue” provisions are both part of the same contract provision and same sentence within Section 4(t) of the parties’ Subscription Agreements. Paramount effectively conceded as much by alleging in its complaint in this action that “collateral estoppel” supposedly bars the Investors from denying that Section 4(t)’s covenant not to sue applies because the federal court found that Section 4(t)’s waiver provision applies.1 1 Paramount cannot assert collateral estoppel based on the decision in the federal action because the covenant not to sue was not actually litigated in that action. At the same time, however, Paramount is barred from asserting the covenant not to sue in this action because of res judicata, since the covenant not to sue could have and should have been asserted in the federal action, if at all. 6 Because the transactional analysis of res judicata was satisfied in this case, the Appellate Division correctly found that Paramount was barred from re- litigating Section 4(t) in this subsequent State action. Contrary to Paramount’s assertion, the Appellate Division did not “mistakenly conflat[e] two distinct concepts: New York’s substantive law of res judicata and the federal procedures to be applied in the federal courts.” (Paramount’s 1/20/17 Br. at 3.) The Appellate Division simply, and correctly, applied res judicata to bar the relitigation of a logically-related theory that Paramount was not permitted by the rules of the prior, federal forum to have withheld as a counterclaim from that action. The Appellate Division likewise brought the considered dictum of this Court’s decision in Gargiulo into full focus: [We] assume without deciding that under the procedural compulsory counterclaim rule in the Federal courts, 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 answer in the prior Federal action between the same parties. 63 N.Y.2d at 845 (emphasis supplied) (string citation of nationwide survey of authorities omitted). This Court should now embrace the dictum of Gargiulo as the law of New York to discourage forum-shopping and piecemeal litigation in two court systems. 7 Paramount’s New Argument Concerning The Federal Rules Enabling Act Was Not Preserved Before The Supreme Court And, In Any Event, Is Meritless The Appellate Division relied on solid case law from New York - including in particular Gargiulo - and around the country that Paramount does not effectively contest. Instead, Paramount strains to use a new theory, not argued before the Supreme Court and not addressed by the First Department, contending that the Federal Rules Enabling Act blocks New York’s res judicata doctrine from operating in this context. This is the lengthiest argument presented by Paramount to this Court, but it violates this Court’s preservation requirement. As a procedural matter, this Court, like the Appellate Division, should disregard Paramount’s Rules Enabling Act argument because it was not presented to the Supreme Court. Paramount’s nearly full page footnote on page 21 of its brief attempts to give an appearance of preservation but one can scour the briefs and transcript before the Supreme Court and not find a single mention of the Rules Enabling Act. It is unnecessary and unfair to allow Paramount to introduce this issue as a grounds for reversal. E.g., Arthur Karger and Henry Cohen, The Powers of the New York Court of Appeals, § 14:1 (Sept. 2016 Update). Even if this Court decides to consider Paramount’s Rules Enabling Act argument, the Court should substantively reject Paramount’s argument because it merely tries to extend the fiction that the Investors sought to have Fed. R. Civ. 8 P. 13(a) supplant CPLR § 3011. Such is not the case. The res judicata doctrine does not import the Federal Rules of Civil Procedure into New York’s procedural code, as Paramount claims. Res judicata is a long-standing doctrine that bars the litigation of claims that should have been raised earlier and elsewhere. That is why the Court in Gargiulo described the res judicata doctrine as independently “extend[ing] to bar” the later assertion of claims that should have been raised under the federal courts’ compulsory counterclaim rule, not as replacing CPLR § 3011 with Fed. R. Civ. P. 13(a). That is also why authorities nationwide addressing this issue uniformly hold that res judicata independently bars the later assertion of claims that should have been brought as compulsory counterclaims in jurisdictions with such a rule - as the Gargiulo Court predicted would be the result in New York when the proper case is presented. This is the proper case to pronounce such a rule. Res judicata enforces elections by litigants in prior, compulsory counterclaim actions either to interpose or waive related theories and claims for relief. Res judicata also protects the State courts of New York from becoming embroiled in afterthought claims that were required to be adjudicated in federal court but where there is an advantage to engage in forum-shopping in State court instead. Res judicata prevents this second-bite-of-the-apple strategy that can pit one court system against the other. 9 For these reasons, res judicata bars Paramount’s “covenant not to sue” claim here. The Decision and Order by the Appellate Division should be affirmed. STATEMENT OF FACTS Background Description of the Federal Action2 The federal action involved the financing of major motion pictures, a subject which is not within common knowledge. It concerned various techniques of film financing and risk mitigation, and arose from the Investors’ 2004 investment in a slate of 25 motion pictures produced and distributed by Paramount between 2004 and 2006 (the “Melrose Transaction”). The essence of the Investors’ claims in the Federal Action was that Paramount represented that it would continue to conduct its business with respect to the financing of motion pictures as it had done in the past. This included in particular the use by Paramount of a risk mitigation technique known as “territorial sales” of film distribution rights, which was a signature risk mitigation technique of Paramount’s. Pursuant to this industry practice, the risk of certain movies performing poorly outside the U.S. is reduced by obtaining a non-refundable distribution fee in advance of a film’s release. As a result, if the film performed poorly, the 2 This description is largely taken from the Investors’ appeal brief before the Second Circuit, with public record citations found therein. (Civil Case No. 14-4455, Dkt. 67.) 10 foreign distributor would suffer the loss associated with the cost of acquiring the rights and distributing the film but Paramount would diminish that risk as a result of the receipt of the non-refundable payment. The Investors asserted that in the five-year period prior to their investment, as reflected in data provided to the Investors by Paramount in a “Historical Data Set,” Paramount had territorially sold 24.1% of the aggregate production cost of its films. The Investors also asserted that, for the Melrose Slate, only 3.2% of the aggregate production cost of films had been offset by territorial sales: a drop of over 85%. Had Paramount conducted its territorial sales as it had in the past, the Investors’ losses in the Melrose Transaction would have been mitigated by over $18 million (constituting the Investors’ damages claim in the Federal Action). The Significance of Section 4(t) of the Subscription Agreement to the Federal Action The fraud claims in the federal action were based on each Investor having purchased securities pursuant to a Subscription Agreement, which set forth the terms of the Investors’ investment and the various rights and liabilities of the parties to the transaction. Paramount’s defense in the Federal Action relied heavily on “Section 4(t)” of the Subscription Agreement, which provides that each Investor (inter alia): waives and releases all claims against Paramount, Viacom Inc. [Paramount’s parent] or any of their affiliates arising out of, or in connection with, the offering of the Securities…. The Investor 11 waives and releases Paramount, Viacom Inc. and their affiliates from liability arising out of the matters described in paragraph (s) above, and agrees that in no event shall it assert any claim or bring any action contradicting the acknowledgements and agreements in this paragraph or in Paragraph (s) above. (R.89; R.66-67.)3 Paramount’s presentation was directed at Section 4(t) of the Subscription Agreement at every stage of the Federal Action, including: (a) in two of the three motions to dismiss that Paramount made; (b) in Paramount’s answers to each of the Investors’ three amended complaints, wherein Paramount explicitly referred to and incorporated the Subscription Agreement, and further stated (in Paramount’s Eighteenth Affirmative Defense) that Paramount’s claims in the Federal Action were “barred by the express waivers in the Subscription Agreements they signed” (R.125); (c) in its motion for summary judgment, wherein Paramount argued in depth that the Investors’ federal claims were barred by Section 4(t) of the Subscription Agreement; and (d) at trial in the Federal Action, wherein Paramount continued to argue (ultimately with success) that the Investors’ claims were barred by Section 4(t) of the Subscription Agreement. (R.128-129; R.132; R.134.) For six years, the Federal Action was litigated before the Hon. Thomas Griesa. Judge Griesa denied four dispositive motions by Paramount, including 3 The Subscription Agreements are governed by New York law. (R.93.) 12 denying Paramount’s motion for summary judgment. On the day before trial was to commence, however, Judge Griesa recused himself and the case was transferred to the Hon. Katherine Forrest. Judge Forrest proceeded to trial the next morning. (R.130.) Judge Forrest saw the case differently from Judge Griesa. Following a two-week bench trial, Judge Forrest awarded judgment to Paramount. (R.130.) Judge Forrest held that the “waiver” provision of Section 4(t) of the Subscription Agreement barred the Investors’ claims, and that decision was affirmed on appeal. (R.132; Marathon Structured Fin. Fund, LP v. Paramount Pictures Corp., 622 Fed. Appx. 85 (2d Cir. 2015).) During the trial in the Federal Action, Paramount’s counsel raised the covenant not to sue that Paramount now relies on in this action. For example, Paramount’s counsel cross-examined one of the Investors’ witnesses and specifically asked: “So isn’t this lawsuit, by virtue of this lawsuit, aren’t you in breach of this provision [the covenant not to sue in Section 4(t)], sir?” (R.134 at 628:25-629:11.) Likewise, during closing arguments Paramount’s counsel specifically quoted both the “waiver” and the “covenant not to sue” language in Section 4(t) and argued that such language meant Paramount owed no duties of disclosure or truthfulness to the Investors. (R.128-29 at 1505:20-1506:1.) 13 Here, Paramount seeks to assert Section 4(t) of the Subscription Agreement offensively based upon the covenant not to sue language, after successfully relying on the related waiver language in that same section as an affirmative defense in the Federal Action. Paramount’s decision not to use the “covenant not to sue” theory either as an affirmative defense or as a compulsory counterclaim in the federal action was binding, and Paramount cannot now revive that theory in State court. Procedural History of This State Action Paramount commenced this action by filing a Summons With Notice on December 2, 2014, one day after the Investors noticed their appeal of Judge Forrest’s decision in the Federal Action, and six years to the day after the Federal Action had been commenced (i.e., at the last day of Paramount’s six-year statute of limitations bar). (R.59-60.) Paramount filed its Complaint approximately three weeks later, on or about December 22, 2014. (R.61-72.) The Investors moved to dismiss Paramount’s action on several grounds, including based upon the doctrine of res judicata (which is the only subject of this appeal). (R.73-74.) The Supreme Court held a hearing on September 8, 2015 and, announcing from the bench, denied the Investors’ motion to dismiss. (R.10- 58.) The Supreme Court announced: At the end of the day I am not going to adhere to the Federal Rule Civil Procedure 13A. This State has a permissive counterclaim rule 14 that was enacted by the legislature. There’s nothing for me to go behind that and say that I am going to disregard that and say, well, you know, for these purposes here I’m going to apply 13A and I’m going to hold plaintiff to that 13A and their failure to assert the counterclaim that they seek in this action here is a bar to this action under res judicata principles. I don’t think that’s proper. There’s been no case, no State case at all that I have seen that indicates that this Court or I should apply 13A. That would require me to ignore CPLR 3011 in terms of the permissive counterclaims and that would not be proper. (R.54.) The Supreme Court misapprehended the significance of CPLR § 3011’s permissive counterclaim rule in this context. While the permissive counterclaim rule may have a mitigating effect on the operation of res judicata when a party elects not to assert a counterclaim in a first action that is governed by CPLR § 3011 (or another jurisdiction’s permissive counterclaim rule), the operation of CPLR § 3011 in a second action is immaterial if the first action was governed by a compulsory counterclaim rule (as in the parties’ prior federal action). In that situation, a res judicata preclusion should apply without any mitigating factors. That is this case. The Investors served Notice of Entry of the decision of the Supreme Court on September 29, 2015 (R.7-9), and timely filed their Notice of Appeal on September 29, 2015. (R.5-6.) By Decision and Order dated July 21, 2016, the Appellate Division, First Department, unanimously reversed the Supreme Court’s decision and directed the Clerk to enter judgment for the Investors 15 dismissing Paramount’s case. (R.167-73.) The Appellate Division concluded, correctly, “that the later assertion in a state court action of a contention that constituted a compulsory counterclaim (FRCP rule 13[a]) in a prior federal action between the same parties is barred under the doctrine of res judicata (see Gargiulo, 63 N.Y.2d at 843; RA Global Servs., Inc. v. Avicenna Overseas Corp., 843 F. Supp. 2d [386, 390 (S.D.N.Y. 2012)].” (R.172-73.) This Court granted Paramount’s motion for leave to appeal the Appellate Division’s Decision and Order on November 22, 2016. (R.161-62.) STANDARD OF APPELLATE REVIEW The Decision and Order is subject to this Court’s de novo review. See, e.g., Soumayah v. Minnelli, 41 A.D.3d 390, 391 (1st Dep’t 2007); Robinson v. Robinson, 303 A.D.2d 234, 235-36 (1st Dep’t 2003); see also Bannon v. Bannon, 270 N.Y. 484, 490 (1936) (application of res judicata is a matter of law). ARGUMENT I. THE APPELLATE DIVISION PROPERLY HELD THAT RES JUDICATA BARRED PARAMOUNT’S ACTION Paramount’s first Question Presented to this Court is “[w]hether New York is free to apply its long-established substantive law of res judicata in the New York courts, which explicitly permits the prosecution of an omitted counterclaim in a second lawsuit that is transactionally-related to a prior action, without regard to the Federal Rule of Civil Procedure 13(a)’s ‘compulsory’ counterclaim rule?” 16 (Paramount’s 1/20/17 Br. at 1.) This question confuses the issues and is not helpful. What controls in a case like this is not the counterclaim rule of a prior action, be it compulsory or permissive. What controls is the doctrine of res judicata. As explained below, the counterclaim rule of the prior action acts only to inform whether or not res judicata should be limited. A. The Appellate Division’s Decision Is Supported By Prior Dictum From This Court “Res judicata is designed to provide finality in the resolution of disputes, recognizing that considerations of judicial economy as well as fairness to the parties mandate, at some point, an end to litigation.” In re Hunter, 4 N.Y.3d at 269-70 (citation & quotations omitted). New York follows a “transactional analysis approach to res judicata,” meaning 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, even if based upon different theories or if seeking a different remedy” Id. at 269 (citation & quotations omitted). “The rule applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation.” Id.; accord Israel v. Wood Dolson Co., 1 N.Y.2d 116, 118 (1956); Fifty CPW Tenants Corp. v. Epstein, 16 A.D.3d 292, 293 (1st Dep’t 2005) (explaining that the “same transaction” standard for res judicata is broad and applies “even if the claims 17 would call for different measures of liability or different kinds of relief.”) (citations & quotations omitted). Like New York’s res judicata doctrine, Federal Rule of Civil Procedure 13(a) requires that “[a] pleading must state as a counterclaim any claim that - at the time of its service - the pleader has against an opposing party if the claim . . . arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim; ….” This compulsory counterclaim rule applies “the same [transactional analysis] standard” as New York’s res judicata test. R.G. Barry Corp. v. Mushroom Makers, Inc., 108 Misc. 2d 113, 117-18 (Sup. Ct. 1981), aff’d, 85 A.D.2d 544 (1st Dep’t 1981).4 As discussed below, if a prior action between the same parties had a compulsory counterclaim rule, then the defendant in that action could not have believed it was entitled to withhold transactionally-related theories as counterclaims and res judicata operates with full effect. If, on the other hand, the prior action had a permissive counterclaim rule, then the defendant in that action was entitled to withhold transactionally-related theories as counterclaims and res judicata is limited accordingly out of deference to that permissive counterclaim rule. This dynamic is best illustrated by dictum statements from 4 Paramount’s suggestion that there may be “doubts regarding the meaning and effect” of Rule 13(a)’s transactional analysis is bereft of any legal support and baseless. (Paramount’s 1/20/17 Br. at 38 n.12 (citation omitted).) 18 this Court in two cases: Gargiulo v. Oppenheim, 63 N.Y.2d 843 (1984), and Henry Modell & Co. v. Minister, Elders & Deacons of the Reformed Protestant Dutch Church, 68 N.Y.2d 456 (1986). In Gargiulo, 63 N.Y.2d at 845, this Court conducted a nationwide survey of authorities and stated in dictum: [W]e assume without deciding that under the procedural [i.e., compulsory] counterclaim rule in the Federal courts, 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 answer in the prior Federal action between the same parties. (emphasis supplied.)5 In Henry Modell, 68 N.Y.2d at 462 n.2, this Court stated in dictum: Our permissive counterclaim rule [CPLR § 3011] may save from the bar of res judicata those claims for separate or different relief that 5 The Court in Gargiulo found that “the reach of the Federal compulsory counterclaim rule, and principles of preclusion would not operate to bar [the] assertion [of a related claim] in the present action” because of the applicability of a particular exception to Fed. R. Civ. P. 13(a)’s compulsory counterclaim rule that is inapplicable here. 63 N.Y.2d at 846. That is why Gargiulo’s analysis of the legal landscape in this area was dictum rather than law. Paramount mischaracterizes the significance of Gargiulo when it claims that the Court “acted cautiously and declined to resolve the matter” (Paramount’s 1/20/17 Br. at 14); in fact, the Court went out of its way to highlight, research and comment upon the assumed operation of res judicata in this context. Gargiulo’s dictum is cited by other courts (discussed more below) because, as the Appellate Division correctly observed in this case, Gargiulo provides “clear guidance” on the exact kind of question now presented. (R.172.) Paramount’s contention that the Appellate Division “inferred far too much” from Gargiulo is unworthy. (Paramount’s 1/20/17 Br. at 15.) See also N.Y. C.L.S. C.P.L.R. R. 3211 (2014) (citing Gargiulo) (“An action brought by plaintiffs seeking to recover sums paid to the defendant would be dismissed, where recovery could have properly been sought in a federal action brought by defendants against plaintiffs by way of a counterclaim for rescission and restitution, and the failure of a party to an action to assert a claim which might have been litigated therein precludes subsequent action on such claim in a future proceeding by application of the doctrine of res judicata or of claim preclusion.”). 19 could have been but were not interposed in the parties’ prior action (see, Batavia Kill Watershed Dist. v. Charles O. Desch, Inc., 83 AD2d 97, affd 57 NY2d 796). It does not, however, permit a party to remain silent in the first action and then bring a second one on the basis of a preexisting claim for relief that would impair the rights or interests established in the first action. (Citation omitted; emphasis supplied.) According to Henry Modell, in those cases where a prior action was governed by a permissive counterclaim rule, res judicata still controls and precludes a “preexisting claim for relief that would impair the rights or interests established in the first action,” regardless of the prior forum’s permissive counterclaim rule. Id. The Court’s dictum observations in Gargiulo and Henry Modell make clear two things: (i) it is res judicata that operates in a second action to determine what claims are barred from being litigated in that action; and (ii) the efficacy of res judicata’s “bar” is determined by whether the prior action was governed by a permissive counterclaim rule - which may “save from the bar” certain (but not all) transactionally-related claims that were not asserted in the prior action - or whether the prior action was governed by a compulsory counterclaim rule, in which case res judicata would “extend to bar” in a second action the assertion of all transactionally-related claims that were required to have been asserted in the first action, without any limitation. 20 1. Res Judicata Is Not Limited In This Case Because Paramount Was Required In The First Action To Assert All Of Its Transactionally-Related Theories For Relief As Compulsory Counterclaims The first action in this case proceeded before a federal forum that had a compulsory counterclaim rule. The first action did not proceed before a forum, such as another New York State court, that had a permissive counterclaim rule. Thus, res judicata is not limited in this case by any entitlement or reasonable expectation by Paramount to have believed that it could withhold transactionally- related theories as counterclaims in the first action. The fact that New York State courts offer a permissive counterclaim rule of their own is a non sequitur. New York’s permissive counterclaim rule does not mean that a party can bring a subsequent claim in a New York State court and nullify a prior action’s compulsory counterclaim requirement. Nor does CPLR § 3011 purport to eviscerate the counterclaim pleading requirements of all other jurisdictions in the country, including the federal courts. Paramount’s assertion that the res judicata analysis of a New York State court in a second action should be “determined by the state’s permissive counterclaim rule” makes no sense where the first action between the parties did not also occur in a New York State court that employed that permissive counterclaim rule. (Paramount’s 1/20/17 Br. at 3.) 21 Accordingly, New York State’s permissive counterclaim rule did not provide Paramount with a basis to have believed it could have ignored the federal court’s compulsory counterclaim rule in the first action between these same parties. New York’s permissive counterclaim rule is simply irrelevant to this action. Likewise, Paramount’s lengthy discussion of the legislative history behind New York’s permissive counterclaim rule is entirely immaterial. (Id. at 15-18.) New York’s reasons for not having a compulsory counterclaim rule do not matter because the first action between the Investors and Paramount did not occur in a New York State court, where a permissive counterclaim rule could have perhaps been significant. What matters is that the first action between the Investors and Paramount occurred in a compulsory counterclaim forum that required Paramount to assert all of its logically-related theories and did not permissively entitle Paramount to withhold any such claims. In the words of Henry Modell, nothing about the prior action’s compulsory counterclaim rule “saved” Paramount’s logically-related claims “from the bar of res judicata” in this second action. 68 N.Y.2d at 462 n.2. Paramount’s reliance on Mason Tenders Dist. Council Pension Fund v. Messera, No. 95 Civ. 9341 (RWS), 1996 WL 351250, at *10 (S.D.N.Y. June 26, 1996), is misplaced because that decision expressly endorses the Investors’ 22 position here. (Paramount’s 1/20/17 Br. at 17 n.5.) The individual defendants in Mason Tenders had been the plaintiffs in a prior action commenced in a New York State court seeking breach of contract damages against a number of pension funds. 1996 WL 351250, at *1-2. The State court proceeding had been governed by New York’s permissive counterclaim rule, not by a compulsory counterclaim rule. Id. at *10. The pension funds later asserted claims for federal racketeering in a second action, brought in federal court, against the individuals. Id. at *1-2. The individuals moved in the second action to dismiss the racketeering claims, arguing (inter alia) that they were barred by res judicata. Id. at *9-10. The court disagreed because the first action had been governed by a permissive counterclaim rule, not by a compulsory counterclaim rule. Id. at *10. The court explained: “[A]bsent a compulsory counterclaim rule, a pleader is never barred by claim preclusion from suing independently on a claim that he refrained from pleading as a counterclaim in a prior action.”… As one court [from the federal Ninth Circuit Court of Appeals] recently reasoned, if res judicata barred a permissive counterclaim, the “permissive” counterclaim would, as a practical matter, become compulsory. Id. (quoting 6 Charles A. Wright, et al., Federal Practice and Procedure: Jurisdiction § 1410, at 59 (1990) and citing Sands v. Reimers, No. 93-56250, 1995 U.S. App. LEXIS 5515, at *5 n.3 (9th Cir. Mar. 17, 1995) (emphasis supplied)). 23 The analysis offered by the court in Mason Tenders is the same analysis inherent in the dictum of Henry Modell and Gargiulo: if a first action was governed by a permissive counterclaim rule, then the res judicata rule applied in a second action is limited because the defendant in the first action was entitled to withhold certain transactionally-related claims; but if a first action was governed by a compulsory counterclaim rule, then the res judicata rule applied in a second action is not limited because the defendant in the first action was not entitled to withhold any transactionally-related claims. Contrary to Paramount’s assertion, this res judicata analysis does not eliminate CPLR § 3011 from the books or convert New York from a permissive counterclaim jurisdiction to a compulsory counterclaim jurisdiction. (Paramount’s 1/20/17 Br. at 4.) This application of res judicata simply protects New York courts from becoming second-thought havens for litigants who were already on notice of their obligations (through compulsory counterclaim rules) to fully raise and litigate certain transactions on the merits. That is precisely the point of the res judicata doctrine. E.g., Hunter, 4 N.Y.3d at 269-70. B. Under Res Judicata, Courts Invariably Dismiss Claims That Should Have Been Asserted In Prior Actions As Compulsory Counterclaims Consistent with Gargiulo’s prediction and with the Appellate Division’s Decision in this case, state courts nationwide uniformly apply res judicata to bar 24 the assertion of claims that should have been raised as compulsory counterclaims in prior federal actions. This is true regardless of whether the state forum - i.e., the forum of the second action - is itself a permissive or compulsory counterclaim jurisdiction: • Michigan (permissive counterclaim jurisdiction): Metro Commcn’s v. Detroit SMSA P’Ship, No. 249171, 2005 Mich. App. LEXIS 1284, at *3, *14 (Mich. Ct. App. May 24, 2005) (holding that state court plaintiff/federal defendant was precluded from raising, in a subsequent state proceeding, claims that should have been Fed. R. Civ. P. 13(a) compulsory counterclaims in the prior federal action) • Connecticut (permissive counterclaim jurisdiction): Loschiavo v. Miranda, No. CV 950325575 (WBR), 1997 Conn. Super. LEXIS 2069, at *12 (Conn. Super. Ct. July 31, 1997) (holding that state court plaintiff/federal defendant’s failure to file a counterclaim compulsory under Fed. R. Civ. P. 13(a) in a prior federal action barred him from asserting the same claim in a subsequent state action) • Virginia (permissive counterclaim jurisdiction): Nottingham v. Weld, 377 S.E.2d 621, 622 (Va. 1989) (holding that current state court/former federal plaintiff that failed to assert a “counterclaim in reply” against defendant was precluded from filing said claim in a subsequent state court action) • Illinois (permissive counterclaim jurisdiction): McDonald’s Corp. v. Levine, 439 N.E.2d 475, 486 (Ill. App. Ct. 1982) (holding that state court plaintiff/federal defendant was precluded from asserting in a state action, as opposed to a pending federal action, a claim that must be filed as a compulsory counterclaim under Fed. R. Civ. P. 13(a), “even though [it] may not be obligated to file a compulsory counterclaim under that state’s law”) • Pennsylvania (permissive counterclaim jurisdiction: London v. City of Philadelphia, 194 A.2d 901, 902 (Pa. 1963) (hodling that failure 25 to assert a compulsory counterclaim under Fed. R. Civ. P. 13(a) bars later assertion of the claim in state court under res judicata) • West Virginia (compulsory counterclaim jurisdiction): State ex rel. Small v. Clawges, 745 S.E.2d 192, 202-03 (W. Va. 2013) (holding that state court plaintiff/federal defendant was precluded by res judicata from bringing, in subsequent state action, a claim that would have been a Fed. R. Civ. P. 13(a) compulsory counterclaim in prior federal action) • Oklahoma (compulsory counterclaim jurisdiction): Metroplex Props. L.L.C. v. Oral Roberts Univ., 956 P.2d 926 (Okla. Civ. App. 1998) (holding that because plaintiff was required to raise his claims as compulsory counterclaims in an earlier federal action, the claims were barred in the state action under res judicata) • Washington (compulsory counterclaim jurisdiction): Schoeman v. New York Life Ins. Co., 726 P.2d 1, 5-6 (Wash. 1986) (holding that failure to comply with federal compulsory counterclaim rule bars later assertion of claims under res judicata) • Ohio (compulsory counterclaim jurisdiction): Horne v. Woolever, 163 N.E.2d 378, 382-83 (Ohio 1959) (holding that state court plaintiff/federal defendant’s subsequent state claim was barred by res judicata where it should have been asserted as a Fed. R. Civ. P. 13(a) compulsory counterclaim in a prior federal action) • Tennessee (compulsory counterclaim jurisdiction): Meacham v. Haley, 270 S.W.2d 503, 511 (Tenn. Ct. App. 1954) (holding that claims which should have been adjudicated in federal court were barred from adjudication in state court) Other New York courts have reached the same conclusion. Cummings v. Dresher, 18 N.Y.2d 105, 108-09 (1966) (Fuld, J., concurring) (cited by Gargiulo and concurring in the dismissal of a New York State court action because the claim was a compulsory counterclaim in a prior federal action and thus barred by 26 res judicata); RA Global Servs. v. Avicenna Overseas Corp., 843 F. Supp. 2d 386, 391 (S.D.N.Y. 2012) (citing Gargiulo and finding that “[c]laims that should have been brought in a prior proceeding … in a domestic compulsory counterclaim jurisdiction [i.e., the United Kingdom] … would be barred in a later proceeding under New York state res judicata law.”); Citimortgage, Inc. v. Samuel, 42 Misc. 3d 1236(A), 2014 N.Y. Misc. LEXIS 1101, at ***6 (Sup. Ct. Mar. 17, 2014) (favorably restating Gargiulo’s assumption “that the compulsory counterclaim rule in the Federal Courts would extend to bar the later assertion in the present State action of a contention that could have been raised by way of counterclaim in the prior Federal action between the two parties”) (citations omitted). This consistent line of authorities under various res judicata doctrines demonstrates that res judicata can and should routinely bar the assertion of transactionally-related claims that should have been brought in prior forums with compulsory counterclaim rules. This result is eminently sensible. A contrary result, which would permit a defendant to ignore a first forum’s compulsory counterclaim rule and forum-shop a transactionally-related claim in a later New York action, would be highly judicially inefficient, 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. 27 C. Paramount’s “Covenant Not To Sue” Claim Was Part Of The Same Transaction That Was The Subject Of The Prior Action The Investors and Paramount litigated the meaning and significance of Section 4(t) of the parties’ Subscription Agreement for six years in the prior federal action. Paramount brought this action based on a covenant not to sue provision in Section 4(t) only after the federal action concluded. Paramount admits in its pleading that its “covenant not to sue” theory based upon Section 4(t) of the Subscription Agreement arises out of the same transaction that was part of the federal action: i.e., the issue of what the parties agreed to under Section 4(t) of their Subscription Agreement, and whether the Investors forfeited their right to sue Paramount for fraud because of that section. Paramount’s admission takes the form of an allegation that collateral estoppel supposedly bars the Investors from denying that the covenant not to sue applies because “the covenant not to sue encompasses the same categories of claims covered by the waiver provision” of Section 4(t), and the application of Section 4(t) was fully litigated in the federal action. (R.68-69.) See, e.g., Bogoni v. Friedlander, 197 A.D.2d 281, 291-92 (1st Dep’t 1994) (“[T]his statement in a pleading constitutes a formal judicial admission which, even though subject to a subsequent, valid amendment, remains evidence of the facts admitted” and “is entitled to great weight.”) (internal & other citations omitted). 28 Thus, Paramount concedes that its “covenant not to sue” theory is part of the same subject matter that was already litigated in the federal action: Paramount characterizes the covenant not to sue provision in Section 4(t) as “encompass[ing] the same categories of claims covered by the waiver provision” in Section 4(t), just with a different kind of remedy or relief. (R.69 (emphasis supplied).) The difference in potential forms of remedy or relief arising out of Section 4(t) (i.e., a grant of dismissal in the federal action versus money damages sought in this action) does not save Paramount’s “covenant not to sue” claim from the bar of res judicata. E.g., Hunter, 4 N.Y.3d at 269-70. As explained in UBS Sec. LLC v. Highland Capital Mgmt., L.P.: “[O]nce a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy.” 86 A.D.3d 469, 474 (1st Dep’t 2011) (citation & quotations omitted); accord Fifty CPW, 16 A.D.3d at 293; see also McKinney v. New York, 78 A.D.2d 884, 886 (2d Dep’t 1980) (“[I]t is clear that in those instances where the Federal court proceeding is predicated on the same basis as is the State court proceeding, Federal court determinations must be given res judicata effect in New York State courts”); Zarcone v. Perry, 78 A.D.2d 70, 71 (2d Dep’t 1980), aff’d, 55 N.Y.2d 782 (1981) (same). 29 Likewise, there is no reason to reverse the Appellate Division’s sound and well-grounded finding that Paramount’s covenant not to sue theory was a compulsory counterclaim in the federal action. (R.171.) There is no genuine question that a “logical relationship” exists between Paramount’s “covenant not to sue” theory under Section 4(t) raised in this action, and Paramount’s “waiver” theory under Section 4(t) raised in the prior federal action. Both provisions of Section 4(t) were intended to prevent future challenges by the Investors, and it would be eminently logical and reasonable to expect that both provisions would be asserted simultaneously. Indeed, Paramount itself now alleges - i.e., judicially admits - that both provisions of Section 4(t) “encompass[] the same categories of claims.” (R.69.) See, e.g., Critical-Vac Filtration Corp. v. Minuteman Int’l Inc., 233 F.3d 697, 699-700 (2d Cir. 2000) (noting that an “obvious ‘logical relationship’ exists” where “the essential facts of the claims are so logically connected that considerations of judicial economy and fairness dictate that all the issues [should have been] resolved in one lawsuit”) (citation & quotations omitted). 1. Paramount’s Authorities Are All Inapt Paramount argues that the transactions at issue in the federal action and in this case are different, but none of its offered authorities supports that position. Paramount directs the Court to cases where later claims for attorneys’ fees were 30 either entirely distinct from previously litigated issues, or else were not ripe until the conclusion of a prior action because subsequent conduct was required to state an attorneys’ fee claim. (Paramount’s 1/20/17 Br. at 39-43.) Those cases are inapt. Paramount’s primary authority, Harris v. Steinem, 571 F.2d 119, 123-25 (2d Cir. 1978), dealt with a “well-established narrow line of decisions” constituting an exception to Fed. R. Civ. P. 13(a), which holds that “a counterclaim which stems from the filing of the main action and subsequent alleged defamations is not a compulsory counterclaim covered by Rule 13(a).” Id. at 124 (emphasis supplied). The “narrow” exception to Rule 13(a) described in Harris, which is about the ripeness and accrual of a claim, has nothing to do with this case. See also Chrysler Corp. v. Fedders Corp., 540 F. Supp. 706, 713 n.2 (S.D.N.Y. 1982) (explaining that the Steinem court “ruled that, despite the artful drafting of the counterclaim in terms of libel, it was actually a claim for malicious prosecution, which is premature if filed before a favorable determination in the claimant’s favor” and thus not a compulsory counterclaim) (emphasis supplied); Mount Everest Ski Shops, Inc. v. Nordica USA, Inc., 736 F. Supp. 523, 524 (D. Vt. 1989) (“A counterclaim which depends upon the judgment in the main action itself is not a compulsory counterclaim.”) (citing Harris, 571 F.2d at 124-25) (emphasis supplied). 31 Unlike a claim for malicious prosecution to recover fees for a successful prior defense, Paramount did not require a judgment in its favor in the federal action as a condition precedent to stating a legally viable covenant not to sue counterclaim. To the contrary, Paramount could have (and should have) asserted its covenant not to sue theory as an injunction against the Investors’ federal court action from proceeding - that is the point of a covenant not to sue. E.g., Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002, 1008 (2d Cir. 1966) (covenant not to sue should be asserted as shield against lawsuit); Thompson v. The Andy Warhol Found. For the Visual Arts, Inc., 103 A.D.3d 528, 529 (1st Dep’t 2013) (affirming dismissal of lawsuit at pleading stage because “[t]he covenants not to sue in the letter agreements that plaintiff signed bar his claims for breach of contract and gross or ordinary negligence,” and denying costs or award of fees as sanction). An instructive decision in this regard is Mali v. Federal Ins. Co., 720 F.3d 387 (2d Cir. 2013). In that case, insureds had sued their insurer for coverage, and the jury eventually found that the insureds had forfeited coverage by submitting fraudulent claims. Id. at 390-91. The insurer then moved, post-trial, for restitution of the amounts it already had paid to the insureds. Id. at 391. The trial court denied the insurer’s motion, finding that the insurer’s claim was part of the same transaction as had been the subject of the trial, and thus should have been 32 brought and litigated by the insurer as a compulsory counterclaim under Fed. R. Civ. P. 13(a). Id. On appeal, the insurer argued that its claim for restitution had not accrued until the jury had rendered its forfeiture verdict against the insureds. Id. at 395. The appellate court disagreed and affirmed the district court’s decision against the insurer, finding: “[The insurer] claimed from the outset that the [insureds] committed fraud and that their fraud voided the policy. It did not need to await the jury’s vindication of that claim to add a counterclaim for reimbursement of the initial payments.” Id. at 395. Similar to the situation in Mali, Paramount asserted from the outset of the federal action that it had a defense based upon Section 4(t) of the Subscription Agreement. Paramount did not need to await a final judgment in the federal action vindicating that belief to add a counterclaim for breach of Section 4(t)’s covenant not to sue. See also Critical-Vac, 233 F.3d at 700. The decision in Petrie Method, Inc. v. Petrie, No. 88 3289, 1989 WL 47709, at *2 (E.D.N.Y. Apr. 26, 1989), also relied upon by Paramount, is distinguishable. Petrie relies on the decision in Steinem for the proposition that “[a] claim that stems from the filing of the main action is not a compulsory counterclaim.” 1989 WL 47709, at *2 (citing Harris, 571 F.2d at 124). The issue in Petrie was whether that federal court should have exercised independent jurisdiction over a 33 defendant’s state law claim for malicious prosecution as a compulsory counterclaim where the plaintiff’s claims arose under the Lanham and Copyright Acts. Id. The court declined to find such jurisdiction and explained: No judicial economy would result from the court’s retention of jurisdiction over the counterclaims because they hinge on entirely different facts from the claims brought in the complaint. There is no unfairness in requiring defendants to litigate in a more appropriate forum state claims that are totally unrelated to the action before this court. Id. (emphases supplied); see also Grendene USA, Inc. v. Brady, No. 14-CV-2955- GPC-KSC, 2015 U.S. Dist. LEXIS 43425, at *6 (S.D. Cal. April 1, 2015) (finding that a later claim for attorneys’ fees was entirely distinct from previously litigated issues between the parties about the existence of trademark infringement, involving entirely different issues and facts, and thus the attorneys’ fee claim was not a compulsory counterclaim under Rule 13(a)’s transactional analysis). The situations in Petrie and Grendene bear no resemblance to the facts here. Here the waiver issue litigated in the federal action, and the covenant not to sue raised in the State action, involve the same set of facts - indeed, the same contract provision. There is a manifest lack of judicial economy in requiring the parties in this case to litigate a covenant not to sue claim that Paramount judicially admits was related to the waiver theory that the parties actually litigated to a final judgment on the merits in the prior federal action. 34 Unlike the situations in the scattershot authorities relied upon by Paramount, the issue of Section 4(t)’s applicability to the Investors’ securities fraud claims (from which both the waiver and the covenant not to sue provisions arise) was one of the primary subjects of the prior federal action. Paramount relied on Section 4(t) as the bulwark against the Investors’ claims. No subsequent conduct or facts were required for Paramount to assert its “covenant not to sue” theory in the federal action together with Paramount’s “waiver” theory. D. Paramount Is Asking This Court To Invite Strategic Litigation-Splitting And Forum-Shopping Despite its bald protest, Paramount indeed really asks this Court to countenance litigation-splitting, which this Court has repeatedly rejected in other contexts. (Paramount’s 1/20/17 Br. at 34.) For example, in 930 Fifth Corp. v. King, 42 N.Y.2d 886, 887 (1977), this Court found that a landlord had impermissibly split causes of action by first suing a tenant for violating a lease restriction on harboring pets, and later suing the tenant for attorneys’ fees incurred by the landlord in the first proceeding under a different lease provision. Id. The Court explained that “[a]ll these facets of the lease are interrelated and constitute but separate integral parts of the whole. The lease entails a single obligation which thus requires the plaintiff to assert its entire claim in one action.” Id.; see also Emery Roth & Sons v. National Kinney Corp., 44 N.Y.2d 912, 914 (1978) (“[D]efendant seeks damages for counsel fees and 35 other expenses incurred in connection with reobtaining possession of the demised premises, putting such premises in good order and preparing them for rerental. However, by failing to assert these claims in the prior summary proceeding based on nonpayment of rent, defendant has impermissibly split a cause of action and is barred from asserting them as a counterclaim in this action.”) (citations omitted); Columbia Corrugated Container Corp. v. Skyway Container Corp., 37 A.D.2d 845, 846 (2d Dep’t 1971), aff’d for reasons stated below, 32 N.Y.2d 818, 819 (1973) (“The key issue surrounding the first cause of action is whether plaintiff’s failure to claim attorney’s fees in the prior litigation bars a claim for those fees now. We think it does. Looking at the language of paragraph 40 of the sublease, we are of the view that plaintiff had the right to demand and recover reasonable counsel fees in the [prior] declaratory judgment action brought by the lessee…. In other words, the amount became due at that time and should have been asserted in the counterclaim.”). Indeed, having raised Section 4(t)’s waiver provision as an affirmative defense in the federal action, nothing prevented Paramount from raising Section 4(t)’s covenant not to sue provision in that action as well. See also Fed. R. Civ. P. 8(c) (“In responding to a pleading, a party must affirmatively state any avoidance or affirmative defense, ….”); Critical-Vac, 233 F.3d at 699-701 (finding that antitrust claims were barred because they arose out of same 36 transaction as party’s patent infringement affirmative defense in prior action and were thus compulsory counterclaims in prior action as well, and stating rule that “[i]f a party has a compulsory counterclaim and fails to plead it, the claim cannot be raised in a subsequent lawsuit.”). It would make no sense, and would contravene the most basic concepts of judicial fairness and economy, to permit Paramount to resurrect a “covenant not to sue” theory that it chose to waive in the prior federal action. See, e.g., Parker v. Blauvelt Volunteer Fire Co., 93 N.Y.2d 343, 347-48 (1999) (“[W]here a plaintiff in a later action brings a claim for damages that could have been presented in a prior…proceeding against the same party, based upon the same harm and arising out of the same or related facts, the claim is barred by res judicata.”) (citation omitted). 1. Paramount Strategically Sought To Avoid Controlling Federal Law That Would Have Barred Its Covenant Not To Sue Claim It is almost certainly the case that Paramount strategically elected to split litigation concerning Section 4(t), and not to bring its related “covenant not to sue” claim in the prior federal action, because controlling federal law would have barred that claim in the federal action. Under long-established and controlling Second Circuit law interpreting the “American Rule” prohibition on attorney fee-shifting, a party may assert a 37 covenant not to sue only as a shield, not as a sword to collect attorneys’ fees unless the other side sued in “obvious breach” of the covenant not to sue or in “bad faith.” E.g., Artvale, 363 F.2d at 1008; Associated Fin. Corp. v. Kleckner, No. 09 Civ. 3895 (JGK), 2010 U.S. Dist. LEXIS 78398, at *15-16 (S.D.N.Y. Aug. 2, 2010), aff’d, 480 F. App’x 89 (2d Cir. 2012). In fact, less than two weeks after awarding judgment to Paramount in the federal action, Judge Forrest herself acknowledged that “New York law[ ] prevents parties from recovering damages in the form of attorney’s fees for a good faith violation of a covenant not to sue, unless there exists clear contractual language providing for attorneys’ fees.” Reach Music Publ’g, Inc. v. Warner/Chappell Music, Inc., No. 09 Civ. 5580 (KBF), 2014 U.S. Dist. LEXIS 159139, at *25 (S.D.N.Y. Nov. 10, 2014) (awarding fees pursuant to express attorneys’ fees provision).6 6 The Investors contend that Paramount almost certainly engaged in strategic forum-shopping to avoid certain dismissal in federal court of its covenant not to sue claim under controlling Second Circuit law governing the American Rule as expressed in Artvale. While Paramount tries to inject uncertainty into this issue by suggesting some tension with the Erie doctrine, (Paramount’s 1/20/17 Br. at 35, 37), the court in Artvale specifically found “nothing in New York law that would lead us to a decision different from what we would independently reach”: i.e., that a covenant not to sue may not be a basis to recover attorneys’ fees in the absence of a showing of bad faith. 363 F.2d at 1007. Paramount’s speculation that the U.S. District Court for the Southern District of New York may have abandoned the Second Circuit’s controlling rule of Artvale and permitted a covenant not to sue counterclaim by Paramount to proceed is ungrounded and unreasonable. (Paramount’ 1/20/17 Br. at 35.) 38 Paramount relies on an unsupported and unexplained statement of dictum in McMahan & Co. v. Bass, 250 A.D.2d 460, 461 (1st Dep’t 1998), that “[a]bsent a covenant not to sue, there exists no implicit agreement by defendants to pay the attorneys’ fees, as would result from a breach of a covenant not to sue,” to support Paramount’s argument that New York State law differs from federal law on the significance of the “American Rule” to covenants not to sue. (Paramount’s 1/20/17 Br. at 36.) Nevertheless, the unexplained dictum statement in McMahan is not a controlling statement of New York State law, nor does it offer any reasoning on which to reject the long line of federal authorities construing this issue. Moreover, while this Court has not yet had occasion to conclusively rule on the issue, it has made clear that “explicit” expressions of prevailing party fee- shifting are required as “a general practice” to overcome the “American Rule.” Baker v. Health Mgmt. Sys., 98 N.Y.2d 80, 88 (2002) (citations omitted) (emphasis supplied). It is uncontested that, unlike the covenant not to sue found in Section 4(t) of the Subscription Agreement, which makes no mention of prevailing party fee- shifting, another provision of the Subscription Agreement, Section 8, explicitly authorizes fee-shifting for other interested persons but not for the benefit of Paramount. (R.90.) Particularly when compared and contrasted with the 39 language of Section 8 of the parties’ Subscription Agreements, Paramount’s statement that the covenant not to sue provision in Section 4(t) “is adequately ‘explicit’” is specious. (Paramount’s 1/20/17 Br. at 36.)7 2. Paramount Could Not Demonstrate “Bad Faith” Paramount could not possibly prove “bad faith” by the Investors in having sued Paramount for securities fraud in the federal action. As explained above, the federal court denied four dispositive motions brought by Paramount over the course of six years of litigation, including Paramount’s summary judgment motion based in part on the claimed applicability of Section 4(t). (Page 11, supra.) Paramount clearly benefitted from the federal action being transferred on the eve of trial from Judge Griesa to Judge Forrest, but Paramount was repeatedly required by Judge Griesa to continue to litigate the case to trial because he repeatedly found merit to the Investors’ claims. Moreover, to answer the question of whether or not the Investors brought their federal court claims in good or bad faith would require the State courts to re-examine all of the facts, law and merits of the Investors’ claims. That itself is an impairment of the rights established in the federal action. See 67-25 7 Paramount’s statement that it “deci[ded] to postpone this lawsuit … because its claim would have almost certainly been rendered moot if [the Investors] had prevailed in the Federal Action” is disingenuous. (Paramount’s 1/20/17 Br. at 42.) Paramount “postponed” and forum-shopped its covenant not to sue claim because that claim was dead-on-arrival in federal court. 40 Dartmouth St. Corp. v. Syllman, 29 A.D.3d 888, 890 (2d Dep’t 2006) (affirming dismissal of attorneys’ fee claim that could have been raised in prior action and explaining that, “[i]n the instant case, consideration of the cooperative’s claim for attorneys’ fees would require the reconsideration of the issues raised in the prior action to determine, inter alia, whether the shareholder was in default, impairing the rights or interests of the shareholder as well as constituting a waste of judicial resources.”); see also Henry Modell, 68 N.Y.2d at 462 n.2. The Appellate Division correctly found that Paramount’s “covenant not to sue” claim was transactionally-related to the subject matter of the parties’ first action in federal court. The Decision appropriately dismissed Paramount’s claim and thereby insulated the New York courts from what was surely a strategic effort by Paramount at forum-shopping. The Decision should be affirmed. II THE FEDERAL RULES ENABLING ACT IS IMMATERIAL TO THIS APPEAL The bulk of Paramount’s appeal brief is devoted to an afterthought argument about the Federal Rules Enabling Act, 28 U.S.C. § 2072. (Paramount’s 1/20/17 Br. at 19-34.) The Rules Enabling Act prescribes that the Federal Rules of Civil Procedure are rules of procedure governing the federal courts only, not the courts of the States and not the substantive laws of the States. 28 U.S.C. § 2072(a)-(b). Paramount provides a façade of importance to its argument about the Rules Enabling Act by offering a flurry of legislative history and 41 commentaries about the purpose of that statute. (Paramount’s 1/20/17 Br. at 19- 34 & Special “Compendium”.) Paramount’s prolix discussion of the Rules Enabling Act is a distraction that should be rejected by this Court for two independent reasons: (i) Paramount failed to preserve this argument before the Supreme Court; and (ii) it is the law of res judicata, not Fed. R. Civ. P. 13(a), that directs dismissal of Paramount’s transactionally-related “covenant not to sue” claim. A. Paramount Failed To Preserve Its Rules Enabling Act Argument Before The Supreme Court In a nearly full-page footnote, Paramount tries to make it appear that it made an argument about the Rules Enabling Act to the Supreme Court. Paramount did not actually do so. (Paramount’s 1/20/17 Br. at 21 n.7.) Nowhere in the record before the Supreme Court are the words, “Rules Enabling Act” used by Paramount. Paramount’s briefs are silent on this issue, and Paramount made no mention of this statute during the oral argument (at the conclusion of which the Supreme Court issued its ruling). (R.10-58.) Paramount contends that it impliedly preserved an argument about the Rules Enabling Act by arguing to the Supreme Court “that the New York courts are not obligated to apply Rule 13(a).” (Paramount’s 1/20/17 Br. at 21 n.7.) Paramount claims that its argument “derived from the Rules Enabling Act’s limited grant of rights” and “relate[d], at a minimum, to a legal ‘question’ that 42 was asserted below,” (id.), even though Paramount never said so directly or gave the Supreme Court an opportunity to consider or pass upon that statute’s scope or meaning. Indeed, whereas Paramount devotes 16 pages of its brief to this Court, plus a 143-page special “Compendium of Secondary Sources,” to articulate its Rules Enabling Act theory, Paramount asks the Court to accept that it somehow “preserved” the same argument before the Supreme Court without saying anything about the Rules Enabling Act at all and without giving the Supreme Court any reason to make any findings about it. Paramount’s failure to preserve its argument about the Rules Enabling Act before the Supreme Court should estop it from relying on the Rules Enabling Act before this Court. E.g., Bottom v. Annucci, 26 N.Y.3d 983, 985 (2015) (finding that claim raised for the first time on appeal was not properly preserved); Wild v. Catholic Health Sys., 21 N.Y.3d 951, 954 (2013) (“Defendants’ broad challenge … is unpreserved and is not properly before the Court”); Wilson v. Galicia Contracting & Restoration Corp., 10 N.Y.3d 827, 829-30 (2008) (“[T]he requirement of preservation is not simply a meaningless technical barrier to review.”); Karger and Cohen, supra, § 14:1 (“The Court’s power of review is further limited by the requirement that a claim of error of law on the part of the courts below must, in general, have been duly preserved for review by 43 appropriate motion, objection or other action in the nisi prius court in order to be reviewable as a question of law.”). Particularly where neither the Supreme Court nor the Appellate Division made any findings concerning the Rules Enabling Act for this Court to consider as arguably having been erroneous, Paramount’s unpreserved Rules Enabling Act argument should not be addressed by this Court tabula rasa. See, e.g., Misicki v. Caradonna, 12 N.Y.3d 511, 519 (2009) (“Our system depends in large part on adversary presentation; our role in that system is best accomplished when we determine legal issues of statewide significance that have first been considered by both the trial and the intermediate appellate court.”) (citation & quotation omitted); Fischer v. Zepa Consulting A.G., 95 N.Y.2d 66, 71 n.4 (2000) (agreeing with Appellate Division’s rejection of new argument as “unpreserved”); Altshuler Shaham Provident Funds, Ltd. v. GML Tower, LLC, 21 N.Y.3d 352, 361 n.4 (2013) (“The Court of Appeals … generally lacks power to review unpreserved issues even where the Appellate Division has chosen to do so.”); Hecker v. State, 20 N.Y.3d 1087, 1087-88 (2013) (same); Bingham v. New York City Transit Auth., 99 N.Y.2d 355, 359 (2003) (same).8 8 Paramount’s further footnoted assertion that “Respondents could not have taken any action before the Supreme Court to avoid the Rules Enabling Act’s conclusive impact” is not an argument in support of preservation but rather an argument about the Rules Enabling Act on the merits. (Paramount’s 1/20/17 Br. at 21 n.7.) While Paramount should be estopped from arguing the merits of its new Rules Enabling Act theory, as explained below Paramount’s 44 B. Paramount’s Rules Enabling Act Argument Is Meritless Paramount is, of course, correct that Fed. R. Civ. P. 13(a) does not control the New York judiciary and does not constitute any substantive law of New York. Nevertheless, as explained above, res judicata functions independently to bar Paramount’s claim in this case. The Rules Enabling Act does not bar this Court from applying the res judicata doctrine. Paramount’s reliance on Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 501-03 (2001), is misplaced. (Paramount’s 1/20/17 Br. at 29-30.) Semtek holds that res judicata applies only to adjudications “on the merits,” meaning where an issue has actually been litigated and decided by a prior court. 531 U.S. at 501-03. In that case, the U.S. Supreme Court found that a claim that had been dismissed previously in a California federal court as time-barred under California’s statute of limitations could be reasserted in a Maryland state court under Maryland’s longer statute of limitations. Id. Res judicata was no bar to the later assertion of the same claim because that claim had not been actually litigated and decided “on the merits” in the first action. Id. The respondent in Semtek had argued that Fed. R. Civ. P. 41(b) constituted authority for finding that the California federal court’s dismissal had been on the argument on the merits is also incorrect. The Rules Enabling Act is no impediment whatsoever to this Court’s application of res judicata. 45 merits because that rule states that dismissals “‘other than a dismissal for lack of jurisdiction, for improper venue, or for failure to join a party under Rule 19, operates as an adjudication upon the merits.’” Id. at 501 (quoting Fed. R. Civ. P. 41(b).) The Court rejected that form-over-substance argument and, in a statement of dictum, commented that “arguably” such a position could violate the Rules Enabling Act by causing Rule 41(b) to supersede a later state court’s substantive right to decide whether or not a prior adjudication is “on the merits.” Id. at 503- 04. In this case, Rule 13(a) is not being invoked by the Investors to supersede New York’s substantive right to decide whether or not Paramount’s “covenant not to sue” claim is transactionally-related to the subject matter of the parties’ first action. The Investors and the Appellate Division appropriately relied on res judicata to guide that determination. Indeed, that is why the Investors moved to dismiss Paramount’s claim not under Fed. R. Civ. P. 13(a) but under CPLR § 3211(a)(7): because Paramount could not state a legally viable claim for relief due to New York’s adherence to res judicata principles where the pleading requirement of the first action did not afford Paramount any right to believe it could withhold its transactionally-related theory as a counterclaim. As predicted by the Court of Appeals in Gargiulo, it is the res judicata doctrine that should “extend to bar the later assertion in the present State court action…a contention 46 which could have been raised by way of a counterclaim in the answer in the prior Federal action between the same parties.” 63 N.Y.2d at 845. Paramount is obviously frustrated that res judicata employs the same transactional analysis as Rule 13(a) and thus leads to the same result that Paramount’s “covenant not to sue” claim is transactionally-related to the subject matter of the federal action and thus barred. Nevertheless, the Rules Enabling Act is no impediment to that analysis and is of no moment to this appeal. Rule 13(a) is not being “applied to bar a claim that would otherwise be permitted by a state’s substantive law of res judicata,” as Paramount claims. (Paramount’s 1/20/17 Br. at 30.) New York’s law of res judicata “extend[s] to bar” the same claims that were compulsory counterclaims in the prior federal action. Gargiulo, 63 N.Y.2d at 845. Paramount’s reliance on Douglas v. NCNB Texas Nat’l Bank, 979 F.2d 1128, 1129-30 (5th Cir. 1992), is also misplaced. (Paramount’s 1/20/17 Br. at 31-33.) In Douglas, the plaintiff-borrower sued the defendant-lender over a promissory note in Texas state court, and the lender removed to Texas federal court. 979 F.2d at 1129-30. Once in the federal forum, the lender decided not to assert a transactionally-related foreclosure theory as a counterclaim, even though that theory fell within the ambit of the federal compulsory counterclaim rule. Id. The lender’s withholding of such a claim was permissible because substantive 47 Texas law permits lenders “to elect judicial or nonjudicial foreclosure,” and thus the lender had the right not “to pursue a judicial foreclosure remedy.” Id. (emphasis supplied). The court found that the federal compulsory counterclaim rule in that instance “would abridge the lender’s substantive rights” under Texas state law, in violation of the Rules Enabling Act. Id.; accord Nunnery v. Ocwen Loan Servicing, LLC, 641 Fed. App’x 430, 433-34 (5th Cir. 2016) (relied upon by Paramount for same proposition). There is no comparable New York substantive law at issue in this case. Paramount cannot claim that it was entitled to disregard the federal forum’s procedural compulsory counterclaim rule because New York State courts have their own procedural permissive counterclaim rule. That assertion, once again, is a non sequitur. Likewise, Paramount’s conclusory effort to sweep away all of the Investors’ authorities cited above by claiming that “none evidence any consideration of the Rules Enabling Act” and “the vast majority were issued before Semtek and Douglas” is misguided. (Paramount’s 1/20/17 Br. at 33 n.11.) The fact that no court has ever hesitated to apply res judicata in this context due to the Rules Enabling Act only further speaks to the inapplicability of the Rules Enabling Act to these kinds of cases. As explained above, Semtek and Douglas are entirely inapposite. 48 Paramount has larded its brief and the record with points and authorities concerning the Rules Enabling Act. The Rules Enabling Act is a red-herring that provides no basis to reverse the Appellate Division’s Decision. CONCLUSION The issue in this case is straightforward and not nearly as complicated as Paramount presents. The Investors respectfully submit that when parties have previously litigated an issue in a forum that was governed by a compulsory counterclaim rule, then New York courts should apply res judicata to preclude in their forums the later assertion of claims that should have been asserted in the parties’ prior action. Paramount’s claim based upon the covenant not to sue provision of Section 4(t) of the parties’ Subscription Agreements was logically- and transactionally- related to the waiver provision of Section 4(t) that was litigated in the federal action. Paramount’s covenant not to sue claim was a compulsory counterclaim in that action. Paramount’s claim was properly dismissed by the Appellate Division under a res judicata analysis. For the foregoing reasons, the Investors respectfully request that this Court affirm the Decision of the Appellate Division and award the Investors such other and further relief as the Court deems just and proper. Dated: New York, New York March 8, 2017 49 PRYOR CASHMAN LLP By: M*---- J a&esA:JanOWitz William L. Charron Bryan T. Mohler Benjamin S. Akley 7 Times Square New York, New York 10036 (212) 421-4100 HARRJS BEACH PLLC Victoria A. Graffeo I 00 Wall Street New York, New York 10005 (212) 687-0100 Attorneys for Defendants- Respondents NEW YORK STATE COURT OF APPEALS CERTIFICATE OF COMPLIANCE I hereby certify pursuant to 22 NYCRR PART 500.1(j) that the foregoing brief was prepared on a computer using Microsoft Word. Type. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 Line spacing: Double Word Count. The total number of words in this brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, table of citations, proof of service, certificate of compliance, corporate disclosure statement, questions presented, statement of related cases, or any authorized addendum containing statutes, rules, regulations, etc., is 11,684 words. Dated: New York, New York March 8, 2017 PRYOR CASHMAN LLP James A. Janowitz William L. Charron Bryan T. Mohler Benjamin S. Akley 7 Times Square New York, New York 10036 (212) 421-4100 2 HARRIS BEACH PLLC Victoria A. Graffeo 100 Wall Street New York, New York 10005 (212) 687-0100 Attorneys for Defendants- Respondents