United States District Court, N.D. Illinois
January 20, 2004.
PAUL WOOLNER AND SUSAN WOOLNER, Plaintiff's,
FLAIR COMMUNICATIONS AGENCY, INC., AND LEE F. FLAHERTY, Defendants
The opinion of the court was delivered by: BLANCHE MANNING, District Judge
MEMORANDUM AND ORDER
Plaintiff's Paul Woolner and Susan Woolner (collectively, "the
Woolners") brought this action against their former employer, Defendants
Flair Communications Agency, Inc. ("Flair") and Lee Flaherty, alleging
employment discrimination and retaliation based on age (in violation of
the Age Discrimination in Employment Act of 1967, 29 U.S.C. § 621, et
seq.) and sex (in violation of Title VII of the Civil Rights Act of
1964, 42 U.S.C. § 2000e, et seq.) The present matter comes before
this Court on Defendants' Motion for Leave to File First Amended Answer
and Counterclaim. For the reasons set forth herein, the Court GRANTS this
The Woolners brought this action after Defendants terminated their
employment for alleged deficiencies in their job performance. Defendants
filed their initial answer on March 25, 2002. After conducting discovery,
on August 15, 2003, Defendants brought the instant motion
seeking to add an additional affirmative defense (No. 6) and a
counterclaim for breach of fiduciary duty. Affirmative Defense No, 6
Pursuant to the after acquired evidence doctrine,
Susan Woolner and Paul Woolner are barred from
receipt of any back pay or other damages based on
a breach of their fiduciary duties and engaging in
prohibited activity and/or receiving income from
such activity while in the employment of Flair
Communications. Susan Woolner engaged in those
activities and/or received compensation from those
activities. Paul Woolner was aware of such
activities and/or received income as a result of
those prohibited activities by Susan Woolner.
Similarly, the counterclaim alleges that while working "as a member of
management" for Flair, Susan Woolner breached her fiduciary duty to Flair
by "engag[ing] in competitive and other activity for an entity other than
Flair." Paul Woolner, who was also a manager at Flair, knew of these
activities and profited from them, and thereby, likewise breached his
fiduciary duty to Flair. As a result of the alleged breach of fiduciary
duties, Flair seeks forfeiture of compensation which it paid to the
Woolners during the time of the breach.
Defendants contend that the reason for their delay in asserting the
additional affirmative defense and the counterclaim was that they were
not aware of Susan Woolner's outside employment activities when their
initial answer was filed. According to Defendants, the Woolners were
terminated for poor job performance, and they did not learn of the
alleged outside employment until discovery was well under way. Therefore,
Defendants contend that they could not have brought Affirmative Defense
No. 6 or the Counterclaim at the time they filed their initial answer and
Moreover, even after discovery commenced, Defendants contend that they
were not certain of the facts surrounding the Woolners' breach of
fiduciary duty until August 2003, the month they filed the instant
motion. At her deposition on November 18, 2002, Susan Woollier
denied engaging in any competitive business with Flair or
performing outside work. After learning that the Woolners had an
ownership interest in a company called M.W. Design, Inc. ("M.W."),
Defendants served discovery requests seeking all documents pertaining to
M.W. The Woolners, however, repeatedly failed to produce the responsive
documents until nearly ten months later. To date only partial records
have been produced and the income tax records from M.W. were not produced
in printable fashion until August 1, 2003. Not until the Woolners finally
produced M.W.'s tax returns did Defendants learn that the Woolners had
received more than $43,000 in income for freelance business while
employed by Flair.
Additionally, Defendants received documents subpoenaed from a non-Flair
client confirming that Susan Woolner, contrary to her testimony,
scheduled "photo shoots" on Flair-workdays and invited non-Flair clients
to call her at Flair to discuss business affairs for the personal benefit
of the Woolners and M.W.
The Woolners object to the filing of both the counterclaim and
Affirmative Defense No. 6. The Court will discuss both of these
objections in turn.
I. Counterclaim for Breach of Fiduciary Duty
The Woolners contend that the Counterclaim is improper because it is;
(A) permissive and "lacks the required jurisdictional basis"; and (B)
barred by the statute of limitations.
A. Counterclaims Under Rule 13
The Federal Rules of Civil Procedure provide for two types of
counterclaims permissive and compulsory. For purposes of this
case, it is important to note that a federal court has supplemental
jurisdiction over compulsory counterclaims, governed by Rule 13(a);
permissive counterclaims, governed by Rule 13(b), require an independent
jurisdictional basis. Unique Concepts, Inc. v. Manuel,
930 F.2d 573, 574-75 (7th Cir. 1991).
The Woolners contend that the instant counterclaim is permissive, and
because it does not have an independent jurisdictional basis
(i.e., diversity or federal question), it is improper. The
Court agrees that because the counterclaim is a state law breach of
fiduciary duty claim between citizens of the same state, that this Court
does not have an independent basis of federal jurisdiction. Therefore,
Defendants may bring the instant counterclaim only if it is compulsory as
defined by Rule 13(a).
To be a compulsory counterclaim, "Rule 13(a) requires that the claim
(1) exist at the time of pleading, (2) arise out of the same transaction
or occurrence as the opposing party's claim, and (3) not require for
adjudication parties over whom the court may not acquire jurisdiction."
Burlington Northern R. Co. v. Strong, 907 F.2d 707, 710-11 (7th
Cir. 1990).*fn2 Here, the only disputed element is whether the breach of
fiduciary counterclaim arose out of the same transaction/occurrence as
the Woolners' employment discrimination claim.
In interpreting Rule 13(a)'s "same transaction or occurrence"
requirement, the Seventh Circuit in Strong, 907 F.2d at 711,
developed a "logical relationship" test. The court noted that:
[c]ourts generally have agreed that the words
`transaction or occurrence' should be interpreted
liberally in order to further the general policies
of the federal rules and carry out the philosophy
of Rule 13(a). . . . As a word of flexible meaning,
`transaction' may comprehend a series of many
occurrences, depending not so much upon the
immediateness of their
connection as upon their logical
relationship. . . . [A] counterclaim that has
its roots in separate transaction or occurrence is
permissive and is governed by Rule 13(b).
Id. (emphasis in original). Despite this "liberal
construction," however, the court stated that all factual allegations
underlying each claim must be carefully examined to determine if the
logical relationship test is met. Id. In determining whether claims are
logically related, a court should consider "the totality of the claims,
including the nature of the claims, legal basis for recovery, the law
involved and the respective factual backgrounds." Id.
Here, the underlying claim alleges that Defendants unlawfully
terminated the Woolners from their employment based on age and gender.
Defendants contend that the breach of fiduciary counterclaim is logically
related to the discrimination claim because then defense is that the
Woolners were not fired based on any discriminatory animus but because of
poor work performance. According to Defendants, the Woolners' poor work
performance can be proved and explained by the fact that they performed
non-Flair business during work hours and thus were not doing the jobs
they were paid to do.
Defendants' reliance on the non-discriminatory defense is consistent
with the law. Under the method set forth in McDonnell Douglas Corp.
v. Green, 411 U.S. 792, 802-03 (1973), if the Woolners establish a
prima facie case, Defendants then have the burden to articulate a
legitimate, non-discriminatory reason for its actions. If Defendants meet
this burden, then the Woolners must show that the proffered reason is
false or pretextual. Id. at 804-05.
This Court thus finds that the breach of fiduciary counterclaim is
logically related to the underlying discrimination claim and that
evidence of the breach will be relevant to the disposition of this case.
Therefore, the Court holds that the counterclaim is compulsory under
Rule 13(a) and that this Court can exercise supplemental
jurisdiction over it.
B. Statute of Limitations
The Woolners also contend that the breach of fiduciary counterclaim is
improper because it is barred by the statute of limitations. Under
Illinois law, the statute of limitations for a breach of fiduciary duty
claim is five years. Armstrong v. Gutsier, 673 N.E.2d 290 (Ill.
1996). Under the "discovery rule," however, the statute of limitations
does not begin to run until the plaintiff knew or reasonably should have
known of its injury and the alleged wrongful conduct. Hermitage
Corp. v. Contractors Adjustment Co., 651 N.E.2d 1132, 1135 (Ill.
1995). Moreover, the limitations period is tolled where a party cannot
obtain information necessary to file suit. Clark v. City of
Braidwood, 318 F.3d 764, 767 (7th Cir. 2003).
Here, as explained in detail above, Defendants did not learn of and/or
have sufficient information to file suit for the alleged breach of
fiduciary duty until August of 2003. Despite Defendants repeated
discovery requests, beginning in November of 2002, it was not until
August 2003 that Woolners finally produced the tax returns from M.W.,
which showed that the Woolners received in excess of $43,000 in outside
income while working for Defendants. Therefore, this Court finds that the
five year statute of limitations does not bar Defendants counterclaim for
breach of fiduciary duty.
II. Affirmative Defense No. 6
The Woolners also contend that because the after-acquired evidence
doctrine operates to mitigate damages and not bar recovery it is not a
proper affirmative defense. This contention is without merit. The
after-acquired evidence doctrine is a proper affirmative defense.
See Johnson v. City of Elgin, 2001 WL 199506, at *2
(N.D. Ill. Feb. 28, 2001) (denying motion to strike affirmative defense
based on the after-acquired evidence doctrine).
For the foregoing reasons, Defendant's Motion for Leave to File an
Amended Answer and Counterclaim [28-1] is GRANTED.