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Hostway Corp. v. JPMorgan Chase Bank

August 24, 2009

HOSTWAY CORP., PLAINTIFF,
v.
JPMORGAN CHASE BANK, N.A., DEFENDANT.



The opinion of the court was delivered by: Robert M. Dow, Jr. United States District Judge

Judge Robert M. Dow, Jr.

MEMORANDUM OPINION AND ORDER

Before the Court is Defendant JPMorgan Chase Bank, N.A.' s ("JPMorgan") motion to dismiss, stay or transfer Plaintiff Hostway Corporation's ("Hostway") complaint [18]. JPMorgan seeks to have Counts II and III of Hostway's complaint dismissed or stayed on the ground that they are compulsory counterclaims under Federal Rule of Civil Procedure 13(a) in JPMorgan's earlier-filed action against Hostway, which currently is pending in the United States District Court for the Southern District of New York (the "New York action"). JPMorgan moves to have Count I dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim, or, in the alternative, transferred to the Southern District of New York pursuant to 28 U.S.C. § 1404(a). For the reasons stated below, JPMorgan' s motion to stay Counts II and III is granted, and JPMorgan' s motion to dismiss Count I is granted without prejudice.

I. Background

On February 2, 2007, Hostway and JPMorgan entered into a written Mutual Nondisclosure Agreement (the "MNA") for the purpose of exploring a business deal that might require the parties to disclose confidential information to one another. Pursuant to the MNA, the parties agreed "not to use the Confidential Information disclosed to it by the other party for its own use or for any purpose except to carry out discussions concerning the undertaking of any business relationship between the two," and to "take all reasonable steps to * * * prevent [the Confidential Information] from falling into the public domain." The MNA defines "Confidential Information" to include "any proprietary or confidential information * * * provided by the disclosing party in whatever form or media, including that which relates to * * * finances." The MNA's definition of "Confidential Information" expressly excludes information that "prior to or after the time of disclosure becomes part of the public knowledge or literature, not as a result of any inaction or action of the receiving party." The MNA contains a choice of law provision providing that it is governed by the laws of the State of Illinois, as well as a forum selection provision stating that "[t]he federal and state courts within the State of Illinois shall have exclusive jurisdiction to adjudicate any dispute arising out of" the MNA.

Subsequently, on June 1, 2007, Hostway and JPMorgan entered into another contract -- the ISDA 2002 Master Agreement (the "ISDA") -- in connection with an interest rate swap transaction. Pursuant to the ISDA, Hostway was required to provide JPMorgan with copies of certain financial statements. On July 15, 2008, JPMorgan sent Hostway a letter stating that Hostway had failed to deliver certain required financial statements and reports, and that an event of default under the ISDA would be declared if the documents were not provided within 30 days.

According to Hostway, in response to the July 15, 2008 letter, it informed JPMorgan that Hostway had failed to timely provide the financial statements at issue because its auditors'had not completed their annual audit of Hostway' s books and records. Hostway failed to provide the financial statements within 30 days; on August 26, 2008, JPMorgan declared a default of the ISDA, and, based on that default, declared an early termination date of August 26, 2008 for the ISDA and the related swap transaction. On August 27, 2008, JPMorgan informed Hostway that an Early Termination Amount of $2,349,000 was due under the ISDA.

JPMorgan filed suit against Hostway in New York state court on December 11, 2008, alleging that Hostway breached the ISDA agreement by failing and refusing to pay the Early Termination Amount of $2,349,000. Approximately one month later, on January 9, 2009, Hostway filed its three count complaint in the instant action. Count I of Hostway' s complaint alleges that JPMorgan breached the MNA by disclosing Hostway' s confidential financial information in the New York complaint. Count II alleges that JPMorgan' s early termination of the ISDA and the swap transaction constituted a breach of those agreements, and Count IIII seeks a declaratory judgment to that effect. On January 13, 2009, Hostway removed the New York action to the Southern District of New York on diversity grounds.

JPMorgan moved to dismiss, stay or transfer plaintiff Hostway's complaint [18] on February 19, 2009. JPMorgan moves to dismiss, or, in the alternative, to stay, Counts II and III on the grounds that Hostway' s ISDA-related claims are compulsory counterclaims in the New York action under Rule 13(a). The motion seeks dismissal of Count I pursuant to Rule 12(b)(6), or, alternatively, a Section 1404(a) transfer to the Southern District of New York.

II. Motion to Dismiss or Stay Counts II and III

Federal Rule of Civil Procedure 13(a) provides 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 (A) arises out of the transaction or occurrence that is the subject matter of the opposing party's claim; and (B) does not require adding another party over whom the court cannot acquire jurisdiction." Fed. R. Civ. P. 13(a). Under Rule 13(a), a party is barred by the doctrine of res judicata from bringing a claim that it should have brought as a compulsory counterclaim in a prior action. See Inforizons, Inc. v. VED Software Services, Inc., 204 F.R.D. 116, 118 (N.D. Ill. 2001) (Rule 13(a) "requirement operates under the doctrine of res judicata"); New SVE, Inc. v. UAV Corp., 2003 WL 1826127, at *1 (N.D. Ill. April 8, 2003) (same).

Rule 13(a) does not, by its terms, bar a party from asserting a claim in an independent action that it could have brought as a compulsory counterclaim in a pending action (i.e., where res judicata has not yet attached). Inforizons, 204 F.R.D. at 118. However, as numerous courts in this district have recognized, where a court is faced with an action involving a claim that is properly characterized as a compulsory counterclaim in action pending in another federal court, in the interests of judicial administration, the court generally will stay or dismiss the proceedings before it. Id. (staying proceedings pending disposition of prior-filed litigation in another federal court, where the claims before the court were compulsory counterclaims in the other litigation). See also Kim v. Sara Lee Bakery Group, Inc., 412 F. Supp. 2d 929, 935 (N.D. Ill. 2006) (granting motion to dismiss second filed action on the ground that it asserted compulsory counterclaims to a pending action); CIVIX-DDI, LLC v. Expedia, Inc., 2005 WL 1126906, at *3 (N.D. Ill. May 2, 2005) (same); New SVE, Inc., 2003 WL 1826127, at *1; Galileo Int'l P'ship v. Global Vill. Communication Inc., 1996 WL 452273, at *2 (N.D. Ill. Aug. 8, 1996). See also 6 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice & Procedure § 1418 (2009) ("Ideally, once a court becomes aware that an action on its docket involves a claim that should be a compulsory counterclaim in another pending federal suit, it will stay its own proceedings or will dismiss the claim with leave to plead it in the prior action").

Under Rule 13(a), to be a compulsory counterclaim, a claim must arise out of the transaction or occurrence that is the subject matter of the opposing party's claim. In the Seventh Circuit, the standard for deciding whether two claims arise out of the "same transaction" for purposes of Rule 13(a) is the "logical relationship" test. In re Price, 42 F.3d 1068, 1073 (7th Cir. 1994) (citing Burlington N. R.R. v. Strong, 907 F.2d 707, 711 (7th Cir. 1990)). To determine whether claims are logically related, "[a] court should consider the totality of the claims, including the nature of the claims, the legal basis for recovery, the law involved, and the respective factual backgrounds." Burlington, 907 F.2d at 711. The Seventh Circuit has instructed courts to interpret the language of Rule 13(a) "liberally in order to further the general policies of the federal rules and carry out the philosophy of Rule 13(a)" -- namely, "prevent[ing] multiplicity of actions and * * * achiev[ing] resolution in a single lawsuit of all disputes arising out of common matters." Warshawsky & Co. v. Arcata Nat'l Corp., 552 F.2d 1257, 1261 (7th Cir. 1977).

Here, there can be no dispute that the breach of ISDA claims asserted in Counts II and III are logically related to, and arise out of the same transaction and occurrence as, JPMorgan' s breach of ISDA claims now pending in the Southern District of New York. Each party claims that the other party' s conduct amounted to a breach ...


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