Gargiulo v. Oppenheim, 63 N.Y.2d 843 (1984)
A claim is not barred by the compulsory counterclaim rule if, at the time the federal action was commenced, the claim was the subject of another pending action in state court.
Summary
Gargiulo and Argento sought restitution of $112,000 paid under an agreement later deemed invalid. The New York Court of Appeals addressed whether this claim was precluded by the compulsory counterclaim rule, given a prior federal action between the same parties. The Court held that the claim was not precluded because a state court action involving the same claim was already pending when the federal action commenced, thus falling under an exception to the compulsory counterclaim rule. However, the court ultimately denied restitution, finding that the appellants had received the benefit for which they bargained.
Facts
Gargiulo and Argento entered into an agreement with Oppenheim and Licht. Subsequently, a dispute arose, leading to both a federal and a state court action. The state court action initially sought rescission of a 1973 agreement and restitution of stock. During litigation, Gargiulo and Argento paid Licht $112,000. A stipulation was made to preserve each party’s rights to maintain their actions, with the payment considered a means to avoid the sale of stock. The agreement under which the payment was made was later declared invalid. Gargiulo and Argento then sought restitution of the $112,000 in the state court action.
Procedural History
The case began in Trial Term, where appellants were permitted to supplement their complaint. The Appellate Division reversed in part. The New York Court of Appeals then reviewed the Appellate Division’s decision, focusing on the application of claim preclusion and the compulsory counterclaim rule. The Appellate Division decision was ultimately affirmed.
Issue(s)
Whether the claim for restitution of $112,000 is barred by claim or issue preclusion, specifically the compulsory counterclaim rule, considering a prior federal action between the same parties.
Holding
No, because an exception to the federal compulsory counterclaim rule applies when the claim was the subject of another pending action at the time the federal action commenced. However, restitution was denied because the appellants received the benefit they bargained for.
Court’s Reasoning
The Court of Appeals addressed whether the failure to assert the restitution claim as a counterclaim in the prior federal action precluded its assertion in the state court action. The court acknowledged the potential applicability of claim preclusion under the federal compulsory counterclaim rule (Fed. Rules Civ. Pro. Rule 13(a)). However, it emphasized an exception to this rule: a claim is excluded if “at the time the action was commenced the claim was the subject of another pending action.” Since the state court action, which included a claim for restitution (originally for the Jamsut stock, later replaced by the $112,000 payment), was commenced before the federal action, the exception applied. Therefore, claim preclusion did not bar the restitution claim. Despite this, the court ultimately denied restitution, reasoning that Gargiulo and Argento “received the benefit for which they bargained and agreed to pay Licht the $112,000 which they now seek to have returned to them. Having received such a benefit, which was of great value to them, they may not obtain return of the sum paid therefor, notwithstanding the fact that the agreement between the parties giving rise to such exchange has been declared a legal nullity”.