DIVERSIFIED MORTGAGE INVESTORS v. VIKING GEN., 16 Mass. App. Ct. 142 (1983)

450 N.E.2d 176

DIVERSIFIED MORTGAGE INVESTORS vs. VIKING GENERAL CORPORATION.

Appeals Court of Massachusetts. Suffolk.April 20, 1983.
June 2, 1983.

Present: GREANEY, CUTTER, PERRETTA, JJ.

Law of the Case. Pleading, Civil, Counterclaim, Amendment. Practice, Civil, Counterclaim. Guaranty. Judgment,
Preclusive effect.

In an action against a corporation on a guaranty, the defendant, which had guaranteed payment of principal and interest on a loan given by the plaintiff to the defendant’s wholly-owned subsidiary, and which had consented to the treatment of the guaranty as separate from the subsidiary’s note and to being sued in Massachusetts on the guaranty, could not successfully contend that recovery was barred by reason of the plaintiff’s failure to assert the defendant’s liability on the guaranty as a compulsory counterclaim in a Florida foreclosure proceeding against the subsidiary in which the plaintiff had been joined, where it appeared that the defendant’s consents had been a principal inducement to the making of the loan, that the defendant had failed to object promptly to the Massachusetts action, and that, in the circumstances, it would be a miscarriage of justice to bar recovery in Massachusetts simply because the Florida action had been the first to be reduced to judgment. [147-151] Where a judge allowed the plaintiff’s motion for summary judgment in an action on a guaranty, following denial by two different judges of the defendant’s respective motions for leave to amend or supplement its pleadings in order to allege that the claim was barred by reason of the plaintiff’s failure to raise it as a counterclaim in a Florida proceeding, the judge, in effect, properly exercised whatever discretion he possessed under “law of the case” principles. [151-152]

CIVIL ACTION commenced in the Superior Court on January 8, 1976.

Motions for summary judgment were heard by Lynch, J., and the case was reported by him.

Joel A. Kozol (Roland E. Shaine with him) for the defendant.

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Peter M. Saparoff (Joan D. Channick with him) for the plaintiff.

CUTTER, J.

The plaintiff (DMI) seeks to recover from the defendant (Viking) some $644,400 (plus interest) upon an unusually broad guaranty by it, dated December 21, 1973, of payment of the principal and interest on a note of Viking Mobile Homes, Inc. (Mobile). DMI is a Massachusetts business trust. Viking, the guarantor, is a Florida corporation, of which Mobile is a wholly owned subsidiary.

Mobile owned land in Florida. As part of a loan transaction in December, 1973, Mobile delivered in Massachusetts a note to DMI for $650,000, a loan agreement, a security agreement, and a third mortgage interest in the Florida land. Over $600,000 was advanced by DMI on its loan to Mobile. These advances remain unpaid.

On June 4, 1975, judicial foreclosure proceedings were initiated in a Florida Circuit Court by the holder of the first mortgage of Mobile’s Florida land. In 1975, Mobile defaulted in making interest payments on its note to DMI. As the consequence of Mobile’s defaults, two pieces of litigation thus have been conducted, (a) the first mortgage foreclosure proceeding in Florida and (b) this action in Massachusetts by DMI on Viking’s guaranty.

A. The Florida First Mortgage Foreclosure.

In the Florida first mortgage foreclosure proceedings, DMI (as third mortgagee), Mobile (as owner), and Viking, the guarantor (as an “interest holder”), were joined as parties. Viking filed a cross claim against DMI which alleged failure by DMI to advance funds to Mobile to make payments on the first mortgage which Viking contended were required by the 1973 agreement, a loan commitment, and the mortgage. DMI’s original answer to Viking’s Florida cross claim did not assert any counterclaims against Viking. In the Florida proceedings, indeed, no counterclaim base on the guaranty was ever asserted by DMI against Viking. DMI, however, did amend its answer on February 11, 1976, to add a counterclaim against Mobile on the note,[1] but by

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then the Massachusetts action against Viking on its guaranty (not litigated in Massachusetts until 1980 or 1981 and never litigated in Florida) had been initiated.

After completion of the Florida proceedings summarized in n. 1, a so called final judgment was entered on April 14, 1981, in favor of DMI against Mobile on the note in the sum of $759,558.99 plus interest at six percent (reserving jurisdiction with regard to costs).[2] This Florida judgment makes no mention of either Viking, the guarantor, or its guaranty.

B. The Massachusetts Action on the Guaranty.

On January 8, 1976, DMI filed in the Superior Court a complaint against Viking, the guarantor, alleging the execution of the note by Mobile in Boston on December 21, 1973 (together with the other instruments already mentioned as then executed). The complaint then alleged (a) the execution of the guaranty by Viking in Massachusetts (see Appendix 1, infra); (b) the advances made by DMI to Mobile based on the note; and (c) Mobile’s subsequent default. Viking filed its answer on March 2, 1976. The

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Massachusetts action against Viking on the guaranty was brought after the initiation (on June 4, 1975) of the Florida judicial first mortgage foreclosure proceeding, but (as already stated) before the filing (on February 11, 1976) of DMI’s amended answer in the Florida proceedings.

On April 15, 1980, DMI filed in the Massachusetts action a motion for summary judgment as to liability only, based upon the Florida judgment entered on October 23, 1978. On June 18, 1980, Viking moved to amend its answer (of March 2, 1976) in the Massachusetts proceedings to aver (essentially as a defense) that in the Florida foreclosure litigation Viking, the guarantor, had “made a cross claim against” DMI, alleging that DMI had committed a breach of “its obligation to fund certain future advances under the terms of the transaction which included, as an integral part, the guaranty” and that DMI, in response to the cross claim, “made a counterclaim but failed to state therein a claim on . . . [Viking’s] guaranty.” After hearing, this motion was denied on July 2, 1980, by one Superior Court judge. On July 10, 1980, Viking sought leave, pursuant to Mass.R.Civ. P. 15(d), 365 Mass. 762 (1974), to supplement its answer in much the same form as the amendment sought by it on June 18, 1980. This leave was denied on July 29, 1980, by another Superior Court judge. The denials were each without statement of reasons. Of course, no such statement was required.

Viking on March 25, 1981, filed in this action a motion for summary judgment, supported by an affidavit concerning the Florida proceedings and later by a copy of a document dated April 14, 1981, entitled “Final Judgment in Accordance with the Mandate of the Second District Court of Appeal,” which (as already stated) made no mention of Viking’s or its guaranty. DMI thereupon moved to strike Viking’s motion for summary judgment. That motion was denied by a third Superior Court judge. The cross motions for summary judgment were referred to a master who filed a report and recommendation for the guidance of a fourth Superior Court judge (hereafter the motion judge). The

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master recommended that summary judgment be entered for DMI on the guaranty, even though, as he viewed the law of Florida, DMI should have raised in the Florida Circuit Court its claim against Viking on the guaranty as a compulsory counterclaim. Fla.R.Civ.P. 1.170(a), Fla. Stat. Ann. (West 1967). The master felt also that no special language of the guaranty prevented “the application of the compulsory counterclaim rule of law.” Instead, he took the position that “the earlier decisions of the two Superior Court [j]ustices who independently refused to accept . . . [Viking’s] amendment [and supplement] to its answer . . . [raising] for the first time its claim of compulsory counterclaim” had become the “law of the case.” For this view he referred to Saporita v Litner, 371 Mass. 607, 620 (1976), and Mr. Justice Lummus’s article, The “Law of the Case” in Massachusetts, 9 B.U.L. Rev. 225, 230-231 (1929). Compare Peterson v. Hopson, 306 Mass. 597, 607-605 (1940). The master did not regard the filing (on April 28, 1981) of the Florida judgment (dated April 14, 1981) in the Superior Court as a sufficient “change of circumstances” to require disregard of the prior action of two Superior Court judges (who, in effect, did not accept DMI’s failure to assert the guaranty in the Florida proceeding as precluding relief to DMI in Massachusetts on Viking’s guaranty).

The motion judge ordered summary judgment for DMI and denied Viking’s motion for summary judgment, without comment on the master’s recommendation, and also (after receiving a brief from Viking’s counsel and after hearing) denied reconsideration of his order. He then (see G.L.c. 231, § 111, and Mass.R.Civ.P. 64, 365 Mass. 831 [1974]) reported to this court the issue whether he correctly had allowed DMI’s motion for summary judgment and denied Viking’s similar motion.

Viking now contends that, because DMI failed to assert Viking’s liability on the guaranty as a counterclaim against Viking’s cross claim in the Florida foreclosure proceeding, the Florida judgment wholly bars DMI from enforcing the guaranty in Massachusetts. Viking’s position, if supported,

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is that DMI has a valid Florida judgment against Mobile, the maker of the guaranteed note, for $759,558.99 plus interest, which (so far as is shown by this record) may well be worthless, but has no claim in Massachusetts on Viking’s comprehensive guaranty, on which a Massachusetts action was brought long prior to any enforceable judgment against Mobile in Florida.

1. A principal inducement to DMI to make the loan to Mobile must have been the overriding guaranty in which (among other special agreements) Viking consented to enforcement of the guaranty in Massachusetts and appointed the Secretary of the Commonwealth its agent to receive service of process. The consent to be sued in Massachusetts was, of course, in part a submission in advance by Viking, as a Florida corporation, to the jurisdiction of any Massachusetts court. It also may be viewed reasonably as a forum selection agreement to have the guaranty enforced in Massachusetts (see Appendix 1, at [F], [G], and [H]) as an independent obligation (see Appendix 1, at [C]), rather than in a distant jurisdiction by courts in which DMI could litigate much less conveniently.[3] To sustain Viking’s position (which wholly disregards equitable considerations) inevitably would have the unjust effect of causing DMI to lose a principal assurance of payment, a result not lightly to be adopted.

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The preclusive effect[4] of a judgment has been considered recently in Restatement (Second) of Judgments §§ 22-26 (1980). This revision gives full consideration to procedural rules similar to Mass.R.Civ.P. 13(a), 365 Mass. 758 (1974) and the cognate Florida rule 1.170(a). The Restatement provisions most pertinent in the present case (set out in Appendix 2), especially § 26(1)(a), recognize that, in appropriate circumstances, a party may consent effectively to the separate litigation of related claims. As noted already, Viking has consented to treatment of the guaranty as an obligation separate from the note of its wholly owned subsidiary (Mobile) and also to being sued on it in Massachusetts. Viking’s consents (in its guaranty) may be taken to have as broad a meaning as the language warrants. The Massachusetts and the Florida actions were pending at the same time, as those acting for Viking well knew. The Florida judgment established (except for costs) Mobile’s liability on its note. It would be unjust in the circumstances to apply rule 13(a) and its Florida equivalent (as well as principles of res judicata) to give that judgment greater effect, as barring completion of the Massachusetts action on the independent guaranty, simply because the Florida action was the first to be reduced to final judgment. Viking also has failed (at least from January 8, 1976, to June 18, 1980) to object with promptness in the Massachusetts action to DMI’s decision to sue in the Commonwealth. Compar Commonwealth v. Andover, 378 Mass. 370, 374-375 (1979) United States v. Greenberg, 237 F. Supp. 439, 444-445 (S.D.N.Y. 1965). Compare also Genesco, Inc. v. Koufman, 11 Mass. App. Ct. 986, 990 (1981).

Viking’s consents and conduct seem to us to justify refusal to recognize here any bar which might otherwise result from the Florida judgment, even if DMI (giving weight only

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to the interests of judicial economy rather than also taking into account equitable considerations) should have asserted the guaranty as a compulsory counterclaim in Florida. No decision in Massachusetts (related to rule 13) brought to our attention seems to require any different result.[5]

Because we rely primarily on Viking’s consent to a separate action in Massachusetts on the independent guaranty,[6] we need not decide whether Fla.R.Civ.P. 1.170(a) required DMI to assert its claim on the guaranty against Viking as a counterclaim to Viking’s Florida cross claim against DMI. In view, however, of the uncertainties about what counterclaims are compulsory, assertion of the guaranty as a counterclaim certainly would have been the cautious and prudent course for DMI to have followed. See Wright, Federal Courts § 79, at 530-531 (4th ed. 1983); 3 Moore’s Federal Practice, par. 13.12[1], at 13-55 (2d ed. 1983).

Various Florida cases suggest a broad construction of its compulsory counterclaim rule. See, e.g., Newton v. Mitchell,

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42 So.2d 53, 54-55 (Fla. Dist. Ct. App. 1949); Pesce v Linaido, 123 So.2d 747, 749 (Fla. Dist. Ct. App. 1960) Lawyers Title Ins. Corp. v. Little River Bank Trust Co., 228 So.2d 412, 413-415 (Fla. Dist. Ct. App. 1969). Compar Cheezem Dev. Corp. v. Maddox Roof Serv., Inc., 362 So.2d 99
(Fla. Dist. Ct. App. 1978). See also Travelers Exp., Inc. v Acosta, 397 So.2d 733, 736-738 (Fla. Dist. Ct. App. 1981). Other Florida cases may indicate some unwillingness on the part of the Florida courts to apply the full measure of the compulsory counterclaim principle in cases where the unasserted claim has at least a reasonable basis in an independent obligation of the person against whom the claim is asserted. See Quarngesser v Appliance Buyers Credit Corp., 187 So.2d 662, 664 (Fla. Dist. Ct. App. 1966), treating a joint and several guaranty by two coguarantors as establishing liabilities independent of each other; First Natl. Bank v. Freedman, 244 So.2d 183, 184-187 (Fla. Dist. Ct. App. 1971), where a judgment, obtained for interest due on a demand note, was held not to preclude a later action for the principal of that note which was due already when the first action was initiated; Fewox v. Tallahassee Bank Trust Co., 249 So.2d 55, 57-58 (Fla. Dist. Ct. App. 1971), which seems to recognize in some degree the independent liability of a guarantor upon a separate guaranty. The authorities just cited leave uncertainty concerning whether a separate action on Viking’s guaranty would be regarded even in Florida as within the purview of Fla.R.Civ. P. 1.170(a).[7]

Rules like Mass.R.Civ.P. 13(a) and Fla.R.Civ.P. 1.170(a) may operate harshly to deny relief to a party to a proceeding in which judgment has been entered, upon a new claim against another party to that earlier proceeding, if the new claim is regarded as a compulsory counterclaim. The

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harshness has been perceived by text writers in various applications of Federal rule 13(a) and has led to some recognition that, in the administration of rules like rule 13(a), there must be reasonable flexibility in order to accomplish the fundamental purpose of combining related claims in one action in the interest of judicial economy while at the same time accomplishing a just result.[8] See 6 Wright Miller, supra
at §§ 1417 1418, particularly at 98-108 (1971 Supp. 1982). See also id. § 1412; 3 Moore’s Federal Practice, pars. 13.12[1]-13.14-1 (2d ed. 1983); 1B id. pars. 0.405[12], 0.410[1], 0.410[2] (2d ed. 1982 Supp. 1982-1983); Smith
Zobel, Rules Practice, § 13.24 (1974 Supp. 1981).

2. We turn now to the ground relied on by the master in the Superior Court in his recommendations. The precise limits of the principle of “law of the case” are indefinite. To the extent that the principle is relied on here, it is presumably in the sense that “a court cannot be compelled, at the will of a party, to hear anew an interlocutory matter, once decided, where no material change in the situation has occurred.” See Mr. Justice Lummus’s article, 9 B.U.L.Rev. at 230-231. The author there (at 231-236) comes close to treating “law of the case” as a largely discretionary doctrine, available to prevent repetitive efforts to obtain interlocutory relief on issues once decided. I Peterson v. Hopson, 306 Mass. at 599-605, also, Mr. Justice Lummus, speaking for the Supreme Judicial Court, gave this aspect of

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the doctrine little more weight than the opportunity to exercise a controlled judicial discretion. See In re Exterior Siding Aluminum Coil Antitrust Litigation, 696 F.2d 613, 614-618 (8th Cir. 1982), and the discussion in 1B Moore’s Federal Practice, pars. 0.404[1]-0.404[4] (2d ed. 1982 Supp. 1982-1983). See als Coolidge Bank Trust Co. v. First Ipswich Co., 11 Mass. App. Ct. 923, 924 (1981). We think that, in effect, the motion judge (although not compelled to treat as binding the rulings of the first Superior Court judges) has exercised reasonably whatever discretion he had under “law of the case” principles in favor of permitting DMI to recover in Massachusetts upon Viking’s independent guaranty. See Saporita v. Litner, 371 Mass. at 620.

3. The question reported for decision by the motion judge must be answered that he correctly (a) allowed DMI’s motion for summary judgment, and (b) denied Viking’s similar motion. Any other result would raise serious questions whether the application of rule 13(a) and related principles of bar had not resulted in a serious miscarriage of justice (see note 8 supra). The case is remanded to the Superior Court for further proceedings consistent with this opinion.

APPENDIX 1

GUARANTY [BY VIKING]

(All emphasis supplied. Bracketed capital letters have been
inserted for convenience in references.)

[A] IN CONSIDERATION OF certain financial accommodations to be
given by . . . [DMI] (hereinafter . . . “Lender”), to . . .
MOBILE (hereinafter . . . “Borrower”), the undersigned, jointly
and severally, hereby absolutely and unconditionally guarantee
and promise to pay both principal and interest of that certain
Promissory Note (hereinafter called “Note”), executed by
Borrower and made payable to the order of Lender in the principal
sum of . . . $650,000 . . . with interest as specified in said
Note, together with all other sums advanced by Lender or
otherwise due

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Lender pursuant to the terms of the Loan Agreement and other
Loan documents of even date with said Note.

[B] This is a guaranty of payment rather than a guaranty of
collection and the undersigned promise that upon any default by
the Borrower in the payment of principal or interest of the Note
or in the performance of any other obligation of the Note or of
the Mortgage, Loan Agreement or other security instrument
securing the Note on the part of the Borrower to be performed and
upon demand made by the holder of said Note, the undersigned
agree to pay to the holder of the Note the entire outstanding
principal balance and all accrued interest thereon and any other
sums then due under the terms of said Note, Mortgage, Loan
Agreement and all other Loan documents. [C] The obligations hereunder are independent of the
obligations of the Borrower, and a separate action or actions
may be brought and prosecuted against the undersigned whether or
not an action is brought against the Borrower or the Security for
such obligations and whether or not the Borrower be joined in any
such action or actions, and whether or not notice be given or
demand be made upon the Borrower; and the undersigned waive the
benefit of any statute of limitations affecting their liability
hereunder or the enforcement thereof.

. . . . [Broad provisions, waiving notice to Viking of changes
in guaranteed indebtedness, are omitted.] [D] Upon any default on the Note, the holder of the Note may,
at its option, proceed directly and at once, without notice or
demand, against the undersigned to collect and recover the full
amount hereby guaranteed, or any portion thereof, without
proceeding against or giving notice to or making demand upon the
Borrower or any other person, foreclosing upon, selling or
otherwise disposing of or collecting or applying any property,
real or personal, securing the Note (or any renewals or
extensions thereof) or this Guaranty.

. . . . [Other broad provisions of waiver omitted.] [E]. . . . Until all indebtedness of . . . [Mobile] to the
Lender shall have been paid in full, the undersigned shall have
no right to subrogation, and until such time the undersigned
waive any right to enforce any remedy which the Lender now has or
may hereafter have against the Borrower, and waive any benefit of
and any right to participate in any security now or hereafter
held by the Lender. The undersigned waive all exemptions,
presentments, demands for performance, notices of
non-performance, protests, notices of protest, notices of
dishonor and notices of acceptance of this Guaranty.

. . . . [Provisions against possible usury defenses omitted.] [F] This Guaranty is delivered to the Lender in Boston . . .
as an inducement to the Lender to make the aforesaid Loan to the
Borrower.

[G] This Guaranty shall be construed in accordance with the
laws . . . of Massachusetts, which laws shall govern in the
interpretation, construction and enforcement hereof.

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[H] The undersigned hereby severally appoint the Secretary of
State . . . of Massachusetts as their agent for the acceptance of
substituted service of process upon them and it is understood
and agreed that the undersigned, severally, thereby subject
each of themselves to the in personam jurisdiction of any duly
constituted court of . . . Massachusetts (upon compliance with
the procedural laws and rules of . . . Massachusetts) wherein
an action may be brought by the holder of said Note for the
enforcement of this Guaranty.

This Guaranty shall inure to the benefit of the successors and
assigns of the Lender and shall bind the heirs, personal
representatives and successors of the undersigned.

. . . . [Definition of “Mortgage” omitted.]

Wherever used in this Guaranty, the singular number shall
include the plural and the plural the singular and the use of any
gender shall include all genders.

EXECUTED this 21st day of December, 1973

. . . . [Signatures of Viking and witnesses omitted.]

APPENDIX 2

PERTINENT PROVISIONS OF RESTATEMENT (SECOND) OF JUDGMENTS

Relevant provisions (emphasis supplied) of Restatement (Second)
of Judgments (1980) include the following:

Section 22 reads: “(1) Where the defendant may interpose a
claim as a counterclaim but he fails to do so, he is not thereby
precluded from subsequently maintaining an action on that claim,
except as stated in Subsection (2).

“(2) A defendant who may interpose a claim as a counterclaim in
an action but fails to do so is precluded, after the rendition of
judgment in that action, from maintaining an action on the claim
if:

“(a) The counterclaim is required to be interposed by a
compulsory counterclaim statute or rule of court, or

“(b) The relationship between the counterclaim and the
plaintiff’s claim is such that successful prosecution of the
second action would nullify the initial judgment or would impair
rights established in the initial action.”

Section 26 reads in part: “(1) When any of the following
circumstances exists, the general rule of § 24 does not apply to
extinguish the claim, and part or all of the claim subsists as a
possible basis for a second action by the plaintiff against the
defendant:

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“(a) The parties have agreed in terms or in effect that the
plaintiff may split his claim or the defendant has acquiesced
therein. . . .”

Section 26 comment a, in its final paragraph, recognizes that
the failure of a party to object to the splitting of closely
related claims, where two separate actions are pending concerning
them, may be as “effective as an acquiescence in the splitting of
the claim[s]” as if that party had “consented,” in express words
or otherwise, to the “splitting of the claim[s].”

Section 24 states in broad terms the dimensions of the term
“claim” and the general rule concerning “splitting” a claim as
these terms in general affect application of rules of merger or
bar. The section also recognizes that what facts will constitute
a “transaction” must be determined pragmatically and in
accordance with business usage.

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