Tuesday, December 6, 2016

For Whom the Cross-Claim Tolls

ZF Micro Devices, Inc. v. TAT Capital Partners, Ltd., No. H040776 (as modified Nov. 30, 2016)

This case deals with an interesting issue on the statute of limitations. To what cross-claims does the relation-back doctrine apply to toll a limitations period? Does it only apply to compulsory cross-claims, or to permissive ones too?

The case is part of a complicated series of lawsuits involving microchip fabrication, venture capital, and corporate governance. But the crucial facts aren’t too hard. Company won a big judgment against a supplier. One of Companys VC investors sued it for failing to distribute the proceeds. Four years in, the company cross-claimed against the VC. By that time, seven years had run since the accrual of Company’s claims. The relevant statute of limitations is four years, so the question is basically whether Company’s claims can relate back to the VC’s filing suit, at a time when company’s claims were unquestionably timely.

Ok. I might have lied a little. The facts are somewhat more complicated because Company’s cross-claim got severed and then consolidated into yet another lawsuit between Company and folks affiliated with the VC. So technically-speaking, the question is whether the period between the VC’s filing and Company’s cross-claim gives rise to tolling, as opposed a pure relation back question. But from what I can tell the analysis is the same.

Anyway, it shouldn’t be a subject of serious dispute that Company’s cross-claim is permissive—under the facts, it’s pretty clear that the cross-claim doesn’t arise from the same transaction and occurrence as the VC’s suit. Company makes a pretty weak argument that the VC is collaterally and/or estopped from denying that the cross-claim is compulsory. But the argument isn’t particularly coherent and the court bats it away.

Conversely, the VC argues that Company is collaterally estopped from denying that the claim is permissive, based on the severance order from the prior case, which was upheld on appeal. The gist is that a court can’t sever a compulsory cross-claim, so upholding the severance was, in effect, an implicit finding that the cross-claim was permissive. But the issue wasn’t actually litigated, so collateral estoppel isn’t appropriate. 

Estoppel-flinging aside, the court pretty easily resolves the merits of the compulsory/permissive issue. The statutory test is set out in Code of Civil Procedure §§ 426.10(c) and 426.30(a). A cross-claim is compulsory when: (1) the “cause of action which arises out of the same transaction, occurrence, or series of transactions or occurrences as the cause of action which the plaintiff alleges in his complaint"; and (2) the claim had accrued by the time the cross-plaintiff answered the underlying claim. The court notes that case law in California is actually pretty thin on what that all means, but the few cases seem to say it doesn’t require an identity of factual background. It instead requires some kind of logical relationship between claim and cross-claim. Some kind of overlap of common issues of law and fact arising from a common transaction. Under that test, there isn’t really a logical relationship between claim and cross-claim, so it’s pretty clearly permissive.

Moving on to the trickier question, it’s not at all clear whether the filing of a complaint tolls the statute for permissive cross-claims. There aren’t any published cases on the issue since 1971—when the cross-claim statutes were enacted by the Legislature. And apparently, Witkin and the Rutter Guide are split on the issue, although Rutter notes that the question isn’t settled. So, finding that the 1971 statute somewhat codifies prior practice, the court takes a tour through pre-enactment case law.

The permissive cross-claim had its origins in a 1927 statute that liberalized counterclaim practice.* The court reads some older Supreme Court cases decided under that statute as tolling the statute of limitations when the underlying complaint was filed, even for what would not be dominated a permissive counterclaim. See Jones v Mortimer, 28 Cal. 2d 627 (1946); Union Sugar Co. v. Hollister Estate Co., 3 Cal. 2d 740 (1935); Whittier v. Visscher, 189 Cal. 450 (1922). There’s also a 1973 case that, while not definitive, describes cross-claim tolling pretty broadly. See Liberty Mut. Ins. Co. v. Fales, 8 Cal. 3d 712 (1973). On the other hand, there are also a bunch of post-1971 Court of Appeal cases, which (mostly in dicta-ish statements) seem to say tolling is appropriate only for compulsory cross-claims. The court relies on the Auto Equity Sales rule—which holds that a Court of Appeal is bound by Supreme Court precedent, but not other decisions of the Court of Appeal—and decides to follow the older Supreme Court cases over the later Court of Appeal decisions.
So Company’s claim case wasn’t time barred.


*As in current federal practice, California used to distinguished a counterclaim (defendant’s claim back against plaintiff) from a cross-claim (a claim between someone other than the original plaintiff and defendant). But California abolished that distinction in the 1971 statute. Anything seeking affirmative relief other than an original complaint is now called a cross-claim. 

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This analysis seems unfulfilling to me. I’ve perused the cited cases, and it seems like the law is a bit of an inconsistent mess. Reading the 1935 Union Sugar case in particular, there seems to be a fair argument that the Supreme Court might have spoken on the issue, albeit a long time ago under the force of a somewhat different statutory scheme.

But given the wiggle room in the precedent, there are a few unaddressed points that seem to merit consideration.

First, the whole point of allowing the joinder of permissive cross-claim is judicial efficiency. Viz, why make someone bring lawsuit #2 when perfectly good lawsuit #1—even if based on a different nexus of facts—is already pending between the parties. But generally speaking, broadly letting people bring otherwise time-barred cross-claims leads to more not less work for the judicial system. So to the extent there is a policy rationale to permit parties to bring otherwise time-barred permissive cross claims, it would be based on a different rationale, one more grounded in fairness and discouraging needless litigation. It’s just not really fair to use the statute of limitations to punish someone who gracefully forebears in bringing claims against a counterparty who later proves to be much more litigious. As the opinion says, “the rationale for the [tolling] doctrine—that by filing the complaint the plaintiff has thereby waived the [statute of limitations defense] and permitted the defendant to make all proper defenses to the cause of action pleaded.” (quotes omitted, citing W. Pipe & Steel Co. of Cal. v. Tuolumne Gold Dredging Corp., 63 Cal. App. 2d 21, 31 (1944)).

It seems, however, like the Legislature has specifically spoken on how much that interest should be protected. As part of the 1971 cross-claim bill, the Legislature also enacted § 431.70. Section 431.70 is a setoff statute that lets a defendant reduce any liability to plaintiff based on time-barred claims—even factually unrelated ones—but only up to the point of zeroing out the plaintiff. Affirmative recovery isn’t permitted. See Constr. Protective Servs., Inc. v. TIG Specialty Ins. Co., 29 Cal. 4th 189 (2002). If every cross-claim relates back, § 431.70 doesn’t serve much purpose, except, I suppose, when defendant’s setoff claim was barred even at the time plaintiff even brought suit. Along these lines, the Jones case, on which the court here relies, seems to address a setoff, not a claim for affirmative relief, for which it found authority in a statutory precursor to § 431.70. See Jones, 28 Cal. 2d at 632.

Second, as the court here implicitly recognizes in discussing the compulsory/permissive distinction, the 1972 bill more or less mirrors the claim joinder standards in Rule 13 of the Federal Rules of Civil Procedure, albeit using different nomenclature. See generally Align Tech., Inc. v. Bao Tran, 179 Cal. App. 4th 949, 965 (2009). Under the weight of federal authority, permissive counterclaims do not relate back to the filing of the original complaint for statute of limitations purposes. See Fed. R. Civ. P. 15(c)(1)(B); Sea-Land Serv., Inc. v. R.V. D'Alfonso Co., 727 F.2d 1, 5 n.2 (1st Cir. 1984). That’s true of other states too: “the usual approach taken by state law is that the filing of the initial claim does not toll the statute for purposes of a permissive counterclaim, and that a Rule 13(b) counterclaim, since it is unrelated to the original claim, may be barred by the expiration of the statute of limitations.” 6 Charles A. Wright, et al., Federal Practice & Procedure § 1425 (2016 online ed.).

So regardless of the right answer, this one seems headed for a pretty grantable review petition so the Supremes can sort it all out.

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