Defect is compulsory counterclaim rules Wisconsin Supreme Court.

• Author: Ziemer, David

Byline: David Ziemer

A claim by a buyer of allegedly defective products is barred by the doctrine of claim preclusion and the compulsory counterclaim rule when the seller has previously sued the buyer for nonpayment of invoices, the Wisconsin Supreme Court held on June 29.

Menard, Inc., purchased lighting products from Liteway Lighting Products from 1993 until 1999. During their business relationship, Menard often held back sums of money due to Liteway as "credit" for products Menard claimed were defective. Following the cessation of their business relationship, the parties began disputing the amount of money Menard owed Liteway.

In 2000, Liteway filed suit for breach of contract, seeking over $350,000 for unpaid invoices. Default judgment was entered against Menard in that amount, plus interest.

While that case was pending, Menard filed a separate complaint against Liteway, alleging that it had returned some of the products due to their defective condition and that Liteway had not reimbursed it for the returns. Menard alleged that as a result, Liteway had been unjustly enriched and that it breached its obligations under the Uniform Commer-cial Code (UCC). Menard sought damages in the sum of $315,346, representing the cost of all goods returned plus storage and shipping fees.

Liteway answered, asserting that, because Menard's claims could have been asserted in the pending action, they were barred by the doctrine of claim preclusion.

Eau Claire County Circuit Court Judge Lisa K. Stark held claim preclusion inapplicable, and Liteway appealed. The court of appeals reversed in a published decision, Menard, Inc., v. Liteway Lighting Products, 2004 WI 95, 273 Wis.2d 439, 685 N.W.2d 365.

The Supreme Court accepted review, and affirmed the court of appeals, in a decision by Justice Jon P. Wilcox. Justice N. Patrick Crooks dissented, in an opinion joined by Justice Louis B. Butler.

Claim Preclusion

The court concluded that claim preclusion applied because Menard's claims are part of the same transaction as the claims in Liteway's original suit.

The court acknowledged that the general rule in Wisconsin is that, where a defendant may assert a counterclaim, but fails to do so, he is not precluded from maintaining a subsequent action on that claim. A.B.C.G. Enterprises v. First Bank Southeast, 184 Wis.2d 465, 476, 515 N.W.2d 904 (1994)

However, an exception to the rule exists where if "a favorable judgment in the second action would nullify the judgment...