Heartland Materials, Inc. v. Warren Paving, Inc.

NOT RECOMMENDED FOR PUBLICATION
File Name: 20a0373n.06
No. 19-5510
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
HEARTLAND MATERIALS, INC.; ) FILED
WILLIAM R. FRAZER, LLC; SOUTHERN ) Jun 23, 2020
AGGREGATE DISTRIBUTORS, INC., ) DEBORAH S. HUNT, Clerk
Plaintiffs-Appellees, )
)
v. )
)
WARREN PAVING, INC.; SLATS LUCAS, ) ON APPEAL FROM THE UNITED
LLC, ) STATES DISTRICT COURT FOR
Defendants-Appellants. ) THE WESTERN DISTRICT OF
) KENTUCKY
OPINION
BEFORE: NORRIS, MOORE, and DONALD, Circuit Judges.
ALAN E. NORRIS, Circuit Judge. In 2014, Warren Paving, Inc. and Slats Lucas, LLC
filed suit against Heartland Materials, Inc. and others asking the court to declare a 2004 contract
void. Under the disputed contract, Warren Paving was required to pay royalties to Heartland based
on the volume of stone extracted from a quarry that Heartland helped Warren acquire. The district
court dismissed the suit in favor of Heartland because it was barred by Kentucky’s five-year statute
of limitations, and this court affirmed. Subsequently, Warren Paving and Slats Lucas simply
stopped paying royalties, causing Heartland to sue to enforce the contract. As defenses to
Heartland’s suit, Warren Paving and Slats Lucas raised substantially the same legal theories as the
claims in their affirmative lawsuit. Common sense would suggest that such a transparent effort to
evade the statute of limitations should fail. Kentucky law confirms this common-sense conclusion.
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The district court again granted summary judgment in favor of Heartland and, for the reasons that
follow, we affirm.
I.
In 2003, Warren Paving began looking for an opportunity to purchase and operate a
limestone quarry. Heartland assisted in the search, eventually identifying a suitable tract of land in
Livingston County, Kentucky (the “Property”). Warren Paving gave Heartland a check for $5,000
to secure an option to buy the Property, and near the end of the option period gave Heartland
another check for $5,000 to extend the option. Heartland purchased both the option and extension
in its own name. Warren Paving claims that it did not know the options were in Heartland’s name,
while Heartland claims that Warren Paving did know and wanted to keep its plans to develop a
quarry confidential.
Warren Paving decided to purchase the Property. Heartland agreed to assign its option to
purchase the Property to Warren Paving, retaining for itself certain royalties. In September 2004,
the parties executed an assignment contract with retained royalties (the “Contract”). Under the
Contract, Warren Paving was required to advance $300,000 to Heartland based on the first 750,000
tons of limestone produced, then a second $300,000 payment for the subsequent 750,000 tons.
Thereafter, Warren Paving was required to pay Heartland ongoing royalties of $0.40 per ton of
limestone mined and loaded for transport.
Warren Paving claims that even though it found these terms to be exorbitant, it was forced
to agree to the Contract because the Property was desirable, and Heartland had threatened that
another buyer was also interested in the property. Heartland next obtained certain required permits
and other approvals for Warren Paving so that Warren Paving could begin mining operations. In
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2007, Warren Paving transferred ownership of the Property to Slats Lucas but leased the property
back and continued to make the royalty payments to Heartland on behalf of Slats Lucas.
In July 2009, Heartland assigned one third of its interest in receiving royalties from Warren
Paving to Walt Gaylord, a principal of Heartland. Gaylord then sold those interests to Slats Lucas,
effectively reducing by one-third the royalties to be paid going forward. In August 2010, Heartland
assigned its remaining rights to the royalties, with half going to William R. Frazer, LLC and half
going to Southern Aggregate Distributors, Inc.
In its 2014 suit, Warren Paving asserted that the Contract should be void because the
royalty payments to Heartland were effectively real estate commissions and at the time the
Contract was executed Heartland did not have a real estate brokerage license as required under
Kentucky law. Warren argued that Heartland acted in the capacity of a real estate broker for its
part in Warren purchasing the land. Warren also included claims based on mistake of fact, breach
of fiduciary duties, fraud and intentional misrepresentation, restitution, assumpsit, unjust
enrichment, and constructive trust. The district court thoroughly examined the claims and
determined that each was subject to a five-year statute of limitations under Kentucky law, and
therefore granted Heartland’s motion to dismiss.1 Warren Paving appealed, but in July 2016 this
court confirmed the applicable statute of limitations and affirmed the court’s dismissal.2
Shortly after this court issued its order, Warren Paving and Slats Lucas stopped paying
royalties under the Contract. In September 2016, Heartland Materials, William R. Frazer, LLC,
and Southern Aggregate Distribution Inc. filed suit for breach of contract. In response, Warren
1
Warren Paving, Inc. v. Heartland Materials, Inc., No. 5:14-CV-149-R, 2015 WL 269204, at *5 (W.D. Ky. Jan. 21,
2015).
2
Warren Paving, Inc. v. Heartland Materials, Inc., No. 15-6052, 2016 U.S. App. LEXIS 24301, at *6 (6th Cir. July
6, 2016).
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Paving and Slats Lucas asserted in defense that they do not owe royalties and the Contract is
unenforceable because (1) the royalty payments are essentially brokerage fees and therefore
violate Kentucky brokerage licensure laws, (2) the contract is void ab initio, (3) mistake of fact,
(4) Heartland breached its fiduciary duties of loyalty and good faith, (5) the Contract was procured
through fraud, breach of fiduciary duties, or material mistake of fact, and (6) Heartland has unclean
hands.3 Warren Paving and Slats Lucas also contend that they are entitled to set-off or recoupment.
The district court noted the symmetry between the claims by Warren Paving and Slats
Lucas in the prior litigation and their defenses in the current litigation, holding that the relevant
defenses were stricken because each was barred by the statute of limitations in the prior suit and
so is barred in this suit under the doctrine of issue preclusion. The court granted summary judgment
in favor of the plaintiff, Heartland, and granted a declaratory judgment clarifying that Warren
Paving and Slats Lucas are contractually obligated to pay ongoing royalties in accordance with the
Contract.
II.
We review de novo the district court’s grant of summary judgment, construing the facts in
the light most favorable to Warren Paving and Slats Lucas. See Brumley v. United Parcel Serv.,
Inc., 909 F.3d 834, 839 (6th Cir. 2018).
The district court held that Warren Paving and Slats Lucas were “barred from asserting
most of their affirmative defenses” due to issue preclusion. Heartland Materials, Inc. v. Warren
Paving, Inc., No. 5:16-CV-00146-TBR, 2018 WL 2324075, at *9 (W.D. Ky. May 22, 2018). The
idea of issue preclusion “is straightforward: Once a court has decided an issue, it is ‘forever settled
3
Heartland claimed also that defendants miscalculated and underpaid the prior royalty payments. The district court
denied summary judgment on that claim and subsequently Heartland dismissed it. That claim is not part of the appeal.
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as between the parties.’” B & B Hardware, Inc. v. Hargis Indus., Inc., 575 U.S. 138, 147 (2015)
(quoting Baldwin v. Iowa State Traveling Men’s Assn., 283 U.S. 522, 525 (1931)). More
specifically, “issue preclusion, bars ‘successive litigation of an issue of fact or law actually
litigated and resolved in a valid court determination essential to the prior judgment, even if the
issue recurs in the context of a different claim.’” Ark. Coals, Inc. v. Lawson, 739 F.3d 309, 320
(6th Cir. 2014) (emphasis added) (quoting Taylor v. Sturgell, 553 U.S. 880, 891 (2008)). And a
dismissal based on statute-of-limitations grounds is a judgment on the merits, barring exceptions
inapplicable here. Fed. R. Civ. P. 41(b); Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 228 (1995)
(“The rules of finality, both statutory and judge made, treat a dismissal on statute-of-limitations
grounds . . . as a judgment on the merits.”).
“[W]hen a federal court exercises diversity jurisdiction over a state law claim, federal
common law governs the issue preclusion analysis.” In re Berge, 953 F.3d 907, 916 (6th Cir. 2020)
(citing Semtek Int’l v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001)). In turn, “federal
preclusion law directs courts to apply ‘the law that would be applied by state courts in the State in
which the federal diversity court sits,’ so long as the state rule is not ‘incompatible with federal
interests.’” Id. at 917 (quoting Semtek Int’l, 531 U.S. at 508-09); see also Taylor, 553 U.S. at 891
n.4 (“For judgments in diversity cases, federal law incorporates the rules of preclusion applied by
the State in which the rendering court sits.”) (citation omitted).
Kentucky law is compatible with federal interests, and so Kentucky law guides our
preclusion analysis. “Issue preclusion bars the parties from relitigating any issue actually litigated
and finally decided in an earlier action.” Yeoman v. Commonwealth, 983 S.W.2d 459, 465 (Ky.
1998). Kentucky issue preclusion requires five elements: “(1) at least one party to be bound in the
second case must have been a party in the first case; (2) ‘the issue in the second case must be the
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same as the issue in the first case’; (3) ‘the issue must have been actually litigated’; (4) ‘the issue
was actually decided in that action’; and (5) ‘the decision on the issue in the prior action must have
been necessary to the court’s judgment’ and adverse to the party to be bound.” Miller v. Admin.
Office of Courts, 361 S.W.3d 867, 872 (Ky. 2011) (quoting Yeoman, 983 S.W.2d at 465).
Appellants maintain that the royalty provision in the Contract is invalid and unenforceable
because Heartland’s involvement in procuring the property was tantamount to acting as a real
estate broker without a license, and therefore the royalty payments are functionally equivalent to
unlawful real estate commissions. In the prior litigation, the issue of Heartland acting as an
unlicensed broker was raised and rejected as time-barred, yet appellants argue that the issue
decided in the prior litigation—whether the Contract was enforceable as a whole—is distinct from
the issue of whether the royalty provision is enforceable. But the key issue in each of appellants’
arguments is whether Kentucky’s real estate statute precludes Heartland from collecting royalties
under the Contract. And that issue was resolved in the prior litigation. The district court explained:
The distinction Defendants attempt to make is a distinction without a
difference for issue preclusion purposes. In the prior suit, Defendants alleged that
Heartland engaged in real estate brokerage without a license in violation of KRS
§ 324.020(2), which provides that “No person shall practice real estate brokerage
with respect to real estate located in this state unless . . . (a) The person holds a
license to practice real estate brokerage under this chapter.” Ky. Rev. Stat. Ann.
§ 324.020(2)(a). Defendants claimed, therefore, that “Heartland was prohibited
from . . . obtaining the consideration it negotiated in the Contract for Assignment.”
Accordingly, Defendants asserted that the Assignment Contract was “void” and
that “Defendants are not entitled to any payments under the Contract.” In
dismissing that claim, this Court explained that, “Plaintiffs are suing based on a
statutory violation, Heartland’s failure to possess a real estate license. Without
ruling on whether the statute was violated in this case, the proper statute of
limitations to apply is [the five year statute of limitations in] KRS § 413.120(2).”
Warren Paving, 2015 WL 269204, at *4. Applying that limitations period, the
Court dismissed the claim.
Here, the issue is identical. Defendants assert in their third defense that,
because “neither Heartland nor its officers were licensed real estate brokers under
Kentucky law[,] [t]he royalties which Plaintiffs seek . . . are not legally owed.”
Once again, then, the issue is the violation of KRS § 324.020(2), which the Court
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has already determined is time-barred by the five-year statute of limitations codified
in KRS § 413.120(2). “The ‘identity of issues’ element requires that ‘the key issue
in both cases is the same . . . .’” Georgia-Pac., 701 F.3d at 1098 (quoting Nat’l
Satellite Sports, Inc. v. Eliadis, Inc., 253 F.3d 900, 908–09 (6th Cir. 2001)).
Accordingly, “[w]here a litigant brings repeated actions based upon the same
operative facts, issue preclusion may still properly apply despite a change in legal
theory.” Id. (citing Randles v. Gregart, 965 F.2d 90, 93 (6th Cir. 1992)). The core
issue in both instances is the allegation that Plaintiffs are not entitled to royalty
payments due to a violation of KRS § 324.020(2). As Sixth Circuit precedent makes
clear, simply repackaging one legal theory, (voidness of a contract due to a statutory
violation), into another, (unenforceability of a contract provision due to a statutory
violation), is insufficient to avoid issue preclusion.
Whether Defendants use the phrase “void” or “unenforceable” in seeking to
invalidate the royalty provision does not change the fact that this issue was already
litigated and decided on the merits in the prior lawsuit. Issue preclusion “bars the
relitigation of issues, regardless of the nature of the legal claims.” W.J. O’Neil, 700
F. App’x at 490 (emphasis added). Because the determination of this issue was
necessary to the prior judgment and because Defendants likewise had a full and fair
opportunity to litigate this issue in the prior case, Defendants [brokerage license]
defense is also barred under the doctrine of issue preclusion.
Heartland Materials, Inc., 2018 WL 2324075, at *11–12 (internal citations to the record omitted).
It is true that the district court in the prior litigation did not decide whether Heartland’s conduct
violated the real estate brokerage license requirement. Heartland still maintains that its role in the
real estate transaction did not require it to be licensed as a broker,4 but more importantly that
specific allegation need not be resolved. The issue as to whether the alleged violation of the real
estate brokerage license would preclude Heartland’s collecting royalties under the Contract was
wholly rejected—on the merits—in the original suit due to the statute of limitations, and in this
suit due to issue preclusion.
Appellants point out that “Kentucky law makes clear that a party may attack the formation
of a contract in a separate action after a court interprets the contract.” Ventas, Inc. v. Health Care
4
Heartland argues that it purchased the option for itself, and then sold the option to Warren Paving, and Ky. Rev. Stat.
Ann. § 324.020 provides an exception to the real estate brokerage license requirement when a party deals in property
that it owns. The district court did not analyze whether this exception applies to the disputed transaction, and we
likewise need not do so here.
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Prop. Inv’rs, Inc., 635 F. Supp. 2d 612, 629–30 (W.D. Ky. 2009). But that does not help the
appellants, because the two issues in Ventas were entirely separate for issue preclusion purposes.
In Ventas, a Canadian court had previously construed a specific term in a contract. Id. at 627. The
Ventas court permitted a party to later challenge the formation of the contract as a whole, based on
an argument entirely unrelated to the term previously construed. Id. at 630. In the instant case, the
very nature of the prior claim was that the Contract to pay royalties was not enforceable because
Heartland was not a licensed real estate broker. And the current claim is that the specific royalty
provision in the Contract is not enforceable for the exact same reason—that Heartland was not a
licensed broker. We agree with the district court that these two issues are the same for issue
preclusion purposes. The other elements of issue preclusion are uncontested.
Appellants add the legal theory of set-off and recoupment as a defense to Heartland’s suit
to enforce the Contract. “Recoupment allows a defendant to defend against a claim by asserting—
up to the amount of the claim—the defendant’s own claim against the plaintiff growing out of the
same transaction.” RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380,
387 (6th Cir. 2014) (quotation omitted). Appellants correctly note that “[r]ecoupment claims are
generally not barred by a statute of limitations so long as the main action is timely.” Id. (quoting
Reiter v. Cooper, 507 U.S. 258, 264 (1993)). This makes sense because once litigation is properly
before a court, it would be unfair for the court to rule “without consideration of all the issues in
the case.” Id. (quoting United States v. W. Pac. R.R., 352 U.S. 59, 72 (1956)). But therein lies the
problem for appellants. Their defense of recoupment does not raise a new issue. They seek set-off
and recoupment of the contractual amounts paid to Heartland based solely on the same issue raised
and rejected in the earlier suit: the contention that Heartland did not have a real estate broker’s
license and therefore is not entitled to receive royalties under the Contract. Where a new claim is
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“based upon the same operative facts, issue preclusion may still properly apply despite a change
in legal theory.” Georgia-Pac. Consumer Prod. LP v. Four-U-Packaging, Inc., 701 F.3d 1093,
1098 (6th Cir. 2012) (citing Randles v. Gregart, 965 F.2d 90, 93 (6th Cir.1992)). Here, appellants’
set-off and recoupment claim was properly rejected by the district court because it is premised
solely on defenses already rejected as time barred and simply seeks to relitigate the same issue
under a new legal theory.5
Finally, appellants cite several cases for the principle that an invalid contract cannot then
be enforced through estoppel. But that is not what happened here. The parties entered into a
contract in 2004, and then Warren Paving and Slats Lucas decided in 2014 to object to that contract
because Heartland did not have a real estate broker’s license. Assuming for the sake of argument
that Heartland should have been licensed in order to purchase the real estate option in its own name
and then assign it, Warren Paving and Slats Lucas waited ten years to object, and their objection
was subject to a five-year statute of limitations. Ultimately, that is why the contract is still in force,
not because of estoppel. And because that earlier decision resolved on the merits the issue of
whether Heartland’s failure to hold a real estate broker’s license precludes Heartland from
receiving royalties under the Contract, all of appellants’ subsequent efforts to relitigate the exact
same underlying broker’s-license issue—even under the new legal theory of set-off and
recoupment—are barred under the doctrine of issue preclusion. The district court did not err by
5
The dissent suggests that the key issue decided in the prior litigation was limited to the statute of limitations. But
that statement of the issue is too narrow. The issue was whether Heartland’s failure to hold a real estate brokerage
license prevents it from collecting royalties under the contract. Heartland prevailed on that issue because of the statute
of limitations, but that is a decision on the merits. See Fed. R. Civ. P. 41(b); Plaut, 514 U.S. at 228. With the real
estate license issue decided on the merits, the doctrine of issue preclusion can and should apply to prevent Warren
from repackaging that same issue as a defense or counterclaim. To hold otherwise would effectively allow Warren to
challenge the contract more than ten years after its formation, undermining Kentucky’s five-year statute of limitations.
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rejecting the defenses and claims offered by Warren Paving and Slats Lucas, and holding that they
are required to pay the royalties required by the Contract.
The district court provided an alternative analysis for its holding, based on City of Saint
Paul, Alaska v. Evans, 344 F.3d 1029 (9th Cir. 2003). In Evans, the court looked beyond who filed
a claim and instead considered which party was the aggressor in an action to discern “a realistic
assessment of the parties’ litigation posture.” Id. at 1035. The goal was to prevent a party from
employing “jurisdictional jujitsu” by inviting claims for the purpose of offering defenses that
otherwise would be time-barred if raised as claims. Id. at 1031. The district court cited Evans and
other cases to support its alternative holding that Warren Paving and Slats Lucas disturbed the
equilibrium among the parties and were the aggressors in this litigation, and under Evans they
cannot provoke Heartland to file suit for the purpose of raising their time-barred claims as defenses.
Heartland Materials, Inc., 2018 WL 2324075, at *6–8 (collecting cases).
As the district court noted, the Sixth Circuit has not addressed this specific issue. Id. at *8.
The district court’s analysis is well reasoned and persuasive. But because this case fits squarely
within the doctrine of issue preclusion, we affirm on that basis and leave to a later date whether
the Evans rule should be adopted in the Sixth Circuit.
III.
The judgment of the district court is affirmed.
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KAREN NELSON MOORE, Circuit Judge, dissenting. Like the district court, the
majority concludes that issue preclusion applies because Defendants-Appellants Warren Paving,
Inc. and Slats Lucas, LLC (“Warren”) raise the same argument as a defense in this case, brought
by Plaintiffs-Appellees Heartland Materials, Inc. et al., (“Heartland”), as Warren did in a previous
case in which Warren sought a declaratory judgment against Heartland. However, careful
application of the issue preclusion test demonstrates that although Warren raises substantially the
same overall argument, that argument was not the issue decided in the earlier case. Therefore,
I would reverse and remand the case.
Under Kentucky law, issue preclusion applies when (1) “the issue in the second case” is
“the same as the issue in the first case,” (2) the issue was “actually litigated” in the first case,
(3) “the issue was actually decided” in the prior litigation, and (4) “the decision on the issue in the
prior action” was “necessary to the court’s judgment.” Yeoman v. Commonwealth, Health Policy
Bd., 983 S.W.2d 459, 465 (Ky. 1998). Additionally, “at least one party to be bound in the second
case must have been a party in the first case.” Miller v. Admin. Office of the Courts, 361 S.W.3d
867, 872 (Ky. 2011).1 To determine whether the issues in two cases are identical, courts may
consider, among other things, not only whether the parties put forth the same arguments, but also
whether the court’s resolution of an argument “involve[s the] application of the same rule of law
as that involved in the prior proceeding.” Restatement (Second) of Judgments § 27 cmt. c (1982).
Whether issue preclusion applies here is a tricky matter. In Warren’s affirmative suit in
2014, Warren as plaintiff sought a declaratory judgment that the assignment contract was void and
1
The requirements for federal issue preclusion are nearly identical: “(1) the question in this case is the same
as the one raised in the earlier litigation; (2) the answer given in the earlier litigation was necessary to the decision;
(3) that decision was a final judgment on the merits; and (4) the affected party had a ‘full and fair opportunity’ to
litigate the issue in the prior litigation.” United States v. United Techs. Corp., 782 F.3d 718, 725 (6th Cir. 2015)
(citing Kosinski v. Comm’r, 541 F.3d 671, 675 (6th Cir. 2008)).
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that the “Defendants are not entitled to any payments under the Contract for Assignment.” Warren
Paving, Inc. v. Heartland Materials, Inc., No. 5:14-cv-00149-TBR, R. 1 (Compl. at ¶ 62) (Page
ID #9).2 In support of this claim, Warren argued that the entire contract must be void as against
public policy because Heartland lacked a real estate broker’s license in contravention of a
Kentucky statute. Warren Paving, Inc. v. Heartland Materials, Inc., No. 5:14-CV-149-R, 2015
WL 269204, at *3 (W.D. Ky. Jan. 21, 2015). “Without ruling on whether the statute was violated
in this case,” the district court concluded that the claim was barred by the five-year statute of
limitations. Id. at *4. In this current action, Heartland as plaintiff argues that Warren has been in
breach of the contract since 2016 by failing to pay royalties as required by the contract. R. 1
(Compl. at ¶ 45) (Page ID #13); see Majority Op. at 4 n.3. In response, Warren asserts that the
fees are not owed as a matter of law because Heartland lacks a brokerage license and that
“Defendants are entitled to set-off or recoupment as to any amounts claimed by Plaintiffs.” R. 10
(Answer at 10) (Page ID #121). The district court here reasoned that “the issue is identical” to the
issue decided in the first case, and thus issue preclusion applies, meaning that Warren’s defense in
this case is time-barred. Heartland Materials, Inc. v. Warren Paving, Inc., No. 5:16-CV-00146-
TBR, at *11–12 (W.D. Ky. May 22, 2018).
In both cases, Warren argues that the contract, or a provision of it, is void as against
Kentucky public policy on the ground that the royalty provision violates the Kentucky brokerage-
license statute. But the only issue that was decided in the first case was that Warren’s declaratory
judgment claim seeking to invalidate the contract based on the brokerage-license statute was time-
barred. Therefore, it is incorrect to conclude that the second case involves the same issue that was
decided in the first case simply because Warren raises the same brokerage-license argument
2
Unless noted otherwise, record citations are to the lower court docket in this case, No. 5:16-CV-146-TBR.
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against the contract. The sole possible basis for issue preclusion in this case is that Warren’s
defense to Heartland’s claim for royalties starting in 2016 raises the same statute-of-limitations
issue as was resolved by the district court on Warren’s declaratory judgment claim in the first case.
We cannot resolve whether the earlier determination on the statute of limitations applies to this
new case without turning to the law regarding the application of statutes of limitations to defenses.
In Kentucky, statutes of limitations are generally “not applicable to defenses . . . . Thus,
so long as the courts will hear the plaintiff’s case, time will not bar the defense which might be
urged thereto and which grew out of the transaction connected with the plaintiff’s claim.” Liter v.
Hoagland, 204 S.W.2d 219, 220 (Ky. 1947). And recoupment and setoff are generally available
as defenses to parties in a contract dispute, despite any statute of limitations. See, e.g., McFall v.
Burley Tobacco Growers’ Coop. Ass’n, 54 S.W.2d 922, 923–24 (Ky. 1932) (addressing setoff and
recoupment); Jefferson, Noyes, & Brown v. W. Nat’l Bank, 138 S.W. 308, 310 (Ky. 1911)
(addressing only recoupment). The Supreme Court has noted as much, stating that “recoupment
is in the nature of a defense . . . . Such a defense is never barred by the statute of limitations so
long as the main action itself is timely.” Bull v. United States, 295 U.S. 247, 262 (1935) (footnote
omitted); see also Desjardins v. Desjardins, 193 F. Supp. 210, 215 (E.D. Ky. 1961). Importantly,
recoupment may be brought as a defense or a counterclaim, “and generally it is optional with [the
party] which course he will adopt.” Hansford v. Comm. Credit Co., 57 S.W.2d 27, 31 (Ky. 1932);
Jefferson, 138 S.W. at 310. However, “if [a] counterclaim was barred by [a statute of] limitation
at the time it was pleaded, it could not be invoked ‘to affirmatively recover damages.’” Armstrong
v. Logsdon, 469 S.W.2d 342, 342–43 (Ky. 1971) (quotation in original). A counterclaim will also
be barred if it raises other “assertions of affirmative relief.” Liter, 204 S.W.2d at 220–21 (allowing
the “defense of payment”). This is consistent with Supreme Court precedent that when a party is
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not seeking “affirmative recovery,” but “only to have adjudicated questions raised by way of
defense,” the statute of limitations is no bar to defenses because statutes of limitations “are aimed
at lawsuits, not at the consideration of particular issues in lawsuits.” United States v. W. Pac. R.R.
Co., 352 U.S. 59, 72–73 (1956).
Warren’s defense has two parts. First, “[t]he royalties which Plaintiffs seek in this lawsuit
are tantamount to a ‘brokerage fee’ or real estate commission. As such, they are not legally owed.”
R. 10 (Answer at 10) (Page ID #121). Second, “Defendants are entitled to set-off or recoupment
as to any amounts claimed by Plaintiffs.” Id. At this stage, Heartland claims damages from
Warren’s failure to pay the royalties since 2016, and Warren does not seek affirmatively to recover
damages; Warren seeks only to defend against the collection of the unpaid royalties from 2016 on
or to reduce the amount of unpaid royalties owed through recoupment and/or setoff. See
Institutional Labor Advisors, Inc. v. Allied Res., Inc., No. 4:12-CV-00044-JHM, 2014 WL
4211196, at *22 (W.D. Ky. Aug. 25, 2014) (concluding that a defense was “a counterclaim in
disguise” in part because the defendant sought damages related to that defense, as well as legal
fees). Warren also does not seek a sweeping declaration as to the illegality of the royalty provision
or contract. Rather, Warren disputes only that Heartland may enforce collection under the royalty
provision as to the alleged 2016 breach. R. 54-1 (Warren’s Mot. for Summ. J. at 15–17) (Page ID
#522–24); R. 40 (Response to Heartland’s Mot. for Summ. J. at 5) (Page ID #395). As Western
Pacific sets forth, the fact that Warren’s affirmative claim in the first action seeking declaratory
relief relied on the brokerage-license issue that is raised in Warren’s defense here is not the
dispositive question; the key is whether Warren seeks affirmative relief through its defense.
Accordingly, the statute of limitations does not apply to Warren’s defense. The district court’s
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prior decision on the issue of the statute of limitations is thus not entitled to issue preclusive effect
in this context.
The majority acknowledges that recoupment defenses generally are not barred by statutes
of limitations and in doing so relies on RL BB Acquisition, LLC v. Bridgemill Commons
Development Group, LLC, 754 F.3d 380, 387 (6th Cir. 2014). Majority Op. at 8. In RL BB, we
explained that “[r]ecoupment claims are generally not barred by a statute of limitations so long as
the main action is timely.” 754 F.3d at 387 (quoting Reiter v. Cooper, 507 U.S. 258, 264 (1993)).
This is consistent with Kentucky law as described above. We concluded in RL BB that this rule is
sensible because “it would be incongruous to hold that once a lawsuit is properly before the court,
[a] decision must be made without consideration of all the issues in the case and without the benefit
of all the applicable law.” Id. (quoting W. Pac., 352 U.S. at 72, 77). Although the majority
recognizes the rule in RL BB that recoupment defenses are not barred by statutes of limitations, it
concludes that Warren’s recoupment defense is in fact barred by the statute of limitations based
on issue preclusion because Warren’s “defense of recoupment does not raise a new issue.”
Majority Op. at 8. The majority conflates the issue decided in the first case, whether the statute of
limitations applied to Warren’s affirmative declaratory judgment claim, with the brokerage-license
issue, which was not decided in the first case. Warren’s brokerage-license defense raises a new
issue—whether Warren’s defense is time barred, which requires evaluating whether the defense
seeks affirmative relief.
As explained above, Warren first filed suit against Heartland, seeking a declaratory
judgment that the assignment contract was void as against public policy because Heartland
allegedly lacked the brokerage license required by statute. The district court rejected this claim
solely because it was time-barred. Later, in 2016, Warren stopped paying royalties and Heartland
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brought the current action for contractual breach. Warren raised the defense that Heartland could
not collect the royalties Warren had allegedly failed to pay since 2016 because the royalty
provision is void or alternatively, that Warren is entitled to recoupment and setoff of those unpaid
royalties. Warren relied on the brokerage-license argument to support this defense. In the first
case, the district court decided that Warren’s declaratory judgment claim was time-barred, not
whether Warren’s brokerage-license argument is correct. If the district court had rejected
Warren’s brokerage-license argument on the merits, then issue preclusion would prevent Warren
from raising defenses premised upon that argument. See In Re Potts, 142 F.2d 883, 889 (6th Cir.
1944). However, there is no issue preclusion here that requires the conclusion that Warren’s
defense is time barred due to the unique rules regarding the interplay of defenses and statutes of
limitations.
Additionally, I would not rely upon City of St. Paul v. Evans, 344 F.3d 1029 (9th Cir.
2003), extra-circuit, federal precedent, to dispose of this Kentucky state-law claim. When sitting
in diversity, federal courts must “apply the substantive law of the forum state.” Fox v.
Amazon.com, Inc., 930 F.3d 415, 422 (6th Cir. 2019). If the state’s highest court has spoken on
the issue, then we must follow its decision. Lindenberg v. Jackson Nat’l Life Ins. Co., 912 F.3d
348, 364 (6th Cir. 2018) (citing In re Dow Corning Corp., 419 F.3d 543, 549 (6th Cir. 2005)).
And when the issue has not been addressed, “a federal court ‘must anticipate how the relevant
state’s highest court would rule’ and may rely on the state’s intermediate appellate court decisions,
along with other persuasive authority, in making this determination.” Kepley v. Lanz, 715 F.3d
969, 972 (6th Cir. 2013) (quoting Savedoff v. Access Grp., Inc., 524 F.3d 754, 762 (6th Cir. 2008)).
Other sources of authority include “the state’s supreme court dicta, restatements of law, law review
commentaries, and the majority rule among other states.” Garden City Osteopathic Hosp. v. HBE
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Corp., 55 F.3d 1126, 1130 (6th Cir. 1995). “Federal courts should be ‘extremely cautious about
adopting “substantive innovation” in state law.’” Lindenberg, 912 F.3d at 364 (quoting Combs v.
Int’l Ins. Co., 354 F.3d 568, 578 (6th Cir. 2004)).
The district court relied on Evans as another justification for barring Warren’s defenses
based on its brokerage-license argument, Heartland, 2018 WL 2324075, at *6–8, but I believe that
transplanting this rule to Kentucky state law is inappropriate. There is no indication that the Evans
approach applies to this case by its own terms or that the highest court in Kentucky would adopt
and then extend the Evans rule to apply here. In Evans, the Ninth Circuit held that the plaintiff
who initiates litigation, thereby “disturb[ing] the equilibrium between the parties,” cannot in the
same action assert as a defense a claim that is time-barred. 344 F.3d at 1035 (quoting 118 E. 60th
Owners v. Bonner Props., Inc., 677 F.2d 200, 205 (2d Cir. 1982)). In Evans, the plaintiff brought
time-barred claims, then one of the defendants counterclaimed, and in response to the
counterclaim, the plaintiff raised as defenses “mirror images of its time-barred claims.” Id.
Critically, this all occurred in the same action. In Bonner, upon which Evans relies, the plaintiff
sought affirmative relief through a declaratory judgment claim that was time-barred and also
sought a “‘defensive’ declaration” in the same action, leading the Second Circuit to conclude that
a declaratory judgment should be denied. 677 F.3d at 202, 204–06. But the Second Circuit
clarified, “[i]f the parties’ current disagreement over the enforceability of [the contracts] ever
escalates into a lawsuit initiated by the defendants, plaintiff will be able to assert its defenses.” Id.
(emphasis added); cf. Consumer Health Info. Corp. v. Amylin Pharm., Inc., 819 F.3d 992, 994–96
(7th Cir. 2016) (holding that a plaintiff could not bring a claim seeking affirmative relief and then
simply characterize it as a defense to avoid the time bar because the plaintiff “was using rescission
offensively in a suit to recover damages”). And finally, in Davis v. 24 Hour Fitness Worldwide
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Inc., the district court also concluded that the defendant’s defenses were time-barred under Evans
when there was only one action between the parties. 75 F. Supp. 3d 635, 639 (D. Del. 2014)
(explaining that the defendant invited the litigation by repudiating the agreement).3
Unlike Evans, Bonner, and Davis, upon which Heartland and the district court relied, see
Appellee Br. at 21–25; Heartland, 2018 WL 2324075, at *6–8 & n.4, we are presented with two
separate actions. In the first case, Warren was the plaintiff, and in this second case, Heartland
brought suit. Therefore, the case before us is one in which the parties’ disagreement over the
enforceability of the contract has escalated into a lawsuit to collect payments now due under the
contract initiated by the defendants in the first action, Heartland, against the plaintiffs in the first
action, Warren. Therefore, Warren should be permitted to assert its defenses here pursuant to
Bonner, and the Evans approach should not bar Warren’s defense.
Heartland points no authorities that show that Kentucky would be inclined to import and
then extend Evans to cases involving two separate actions. In support of its position, Heartland
points to only two published federal circuit decisions, Evans and Bonner, and a single published
federal district court decision, Davis—none of which speak to Kentucky law. Under Kentucky
precedent, the statute of limitations does not preclude a defense to a timely claim nor does the
statute of limitations preclude a claim for set-off or recoupment when a new claim has been filed
against the defending party. Here, principles of issue preclusion do not apply regarding the sole
issue previously decided—the statute of limitations—given the special rules Kentucky follows for
defenses. Therefore, we should vacate and remand to the district court for further proceedings.
3
Arguably, Davis goes even further than Evans and simply contravenes the general rule that defenses, so
long as they are not claims for affirmative relief in disguise, are not subject to statutes of limitations. Unlike the parties
in Evans and Bonner, the defendants in Davis did not bring any affirmative claims or otherwise seek affirmative relief.
See Davis, 75 F. Supp. 3d at 639.
18