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SMS MKTG. & TELECOM., INC. v. H.G. TELECOM

December 10, 1996

SMS MARKETING & TELECOMMUNICATIONS, INC., Plaintiff, against H.G. TELECOM, INC., LINQ TELECOM, INC., TRAVIS HAMER and RALPH SENTER, Defendants.


The opinion of the court was delivered by: GLASSER

 GLASSER, United States District Judge:

 SUMMARY

 This is an action by plaintiff SMS Marketing & Communications, Inc. ("SMS") against defendants H.G. Telecom, Inc. ("HG"), LINQ Telecom, Inc. ("LINQ"), Travis Hamer ("Hamer") and Ralph Senter ("Senter") for breach of contract, fraud, unjust enrichment and violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq.. Defendants move to dismiss the complaint under the doctrine of res judicata and pursuant to Fed. R. Civ. P. 12(b)(6) and 12(b)(2). For the reasons set forth below, the defendants' motion should be granted.

 BACKGROUND

 Plaintiff SMS is a corporation located in Kings Park, New York which offers prepaid telephone calling cards to customers. Defendants HG and LINQ are corporations located in Texas that re-sell long distance telephone communications service. Hamer is the president of HG and LINQ, and Senter is the chief financial officer of LINQ.

 On or about June 23, 1995, SMS entered into a contract with HG and LINQ under which it was to receive long distance telephone service for the calling cards it sold to customers. Compl. P 10. *fn1" That service was enjoyed for a time, but, at some point, purchasers of SMS's phone cards began experiencing periods during which the calling cards were rendered useless. Compl. P 17. According to the complaint, Hamer and Senter attributed this "down time" to technical errors when, in fact, it was caused by the failure of the defendants to remit payments to AT&T, the company from which it purchased the phone time that was resold to SMS. Id.

 On or about April 24, 1996, all of the long distance telephone lines which SMS had purchased from the defendants and sold to its customers via its pre-paid calling cards were terminated. Compl. P 19. The defendants maintain that they terminated the long distance service due to SMS's failure to pay outstanding charges. Affirmation of Travis Hamer, dated October 21, 1996, (hereinafter "Hamer Aff. I") P 2.

 On July 26, 1996, LINQ sued SMS in the District Court of Tarrant County, Texas, 96th Judicial District, to recover the outstanding service charges (the "Texas action"). Hamer Aff. I, P 3. SMS neither answered nor defended the suit and, on September 6, 1996, LINQ obtained a default judgment against it in the amount of $ 73,363.78, plus interest and legal fees. Id.

 Subsequent to the filing of the Texas action, but prior to entry of the default judgment therein, SMS commenced the action now before this Court in the Supreme Court of the State of New York. The defendants removed the case to this Court on September 30, 1996 pursuant to 28 U.S.C. §§ 1441(a) and 1332(a)(1). Jurisdiction is based upon diversity of citizenship.

 The defendants now move to dismiss on the grounds that (1) SMS's causes of action in this suit were compulsory counterclaims in the Texas action and are therefore barred under the doctrine of res judicata, (2) the complaint fails to state a claim upon which relief can be granted, and (3) this Court lacks personal jurisdiction over Hamer and Senter.

 DISCUSSION

 I. Introduction

 The commercial relationships between and among the parties to this litigation are not addressed by either side in any detail. The contract at issue, annexed to the Affidavit of SMS's president Vincent Annunziata, dated November 11, 1996 (hereinafter "Annunziata Aff."), appears to be between HG and SMS, but LINQ was the party that sued SMS on the contract in Texas. Neither party's submissions make any factual distinction between defendants LINQ and HG and the two are often referred to interchangeably. For example, the complaint alleges that "plaintiff and defendants HG and LINQ entered into a contract . . . whereby H.G. & [sic] LINQ agreed to provide . . ..". Compl. P 10. The next paragraph provides that "the long distance carrier from whom the defendant's [sic] purchased phone time . . . was AT&T." Compl. P 11. Because the parties treat HG and LINQ as being one and the same, or at least as being in privity with each other, so does the Court for purposes of the res judicata discussion that follows. In addition, because a judgment in an action to which a corporation is a party does not in general redound to the benefit of its management or shareholders (except insofar as it affects the corporation itself), see Restatement of Judgments 2d., § 59, the status of Hamer and Senter is addressed separately in section III below.

 II. The Res Judicata Effect of the Texas Action on HG and LINQ

 The determination of the res judicata effect of the Texas action must be based upon the law of Texas, the state from which the judgment was obtained. See Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 84 L. Ed. 2d 274, 105 S. Ct. 1327 (1985). Under Texas law, a court may invoke the doctrine of res judicata to bar consideration of a claim already presented to a Texas court upon finding that: (1) the prior judgment was rendered by a court of competent jurisdiction; (2) there was a final judgment on the merits; (3) the parties, or those in privity with them, are identical in both suits; and (4) the same cause of action is involved in both suits. Sutherland v. Cobern, 843 S.W.2d 127, 130 (Tex. App.--Texarcana 1992, writ denied).

 In raising the doctrine of res judicata, the defendants assert that SMS's causes of action here were compulsory counterclaims in the Texas action under Tex. R.Civ. P. 97(a). In Texas, the test for determining whether a claim is a compulsory counterclaim is the "logical relationship" test. Jack H. Brown & Co., Inc. v. Northwest Sign Co., 718 S.W.2d 397 (Tex. App.--Dallas 1986, writ ref'd n.r.e.). Application of this test requires that at least some of the facts surrounding the causes of action arise from the same transaction or circumstance. Id. When the same facts are significant and logically relevant to the various causes of action, the test is satisfied. Id. Under Texas law, where a counterclaim is compulsory and has not been asserted in a prior action, a defendant is barred by the doctrine of res judicata from asserting the claim in a later lawsuit. Williams v. National Mortgage Co., 903 S.W.2d 398, 402 (Texas App.--Dallas 1995). This rule applies with equal force to default judgments. Jack H. Brown & Co., 718 S.W.2d at 400 ("a party has no right to let an adverse claim go by default and reserve his counterclaim for a time and place of his own choice.").

 It is indisputable that SMS's causes of action in this case for breach of contract, fraud and unjust enrichment arise from the same transaction as LINQ's claims in the Texas action, namely, the contract for telecommunications service. There is a logical relationship between the suit filed by LINQ for payments due on the contract, and the suit filed by SMS which alleges, in essence, breach of the same contract. Because SMS's causes of action are logically related to LINQ's suit for payments due under the contract, they were compulsory counterclaims which should have been litigated in the Texas action and cannot be raised here. See Connell v. Spires, 264 S.W.2d 458, 459 (Texas Civ. App.--Eastland 1954)(breach of contract claim was a compulsory counterclaim to the prior suit to collect balance due under contract); Lesbrookton, Inc. v. Jackson, 796 S.W.2d 276 (Tex. App.-- Amarillo 1990, writ denied)(guarantor's fraud claim was compulsory counterclaim to vendor's prior action on guarantee); Republic Telcom Corp. v. Telemetrics Communications, Inc., 634 F. Supp. 767 (D. Minn. 1986)(buyer's action for fraud in connection with contract appeared to be compulsory counterclaim to seller's action for breach under Fed. R. Civ. P. 13(a) from which Texas compulsory counterclaim rule was taken).

 Indeed, SMS does not question that the Texas judgment was on the merits, that the parties in both cases are identical and that the causes of action involved are the same. Instead, its arguments ...


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