Vol. 79, No. 3, March
Landing in A.B.C.G. Soup:
The Compulsory Counterclaim Trap
Wisconsin's counterclaim statute says
counterclaims may be brought, but the supreme court in A.B.C.G. said
counterclaims must be brought for certain claims. A rule change to
clarify when a counterclaim is compulsory would help litigants avoid the
soup of uncertainty.
by Donald Leo Bach
our client is a buyer of
goods. The seller has
sued your client for nonpayment. Your client reveals facts to you that
indicate there was a mutual mistake in the formation of the contract
justifying its rescission and return of the goods. When you advise the
client of the availability of such claim for rescission, the client
indicates he does not want to litigate that issue now in the pending
You check the pleading statutes to see if your client's claim has to
be brought as part of the current action. Pleadings are controlled by
the Wisconsin Rules of Civil Procedure, specifically by Wis. Stat.
chapter 802, Civil Procedure - Pleadings, Motions and Pretrial Practice.
You find a statute directly on point, namely Wis. Stat. section
802.07(1), which states:
"802.07 Counterclaim and cross-claim. (1) Counterclaim. A defendant
may counterclaim any claim which the defendant has against a
plaintiff, upon which a judgment may be had in the action. A
counterclaim may or may not diminish or defeat the recovery sought by
the opposing party." (Emphasis added.)
The statute is clearly a permissive counterclaim statute. There is no
language in the statute that can be fairly read in any way to compel the
bringing of any counterclaim. The statute says to the defendant, "you
get your day in court when and where you see fit, not in the place, the
proceeding, or the timeframe chosen by the opponent." Therefore, it is
crystal clear that your client does not have to bring a counterclaim for
rescission in the current suit and that you can wait right up to the
statute of limitation expires to file an action for rescission.
You have just fallen into the A.B.C.G. compulsory
The A.B.C.G. Common-law Compulsory Counterclaim
Bach, U.W. 1974, is a shareholder in DeWitt Ross & Stevens
S.C., Madison, where he practices litigation, environmental, consumer,
and administrative law. He is a member of the Wisconsin Judicial
Commission, which conducts investigations for review and action by the
Wisconsin Supreme Court regarding allegations of misconduct or permanent
disability of a judge or court commissioner. He formerly served as chair
of the State Bar Bench-Bar Committee and of its survey subcommittee.
In spite of the permissive language contained in Wis. Stat. section
802.07, in 2005 in Menard Inc. v. Liteway Lighting
Products,1 the Wisconsin Supreme Court
confirmed a compulsory common-law counterclaim rule for certain claims.
The court set forth the rule in 1994 in A.B.C.G. Enterprises Inc. v.
First Bank Southeast N.A.2 In that
case, A.B.C.G. Enterprises Inc. and two individuals
("A.B.C.G.") sued First Bank Southeast. First Bank had
previously sued A.B.C.G. in six separate foreclosure actions, all of
which resulted in default judgments in favor of First Bank. A.B.C.G.'s
follow-up suit asserted that First Bank's breach of the contract,
misrepresentation, and failure to properly manage the properties that
were the subject of First Bank's prior foreclosure actions caused
A.B.C.G. to default. Accordingly, A.B.C.G. sought compensatory damages
resulting from the foreclosure. The circuit court granted summary
judgment to First Bank and dismissed A.B.C.G.'s action. The court of
appeals affirmed. The Wisconsin Supreme Court upheld the dismissal,
holding that "principles of res judicata [claim preclusion]3 preclude a defendant who may counterclaim in a
prior action from bringing a subsequent action on the claim if the
action would nullify the initial judgment or impair rights established
in the initial action."4 Concluding that a
favorable judgment for A.B.C.G. would undermine the previous judgments
granted to First Bank, the supreme court affirmed the summary judgment
dismissing A.B.C.G.'s action.5
In issuing its ruling, the supreme court relied on the common-law
compulsory counterclaim rule as stated in the Restatement (Second) of
Judgments section 22(2)(b) (1982):
"(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 ...
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
The supreme court explained that section 22(2)(b) of the Restatement
recognizes the need to preclude defendants - even in jurisdictions, like
Wisconsin, that have a permissive counterclaim statute - from bringing a
subsequent action that would undermine the rights established in the
initial judgment. According to the supreme court, the rule "preserves
the integrity and finality of judgments and the litigants' reliance on
Observing that the claim preclusion doctrine is premised on the maxim
that litigation must come to an end so as to ensure fairness to the
parties and sound judicial administration, the court remarked that the
doctrine "is applied with a broad brush so as to achieve these goals. It
embraces not only what has been litigated in previous proceedings, but
also extends to issues that could have been litigated."8
A.B.C.G. conceded that the doctrine of res judicata existed in
Wisconsin. However, A.B.C.G. argued that even if its claims would
traditionally be barred under a claim preclusion analysis, the doctrine
was inapplicable because Wis. Stat. section 802.07(1) is a permissive
counterclaim statute.9 A.B.C.G. argued that
the statute's language does not require a defendant to bring any
counterclaim; thus, to bar A.B.C.G.'s claims would transform Wisconsin's
permissive counterclaim rule into a compulsory rule.
In response, the court acknowledged that the "general rule in
Wisconsin is that where a defendant may interpose a counterclaim but
fails to do so, he is not precluded from maintaining a subsequent action
on that claim," but the court held that the rule is not absolute.10 The court said that the "better rule of law to
apply" was section 22(2)(b) of the Restatement as a "common-law
compulsory counterclaim" exception, finding:
"This rule preserves the integrity and finality of judgments and the
litigants' reliance on them, by precluding a collateral attack upon a
judgment in a subsequent proceeding when the attack would completely
undermine the rights established in the initial judgment."11
The court summarized its holding:
"We hold that the principles of res judicata preclude a defendant who
may counterclaim in a prior action from bringing a subsequent action on
the claim if the action would nullify the initial judgment or impair
rights established in the initial action."12
Wisconsin Supreme Court Reaffirmation of A.B.C.G.
Although a decade has passed since the A.B.C.G. holding, the
issue remains contentious. In 2005 the Wisconsin Supreme Court revisited
the matter, confirming its A.B.C.G. decision in Menard Inc.
v. Liteway Lighting Products.13
For six years, Menard purchased lighting fixtures from Liteway.
Menard and Liteway ended their business relationship in 1999. In 2000,
Liteway sued and obtained a default judgment against Menard for unpaid
invoices totalling $355,000. About eight months after the judgment was
docketed, Menard sued Liteway for unjust enrichment and for violating
the Uniform Commercial Code. Menard alleged that it had returned some of
Liteway's products due to their defective condition (before Liteway
brought suit) and that Liteway had not reimbursed Menard for the
returns. Liteway moved for summary judgment based on claim preclusion.
The circuit court denied summary judgment, held a trial, and granted
Menard a $140,000 judgment against Liteway. The court of appeals
reversed, concluding that Menard's claims were barred by claim
preclusion, because the claims were covered under the common-law
compulsory counterclaim rule as set forth in A.B.C.G. The
matter was appealed to the supreme court.
The supreme court agreed with the court of appeals, holding that the
principles of A.B.C.G. applied. In its decision, the supreme
court again addressed and rejected the argument that the common-law
compulsory counterclaim rule was inconsistent with Wisconsin's
permissive counterclaim statute, Wis. Stat. section 802.07. In
Menard, the court reaffirmed its holding in
"The common-law compulsory counterclaim rule creates an exception to
the permissive counterclaim statute and bars a subsequent action by a
party who was a defendant in a previous suit if `a favorable judgment in
the second action would nullify the judgment in the original action or
impair rights established in the initial action.' The common-law
compulsory counterclaim rule operates to `preserve[ ] the integrity and
finality of judgments and the litigants' reliance on them, by precluding
a collateral attack upon a judgment in a subsequent proceeding when the
attack would completely undermine the rights established in the initial
The court concluded that for the common-law compulsory counterclaim
rule to apply, a court must find that: 1) all the elements of claim
preclusion are present and 2) a judgment favorable to the plaintiff in
the second suit would undermine the judgment or impair the established
legal rights of the plaintiff in the initial action.15
The court decided that Menard's claims in the second suit were part
of the same transaction as the claims in the original suit because both
suits arose from the same "common nucleus of operative facts."16 Further, the court found that Menard's claims in
the second suit could have been raised in the original suit.17 Accordingly, it upheld dismissal of Menard's
action against Liteway.
Justice Crooks, in a dissent joined by Justice Butler, asserted that
claim preclusion and A.B.C.G.'s compulsory counterclaim rule
did not apply. As to the latter, Justice Crooks stated:
"Although the resolution of this case rests on whether there was an
identity of claims or causes of action for purposes of claim preclusion,
it is also necessary to highlight the majority's misinterpretation of
Wisconsin's counterclaim statute. In Wisconsin, the joinder of
counterclaims is permissive, not mandatory. Wisconsin Stat. section
802.07(1) states in relevant part: `[a] defendant may
counterclaim any claim which the defendant has against a plaintiff, upon
which a judgment may be had in the action.' (Emphasis added.)
"I recognize, as does the majority, that this court has established a
narrow exception to the permissive counterclaim statute. In A.B.C.G.
Enterprises, we stated that there is a `"common-law compulsory
counterclaim rule" which requires a defendant to counterclaim if its
claim, when brought in a subsequent, separate action, would nullify the
initial judgment or impair rights established in the initial action.'
A.B.C.G. Enters., 184 Wis. 2d at 474. However, the court
emphasized that the application of this `common-law counterclaim' rule
is definitely an exception to the general rule and is meant to preclude
a collateral attack when the attack would completely nullify the rights
established in the first judgment. See id. at 476-77.
Specifically, it stated that the rule `applies only if a
favorable judgment in the second action would nullify the judgment in
the original action or impair rights established in the original
action.' Id. (emphasis added.) In this case, consistent with
our holding in National Operating, the narrow exception should
not be applied, because the test for its application is not met here.
Menard's UCC and unjust enrichment claims would not nullify, but would
merely reduce, the amount that Liteway would realize on its judgment.
The majority opinion extends the compulsory counterclaim exception in a
manner contrary to Wisconsin's permissive counterclaim statute, the UCC,
and the public policy expressed by the legislature in its adoption of
The Problem and the Fix
Due to A.B.C.G. and its progeny, an unfortunate situation
has developed in which a statute clearly says one thing and a court
doctrine says another, thus creating a veritable trap for unwary
practitioners. Further, although the court has said that the
A.B.C.G. compulsory counterclaim rule covers a "narrowly
defined class" of counterclaims,19
ascertaining when that narrow exception applies can be difficult: not
all counterclaims must be brought, only those that "would nullify the
initial judgment or impair rights established in the initial
action."20 Indeed, the Restatement notes
that subsection (2)(b) and its comments and illustrations "represent an
effort to articulate the basis in precedent and policy for what might be
termed a `common-law compulsory counterclaim rule.' It is perhaps
impossible to define the scope of this concept with precision and in any
event the problem is one of decreasing importance with the growth of
compulsory counterclaim statutes. ..."21
The problem can be resolved; several options are available. First,
the Wisconsin Supreme Court22 or the
legislature could decree that no counterclaims of any type are required
whatsoever, that is, create an "absolutely permissive" counterclaim
statute. However, this option would obviously undercut the doctrine of
claim preclusion and its underlying principles and might lead to
potentially endless and multiple litigation, gamesmanship, and
Second, the Wisconsin legislature or supreme court could make all
counterclaims mandatory no matter what the nature of the counterclaim.
However, this option would deprive defendants of the ability to choose
the time and place for bringing their claims and would require parties
to litigate at one time all legal disputes between them - even those
disputes unrelated to the original claim - just because one party
started a lawsuit.
Third, the Wisconsin Supreme Court or the legislature could codify
A.B.C.G. as an exception to the permissive counterclaim statute
simply by incorporating the substance of the Restatement rule section
22(2)(b) language into Wis. Stat. section 802.07(1). Such a provision
could read as follows:
"802.07 Counterclaim and cross-claim. (1)
Counterclaim. A defendant shall interpose a claim as a counterclaim if
the relationship between the counterclaim and the plaintiff's claim is
such that successful prosecution of the claim in a subsequent action by
the defendant would nullify the initial judgment or would impair rights
established in the initial action. A defendant may counterclaim any
other claim that the defendant has against a plaintiff, upon which a
judgment may be had in the action. A counterclaim may or may not
diminish or defeat the recovery sought by the opposing party. Except as
prohibited by § 802.02(1m), the counterclaim may claim relief
exceeding in amount or different in kind from that sought in the
pleading of the opposing party."
Fourth, Wisconsin could essentially codify the finality-of-litigation
policy underlying A.B.C.G. and Restatement 22(2)(b) and greatly
simplify the A.B.C.G. rule by replacing Wis. Stat. section
802.07(1) with the text of Rule 13(a)-(c) and (e)-(f) of the Federal
Rules of Civil Procedure (modified to refer to state law) as
"(a) Compulsory Counterclaims. A pleading shall state as a
counterclaim any claim which at the time of serving the pleading the
pleader has against any opposing party, if it arises out of the
transaction or occurrence that is the subject matter of the opposing
party's claim and does not require for its adjudication the presence of
third parties of whom the court cannot acquire jurisdiction. But the
pleader need not state the claim if (1) at the time the action was
commenced the claim was the subject of another pending action, or (2)
the opposing party brought suit upon the claim by attachment or other
process by which the court did not acquire jurisdiction to render a
personal judgment on that claim, and the pleader is not stating any
counterclaim under this rule.
(b) Permissive Counterclaims. A pleading may state as a counterclaim
any claim against an opposing party not arising out of the transaction
or occurrence that is the subject matter of the opposing party's
(c) Counterclaim Exceeding Opposing Claim. A counterclaim may or may
not diminish or defeat the recovery sought by the opposing party. It may
claim relief exceeding in amount or different in kind from that sought
in the pleading of the opposing party.
(d) Counterclaim Maturing or Acquired After Pleading. A claim which
either matured or was acquired by the pleader after serving a pleading
may, with the permission of the court, be presented as a counterclaim by
(e) Omitted Counterclaim. When a pleader fails to set up a
counterclaim through oversight, inadvertence, or excusable neglect, or
when justice requires, the pleader may by leave of court set up the
counterclaim by amendment."
This last option solves the potential malpractice problem; eliminates
much if not all of the guesswork under A.B.C.G. as to which
counterclaims must be brought; promotes judicial efficiency by ensuring
that the parties litigate the claims they have against each other
arising out of the same transaction or occurrence; and brings years of
case law to bear on interpreting the statutes. Further, it would reduce
the process to deciding one issue - whether the claim arises out of the
same transaction or occurrence on which the plaintiff's suit was brought
- by eliminating the troublesome task of deciding whether the claim
would "nullify the initial judgment" or "(completely) impair rights in
the initial action."
Although the statutes indicate exactly the opposite, certain
counterclaims are mandated by case law. This not only presents a trap
for the unwary but also continues to generate confusion, uncertainty,
and litigation over whether a claim must be (or must have been) brought.
A rule change would greatly assist circuit courts, litigants and their
attorneys, and attorneys' insurers from taking a bath in the
A.B.C.G. alphabet soup.
1Menard Inc. v. Liteway
Lighting Prods., 2005 WI 98, 282 Wis. 2d 582, 698 N.W.2d 738.
2A.B.C.G. Enters. Inc. v. First
Bank Southeast N.A., 184 Wis. 2d 465, 515 N.W.2d 904 (1994).
3Wisconsin courts now use the term
"claim preclusion" instead of "res judicata." See Northern States
Power Co. v. Bugher, 189 Wis. 2d 541, 550, 525 N.W.2d 723
4A.B.C.G., 184 Wis. 2d at
5Id. at 482-84.
6Id. at 477.
8Id. at 473.
10Id. at 476.
11Id. at 477.
12Id. at 480. It is
unclear whether the difference between "impairing" rights established in
the initial action and "completely undermining" rights established in
the initial judgment is a distinction without a difference or an
intended substantive qualification. Nevertheless, the wording presents
an ambiguity in determining exactly which counterclaims must be brought.
Dissenting in Menard, Justice Crooks did find and relied on a
distinction between "nullifying" and "merely reducing" the initial
judgment rendered. Menard, 2005 WI 98, ¶ 70.
13Menard, 2005 WI
14Id. ¶ 28 (quoting
A.B.C.G., 184 Wis. 2d at 476-77).
15Id. ¶ 28.
16Id. ¶ 21.
17Id. The court did note
that instances in which the common-law compulsory counterclaim rule
applies are to be distinguished from instances in which the defendant
has grounds for relief from the judgment that were not available to the
defendant in the form of a counterclaim in the original action.
Id. ¶ 54 n.15. However, the court found that the situation
at hand did not fit within this exception to the rule.
18Id. ¶¶ 69-70
19A.B.C.G., 184 Wis. 2d
at 476. The supreme court in Menard termed the compulsory
counterclaim rule as "a narrow exception" to Wisconsin's permissive
counterclaim statute. Menard, 2005 WI 98, ¶ 47.
20A.B.C.G., 184 Wis. 2d
at 474. Or, again, "completely undermine" the rights established in the
21Restatement (Second) of
Judgments, reporter's note at 193.
22The Wisconsin Supreme Court has
the power to enact procedural rules on its own. See Wis. Stat.
§ 751.12(1), (2).