Hanover Specialties Inc. v. Les Revtements Polyval Inc.

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

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HANOVER SPECIALTIES, INC. D/B/A

VITRITURF,

Plaintiff, MEMORANDUM & ORDER

19-CV-3732 (KAM)(CLP)

-against-

LES REVȆTEMENTS POLYVAL INC.

D/B/A POLYVAL COATINGS INC.,

Defendant.

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KIYO A. MATSUMOTO, United States District Judge:

Plaintiff Hanover Specialties Inc. d/b/a Vitrituf

(“Hanover”), commenced this action against defendant Les

Revêtements Polyval Inc. d/b/a Polyval Coatings Inc.

(“Polyval”), alleging that defendant: breached a contract to

provide plaintiff polyurethane binder used in plaintiff’s

business operations, damaged plaintiff’s reputation, breached an

implied warranty of merchantability, and was unjustly enriched.

(ECF No. 1, Complaint (“Compl.”) at 4-8.)

Presently before the Court is defendant’s motion to

dismiss plaintiff’s complaint pursuant to Federal Rule of Civil

Procedure 12(b)(6). (See ECF No. 22, Notice of Motion to

Dismiss; ECF No. 22-1, Defendant’s Memorandum of Law in Support

of the Motion to Dismiss (“Def. Mem.”); ECF No. 23, Defendant’s

Reply Memorandum (“Def. Reply Mem.”).) For the reasons set

forth below, defendant’s motion to dismiss is GRANTED in part

and DENIED in part.

BACKGROUND

The following facts -- drawn from the complaint and

documents that are incorporated by reference in, or integral to,

the complaint -- are assumed to be true for purposes of this

motion. See, e.g., DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104,

111 (2d Cir. 2010). Furthermore, in evaluating the res judicata

effect of a prior action, “courts routinely take judicial notice

of documents filed in other courts, [] not for the truth of the

matters asserted in the other litigation, but rather to

establish the fact of such litigation and related filings.”

Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991);

see Conopco, Inc. v. Roll Int'l, 231 F.3d 82, 86 n.3 (2d Cir.

2000) (taking judicial notice of a final judgment and notice of

appeal entered by a California state court).

I. Factual Background

Defendant Polyval is a Canadian corporation in the

business of manufacturing high-performance industrial

strength protective coatings. (Compl. ¶¶ 3, 7.)

Plaintiff Hanover is a New York corporation with its

corporate headquarters and principal place of business in New

York, New York. (Id. ¶ 2.) Hanover is in the business of

installing “Poured in Place Safety Surfacing,” which is a

cushioned flooring used for playgrounds and other physical

spaces across the country. (Id. ¶ 7.) Hanover utilizes the

polyurethane “binder,” offered by Polyval to create the rubber

layer of the cushioned surfaces. (Id.)

From 2015 to 2018, Hanover purchased from Polyval

large shipments of a polyurethane binder for use in installing

cushioned, seamless flooring surfaces in playgrounds in multiple

states, including New York and Texas. (Id. ¶ 8.) Hanover

relied on Polyval and its chemists to provide a suitable binder

for Hanover’s installation at playgrounds and other sites across

the country. (Id. ¶ 10.) On several unspecified occasions,

Hanover determined that there were viscosity issues with

Polyval’s binder and also discovered instances where Hanover’s

“poured in place surfacing was lifting off the ground.” (Id. ¶¶

11-12.) Hanover allegedly conducted in-house testing on

Polyval’s binder and determined that the binder was not suitable

for use in pour in place safety surfacing due to a latent defect

the binder created. (Id. ¶ 14.) Hanover anticipates that this

latent defect will be discovered in numerous installations

Hanover has already completed leading to millions of dollars in

costs of repair and damages. (Id. ¶ 16.)

A. The Texas Action

Due to the ongoing dispute between Hanover and Polyval

over the binder, Hanover ceased paying Polyval’s invoices, which

led to billing dispute. On February 14, 2019, Polyval assigned

its right, title, and interest in a debt in the amount of

$541,107, arising from Hanover’s unpaid invoices due to Polyval

to Export Development Canada (“EDC”). (ECF No. 22-2,

Declaration of Bradley Nash (“Nash Decl.”), Ex. A, Complaint in

Texas Action (“Compl. Texas Action”), ¶¶ 10, 12.) On March 18,

2019, EDC, as Polyval’s assignee, filed suit against Hanover in

the United States District Court for the Eastern District of

Texas, Export Development Canada v. Hanover Specialties, No. 19-

cv-207 (E.D. Tex.) (the “Texas Action”), seeking to collect

$541,107.00 for the thirteen unpaid invoices, plus interest and

attorneys’ fees. (See Compl. Texas Action.) Specifically, EDC

sought to recover payments for thirteen invoices for material

provided to Hanover by Polyval between August 2, 2018 and

November 30, 2018 (the “thirteen invoices”). (Id. ¶ 10.)

Despite sending written demands to Hanover, Polyval was unable

to collect the unpaid amounts and $541,107.00 remained

outstanding on the thirteen invoices. (Id. ¶ 11.)

On May 28, 2019, Hanover filed an answer to EDC’s

complaint, asserting setoff as a sixth affirmative defense to

EDC’s claim for damages and noting that “[t]o the extent

plaintiff has sustained any damages, which is denied, such

damages were caused in whole or in part by plaintiff’s conduct

or that of its agents, representatives and not Hanover.” (ECF

No. 22-4, Nash Dec., Ex. B, Answer in Texas Action, at 4-5.)

Specifically, Hanover asserted that Polyval had breached an

“implied warranty of merchantability” because its “binder” was

allegedly “defectively manufactured and was not adequate for use

for the surfacing installed by Hanover,” resulting in a loss “of

over $200,000 and rising.” (Id.)

One month later, on June 26, 2019, Hanover filed the

instant New York action against Polyval, asserting claims,

arising during an unspecified period of time, for breach of

contract (Count 1), damage to Hanover’s reputation (Count 2),

breach of the implied warranty of merchantability (Counts 3 and

4), and unjust enrichment (Count 5), which was similar to the

sixth affirmative defense Hanover raised in the Texas Action as

to the thirteen invoices. (See ECF No. 1.)

On August 13, 2019, in the Texas Action, Hanover filed

a motion to transfer the Texas Action from the Eastern District

of Texas to this Court. (Nash Decl., Ex. C, Texas Action Docket

No. 19-cv-207 (“Texas Action Docket”), ECF No. 20.) Hanover

argued in that motion that the New York action “is based on the

same facts and circumstances that will arise for all defenses in

[the Texas Action].” (Nash Decl., Ex. D, Hanover’s Motion to

Change Venue, at 1-2; 8-11.) The Texas Action proceeded to

discovery. (See Nash Decl. Ex. C., Texas Action Docket, ECF

Nos. 16, 36, 38-46.) The motion to transfer venue was never

adjudicated in the Texas Action.

On February 26, 2020, the parties to the Texas Action

presented a joint motion for entry of judgment under Federal

Rule of Civil Procedure 54(b) in the form of an Agreed Final

Judgment. (Nash Decl., Ex. I, Agreed Final Judgment in Texas

Action (the “Agreed Final Judgment”).) In the Agreed Final

Judgment, the court considered the parties’ agreement and

ordered that “judgment should be . . . entered in favor of [EDC]

against [Hanover].” (Id. at 1.) The Agreed Final Judgment

provided that “based on the agreement of the parties, . . .

[EDC’s] claims and [Hanover’s] defenses, including any

affirmative defenses, related and encompass only materials

supplied by [Polyval] to [Hanover] referenced in” the thirteen

invoices “issued between August 2, 2018, and November 30, 2018.”

(Id.) The Agreed Final Judgment also ordered that Hanover’s

defenses “relate to and encompass only” the thirteen listed

invoices issued between August 2, 2018 and November 30, 2018.

(Id. at 3.) The Agreed Final Judgment further stated that any

invoices “other than the invoices and materials [specified in

the agreement] are the subject of separate unrelated

transactions, occurrences, and agreements outside the scope of

this lawsuit, and were not the basis in this lawsuit of any

claim or defense, including affirmative defenses.” (Id.) The

parties agreed that EDC “is entitled to judgment against

[Hanover] in the principal amount of $541,107.00,” the amount

sought in the Texas Action, plus pre- and post-judgment interest

and attorneys’ fees. (Id. at 2.) The Texas district court

entered the Agreed Final Judgment on February 28, 2020. (Texas

Action Docket, ECF No. 60.)

II. Procedural Background

On June 26, 2019, while the Texas Action was pending,

plaintiff commenced the instant action seeking monetary damages,

attorney’s fees, and costs. (See ECF No. 1.) On December 26,

2019, defendant filed a pre-motion letter requesting leave to

file an anticipated motion to dismiss plaintiff’s complaint for

failure to effect timely service under Federal Rule of Civil

Procedure 4(m), to stay or dismiss this action in favor of an

earlier filed action raising similar issues, and for a partial

motion to dismiss plaintiff’s complaint for failure to state a

claim upon which relief could be granted. (ECF No. 10.)

Plaintiff opposed defendant’s request for a pre-motion

conference. (ECF No. 13.) On February 26, 2020, the court set

a briefing schedule for defendant’s partial motion to dismiss.

(See Scheduling Order 2/26/2020.) After several extension

requests, the defendant’s partial motion to dismiss was fully

briefed on July 10, 2020. (See ECF Nos. 22-25.)

Presently before the Court is defendant’s partial

motion to dismiss plaintiff’s complaint pursuant to Federal Rule

of Civil Procedure 12(b)(6) for failure to state a claim. (See

ECF No. 22.) Specifically, defendant moves to dismiss

plaintiff’s complaint on the grounds that (1) the instant suit

is duplicative of the Texas Action and thus barred under the

doctrine of res judicata; (2) plaintiff’s damage to reputation

claim fails as a matter of law under New York’s economic loss

rule; and (3) plaintiff’s unjust enrichment claim is duplicative

of its breach of contract claim. (Def. Mem. at 2-3.)

LEGAL STANDARD

In evaluating defendant’s motion to dismiss, the Court

must accept all well-pleaded facts in the complaint as true and

draw all reasonable inferences in plaintiff’s favor. See,

e.g., Burch v. Pioneer Credit Recovery, Inc., 551 F.3d 122, 124

(2d Cir. 2008) (per curiam). A claim survives a Rule 12(b)(6)

motion, however, only if the plaintiff alleges facts sufficient

“to state a claim to relief that is plausible on its face.”

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim

is facially plausible “when the plaintiff pleads factual content

that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Ashcroft v.

Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at

556). A plaintiff must show “more than a sheer possibility that

a defendant has acted unlawfully,” id., and cannot rely on mere

“labels and conclusions” to support a claim, Twombly, 550 U.S.

at 555. If the plaintiff’s pleadings “have not nudged [his or

her] claims across the line from conceivable to plausible, [the]

complaint must be dismissed.” Id. at 570.

District courts “must consider the complaint in its

entirety, as well as other sources courts ordinarily examine

when ruling on Rule 12(b)(6) motions to dismiss, in particular,

documents incorporated into the complaint by reference, and

matters of which a court may take judicial notice.” Tellabs,

Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).

The court may also consider documents the plaintiff relied on in

bringing suit, and which are either in the plaintiff’s

possession, or that the plaintiff knew of when bringing suit.

Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002);

Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.

1993); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47–

48 (2d Cir. 1991), cert. denied, 503 U.S. 960 (1992); McKevitt

v. Mueller, 689 F. Supp. 2d 661, 665 (S.D.N.Y. 2010).

“Res judicata challenges may properly be raised via

a motion to dismiss for failure to state a claim under Rule

12(b)(6).” Thompson v. Cty. of Franklin, 15 F.3d 245, 253 (2d

Cir.1994). Dismissal on res judicata grounds is appropriate if

“it is clear from the face of the complaint, and matters of

which the court may take judicial notice, that the plaintiff’s

claims are barred as a matter of law.” Conopco, Inc. v. Roll

Int'l, 231 F.3d 82, 86 (2d Cir. 2000).

DISCUSSION

Plaintiff seeks relief for defendant’s alleged breach

of contract, damage to plaintiff’s reputation, and unjust

enrichment in violation of New York state law. Defendant moves

for complete dismissal plaintiff’s complaint under the doctrine

of res judicata and partial dismissal of plaintiff’s damage to

reputation and unjust enrichment claims for failing to state a

claim under Federal Rules of Civil Procedure 12(b)(6). For the

reasons set forth below, the court grants in part and denies in

part defendant’s motion to dismiss.

I. The Preclusive Effect of the Texas Action

Defendant argues that the judgment entered by the

Eastern District of Texas should have preclusive effect in this

action and requires complete dismissal of plaintiff’s complaint.

(Def. Mem. at 12-21.) Plaintiff argues that the Texas Action

does not preclude the instant suit because plaintiff’s

affirmative defense in the Texas Action was not a compulsory

counterclaim, Polyval was not an opposing party against whom a

counterclaim could be brought, and the thirteen invoices subject

to EDC’s claim do not arise out of the same “transaction or

occurrence” as the New York action. (Pl. Mem. at 6-17.)

A. Applicable Law

Federal courts “apply federal law in determining the

preclusive effect of a federal judgment.” Marvel Characters,

Inc. v. Simon, 310 F.3d 280, 286 (2d Cir. 2002). The Second

Circuit has explained that “[u]nder federal common law, the

question of whose law governs the preclusive effect of a prior

federal judgment turns on the basis for jurisdiction in that

prior case, without regard to the basis for jurisdiction in a

later case applying it.” Stinnett v. Delta Air Lines, Inc., 803

F. App’x 505, 508 n.3 (2d Cir. 2020) (summary order). The

“preclusive effect of a judgment rendered by a federal court

sitting in diversity is determined by the law of the state in

which the rendering court sat.” Id. (citing Semtek Int'l Inc.

v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001)); see also

Plymouth Venture Partners, II, L.P. v. GTR Source, LLC, No. 20-

118, 2021 WL 683831, at *5 (2d Cir. Feb. 23, 2021) (“[F]ederal

diversity judgments should be accorded the same preclusive

effect that would be applied by state courts in the state in

which the federal diversity court sits.” (citing Semtek Int'l

Inc., 531 U.S. at 507–08)). Here, the Texas Action in which the

prior federal judgment was entered was before the Eastern

District of Texas federal district court based on the parties’

diversity of citizenship. (Texas Action Docket, ECF No. 1,

Complaint (“Texas Compl.”) ¶ 4.) Accordingly, this court will

apply Texas law governing preclusion because the Eastern

District of Texas sits in the state of Texas.

Under Texas law, res judicata “requires proof of the

following elements: (1) a prior final judgment on the merits by

a court of competent jurisdiction; (2) identity of parties or

those in privity with them; and (3) a second action based on the

same claims as were raised or could have been raised in the

first action.” Amstadt v. U.S. Brass Corp., 919 S.W.2d 644, 652

(Tex. 1996). Texas follows a transactional approach to res

judicata. See Barr v. Resolution Tr. Corp., 837 S.W.2d 627, 631

(Tex. 1992). Under the transactional approach, res judicata

precludes not only claims that were raised in an earlier

litigation “‘but also . . . causes of action or defenses which

arise out of the same subject matter and which might have been

litigated in the first suit.’” Getty Oil Co. v. Ins. Co. of N.

Am., 845 S.W.2d 794, 798 (Tex. 1993) (quoting Barr, 837 S.W.2d

at 630).

B. Application

The court now turns to each of the requirements for

application of res judicata and concludes, as set forth below,

that res judicata does not bar the instant New York action.

i. Prior Final Judgment on the Merits

Pursuant to Federal Rule of Civil Procedure 54(b), the

parties moved the Eastern District of Texas for an entry of

judgment on February 26, 2020. (Texas Action Docket, ECF No.

59.) On February 28, 2020, the Eastern District of Texas

entered an Agreed Final Judgment, disposing “of all parties and

all claims.” (ECF No. 60.) Generally, “[a]n agreed order or

judgment of dismissal in settlement of a controversy is a

judgment on the merits.” Jistel v. Tiffany Trail Owners Ass'n,

Inc., 215 S.W.3d 474, 480 (Tex. App. 2006). Under these

circumstances, this court concludes that the Agreed Final

Judgment in the Texas Action constituted a prior final judgment

on the merits of the claim for payment of thirteen invoices by a

court of competent jurisdiction. (See Agreed Final Judgment at

4 (“It is further ORDERED this Judgment is FINAL and appealable.

This Final Judgment disposes of all parties and all claims.”);

see also Paradise Living, Inc. v. Blackburne & Brown Mortg. Fund

I, No. 01-18-00194-CV, 2019 WL 2426168, at *4 (Tex. App. June

11, 2019) (concluding that an “agreed final judgment” settling

the parties’ claims constituted a “final prior judgment” under

Texas law).

ii. Identity of Parties or Those in Privity with Them

“‘[T]he identity of parties [element] requires that

both parties to the current litigation be parties to the prior

litigation or in privity with parties to the prior litigation.’”

United States ex rel. Laird v. Lockheed Martin Eng’g and Sci.

Serv. Co., 336 F.3d 346, 357 (5th Cir. 2003) (applying Texas

law) (second alteration in original) (quoting Jones v. Sheehan,

Young & Culp, P .C., 82 F.3d 1334, 1341 (5th Cir. 1996)),

abrogated on other grounds by Rockwell Int'l v. United States,

549 U.S. 457, 472, (2007); see also Getty Oil, 845 S.W.2d at

800 (stating that “[u]nder Texas law, a former judgment bars a

second suit against all who were in ‘privity’ with the parties

to the first suit”). The Supreme Court of Texas has explained

that “privity” cannot be defined precisely but instead depends

on “the circumstances of each case.” Getty Oil, 845 S.W.2d at

800. Under Texas law, an assignor-assignee relationship can

constitute privity for res judicata purposes. See Gwinn v.

Midland Credit Mgmt., Inc., No. 17-cv-74, 2019 WL 7759521, at *4

(W.D. Tex. Sept. 16, 2019) (applying Texas law) (concluding that

privity existed under Texas law for res judicata to apply where

parties were in an assignor-assignee relationship).

Here, the relationship of the parties in the present

action to those in the prior Texas action is sufficient to meet

the identity of parties requirement with regard to the thirteen

invoices in dispute. It is undisputed that on or around

February 14, 2019, Polyval assigned to EDC all right, title, and

interest in Hanover’s debt in the amount of $541,107, arising

from the thirteen outstanding invoices. (See Pl. Mem. at 1;

Compl. Texas Action ¶ 12.) Accordingly, because Polyval and EDC

entered into an assignor-assignee relationship, the parties were

in privity during the Texas Action, with respect to the thirteen

invoices in dispute. Thus, for purposes of res judicata, the

court concludes that the identity of the parties (Polyval and

EDC) were the same due to the legal relationship establishing

privity. Indeed, by receiving the assignment of Hanover’s debt

in the amount of Polyval’s thirteen invoices, EDC stood in the

shoes of Polyval and exercised Polyval’s rights when it

initiated the Texas Action to recover the outstanding payments

owed by Hanover as to the thirteen invoices. See First-Citizens

Bank & Tr. Co. v. Greater Austin Area Telecomms. Network, 318

S.W.3d 560, 566 (Tex. App. 2010) (reasoning that an assignment

may create privity because “an assignee stands in the shoes of

the assignor and may assert those rights that the assignor could

assert, including bringing suit”). For these reasons, the court

concludes that the second element of res judicata is also met

here because there was privity between Polyval and EDC as to the

thirteen invoices in dispute in the Texas Action.1

1 The court rejects plaintiff’s argument that Polyval was not an

“opposing party” in the Texas Action because res judicata does not require an

identical opposing party in the first suit. Instead, as discussed above,

based on the assignment by Polyval to EDC, under Texas law, res judicata may

apply when the party in the second suit is in “privity” with the party to the

first suit. Polyval and EDC were in privity in the Texas suit as to the

thirteen invoices. See Amstadt, 919 S.W.2d at 652; see also Montes v.

Overhead Corp., No. 19-cv-32, 2019 WL 6792545, at *4 (S.D. Tex. Sept. 6,

2019) (applying Texas law) (“[T]he parties need not be completely identical

for res judicata to apply”), report and recommendation adopted, No. 19-cv-32,

2019 WL 6790516 (S.D. Tex. Dec. 12, 2019).

iii. Identity of Claims Between First and Second Suits

Polyval argues that claims are the same in both

actions because they arise from the same transaction involving

the sale of Polyval’s binder. (Def. Mem. at 15-18.) In

response, Hanover argues that because Polyval was not a party in

the Texas Action, any claims against Polyval could not be

compulsory. (Pl. Mem. at 7-8.) Specifically, plaintiff argues

that Polyal was not an opposing party in the Texas Action and

Hanover could not obtain full relief against EDC in the Texas

Action. (Pl. Mem. at 12-14.) Finally, plaintiff argues that

Hanover’s and Polyval’s transactions do not arise from the same

transactions or occurrences as the thirteen invoices in dispute

in the Texas Action. (Pl. Mem. at 14-17.)

For res judicata to apply, the second action must be

based on the same claims as were raised, or could have been

raised, in the first action. Under this standard, a claim that

would have been a compulsory counterclaim in the first action is

precluded from being brought in a second action. State & County

Mut. Fire Ins. Co. v. Miller, 52 S.W.3d 693, 696 (Tex. 2001)

(“Texas follows the transactional approach to res judicata. This

approach mandates that a defendant bring as a counterclaim any

claim arising out of the transaction or occurrence that is the

subject matter of the opposing party’s suit.” (internal

citations omitted)); Ingersoll–Rand Co. v. Valero Energy Corp.,

997 S.W.2d 203, 207 (Tex. 1999) (res judicata bars asserting in

a second action claims that would have been compulsory

counterclaims in an earlier action). Under Texas law, a

potential counterclaim is compulsory if: (1) it is within the

jurisdiction of the court; (2) it is not at the time of filing

the answer the subject of a pending action; (3) the claim is

mature and owned by the defendant at the time of filing the

answer; (4) it arose out of the same transaction or occurrence

that is the subject of the opposing party’s claim; (5) it is

against an opposing party in the same capacity; and (6) it does

not require the presence of third parties over whom the court

cannot acquire jurisdiction. Ingersoll–Rand Co., 997 S.W.2d at

207; see also Tex. R. Civ. Proc. 97(a), (d).

In this case, Hanover argues that it is not precluded

from litigating its claims in New York because the damages

sought in this court do not “arise out of the same transaction

or occurrence” as the thirteen invoices in dispute in the Texas

Action. (Pl. Mem. at 14-17.) Specifically, Hanover argues that

its claims in the Texas Action were not “compulsory” because

they did not involve the same transaction or occurrence as those

in the Texas Action. (Id. at 7-8.) “To determine what

constitutes a transaction or occurrence, Texas courts employ a

‘logical relationship’ test which focuses on whether the

essential facts on which claims are based are significantly and

logically relevant to both claims.” Rainwater v. 21st Mortg.

Corp., No. 09-cv-331, 2010 WL 1330624, at *7 (E.D. Tex. Feb. 25,

2010) (citing Freeman v. Cherokee Water Co., 11 S.W.3d 480, 483

(Tex. App. 2000)), report and recommendation adopted, No. 09-cv-

331, 2010 WL 1328845 (E.D. Tex. Mar. 29, 2010); SMS Mktg. &

Telecomms., Inc. v. H.G. Telecom, Inc., 949 F. Supp. 134, 139

(E.D.N.Y. 1996) (“In Texas, the test for determining whether a

claim is a compulsory counterclaim is the ‘logical relationship’

test.”). To determine what claims are precluded by an earlier

judgment, the court must compare “the factual matters that make

up the gist of the complaint” in each claim. Barr v. Resol. Tr.

Corp. ex rel. Sunbelt Fed. Sav., 837 S.W.2d 627, 630 (Tex.

1992).

Here, in comparing the factual matters in the

complaints in both cases, the court concludes that Hanover’s

claims in the instant action do not arise from the “same

transaction or occurrence” as the thirteen invoices in dispute

in the Texas Action. Specifically, in the Texas Action, EDC,

Polyval’s assignee, chose to initiate an action for non-payment

of thirteen specific invoices owed by Hanover. (See Texas

Compl. ¶ 10 (“Hanover failed to pay for the Materials pursuant

to certain invoices provided to Hanover” as outlined in the

complaint) (emphasis added).) In seeking payment for these

thirteen invoices, EDC sought a principal amount of $541,107.00

plus interest and attorneys’ fees. (Id. ¶¶ 12.) Indeed, the

assignment agreement between Polyval and EDC confirms that the

scope of the assignment to EDC was narrowly limited to the

recovery of a debt in the amount of $541,107.00. (ECF No. 23-5,

Declaration by Michael Taubenfeld, Ex. 3, EDC Portfolio Credit

Insurance.)2

In contrast, in the New York action, Hanover seeks a

broader range of damages for different alleged conduct by

Polyval than what EDC sought in the Texas Action. In

particular, Hanover seeks damages for the allegedly defective

binder provided by Polyval, which resulted in economic losses

potentially extending into the millions of dollars. (Compl. ¶¶

16, 21.) Hanover alleges that the binder provided by Polyval

contained a “latent defect,” which was allegedly discovered

years after installation had occurred. (Id. ¶¶ 14, 18, 34.)

Although the allegation of a latent defect is similar to the

affirmative defense raised by Hanover in the Texas Action (see

Nash Decl., Ex. B at 4-5), the key distinction is that the

affirmative defense of setoff raised by Hanover was limited to

rebutting Hanover’s potential liability under EDC’s breach of

contract claim based on the thirteen invoices. In other words,

Hanover’s setoff defense was limited to extinguishing whatever

2 This court may properly consider the assignment agreement because the

agreement was integral to the Texas complaint.

debt was owed by Hanover to EDC in the Texas Action for the

enumerated thirteen invoices upon which EDC sued. See CPS

Int’l, Inc. v. Harris & Westmoreland, 784 S.W.2d 538, 544 (Tex.

App. 1990) (“A setoff brings together the obligations of

opposing parties to each other and, by judicial action of the

court, makes each obligation extinguish the other. The object

of a setoff is to adjust the indebtedness between the parties

and allow recovery of only the balance that is due.”). Thus,

unlike the claims set forth by Hanover in the New York suit,

which seek an expansive recovery beyond a setoff for thirteen

invoices for Polyval’s allegedly defective product, the

affirmative defense in the Texas Action was limited in scope

and, accordingly, contrary to Polyval’s argument, was not the

same as the claims in dispute here. (See Nash Decl., Ex. B at

4-5 (“To the extent plaintiff has sustained any damages, which

is denied, such damages were caused in whole or in part by

plaintiff’s conduct or that of its agents, representatives and

not Hanover . . . .” (emphasis added).) Accordingly, because

the setoff defense in the Texas Action was limited to rebutting

EDC’s breach of contract claim and was narrow in scope, the

extent of relief sought in the Texas Action was not identical to

the broad scope of relief sought in the New York suit.

Moreover, the temporal scope of each suit also

distinguishes the present claims from those at issue in the

Texas Action. According to the complaint filed in Texas,

Hanover and Polyval began their commercial relationship in or

around 2015. (Texas Compl. ¶ 7.) The thirteen invoices in

dispute in the Texas Action only involve transactions taking

place between August 2018 and November 2018. (Id. ¶ 10.) Thus,

for the purposes of the nonpayment claim, the Texas court and

the parties in that action only litigated Hanover’s alleged

nonpayment of specific invoices from August 2018 and November

2018. In contrast, in the New York action, Hanover alleges that

its business relationship with Polyval began in or around 2015,

and that Hanover expressed concern over the years that Polyval’s

binder was not suitable for use and suffered damages. (Compl.

¶¶ 8-16.) Thus, although not expressly defining a time range,

Hanover’s New York complaint alleges damages arising from any

hidden defects in products supplied by Polyval since the

inception of the business relationship in 2015. Accordingly,

unlike the Texas Action, which focuses on thirteen invoices

issued between August 2018 and November 2018, the New York

action encompasses a broader period of time and different

factual and legal issues. See Weaver v. Texas Cap. Bank N.A.,

660 F.3d 900, 907 (5th Cir. 2011) (applying Texas law) (“To

decide whether the two lawsuits arose out of the same

transaction or occurrence, several factors are considered

together, including ‘their relatedness in time, space, origin,

or motivation, and whether, taken together, they form a

convenient unit for trial purposes.’” (quoting Getty Oil Co.,

845 S.W.2d at 799)).

To be sure, Texas law also confirms that the claims in

dispute here did not arise from the “same transaction or

occurrence” as the thirteen invoices in dispute in the Texas

Action. For example, in Texas Beef Cattle Co. v. Green, the

Texas Court of Appeals held that that two transactions to

purchase cattle between the same parties were not the same

transaction and therefore a judgment regarding one group of

cattle did not preclude claims regarding the other group. 860

S.W.2d 722, 724 (Tex. App. 1993). There, the court noted that

“[e]ven though the two separate transactions involved

essentially the same parties and subject matter (i.e., cattle),

these transactions are separate and distinct, because they are

based on separate and distinct actions of the parties.” Id.

Defendant criticizes the “scant justification” of the case and

notes that cattle have different characteristics. (Def. Reply.

Mem. at 6.) Defendant, however, offers no basis for its claim

that it sold “identical” product over the course of its dealing

with plaintiff. Discovery may disclose whether and what “hidden

defects” existed in the various batches of product sold by

defendant to plaintiff over the years of their contractual

relationship.

Here, the court concludes that the thirteen invoices

in dispute in the Texas Action were “separate and distinct” from

the transaction at issue in the New York suit, which

specifically addresses Polyval’s purported breach of warranty

and breach of contract by providing defective products. (See

Compl. ¶¶ 17-21; 29-46.) Thus, unlike the Texas Action, which

focused on Hanover’s actions (or inaction) in failing to pay the

thirteen invoices, the New York action focuses on Polyval’s

actions in breaching a contract or warranty by providing

defective binder to Hanover. Thus, the factual and legal bases

for the claims in each suit are not identical and, accordingly,

do not arise from the “same transaction or occurrence” because

the suits are “based on separate and distinct actions of the

parties.” Texas Beef Cattle Co., 860 S.W.2d at 724; see also

Karle v. Innovative Direct Media Co., 309 S.W.3d 762, 766-67

(Tex. App. 2010) (declining to apply res judicata where the two

suits involved different facts and sought different forms of

relief).

Finally, turning to the terms of the final judgment in

the Texas Action, the court notes that its sister federal court

in the Eastern District of Texas decreed that the invoices in

the Texas Action were separate and unrelated from any other

invoices issued by Polyval to Hanover. See Fed. R. Civ. P.

54(a) (A judgment “includes a decree and any order from which an

appeal lies”). The final judgment in the Texas Action, which

was jointly stipulated to by EDC (Polyval’s assignee) and

Hanover, expressly states that:

[A]ny invoices issued by Les Revetements

Polyval Inc. to Defendant Hanover Specialties,

Inc. d/b/a Vitriturf, or any materials

provided by Les Revetements Polyval Inc. to

Defendant Hanover Specialties, Inc. d/b/a

Vitriturf, other than the invoices and

materials referenced in the chart above, are

the subject of separate unrelated

transactions, occurrences, and agreements

outside the scope of this lawsuit, and were

not the basis in this lawsuit of any claim or

defense, including affirmative defenses.

(Agreed Final Judgment at 3.) To be clear, the Agreed Final

Judgment also included a chart of the thirteen invoices

comprising the debt assigned to EDC by Polyval that were in

dispute, which directly corresponds with a chart of the invoices

originally identified in the complaint in the Texas Action.

(Compare Agreed Final Judgment at 3, with Texas Compl. ¶ 10.)

The district court in the Eastern District of Texas signed the

parties’ Agreed Final Judgment, which was entered on February

28, 2020. (Texas Action Docket, ECF No. 60.) Thus, based on

the parties’ representations and the record before it, the

district court in Texas judicially decreed that the judgment in

Texas involved invoices distinct and unrelated from any other

invoices in dispute between Polyval and Hanover. (See Agreed

Final Judgment at 3.) Having reviewed the express terms of the

Agreed Final Judgment in the Texas Action and for the reasons

set forth above, the court concludes that Hanover’s claims in

the New York action do not arise out of the “same transaction or

occurrence” involved in the Texas Action, and therefore, are not

barred by res judicata as compulsory counterclaims.3

Accordingly, the court denies Polyval’s motion to dismiss

Hanover’s complaint under res judicata.

Nonetheless, even though the court concludes that

Hanover’s complaint should not be dismissed in its entirety, the

court finds that res judicata does bar Hanover from relitigating

the amounts due under the thirteen invoices in dispute in the

Texas Action. Specifically, turning to the express terms of the

Agreed Final Judgment in the Texas Action, Hanover and Polyval’s

assignee, EDC, stipulated that Hanover’s “defenses in [the Texas

Action], including its affirmative defenses, relate to and

encompass only the [thirteen invoices] issued between August 2,

2018, and November 30, 2018.” (Agreed Final Judgment at 3.) To

3 Although the court acknowledges that some facts in both suits may

overlap, the court concludes -- after review of the complaints in each case

and the documents to which the court may properly take judicial notice from

the Texas Action -- that the facts in the Texas Action are not “significantly

and logically relevant” to the “essential facts” in the New York suit because

Hanover’s case in New York involves an allegation of a product defect where

the Texas Action solely involved a dispute over the nonpayment of thirteen

invoices. Rahlek, Ltd. v. Wells, 587 S.W.3d 57, 74 (Tex. App. 2019); see cf.

Mack v. Midland Credit Mgmt., Inc., 2015 WL 1383760, at * 4 (E.D. Tex. Mar.

23, 2015) (finding that res judicata did not bar subsequent breach of

contract suit for underlying debt in state court in FDCPA case). Moreover,

as explained above, the court concludes that the two actions involve separate

and distinct transactions, different forms of relief, and separate time

periods.

permit Hanover to now relitigate those thirteen invoices would

violate the broad principles of preclusion under Texas law in

preventing duplicative litigation and double recovery. See

McNeil Interests, Inc. v. Quisenberry, 407 S.W.3d 381, 387 (Tex.

App. 2013) (“The public policy underlying the doctrine of res

judicata could not be more clear in Texas jurisprudence. As a

subset of the broad principles of issue and claim preclusion,

res judicata brings litigation to an end, prevents vexatious

litigation, maintains the stability of court decisions, promotes

judicial economy, and prevents double recovery.”). Thus, to the

extent Hanover seeks recovery (or setoff) for the thirteen

invoices in dispute in the Texas Action, those claims are

precluded under res judicata and dismissed with prejudice.

II. Damage to Reputation Claim

Hanover’s second cause of action asserts that

Polyval’s conduct in failing in multiple orders to deliver

suitable binder “harmed Hanover’s longstanding relationships

with its customers and its reputation generally.” (Compl. ¶

25.) Hanover alleges that it “has long enjoyed a reputation for

installing first-rate poured in place surfacing to

municipalities, parks, recreation centers, and educational

facilities” and likewise has “long-standing business

relationships with its customers.” (Id. ¶ 23.) In moving to

dismiss Hanover’s damage to reputation claim, Polyval argues

that Hanover’s claim is barred by New York’s economic loss rule.

(Def. Mem. at 21-22.)

In general, damages to reputation “are not recoverable

in a breach of contract action under New York law.” Ainbinder

v. Money Ctr. Fin. Grp., Inc., No. 10-cv-5270 (SJF) (AKT), 2013

WL 1335997, at *10 (E.D.N.Y. Feb. 28, 2013), report and

recommendation adopted, No. 10-cv-5270 (SJF) (AKT), 2013 WL

1335893 (E.D.N.Y. Mar. 25, 2013). Nonetheless, there is a

limited exception in “exceptional cases” where the plaintiff can

prove “specific business opportunities lost as a result of its

diminished reputation.” Smith v. Positive Prods., 419 F. Supp.

2d 437, 453 (S.D.N.Y. 2005); see Anderson Grp., LLC v. City of

Saratoga Springs, 805 F.3d 34, 55 (2d Cir. 2015).

Here, Hanover alleges that Polyval damaged “Hanover’s

reputation and business relationships” by “failing to deliver

the agreed-upon ‘binder’ for the quality and functionality in

the PIP surfacing,” and by “failing to respond to the questions

concerning the integrity of the ‘binder’ being sold to Hanover.”

(Compl. ¶¶ 25, 26.) Hanover alleges that it will suffer damages

to its reputation because its “customers have threatened legal

action against Hanover, and have threatened to make complaints

to the media,” which will result in damages “in no event less

than $10,000,000, plus interest.” (Id. ¶¶ 27-28.) In light of

the facts alleged and the foregoing case law recognizing

“exceptional cases” where reputational harm may be recovered,

see Smith, 419 F. Supp. 2d at 453, the court declines to dismiss

Hanover’s damage to reputation claim at this early stage in the

litigation. Nevertheless, the court notes that Hanover will be

required to prove the reputational damages it seeks or face

dismissal. See Saxton Commc'n. Grp. v. Valassis Inserts, Inc.,

1995 WL 679256, at *2 (S.D.N.Y. Nov. 15, 1995) (“Absent specific

proof, damages for loss of reputation are too speculative to be

recovered under contract law.”); AmTrust N. Am., Inc. v. KF&B,

Inc., No. 17-cv-5340 (LJL), 2020 WL 5503479, at *2 (S.D.N.Y.

Sept. 11, 2020) (granting summary judgment and dismissing claim

for reputational damages where plaintiffs identified no evidence

showing any reputational harm); I.R.V. Merch. Corp. v. Jay Ward

Prods., Inc., 856 F. Supp. 168, 175 (S.D.N.Y. 1994) (granting

summary judgment and dismissing claim for reputational damages

where plaintiff had “not enumerated any specific harms arising

from the alleged loss of reputation”). Accordingly, for the

reasons set forth above, the court denies defendant’s motion to

dismiss plaintiff’s damage to reputation claim at this time.4

III. Unjust Enrichment

Hanover’s fifth cause of action alleges that Hanover

“conferred a benefit upon Polyval” in the form of payments and

4 In light of the limited exception for reputational harm under New York

contract law discussed above, the court declines to conclude that plaintiff’s

damage to reputation claim violates New York’s economic loss rule.

Polyval “retained that benefit under circumstances that make it

unjust and inequitable for Polyval to retain it without paying

Hanover the value thereof plus damages resulting from its use.”

(Compl. ¶¶ 48-50.) Polyval argue that Hanover’s unjust

enrichment claim is duplicative of Hanover’s breach of contract

claim, and should therefore be dismissed. (Def. Mem. at 22-23.)

Hanover argues that it is permitted to assert a claim for unjust

enrichment in the alternative to its breach of contract claim to

the extent that Polyval disputes the existence of a contract.

(Pl. Mem. at 18.)

“Under New York law, a plaintiff may prevail on a

claim for unjust enrichment by demonstrating ‘(1) that the

defendant benefitted; (2) at the plaintiff's expense; and (3)

that equity and good conscience require restitution.’” Nordwind

v. Rowland, 584 F.3d 420, 434 (2d Cir. 2009) (quoting Beth Isr.

Med. Ctr. v. Horizon Blue Cross & Blue Shield of N.J., Inc., 448

F.3d 573, 586 (2d Cir. 2006)). “New York permits the

alternative pleading of breach of contract and unjust enrichment

claims -- and the survival of both claims at the motion to

dismiss stage -- where there is a bona fide dispute as to the

existence of a contract or where the contract does not cover the

dispute in issue.” Sikarevich Fam. L.P. v. Nationwide Mut. Ins.

Co., 30 F. Supp. 3d 166, 172 (E.D.N.Y. 2014).

Here, Hanover’s unjust enrichment claim duplicates its

breach of contract claim and cannot be pled in the alternative

because the parties do not appear to dispute the existence of a

contract, or contend that the contract is invalid or

unenforceable. See, e.g., Air Atlanta Aero Eng'g Ltd. v. SP

Aircraft Owner I, LLC, 637 F. Supp. 2d 185, 196 (S.D.N.Y. 2009)

(dismissing unjust enrichment claim where plaintiff did not

contend that the contract was “not valid and enforceable”);

Bristol Vill., Inc. v. Louisiana-Pac. Corp., 916 F. Supp. 2d

357, 367 (W.D.N.Y. 2013) (dismissing unjust enrichment claim

where defendant did not dispute validity of contract in its

briefing supporting its motion to dismiss); (see generally Def.

Mem. at 22-23 (not disputing validity of contract); Def. Reply

Mem. at 10 (same)). Accordingly, based on the current record,

because it does not appear that there is a bona fide dispute

over the validity of the parties’ contract, the court dismisses

plaintiff’s unjust enrichment claim without prejudice, as

duplicative of its breach of contract claim. See, e.g., Remede

Consulting Grp. Inc. v. Hamer, No. 19-cv-3950 (NGG)(VMS), 2021

WL 430898, at *5 (E.D.N.Y. Feb. 8, 2021) (dismissing unjust

enrichment claim as duplicative of breach of contract claim);

Giugliano v. FS2 Cap. Partners, LLC, No. 14-cv-7240 (ADS) (GRB),

2015 WL 5124796, at *17 (E.D.N.Y. Sept. 1, 2015) (same). If

defendant raises a dispute in its answer regarding the existence

and validity of a contract, plaintiff will be granted leave to

amend as set forth below.

IV. Leave to Amend the Complaint

Hanover seeks leave to amend its complaint in the

event that this court dismisses any part of the complaint. (Pl.

Mem. at 18-19.) Polyval does not oppose Hanover’s request to

amend the complaint in its reply memorandum of law. (See

generally Def. Reply Mem.)

District courts “ha[ve] broad discretion in

determining whether to grant leave to amend,” Gurary v.

Winehouse, 235 F.3d 793, 801 (2d Cir. 2000), and “leave to amend

should be freely granted when ‘justice so requires.’” Pangburn

v. Culbertson, 200 F.3d 65, 70 (2d Cir. 1999) (quoting Fed. R.

Civ. P. 15(a)). “This permissive standard is consistent with

[the Second Circuit's] strong preference for resolving disputes

on the merits.” Williams v. Citigroup Inc., 659 F.3d 208, 212–

13 (2d Cir. 2011) (citation omitted). “[T]he court should not

dismiss without granting leave to amend at least once when a

liberal reading of the complaint gives any indication that a

valid claim might be stated.” Cuoco v. Moritsugu, 222 F.3d 99,

112 (2d Cir. 2000). But leave should be denied if repleading

would be “futile.” Id. Here, the court denies plaintiff leave

to amend plaintiff’s unjust enrichment claim without prejudice

because it does not appear that there is a bona fide dispute

over the validity of the parties’ contract. In the event

defendant disputes the existence of a valid contract, plaintiff

will be afforded leave to amend the complaint to properly

replead its unjust enrichment claim in the alternative.

CONCLUSION

For the foregoing reasons, defendant’s motion to

dismiss is granted in part and denied in part. Defendant must

respond to the complaint within the time period required by the

Federal Rules of Civil Procedure.

SO ORDERED.

/s/

KIYO A. MATSUMOTO

United States District Judge

Eastern District of New York

Dated: March 15, 2021

Brooklyn, New York