# Hanover Specialties Inc. v. Les Revtements Polyval Inc.

> District Court, E.D. New York · March 15, 2021

URL: https://www.frixlaw.com/law-library/cases/10305887

## Case

- **Court:** District Court, E.D. New York
- **Decided:** March 15, 2021
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10305887

## How later opinions describe it (automated extraction)

- 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”
- declining to apply res judicata where the two suits involved different facts and sought different forms of relief
- 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”

## Opinion text

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
----------------------------------X
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.
----------------------------------X
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10305887. Public record. Not legal advice.