GENERAL TIRE & RUBBER COMPANY, a Corporation,
v.
DISTRIBUTORS, INC., a Corporation.
No. 235.
Supreme Court of North Carolina.
December 16, 1959.*618 Orr, Osborne & Hubbard, Charlotte, for plaintiff, appellee.
Ralph C. Clontz, Jr., Charlotte, for defendant, appellant.
BOBBITT, Justice.
The demurrer does not challenge defendant's counterclaim on the ground that it fails to state facts sufficient to constitute a cause of action against plaintiff. Nor does it challenge defendant's counterclaim on the ground that it united, but did not separately state, two causes of action. G.S. § 1-123; Heath v. Kirkman, 240 N.C. 303, 306, 82 S.E.2d 104. The phrase "misjoinder of causes of action," as used in the demurrer, refers to plaintiff's contention that "the matters alleged in defendant's counterclaim are foreign to the subject action in time and substance * * *."
Plaintiff's contention is that the cause of action alleged by defendant is for the alleged breach on July 2, 1958, of a contract entered into between plaintiff and defendant on May 1, 1958, all occurring subsequent to the commencement of this action; and, upon this premise, plaintiff asserts that the counterclaim is not permissible under G.S. § 1-137(2).
In determining whether the counterclaim is permissible under G.S. § 1-137, we accept as true the facts alleged by defendant. Burns v. Gulf Oil Corp., 246 N. C. 266, 98 S.E.2d 339. "In the construction of a pleading for the purpose of determining its effect its allegations shall be liberally construed with a view to substantial justice between the parties." G.S. § 1-151.
"A pleading must be fatally and wholly defective before it will be rejected as insufficient." Guerry v. American Trust Co., 234 N.C. 644, 646, 68 S.E.2d 272, 274, and cases cited. Plaintiff's demurrer is directed to defendant's said pleading in its entirety, not to specific portions thereof. Whether particular allegations thereof should be stricken is not presented. Thus, if defendant's said pleading includes a permissible counterclaim, it was error to sustain plaintiff's demurrer.
Under G.S. § 1-137(1), it is permissible to allege as a counterclaim "A cause of action arising out of the contract or transaction set forth in the complaint as the foundation of the plaintiff's claim, or connected with the subject of the action."
In addition to counterclaims permissible under G.S. § 1-137(1), G.S. § 1-137(2) permits a defendant to allege as a counterclaim in an action arising on contract, "any other cause of action arising also on contract, and existing at the commencement of the action." Thus, G.S. § 1-137(2) is applicable "wherein an action on a contract, the breach of an entirely different and distinct contract, is set up by defendant." Smith & Co. v. French, 141 N.C. 1, 7, 53 S.E. 435, 437. A counterclaim permissible under G.S. § 1-137(2) need not relate to the contract or transaction set forth in the complaint "as the foundation of the plaintiff's claim or (that it be) connected with the subject of the action." Commercial Credit Corp. v. Robeson Motors, Inc., 243 N.C. 326, 334, 90 S.E.2d 886, 892, 54 A. L.R.2d 1337.
The purpose and intent of G.S. § 1-137(1) "is to permit the trial in one action of all causes of action arising out of any one contract or transaction." Hancammon v. Carr, 229 N.C. 52, 47 S.E.2d 614, 615; Standard Amusement Co. v. Tarkington, 247 N.C. 444, 101 S.E.2d 398. While it authorizes "the litigation of all questions arising out of any one transaction, or series of transactions concerning the same subject matter, in one and the same action," and so does not permit multifariousness, "it must appear that there is but one subject of controversy." Hancammon *619 v. Carr, supra, and cases cited. "The cross action must have such relation to the plaintiffs' claim that the adjustment of both is necessary to a full and final determination of the controversy. Schnepp v. Richardson, 222 N.C. 228, 22 S.E.2d 555. This means that it must be so interwoven in plaintiffs' cause of action that a full and complete story as to the one cannot be told without relating the essential facts as to the other." Hancammon v. Carr, supra, where Barnhill, J. (later C. J.), quotes with approval definitions of the phrases "connected with" and "subject of the action." Also, see Garrett v. Rose, 236 N.C. 299, 72 S.E.2d 843.
When considered in the light most favorable to it, defendant alleged: That the "Warehouse Agreement" was an integral part of a distributorship agreement entered into between plaintiff and defendant in July, 1956, which, by agreement of July 31, 1957, was extended until July 31, 1960; that defendant had fully performed its obligations; and that plaintiff breached their agreement on March 6, 1958, by then demanding, and thereafter by seizing under claim and delivery proceedings herein, all inventory then in defendant's possession, thus depriving defendant of its distributorship. Allegations of defendant to this effect suffice to allege a breach by plaintiff of its contract with defendant that occurred prior to the commencement of this action. Thus, the premise upon which plaintiff bases its aforesaid contention is untenable.
True, plaintiff's action is based solely on the "Warehouse Agreement" and defendant's failure, upon demand, to deliver to plaintiff the consigned merchandise. Even so, if the facts are as alleged by defendant, plaintiff may not deprive defendant of its right to recover by counterclaim for plaintiff's breach of contract simply by treating the "Warehouse Agreement" as if it were the entire contract between the parties.
The subject of plaintiff's action is its alleged right to the immediate possession of the consigned merchandise. (Plaintiff seeks to recover the consigned merchandise, "or so much thereof as is available," and to recover judgment for such portion thereof "as has been disposed of and is not now recoverable by this action.") It did not have such right, notwithstanding title thereto was in plaintiff until disposed of in accordance with the provisions of the "Warehouse Agreement," if it was agreed that the "Warehouse Agreement" and the distributorship were to continue until July 31, 1960. Hence, defendant's counterclaim relates to a controversy directly "connected with the subject of plaintiff's action." It is "so interwoven in (plaintiff's) cause of action that a full and complete story as to the one cannot be told without relating the essential facts as to the other." Indeed, if it were determined in this action that plaintiff is entitled to the immediate possession of the consigned merchandise, it would appear that such finding, and a judgment predicated thereon, would preclude defendant from thereafter asserting in an independent action the alleged contract and breach thereof now asserted as the basis of its counterclaim.
Our conclusion is that defendant has alleged a counterclaim permissible under both G.S. § 1-137(1) and G.S. § 1-137(2). Hence, the court erred in sustaining plaintiff's demurrer.
Since defendant has alleged a cause of action permissible as a counterclaim, it is unnecessary to consider in detail defendant's allegations as to what occurred subsequent to the commencement of this action. Suffice to say, such allegations are not inconsistent with defendant's allegations to the effect that plaintiff had breached its contract with defendant prior to the commencement of this action. Too, without determining whether these allegations should have been separately stated as a second cause of action, a question not presented by this appeal, these allegations are germane to the "one subject of controversy," namely, the contractual relations between plaintiff and defendant with reference *620 to the "Warehouse Agreement" and the distributorship agreement and whether plaintiff or defendant breached their contractual obligations.
It appears that the answer, inclusive of the counterclaim, were served on plaintiff. Hence, plaintiff will reply thereto. G.S. § 1-140.
Reversed.
HIGGINS, J., took no part in the consideration or decision of this case.