James KLEIN, Ramona Klein, and Ruby Klein, Petitioners, v. Carol DOOLEY d/b/a Re-Max Champions, Steve Ernst, Elyse Ernst, and Matthew Jones, Respondents, 949 S.W.2d 307

PER CURIAM. A defendant in a suit under the Deceptive Trade Practices Act may recover costs and attorney’s fees if the trial court finds that the plaintiffs DTPA claims were groundless or made in bad faith or for purposes of harassment. Tex. Bus. & Com.Code § 17.50(e). A plaintiffs voluntary nonsuit does not affect a defendant’s pending counterclaim for costs and attorney’s fees. Tex.R. Civ. P. 162. Today we consider: When DTPA plaintiffs take a voluntary non-suit and the trial court later rules that the defendants are not entitled to costs and fees under

section 17.50(c), does the trial court’s judgment preclude the plaintiffs from filing their claims in a second suit, under Texas Rule of Civil Procedure 97(

a) governing compulsory counterclaims? We hold that on these facts, the trial court’s judgment in the first suit does not preclude the plaintiffs’ claims in a second suit. James, Ramona, and Ruby Klein sued Matthew Jones, Steve Ernst, Elyse Ernst, and Carol Dooley for negligence and violations of various statutes including the Deceptive Trade Practices Act in connection with the Kleins’ purchase of a house from Jones. Dooley and Steve Ernst asserted counterclaims under

section 17.50(

c) of the DTPA for costs and attorney’s fees, alleging that the Kleins had filed groundless, bad faith, or harassing DTPA claims. At trial, the court excluded the Kleins’ expert witness testimony and documentary evidence as a discovery sanction, and the Kleins announced a nonsuit without prejudice on all their claims. The Kleins then sued Jones, the Ernsts and Dooley a second time, asserting the same factual allegations and the same theories of recovery except for the DTPA claims.

Meanwhile, a year after the nonsuit, the trial court in the first suit found that the Kleins’ DTPA allegations were not groundless, harassing, or in bad faith, and denied the pending counterclaims. Jones, the Ernsts, and Dooley then moved for

summary judgment in the second suit, arguing the Kleins’ claims were precluded by res judicata and Rule 97(

a) governing compulsory counterclaims. Jones also moved for

summary judgment on the Kleins’ negligence claims on a limitations defense. The trial court granted

summary judgment for Jones, the Ernsts, and Dooley on all the Kleins’ claims. The court of appeals affirmed, holding that the Kleins’ real estate fraud claims were barred as compulsory counterclaims to Dooley’s and Ernst’s claims under

section 17.50(

c) for costs and attorney’s fees based on the filing of groundless, bad faith, or harassing DTPA claims. We disagree. The Kleins’ DTPA and real estate fraud claims were not “counterclaims” to Dooley’s and Ernst’s derivative statutory claims for attorney’s fees and costs, which arose when the Kleins filed their suit. When the Kleins exercised their right to nonsuit without prejudice under Rule 162, the claims for costs and attorney’s fees remained before the trial court only because Rule 162 expressly permits a trial court to rule on such issues after a dismissal without prejudice.

We will not construe Rule 97 to undermine the exact conduct that Rule 162 authorizes. Treating the Kleins’ substantive claims as compulsory counterclaims to the DTPA costs and attorney’s fees claims would defeat the purpose of

section 17.50(c). Awards of costs and fees based on the filing of frivolous or harassing claims are intended “to deter similar conduct in the future and to compensate the aggrieved party by reimbursing the costs incurred in responding to baseless pleadings.” Scott & White Mem. Hasp. v. Schexnider, 940 S.W.2d 594, 596-97 (Tex.1996). The court of appeals’ holding, however, would have a chilling effect on appropriate nonsuits in actions that include a counter-cláim for attorney’s fees and costs based on filing of a frivolous claim. Cf. Felderhoff v. Knauf, 819 S.W.2d 110, 111 (Tex.1991).

We hold that the Kleins’ claims were not compulsory counterclaims to Dooley’s and Ernst’s claims for costs and attorney’s fees under

section 17.50(c). Under Texas Rule of Appellate Procedure 170, we grant Petitioners’ application for writ of error, and, without hearing oral argument, we reverse the trial court’s

summary judgment for Dooley and the Ernsts. Because the court of appeals did not consider whether Jones was entitled to

summary judgment based on his limitations defense, we remand this suit to the court of appeals to resolve that issue and for further proceedings consistent with this opinion.