Court also Addresses Res Judicata Effect of Prior DeclaratoryJudgment Rulings
The North Carolina Supreme Court recently affirmed a December 2018 Business Court ruling in Orlando Residence, Ltd. v. Alliance Hospitality Mgmt., LLC that clarified Rule 13 crossclaim principles, created new doctrine on issue and claim preclusion, and provided issue-spotting fodder for civil procedure professors whose fact patterns need an update. The Supreme Court’s August 14, 2020 ruling by Justice Davis joined a dispute among the parties that had lingered in various forms for more than 30 years, including Orlando’s efforts to collect a debt from one of the defendants and the defendants’ inability to agree among themselves upon corporate ownership percentages.
The vitality of crossclaims after a plaintiff’s claims fall
The Business Court had dismissed a bulky set of 18 crossclaims that defendant Kenneth Nelson filed against other defendants with whom he had been in dispute over management, ownership interest, and financial matters connected to defendant Alliance Hospitality Management. After dismissing plaintiff Orlando’s claims, the Business Court had determined that Nelson’s crossclaims “were not proper because the right to assert them depends on Orlando’s Complaint surviving, which it has not.” (2018 NCBC 132, ¶ 44). That ruling was premised on a reading of the Rule 13(g) requirement that a crossclaim arise “out of the transaction or occurrence that is the subject matter” of the complaint or a counterclaim.
The Supreme Court disagreed, and adopted a 35-year-old Court of Appeals decision that found it would “elevate form over substance” to dismiss properly filed crossclaims over which jurisdiction exists unless they were dependent (indemnity, contribution) on plaintiff’s dismissed claims. Orlando Residence at 11. See Jennette Fruit & Produce Co. v. Seafare Corp., S.E.2d 305 (N.C. App. 1985).
Affirming correct results reached for the wrong reason
The Supreme Court still went on to affirm the Business Court under the guidepost that trial court judgments should be affirmed even when the right result is not paired with the correct rationale. Orlando Residence at 13-14. The Court relied on a 30-year-old case of its own for this point: Eways v. Governor’s Island, 391 S.E.2d 182, 183 (1990) (“[w]here a trial court has reached the correct result, the judgment will not be disturbed on appeal even where a different reason is assigned to the decision.”) The point already was well settled at the Court of Appeals, which has repeatedly applied the principle. See e.g., Asheville Lakeview Properties, LLC v. Lake View Park Comm., Inc., 803 S.E.2d 632, 636 (N.C. Ct. App. 2017).
Applying claim preclusion to prior declaratory judgment rulings
The substantive path to affirmance in Orlando Residence was considerably more complicated. The Court found the three crossclaims that were related to the lawsuit’s subject matter were barred by res judicata because those issues could have been adjudicated in a previous action brought by Nelson involving the same parties. Orlando Residence at 17-18. In the earlier action, Nelson had sought a declaration that he owned 10 of Alliance’s 61 membership units, but the jury only found that he owned 10 units – not 10 of 61. Thus, there was no determination of the ownership percentage that Nelson held in Alliance. The Supreme Court faulted Nelson’s counsel for a jury instruction that didn’t force an answer on the critical percentage ownership issue, and for not raising the issue in an earlier appeal of that judgment. Id. Thus, when Nelson surfaced the ownership share issues in his crossclaims in Orlando Residence, the Court found Nelson could have had the issues answered in the earlier litigation.
As the Supreme Court noted in a one-paragraph, action-packed footnote, a declaratory judgment ruling is typically “limited to issues ‘actually litigated by the parties and determined by a declaratory judgment,’” – understood as issues preclusion (collateral estoppel). Id. at 19. However, Orlando Residence decided that North Carolina will adhere to how federal courts have generally viewed the issue: that a prior declaratory judgment ruling will have a claims preclusion (res judicata) effect where the earlier declaratory judgment request was paired with additional requests for relief (injunctive, damages). Id. With that doctrinal shift, Nelson’s three crossclaims that were related to the suit’s subject matter were barred.
Rule 18(a) allows tag-along crossclaims when the claims to which they attach survive challenges to the pleadings
The Supreme Court found that Nelson’s remaining 15 crossclaims could not, then, survive without the three crossclaims that were related to the subject of the underlying action. This was so, the Court held, because the Rule 18(a) allowance to join other claims against a party depends on having a “qualifying claim” that is properly pled. Here, the three crossclaims related to the subject of the suit had to survive in order for the 15 non-related claims to tag along, and when they didn’t the Court held that the “implicit” notion of Rule 18(a) controlled: “the predicate crossclaim asserted by the crossclaimant in accordance with Rule 13(g) must survive the pleading stage.” Id. at 20-21.
Dismissal of crossclaims with prejudice
Defendant Nelson also claimed the Business Court had erred in dismissing his crossclaims with prejudice. The Supreme Court found that was not an abuse of discretion, though didn’t address that the Business Court’s determination was based on a theory dismissing the crossclaims which the Supreme Court rejected. Instead, the Court seemed more influenced by the length of time the parties had spent litigating related issues, and a 2009 district court order from Wisconsin that required a “show cause” from Nelson if he wanted to file any future actions against Orlando. The Supreme Court’s approval of a discretionary trial court decision that brought “some measure of finality between the parties” does not seem unusual (Id. at 22), but it is a curious coda to an opinion that adopted a few new legal variants to deliver that closure.
- Crossclaims can survive dismissal of a plaintiff’s claims where they are not dependent on them.
- Claim preclusion (res judicata) arises from a prior declaratory judgment ruling when other forms of relief were requested along with it.
- Under Rule 18(a), tag-along crossclaims can only survive if the claims to which they are attached survive motions pleading.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.