Thursday, March 17, 2005

Allied Fire Protection v. Diede Const. Co. (Cal. Ct. App. - February 24, 2005)

This case is admittedly not one that most people would be interested in reading. But I wanted to mention it nonetheless because I'm profoundly conflicted about whether the Court of Appeals reaches the right result.

At issue is basically the manner in which res judicata -- in particular, claim preclusion -- properly applies to supplemental complaints (or, more accurately, the failure to assert such claims). Justice Morrison holds that claim preclusion doesn't apply essentially because courts can never be sure whether the party would have been permitted to amend the complaint to include the supplemental allegations, and hence that the proper bright-line rule is to apply claim preclusion only to claims that existed at the time of initial filing. There is a minor problem with this justification, as parties in federal court generally have an absolute right to amend under Rule 15(a) for 20 days. Nonetheless, overall, I mostly agree with Justice Morrison that, as a general rule, claim preclusion shouldn't apply to supplemental (i.e., post-filing 15(d)) causes of action.

(Parenthetically, I was perplexed to find counsel for Allied arguing that California law applies to determine the res judicata effect of a federal judgment and Justice Morrison repeatedly citing to California cases for the proper resolution of this issue. Federal -- not California -- law clearly applies here. Cut that California stuff out.)

So I largely agree with Justice Morrison's overall aproach. The part of the case as to which I'm somewhat conflicted, however, is whether this principle properly applies to the present dispute. The omitted claim here is not your classic supplemental cause of action; in particular, it is not one that arises out of "transactions or occurrences or events which have happened since the date of the pleading sought to be supplemented" under Rule 15(d). Rather, the cause of action here relates to fraud that indisputably occurred prior to the filing of the original complaint, but that was only discovered thereafter.

Justice Morrison holds that the general "no preclusion" rule applies in such a setting because a cause of action for fraud doesn't accrue until the fraud is (or reasonably should be) discovered. But that accrual rule only concerns the proper limitations period, and doesn't at all reflect when the fraud claim actually arises -- which exists upon the commission of the fraud and occurrence of damage. The fraud claim exists -- and is perfectly valid -- even if the damaged party doesn't know about it. So Justice Morrison's argument in this regard simply doesn't work.

Plus, it seems to me that in some settings, Justice Morrison's rule is clearly wrong. Imagine that a plaintiff sues defendant for straightforward breach of contract. Sixty days later, in discovery, plaintiff learns that the defendant never intended to complete the contract, and hence was also guilty of fraud. Justice Morrison's rule would suggest that plaintiff could effectively get two bites at the apple by refusing to amend to add the fraud claim, as claim preclusion wouldn't apply since the fraud claim didn't accrue until after the initial complaint. But the efficiency and fairness rationales of claim preclusion seem to clearly suggest that such a result would be wrong. And yet it follows directly from Justice Morrison's holding.

None of these issues are addressed by the Court of Appeals. And they've got me concerned. I feel like the overall approach articulated by Justice Morrison is right, but am quite concerned about both the somewhat misguided nature of his analysis as well as the application of the general rule to this particular case. I initially thought that Justice Morrison got it right. Now I'm very much not so sure he did.