Lemartec Eng'g & Constr. v. Advance Conveying Techs., LLC

• Decision Date: 20 March 2020
• Docket Number: No. 18-2183,18-2183
• Citation: 940 N.W.2d 775
• Court: Iowa Supreme Court
• Parties: LEMARTEC ENGINEERING & CONSTRUCTION n/k/a Lemartec Corporation, Appellant, v. ADVANCE CONVEYING TECHNOLOGIES, LLC, Appellee.

940 N.W.2d 775

LEMARTEC ENGINEERING & CONSTRUCTION n/k/a Lemartec Corporation, Appellant,

v.ADVANCE CONVEYING TECHNOLOGIES, LLC, Appellee.

No. 18-2183

Supreme Court of Iowa.

Filed March 20, 2020

Erik W. Scharf, Miami, Florida, Mark L. Tripp, Andrew C. Johnson, Thomas M. Boes, and Robert J. Thole of Bradshaw, Fowler, Proctor & Fairgrave, P.C., Des Moines, and Jason L. Molder, Miami, Florida, for appellant.

Kevin J. Caster and Dana L. Oxley (until withdrawal) of Shuttleworth & Ingersoll, P.L.C., Cedar Rapids, for appellee.

APPEL, Justice.

In this construction law case, we consider the applicability of the doctrines of claim and issue preclusion to disputes arising out of a contract between two subcontractors in a construction project.

First, a dispute arose around the fabrication and operation of a salt conveyor system. In federal litigation, a number of subcontracting parties litigated questions related to the fabrication of the salt conveyor system prior to litigation. The federal controversy was eventually reduced to judgment.

The owner of the facility filed a second lawsuit against subcontractors involved in the federal litigation in state court. The owner claimed in the state court litigation that after installation, the salt conveyor system developed corrosion issues in breach of contract and express and implied warranties. The parties filed various cross-claims, with one contractor seeking indemnity from the fabricator of the salt conveyor system.

After the federal litigation was resolved, a successful subcontractor in the federal litigation brought a motion for summary judgment in the state court action, arguing that determinations in the federal litigation precluded parties from litigating issues related to the salt conveyor system in state court.

The district court granted summary judgment to the successful federal subcontractor on claim and issue preclusion grounds. A disappointed party sought interlocutory appeal, claiming, among other things, that the successful party in the federal litigation waived its claim preclusion argument in the state court litigation because it failed to give notice of intent to pursue claim preclusion in the simultaneously pending state court litigation. On the question of issue preclusion, the disappointed party asserted that it had no reasonable opportunity in federal court to litigate its indemnity claim related to the alleged corrosion problems that arose after the salt conveyor equipment was installed and, therefore, issue preclusion did not apply.

We granted the application for interlocutory review. For the reasons expressed below, we conclude that the district court erred in granting summary judgment based on claim and issue preclusion under the facts of this case.

I. Factual and Procedural Background.

A. Relationship of the Parties. In 2013, HF Chlor-Alkali, LLC (HFCA) entered into a written agreement with Conve & AVS, Inc. (Conve) to construct a chlor-alkali manufacturing facility (the Project) in Eddyville, Iowa. Conve in turn entered into a subcontract with Lemartec Engineering & Construction n/k/a Lemartec Corporation (Lemartec) to design and build the physical plant for the Project which included a salt conveyor system (conveyor system).

Lemartec subcontracted part of the work on the conveyor system to two other entities. Lemartec, through a purchase order, hired Advance Conveying Technologies, LLC (ACT) for the design and manufacture of the conveyor system. Later, Lemartec entered into a subcontract with Southland Process Group, LLC (SPG) for the installation and erection of the conveyor system at the Project location.

The conveyor system aspect of the Project did not proceed smoothly. SPG claimed that there were problems with the component parts supplied by ACT. Lemartec contacted ACT, claiming deficiencies in ACT’s work. SPG eventually finished the work but claimed that it incurred significant additional costs and that Lemartec and ACT were responsible for them.

B. Filing of Federal Court and State Court Litigation.

1. Overview of federal court litigation. The first litigation arrow in this case was fired by SPG on October 16, 2015, in the United States District Court for the Southern District of Iowa. SPG sought to recover its additional expenses related to the assembly of the conveyor system from Lemartec and ACT. Lemartec and SPG settled outstanding disputes between them, leaving ACT’s claim that Lemartec improperly withheld from ATC the balance owed under the purchase order to be litigated.

2. Overview of state court litigation. The completed Project was turned over to Conve in June 2015 and later to owner HFCA. HFCA was dissatisfied with many aspects of the Project. As a result, HFCA launched the second litigation arrow in this case in state court, naming a number of defendants including Conve. HFCA alleged, among other things, that the conveyor system was installed, turned over and put to use, and failed to perform to specifications. Conve, in turn brought a third-party claim against Lemartec for indemnification and contribution. Lemartec on June 5, 2017, brought a third-party claim against ACT.

ACT filed an answer to Lemartec’s third-party claim. In its answer, ACT did not make reference to the pending federal litigation and did not raise a res judicata affirmative defense.

Discovery proceeded in the state court litigation. On June 14, 2018, HFCA served interrogatory responses on the parties. According to the responses, HFCA claimed that the conveyor system failed to perform in that the conveyor components and electrical system corroded; the conveyor belt did not pass approval testing; the bucket system leaked, corroded, and fell apart; and the equipment ruptured due to the failure to prevent vibrations.

3. Federal court judgment. The federal court held a bench trial in the federal litigation in April 2018. The federal court characterized the issue to be tried as "whether either of the two remaining parties [Lemartec and/or ACT] owes money to the other for money earned, but unpaid; project delays; and for additional work that was required to make the conveyor system functional."

On May 21, 2018, the federal district court entered its ruling in favor of ACT. The federal district court awarded ACT $317,467.07 plus interest. Lemartec has appealed the case to the United States Court of Appeals for the Eighth Circuit.

4. Summary judgment in state court proceedings based on preclusive effect of federal judgment. On August 15, 2018, ACT filed a motion for summary judgment in the state court proceedings. In its moving papers, ACT claimed that the judgment in the federal litigation compelled judgment in its favor in the state court litigation. Lemartec responded, in part, that res judicata is an affirmative defense that must be raised in an answer and that ACT had failed to do so. In response, on October 31, 2018, ACT filed a motion to amend its answer to include a res judicata affirmative defense. Lemartec opposed the motion.

The district court granted ACT’s motion for summary judgment. The district court rejected Lemartec’s argument that ACT waived its right to assert preclusion where litigation is simultaneous by failing to provide Lemartec with notice. On the question of claim preclusion, the district court found that the claims in the federal and state actions were similar because they are "premised on the contractual relationship between Lemartec and ACT." Turning to issue preclusion, the district court reasoned that "the issue of indemnity rights arising under the Purchase Order has been raised and litigated in the prior federal action." As a result, the district court granted summary judgment on both claim preclusion and issue preclusion. Lemartec appealed. We retained the case for our consideration.

II. Claim Preclusion.

A. Introduction. This case involves the related concepts of claim preclusion and issue preclusion.

1. Claim preclusion. Claim preclusion is "based on the principle that a party may not split or try his claim piecemeal .... A party must litigate all matters growing out of his claim at one time and not in separate actions." Iowa Coal Mining Co. v. Monroe County , 555 N.W.2d 418, 441 (Iowa 1996) (quoting B & B Asphalt Co. v. T.S. McShane Co. , 242 N.W.2d 279, 286 (Iowa 1976) ). "Once an issue has been resolved, there is no further fact-finding function to be performed." Colvin v. Story Cty. Bd. of Review , 653 N.W.2d 345, 349 (Iowa 2002).

2. Issue preclusion. Issue preclusion prevents a party "from relitigating in a subsequent action issues raised and resolved in [a] previous action." Soults Farms, Inc. v. Schafer , 797 N.W.2d 92, 103 (Iowa 2011). "[W]here a particular issue or fact is litigated and decided, the judgment estops both parties from later litigating the same issue." Grant v. Iowa Dep't of Human Servs. , 722 N.W.2d 169, 174 (Iowa 2006). Issue preclusion applies to both factual and legal issues raised and resolved in a previous action. See Barker v. Iowa Dep't of Pub. Safety , 922 N.W.2d 581, 587 (Iowa 2019).

The doctrine "serves a dual purpose: to protect litigants from ‘the vexation of relitigating identical issues with identical parties’ " and to further "the interest of judicial economy and efficiency by preventing unnecessary litigation." Winnebago Indus. v. Haverly , 727 N.W.2d 567, 571–72 (Iowa 2006) (quoting Am. Family Mut. Ins. v. Allied Mut. Ins. , 562 N.W.2d 159, 163 (Iowa 1997) ). Issue preclusion "prevent[s] the anomalous situation, so damaging to public faith in the judicial system, of two authoritative but conflicting answers being given to the very same question." Emp'rs Mut. Cas. v. Van Haaften , 815 N.W.2d 17, 22 (Iowa 2012) (quoting Grant , 722 N.W.2d at 178 ).

In order to successfully invoke issue preclusion,

(1) the issue in the present case must be identical, (2) the issue must have been raised and litigated in the prior action, (3) the issue must have been material and relevant to the disposition of the prior case, and (4

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