DKN Holdings LLC v. Faerber

• Decision Date: 13 July 2015
• Docket Number: No. S218597.,S218597.
• Court: California Supreme Court
• Parties: DKN HOLDINGS LLC, Plaintiff and Appellant, v. Wade FAERBER, Defendant and Respondent.

61 Cal.4th 813

352 P.3d 378

189 Cal.Rptr.3d 809

DKN HOLDINGS LLC, Plaintiff and Appellant

v.Wade FAERBER, Defendant and Respondent.

No. S218597.

Supreme Court of California

July 13, 2015.

Prenovost, Normandin, Bergh & Dawe, Michael G. Dawe, Kristin F. Godeke and Paula M. Harrelson, Santa Ana, for Plaintiff and Appellant.

Callahan & Blaine, Daniel J. Callahan, Edward Susolik, Michael S. LeBoff, Santa Ana, and Jill A. Thomas for Defendant and Respondent.

Opinion

CORRIGAN, J.

We granted review to clarify a bedrock principle of contract law: Parties who are jointly and severally liable on an obligation may be sued in separate actions. Although long-standing case law has found separate actions permissible, the Court of Appeal here held that a second suit is barred after entry of judgment against one of the contracting parties. The court reasoned that a breach of contract invades a single primary right, and the plaintiff could not split its breach of contract cause of action into multiple claims. This reasoning was erroneous because joint and several liability does not implicate the “primary rights” doctrine.¹ Moreover, the facts here do not support preclusion. Although a breach of contract may constitute a single wrong, the plaintiff has separate breach of contract claims against each of the defendants alleged to be jointly and severally liable.

I. BACKGROUND

Acting on behalf of a company called Evolution Fitness, Roy Caputo, Wade Faerber, and Matthew Neel leased commercial space in a shopping center to operate a fitness club.² Their 10–year lease with DKN Holdings LLC (DKN) provided that multiple parties who signed as lessors or lessees “shall have joint and several responsibility” to comply with the lease terms. (Italics added.) The parties do not dispute that Caputo, Faerber, and Neel were jointly and severally liable on this contract.

Caputo later sued DKN for fraud, breach of contract, unfair business practices, and breach of fiduciary duty (the Caputo action). Among other things, he alleged DKN had failed to disclose that construction on a driveway into the shopping center would not begin for over a year and that state regulations prohibited cutting back vegetation that made the gym less visible. Caputo sought damages and rescission of the lease. DKN cross-complained for rent and other monies due. Although the cross-complaint named all three lessees, it was served on Caputo alone. Faerber and Neel were subsequently dismissed as cross-defendants.³ After a bench trial, the court rejected all of Caputo's claims and awarded over $2.8 million on DKN's cross-complaint. Judgment was entered on June 20, 2011.⁴

Shortly before the statement of decision in the Caputo action was filed, DKN sued Faerber and Neel for breach of the lease.⁵ Faerber demurred, arguing that, because DKN's rights under the lease had been adjudicated in the Caputo action, suit against Faerber was barred by the rule against splitting a cause of action. (See Wulfjen v. Dolton (1944) 24 Cal.2d 891, 894, 151 P.2d 846.) In opposition, DKN argued California law permits separate actions against parties who are jointly and severally liable. The trial court sustained the demurrer without leave to amend and entered judgment for Faerber. The Court of Appeal affirmed.⁶

II. DISCUSSION

The parties frame the issue here as a clash between two venerable doctrines, debating whether the rule of joint and several liability must yield to rules governing the preclusive effect of judgments. The characterization is inapt because the doctrines are separate. Neither need be subordinated to the other. While acknowledging that separate actions are permitted against joint and several obligors, the Court of Appeal held that when one of the actions has resulted in a final judgment on the merits, that judgment bars assertion of the same claims in any other action. In other words, although separate suits on a contract are technically allowed, the lower court held only one can proceed to judgment if the suits allege the same claims. Precedent provides no support for this conclusion.

As we explain, there is no conflict between the doctrines of claim preclusion and joint and several liability. Parties who are jointly and severally liable on a contract may be sued in separate actions. Judgment in the first action does not bar judgments in later actions, even when they allege the same claim of wrongdoing, as long as the suits are against different parties.

A. Parties Who Are Jointly and Severally Liable May Be Sued in Separate Actions.

At common law, when multiple parties promised the same performance, they were presumed to be jointly obligated absent a clear indication otherwise. (Farmers' Exchange Bank v. Morse (1900) 129 Cal. 239, 243, 61 P. 1088.) Parties who are jointly liable are each responsible for their share of a total obligation. When enforcement was sought, the common law rule required that all jointly liable parties be joined in a single suit that would determine the total amount of their shared liability. (Ibid.; see Harrison v. McCormick (1886) 69 Cal. 616, 11 P. 456.) This joinder requirement sometimes made enforcement difficult, if not impossible. (See 9 Corbin on Contracts (rev. ed. 2007) § 52.1, p. 279.)

California and nearly all other states have passed statutes to ameliorate the harshness of the common law's compulsory joinder rule. (9 Corbin, supra, § 52.1, pp. 280–281.) The typical solution was to convert “joint” obligations into “joint and several” obligations. (Id., § 52.1, p. 281.) A joint and several contract is considered to be a contract that is made both separately with each promisor and jointly with all the promisors. (12 Williston on Contracts (4th ed. 2012) § 36:1, pp. 801–802.) Parties to a joint and several contract are thus bound jointly, so that they are liable for the entire obligation, and severally, so that each may be sued separately for the entire loss. (See id., § 36:1, p. 803.) The change to joint and several liability allowed individual promisors to be sued for enforcement of a contract without joining all copromisors.

(9 Corbin, supra, § 52.1, p. 281.) To this end, Civil Code section 1659 provides, “Where all the parties who unite in a promise receive some benefit from the consideration, whether past or present, their promise is presumed to be joint and several.” Similarly, Civil Code section 1660 states, “A promise, made in the singular number, but executed by several persons, is presumed to be joint and several.”

It has long been settled that contracting parties who are severally liable, or subject to joint and several liability, may be sued in the same action or in separate actions at the plaintiff's option. (Goff v. Ladd (1911) 161 Cal. 257, 260, 118 P. 792 ; Moreing v. Weber (1906) 3 Cal.App. 14, 21–22, 84 P. 220.) The plaintiff “does not lose the right to the several liability of a several obligor until the obligation is fully satisfied,” notwithstanding that he may have obtained a judgment against other severally liable obligors. (Melander v. Western Nat. Bank, supra, 21 Cal.App. at p. 475, 132 P. 265.) This principle was explored in some detail in Williams v. Reed (1952) 113 Cal.App.2d 195, 248 P.2d 147 (Williams I ) and Williams v. Reed (1957) 48 Cal.2d 57, 307 P.2d 353 (Williams II ).

In the Williams litigation, defendant Reed and three others promised to pay a debt totaling $40,000. (Williams I, supra, 113 Cal.App.2d at p. 197, 248 P.2d 147.) After they defaulted, Reed entered a separate agreement promising to pay $35,000 of the debt. (Id. at pp. 197–199, 248 P.2d 147.) He failed to pay, and the creditor obtained a judgment against him for the $35,000, plus interest. (Id. at p. 199, 248 P.2d 147.) When Reed failed to pay that judgment as well, the creditor sued Reed and his copromisors on the original notes. (Ibid. ) The copromisors argued the action was barred because the creditor had not joined them in the initial suit against Reed and had obtained a judgment against Reed alone. (Id. at pp. 203–204, 248 P.2d 147.) The Court of Appeal rejected this argument. It explained that while joint obligors are indispensable parties and may not be sued separately, the same is not true when an obligation is joint and several. (Id. at p. 204, 248 P.2d 147.) “In such a case the judgment obtained against one is not a bar to an action against the remaining joint and several obligors. ‘Nothing short of satisfaction in some form constitutes a bar ...’ [citation].” (Ibid., italics added.) In later proceedings, we too concluded that the creditor was not required to join the co-promisors in its suit against Reed because their obligations on the promissory notes were joint and several. (Williams II, supra, 48 Cal.2d at pp. 64–65, 307 P.2d 353.) We explained that the judgment against Reed “add[ed] nothing to the picture” except insofar as it benefitted the copromisors by partially exhausting the creditor's rights against Reed. (Id. at p. 65, 307 P.2d 353.) That judgment did not preclude the subsequent action, we repeated, because “ ‘[n]othing short of satisfaction in some form constitutes a bar’ against an action against the comakers” of a promise. (Id. at p. 66, 307 P.2d 353.)⁷

The Court of Appeal here asserted our discussion of joint and several liability in Williams II was “ ‘wrong’ and incorrectly state[d] the law” if it would permit “an obligee, such as DKN, to obtain separate judgments in separate actions against joint and several obligors, based on the same claims.” The court erred. The principle it rejected is fundamental to the concept of joint and several liability and is set out in the Restatements of both Contracts and Judgments. The Restatement Second of Contracts states: “A judgment against one or more promisors does not discharge other promisors of the same performance unless joinder of the other promisors is required by the rule stated in § 290.”⁸ (Rest.2d, Contracts, § 292.) An official comment explains the historical development of the rule:...