National Equipment Rental, Ltd. v. Estherville Ford, Inc.

• Decision Date: 23 December 1981
• Docket Number: No. 64988,64988
• Citation: 313 N.W.2d 538
• Parties: NATIONAL EQUIPMENT RENTAL, LTD., Appellant, v. ESTHERVILLE FORD, INC. and Doyle Seley, Appellees.
• Court: Iowa Supreme Court

Page 538

313 N.W.2d 538

NATIONAL EQUIPMENT RENTAL, LTD., Appellant, v. ESTHERVILLE FORD, INC. and Doyle Seley, Appellees.

No. 64988.

Supreme Court of Iowa.

Dec. 23, 1981.

Alvin J. Ford of Whicher, Ford & Gurdin, Sioux City, for appellant.

William B. Ridout and Kendall R. Surfass of Sanderson, Sanderson, Ridout, Martens & Surfass, Estherville, for appellees.

Considered by LeGRAND, P. J., and UHLENHOPP, HARRIS, ALLBEE, and LARSON, JJ.

UHLENHOPP, Justice.

This appeal requires us to decide whether a lessee can assert a counterclaim for breach of a lease in an action brought in Iowa by the lessor to enforce a default judgment obtained in New York for the balance due under the lease.

Defendant Doyle Seley is the owner and president of Estherville Ford, Inc., an automobile dealership located in Estherville, Iowa. In addition to selling new and used automobiles, Estherville Ford provides maintenance service for all makes of automobiles. We will speak of Seley as including Estherville Ford.

To increase the amount of service work performed by his business, Seley became interested in obtaining a Regal Muffler franchise. The franchise consisted of a pipe bending machine, numerous bending dies, a card index system, an inventory of mufflers and straight exhaust pipe, and a Regal Muffler display sign. The machine was designed to bend and modify straight exhaust pipe to fit the emission systems of various automobiles. Each card from the index system contained instructions for forming an exhaust pipe to fit a particular model of vehicle. The machine eliminated the need to maintain an inventory of preformed exhaust pipe.

Seley supplied the necessary information on a Regal Muffler advertisement card found in a trade journal and sent it to the company. On June 2, 1975, a Regal representative visited Seley in Estherville to explain the details of the franchise program. Seley signed a franchise agreement with Regal and became a Regal Muffler dealer. The representative also had a written lease in which plaintiff National Equipment Rental, Ltd. was the lessor. He informed Seley that he was not an agent of National but that National regularly entered into written leases whereby it purchased the machines and accessories and leased them to the dealers.

On June 20, 1975, the Regal representative made a return visit to Estherville, and Seley, on behalf of Estherville Ford, signed a lease with National to lease the pipe bending machine and accessories. Seley also executed a document personally guaranteeing all payments under the lease. The representative sent the lease to National, and that company accepted it on July 22, 1975.

The pipe bending machine and accessories were delivered to Seley in August 1975. A Regal representative trained several of Seley's employees to operate the system, and Seley began making the required monthly payments to National. Eventually, however, problems arose with the card index system and with the availability of exhaust pipe. Seley contacted Regal but was informed that the company had gone out of business. He also contacted National but received no assistance. Since these problems rendered the machine incapable of producing income, Seley ceased making the lease payments. In August 1978 Seley returned the pipe bending machine to National at the latter's request.

National subsequently instituted an action against Seley in the Supreme Court of New York, County of Nassau, to recover the balance due under the lease. Seley was personally served with an original notice and petition in Estherville. Personal jurisdiction of Seley was obtained through the following clause in the lease:

This lease shall only be binding when accepted by the Lessor of its North New Hyde Park, N.Y. office and shall be deemed to have been made in Nassau County, New York and shall be governed by the laws of the State of New York except for local recording statutes. As part of the consideration for the Lessor's executing this lease, Lessee agrees that all actions or proceedings arising directly or indirectly from this lease shall be litigated only in courts having situs within the State of New York and the Lessee hereby consents to the jurisdiction of any local, state or federal court located within the State of New York and waives personal service of any and all process upon the Lessee herein, and consents that all such service or process shall be made by certified mail, return receipt requested, directed to the Lessee at the address hereinabove stated; and service so made shall be complete two (2) days after the same shall have been posted as aforesaid.

Seley does not contend that the above clause was ineffective to grant personal jurisdiction to the New York court. See National Equipment Rental, Ltd. v. Szukhent, 375 U.S. 311, 84 S.Ct. 411, 11 L.Ed.2d 354 (1964); Joseph L. Wilmotte & Co. v. Rosenman Bros., 258 N.W.2d 317, 328-29 (Iowa 1977). Seley failed to appear or answer in the New York action and the court entered a default judgment for National in the amount of $9,542.10.

National thereafter commenced an action in Emmet County, Iowa, to enforce its New York judgment. Seley answered and denied the allegations of the petition. National then moved for summary judgment. Seley responded by amending his answer to assert several affirmative defenses and a counterclaim. He alleged that under the lease National had promised to provide Seley with an adequate card index system and sufficient quantities of exhaust pipe and had failed in both respects, and that non-compliance with the lease prevented substantial use of the pipe bending machine. He further alleged that National had promised to give Seley proper credit on its account for the return of the pipe bending machine, but failed to do so. The value of the machine was alleged at $10,000 and the prayer in the counterclaim was for that amount. Seley did not allege that he had incurred any monetary damage as a result of National's failure to provide the card index system and inventory.

In ruling on National's motion for summary judgment, the trial court found that the New York judgment was entitled to full faith and credit in Iowa and accordingly granted the motion. The trial court also held, however, that Seley was entitled to a jury trial on his counterclaim. The trial court therefore stayed entry of National's judgment and execution thereon pending disposition of the counterclaim. See Farmers Cooperative Elevator Co., Panora v. Knapp, 259 N.W.2d 762, 764 (Iowa 1977).

National moved to dismiss the counterclaim on the ground that it was barred by collateral estoppel. The trial court relied on the following clause in the lease agreement to reject National's argument: "Lessee hereby waives a trial by jury and the right to interpose any counterclaim or offset of any nature or description in any litigation between the Lessee and Lessor (National) with respect to this lease, the property covered hereunder and repossession hereof." According to the trial court, that clause effectively deprived Seley of a fair opportunity to raise his counterclaim in the prior New York litigation. In the absence of a fair opportunity to litigate the claim, the trial court concluded that collateral estoppel was not applicable and hence denied National's motion to dismiss.

At trial Seley amended the counterclaim in several respects. He first alleged that National's failure to provide an adequate card index system and inventory of exhaust pipe constituted a breach of contract which damaged him in the amount of $10,000. He also increased the prayer from the initial $10,000 figure to $20,000. After trial the jury returned a verdict of $12,000 for Seley on the counterclaim. National moved for a new trial or in the alternative for judgment notwithstanding the verdict. These motions were denied, and National appealed.

On appeal National asserts that (1) the trial court erred in failing to dismiss Seley's counterclaim on the basis of collateral estoppel, and (2) the trial court committed several procedural and evidentiary errors in the trial on the counterclaim. We conclude that the counterclaim was barred by collateral estoppel except in one respect, and we do not reach the second contention.

National asserts that Seley was required by the doctrine of collateral estoppel to litigate his breach of contract claim in the prior New York action. National argues that a necessary determination supporting the New York judgment was that it had successfully performed its obligations under the agreement. It therefore contends that Seley is precluded from asserting the counterclaim for breach of contract in the present action.

I. Choice of law. Initially we must decide whether Iowa or New York law will be applied to determine the preclusive effect of National's New York judgment.

The full faith and credit clause of the United States Constitution states: "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State." U.S.Const. art. 4, § 1. That clause renders the doctrines of res judicata and collateral estoppel compulsory as between the States. Durfee v. Duke, 375 U.S. 106, 109, 84 S.Ct. 242, 244, 11 L.Ed.2d 186, 188 (1963) ("Full faith and credit ... requires every State to give to a judgment at least the res judicata effect which the judgment would be accorded in the State which rendered it."); Phillips v. Cooper, 253 Iowa 359, 363, 112 N.W.2d 317, 319 (1961); Vestal, Res Judicata/Preclusion V-120 (1969). It requires the courts of each state to give to the judgment of another state the same preclusive effect between the parties as is given such judgment in the state in which it was rendered, and this is so even if the judgment is obtained by default. Riehle v. Margolies, 279 U.S. 218, 225, 49 S.Ct. 310, 313, 73 L.Ed. 669, 673 (1929). Under the full faith and credit clause, the preclusive effect of a judgment must be determined by the law...