Nbcc v. Founding Members

• Decision Date: 26 June 2006
• Docket Number: No. G035099.,G035099.
• Citation: 45 Cal.Rptr.3d 207,140 Cal.App.4th 1120
• Court: California Court of Appeals
• Parties: The NEWPORT BEACH COUNTRY CLUB, INCORPORATED, Plaintiff and Respondent, v. FOUNDING MEMBERS OF the NEWPORT BEACH COUNTRY CLUB, Defendant and Appellant.

45 Cal.Rptr.3d 207

140 Cal.App.4th 1120

The NEWPORT BEACH COUNTRY CLUB, INCORPORATED, Plaintiff and Respondent, v. FOUNDING MEMBERS OF the NEWPORT BEACH COUNTRY CLUB, Defendant and Appellant.

No. G035099.

Court of Appeal, Fourth District, Division Three.

June 26, 2006.

Morgan, Lewis & Bockius, Anthony Ciasulli, Los Angeles, Jeffrey N. Brown, Teresa A. Ascencio, Charles J. Malaret, Los Angeles, and Salvatore Picariello, Irvine, for Defendant and Appellant.

Dubia, Erickson, Tenerelli & Russo, Dubia, Erickson & Tenerelli, Christian F. Dubia, Jr., and Mark D. Erickson, Irvine, for Plaintiff and Respondent.

OPINION

FYBEL, J.

I. INTRODUCTION

We hold that when a trial court judgment decides a case on two alternate grounds, and the appellate court affirms based on one ground, the judgment is binding under principles of res judicata and collateral estoppel only on the ground addressed by the appellate court. In so holding, we decline to follow People v. Skidmore (1865) 27 Cal. 287 (Skidmore) because subsequent developments in California law and the trend of decisions have weakened that case's authority to the point where we can conclude it no longer reflects the views of the California Supreme Court. Our holding, which is consistent with the Restatement Second of Judgments and recent California state appellate court authority, leads us to reverse the judgment and remand.

This case is a sequel to our decision in Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944, 135 Cal.Rptr.2d 505 (Founding Members I). In Founding Members I, the trial court granted summary judgment in favor of The Newport Beach Country Club, Inc. (NBCC), on two grounds. We affirmed based on the first ground, and expressly declined to address the second. In this case (Founding Members II), the trial court granted summary judgment in favor of NBCC on the second ground. Relying on Skidmore, the trial court concluded the second ground had been resolved under principles of res judicata and collateral estoppel by our decision in Founding Members I. Because, as we now hold, the judgment in Founding Members I is binding only on the ground actually decided in that decision, we reverse and remand.

II. FACTS AND PROCEDURAL HISTORY

In Founding Members I, an unincorporated association of country club members known as the Founding Members of The Newport Beach Country Club (Founding Members) sued The Newport Beach Country Club, Incorporated (NBCC), to enforce a "Right of First Offer" contained in NBCC's governing regulations.¹ (Founding Members I, supra, 109 Cal.App.4th at p. 947, 135 Cal.Rptr.2d 505.) Founding Members alleged a proposed sale in October 1999 of the stock of IBC, Inc. (IBC), which owned NBCC, triggered Founding Members' rights under the Right of First Offer to purchase NBCC.

The trial court in Founding Members I construed the Right of First Offer as extending only to a "`Member Organization . . . in existence.'" (Founding Members I, supra, 109 Cal.App.4th at p. 948, 135 Cal.Rptr.2d 505.) The trial court granted summary judgment in favor of NBCC on two grounds: (1) no such member organization existed on the date of the proposed sale that Founding Members asserted triggered the Right of First Offer; and (2) the proposed sale of IBC's stock did not trigger the Right of First Offer. (Id. at p. 952, 135 Cal.Rptr.2d 505.)

We affirmed based on the first ground only. We agreed with the trial court's construction of the Right of First Offer as extending only to a member organization in existence when the triggering event occurred, and concluded: "Because the undisputed facts revealed that neither Founding Members nor any member organization, as referred to in the governing regulations, existed as of the date of the agreement to sell IBC's stock, NBCC had no obligations under the Right of First Offer. In light of this conclusion, we do not address whether the agreement to sell IBC's stock constituted an agreement to sell `part or all' of NBCC's `legal interest in the Club.'" (Founding Members I, supra, 109 Cal.App.4th at p. 948, 135 Cal.Rptr.2d 505.)

In 2003, after we issued our decision in Founding Members I, Founding Members registered with NBCC as an organization entitled to exercise the Right of First Offer. NBCC recognized that right, subject to the limitation that Founding Members had no right to exercise the Right of First Offer with respect to a sale of the stock of IBC. When Founding Members refused to acknowledge that limitation, NBCC filed this lawsuit for declaratory relief, Founding Members II. NBCC's complaint in Founding Members II sought a declaration that: (1) "The Right of First Offer is not triggered and does not apply to a proposed sale of all or a majority of the stock of IBC, parent company of NBCC"; and (2) "The Order and Judgment in [Founding Members I] are binding in their entirety on Defendants and establish, through collateral estoppel/res judicata, that the Right of First Offer is not triggered and does not apply to a proposed sale of all or a majority of the stock of IBC."

The trial court granted summary judgment in favor of NBCC and decreed: "The Order Granting Summary Judgment in favor of NBCC and against Founding Members in that certain action known as Founding Members of The Newport Beach Count[r]y Club v. Newport Beach Country Club, Incorporated (Orange County Superior Court Case No. 01CC10534) is binding upon Founding Members in its entirety, including, without limitation, the conclusion in the Order that the sale of the stock of NBCC's parent corporation, International Bay Clubs, Incorporated, does not trigger the Right of First Offer in Article V, Section 2 of the Governing Regulations." The trial court explained: "In granting this summary judgment, the Court has examined the competing lines of authority on the scope of res judicata/collateral estoppel effect to be accorded orders and judgments of trial courts, including the California appellate court decision cited by Founding Members of Butcher v. Truck Ins. Exchange, 77 Cal.App.4th 1442, 92 Cal.Rptr.2d 521 (2000). However, this Court ultimately concludes that Auto Equity Sales v. Superior Court, 57 Cal.2d 450, 20 Cal.Rptr. 321, 369 P.2d 937 (1962), People v. Skidmore, 27 Cal. 287 (1865) and the persuasive discussion of California law in Di[R]uzza v. County of Tehama, 323 F.3d 1147 (9th Cir.2003) establish that, under California law, the affirmance of a decision at the trial court level by an appellate court extends binding and legal effect to the whole of the trial court's determination, with attendant collateral estoppel effect."

Founding Members timely appealed from the judgment in favor of NBCC in Founding Members II, bringing the matter back to us. The issues presented this time are: (1) Is the judgment affirmed by Founding Members I binding on the issue whether a sale of IBC stock triggered the Right of First Offer, even though we did not address that issue in affirming the judgment? and (2) If the first judgment is not binding on that issue, is NBCC entitled to summary judgment in Founding Members II on the issue whether a sale of IBC stock triggered the Founding Members' rights of purchase under the Right of First Offer?

III. DISCUSSION

When a trial court judgment decides a case on two alternate grounds, and the appellate court affirms based on one ground, is the judgment binding under principles of res judicata and collateral estoppel on both grounds recited in the judgment, or only on the ground addressed by the appellate court?

There are two contrary lines of authority on this issue. One line, which we call the traditional rule, provides that "`[a] general affirmance of a judgment on appeal makes it res judicata as to all the issues, claims, or controversies involved in the action and passed upon by the court below, although the appellate court does not consider or decide upon all of them.'" (Bank of America v. McLaughlin etc. Co. (1940) 40 Cal.App.2d 620, 628-629, 105 P.2d 607 (McLaughlin), quoting 34 C.J. (1924) Judgments, § 1190, p. 773.) The other line of authority, which we call the modern or Restatement Second rule, provides that "`[i]f the appellant court upholds one of these determinations as sufficient and refuses to consider whether or not the other is sufficient and accordingly affirms the judgment, the judgment is conclusive as to the first determination.'" (Butcher v. Truck Ins. Exchange (2000) 77 Cal.App.4th 1442, 1457, 92 Cal.Rptr.2d 521 (Butcher), quoting Rest.2d Judgments, § 27, com. o.)

A. The Traditional Rule

NBCC advocates the traditional rule, which finds its source in California law in Skidmore, supra, 27 Cal. 287. In that case, the parties stipulated that a referee would try the issues of law and fact and "report a judgment thereon." (Id. at p. 289.) In the resulting report, the referee found the plaintiff should not recover. (Id. at p. 292.) Judgment was entered accordingly, and the plaintiff appealed to the California Supreme Court. The Supreme Court affirmed the judgment, but relied on a procedural issue—misjoinder—to reach its decision. The case eventually returned to the California Supreme Court for a determination whether the plaintiff, having corrected the misjoinder, could sue again. The Supreme Court concluded the referee's report and resulting judgment, which reached the merits of the case, had been affirmed by the judgment accompanying the previous opinion, despite that opinion's reliance on misjoinder. The plaintiff could not sue again, the Supreme Court held, because: "The Court, in examining the judgment in connection with the errors assigned, found that there was at least one ground upon which the judgment could be justified, and therefore very properly refrained from considering it in connection with the other errors. But the affirmance, still, was an affirmance to the whole extent of the legal effect of the judgment at the time when it...