Yelin v. Carvel Corp.

• Decision Date: 06 March 1995
• Docket Number: No. 21513,21513
• Citation: 893 P.2d 450,1995 NMSC 21,119 N.M. 554
• Parties: Kenneth P. YELIN and Jacqueline Yelin, Defendants-and-Cross-Claimants-Appellants, v. CARVEL CORPORATION and Franchise Stores Realty Corporation, Cross-Defendants-Appellees.
• Court: New Mexico Supreme Court

Page 450

893 P.2d 450

119 N.M. 554

Kenneth P. YELIN and Jacqueline Yelin Defendants-and-Cross-Claimants-Appellants, v. CARVEL CORPORATION and Franchise Stores Realty Corporation Cross-Defendants-Appellees.

No. 21513.

Supreme Court of New Mexico.

March 6, 1995.

Rehearing Denied April 5, 1995.

[119 N.M. 555] Charles G. Berry & Associates, P.A., Charles G. Berry, Albuquerque, for appellants.

Guebert & Yeomans, P.C., Richard Yeomans, Albuquerque, for appellees.

OPINION

FROST, Justice.

Defendants-Appellants, Kenneth and Jacqueline Yelin (the Yelins), appeal from the district court's order dismissing their third-party complaint against Third-Party-Defendant-Appellee, Carvel Corporation (Carvel). The district court held that the third-party complaint was improperly filed under SCRA 1986, 1-014(A). We affirm.

FACTS

Carvel is in the business of licensing individuals to manufacture and sell ice cream and frozen dessert products under the Carvel name. In December 1986 the Yelins entered into a franchise agreement with Carvel to sell ice cream products in Albuquerque. As part of the agreement, Carvel's wholly owned subsidiary, Franchise Stores Realty Corporation, leased retail space in Albuquerque from George Doolittle and Jeanette Doolittle Ingram (the Doolittles). Franchise Stores Realty Corporation then assigned its entire interest in the lease to the Yelins as owners of the franchise. The term of the lease was for a period of nine years and ten months, beginning on February 1, 1987, and its provisions included payments for rent, taxes, insurance, and other miscellaneous charges. The Yelins operated the Carvel franchise for approximately 3 1/2 years. Over the course of this period, however, the franchise lost money, and, ultimately, the Yelins were forced to close the business.

In September 1991 the Doolittles filed suit against the Yelins for breach of the lease agreement. The Doolittles claimed that the Yelins breached the lease by failing to continue to operate their business at the leased premises, and by failing to pay rent and their proportionate share of taxes, insurance, and other costs. The Yelins, in turn, filed a third-party complaint against Carvel seeking to recover, in addition to other damages, all amounts adjudged against them in the Doolittles' suit. The Yelins claim that Carvel's negligent misrepresentations induced them to enter the franchise agreement and that Carvel breached the terms of the franchise agreement by failing to provide advertising and necessary supplies on a timely basis. The Yelins argue that Carvel's failures and wrongful conduct interfered with their ability to make a profit and thereby precluded them from fulfilling their obligations under the lease agreement.

Carvel moved to dismiss the third-party complaint on the grounds that it was improper under SCRA 1-014(A), which governs third-party practice. The district court granted the motion to dismiss, finding that Carvel's potential liability to the Yelins was not dependent on the outcome of the Doolittles' suit. The Yelins now appeal the dismissal.

DISCUSSION

The issue on appeal is whether the Yelins may properly implead Carvel under SCRA 1-014(A) of the New Mexico Rules of Civil Procedure. SCRA 1-014(A) allows a defendant to implead "a person not a party to the action who is or may be liable to him for all or part of the plaintiff's claim against him." This Court has consistently interpreted this requirement to mean that the third party's potential liability must be derivative of or dependent upon the outcome of the primary claim against the defendant. Yates Exploration, Inc. v. Valley Improvement Ass'n, 108 N.M. 405, 408, 773 P.2d 350, 353 (1989); Grain Dealers Mut. Ins. Co. v. Reed, 105 N.M. 586, 587, 734 P.2d 1269, 1270 (1987). See also 6 Charles A. Wright et al., Federal Practice and Procedure Sec. 1446 (2d ed.1990) (noting that the secondary or derivative liability notion is central to impleader); United States v. Joe Grasso & Son, Inc., 380 F.2d 749, 751 (5th Cir.1967) (noting that Federal Rules of Civil Procedure require derivative liability).

Traditionally, we have held that derivative or secondary liability to the defendant, on the basis of indemnity, contribution or some similar theory, is essential for maintaining a third-party action. Yates Exploration, 108 N.M. at 408, 773 P.2d at 353; Grain Dealers, 105 N.M. at 587, 734 P.2d at 1270; cf. Tipton v. Texaco, Inc., 103 N.M. 689, 693, 712 P.2d 1351, 1355 (1985) (allowing continued impleader of concurrent tortfeasors, whose liability for contribution was abolished after the adoption of comparative negligence). Thus, we note that although SCRA 1-014 should be interpreted liberally to facilitate judicial economy, Tipton, 103 N.M. at 693, 712 P.2d at 1355; 3 James W. Moore & Richard D. Freer, Moore's Federal Practice p 14.07 (2d ed.1994), "it was not intended to be used to resolve every controversy between the defendant and a third-party which may have some relationship with the transaction at issue in the original complaint." Yates Exploration, 108 N.M. at 408, 773 P.2d at 353.

The only question in this appeal is whether Carvel's potential liability is derivative of or independent from the Doolittles' main claim against the Yelins. The Yelins argue that a defendant sued for breach of contract has a right of implied indemnity against a third person whose wrong caused the defendant's breach. They claim that Carvel's wrongful conduct and breach of the franchise agreement made it impossible for them to fulfill their obligations under the lease agreement and that Carvel's actions give rise to a claim for implied indemnity.

New Mexico courts have allowed an action for indemnification in several situations. See Amrep Southwest, Inc. v. Shollenbarger Wood Treating, Inc. (In re Consol. Vista Hills Retaining Wall Litigation), 119 N.M. 542, 546, 893 P.2d 438, 441-42 (1995). Traditional indemnification is based on an independent, preexisting legal relationship, and the right to indemnification typically arises from an express or implied contract. Id. New Mexico courts have also held that indemnification can arise by operation of law to prevent an inequitable result. Consequently, we have applied equitable indemnity in cases involving vicarious or derivative liability, "as when an employer must pay for the negligent conduct of its employee under the doctrine of respondeat superior or when a person is directed by another to do something that appears innocent but is in fact wrongful." Id. We have also applied indemnification principles "in both negligence and strict liability cases involving persons in the chain of supply of a product, and in breach of warranty cases." Id. (citations omitted). In addition, this Court recently recognized the theory of proportional indemnification, which applies when both a defendant and a third party would be concurrently liable to the plaintiff but, because of the plaintiff's choice of remedy, the liability is placed only on the former and cannot be prorated between the wrongdoers. Id. at 551, 893 P.2d at 447-49. The Yelins' indemnity claim, however, does not implicate any of these designated theories; nor do the underlying facts of this case fall within one of the aforementioned situations in which we have applied indemnity principles in order to avoid inequitable results.

Instead, the Yelins rely on University Ford v. Marlin, 87 N.M. 203, 531 P.2d 937 (1974) for support of their proposition that equitable indemnity also arises when a defendant's breach is caused by the wrongful acts of a third person. In University Ford, the plaintiff sued the defendant, Louis Motors, for failing to turn over the proceeds of a sale Louis Motors made on the plaintiff's behalf. Louis Motors was unable to turn over the proceeds because the third-party defendant bank had negligently allowed another individual to cash the proceeds check which had been issued in defendant's name. Id. at 204-05, 531 P.2d at 938-39. The University Ford Court upheld the trial court's finding that the bank was liable to Louis Motors for the loss of the proceeds under the circumstances. Id. at 205, 531 P.2d at 939.

We are not persuaded that University Ford supports the Yelins' position in this matter. An examination of the opinion in University Ford does not reveal the legal theory or rationale which the University Ford court employed in arriving at its conclusion. The Court never focused upon or discussed the principles of indemnification. In our view, all that can be said of University Ford is that it held that the bank was negligent in cashing a check without proper authorization and endorsement, and therefore the bank owed the lost proceeds to its customer on whose account the check was drawn. In view of the potential for confusion which is inherent in University Ford, to the extent that it can be read as inconsistent with this opinion, it is overruled.

The Yelins' claim for indemnity is much closer to the claim the court in Southeast Mortgage Co. v. Mullins, 514 F.2d 747 (5th Cir.1975), rejected as improper under Rule 14 of the Federal Rules of Civil Procedure, the federal counterpart to SCRA 1-014. In Southeast Mortgage, the Department of Housing and Urban Development (HUD) helped the defendant, Mullins, take out a loan to purchase a home. After Mullins defaulted on the loan and the mortgage company instituted foreclosure proceedings against Mullins, she attempted to implead HUD. Mullins alleged that HUD had violated the National Housing Act by failing to enforce certain regulations thereby causing the foreclosure proceeding. Id. at 748-49. The court noted,

The sole connection between the [main claim and the third-party claim] is the contention that, but for HUD's failure to adopt and enforce adequate regulations, there would have been no foreclosure proceedings.

The suggestion that a separate and independent claim can be made the proper subject of a third party...