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Funny Guy LLC v. Lecego LLC

Supreme Court of Virginia

February 16, 2017

THE FUNNY GUY, LLC, ET AL.
v.
LECEGO, LLC, ET AL.

         FROM THE CIRCUIT COURT OF FAIRFAX COUNTY Daniel E. Ortiz, Judge

          OPINION

          D. ARTHUR KELSEY JUSTICE

         This case involves only one underlying dispute: The Funny Guy, LLC contends that it was not paid for work it did for Lecego, LLC.[1] That dispute, however, generated three cascading theories of recovery against Lecego. Funny Guy first claimed that, after the dispute arose, Lecego agreed to pay almost all (about 97%) of the money that it allegedly owed as part of a settlement agreement (the settlement theory). Funny Guy filed suit on that theory and lost because the trial court found that no such settlement ever existed.

         After that theory proved unsuccessful, Funny Guy filed a second suit claiming that the initial promise to pay constituted a binding contract (the oral-contract theory) and argued alternatively that Lecego should pay anyway even if no binding contract existed (the quantum-meruit theory). The trial court dismissed the second suit because these two alternative theories of recovery could have been, and thus should have been, asserted in the first suit. On appeal, Funny Guy contends that the trial court erred in dismissing this second suit on the basis of res judicata. We disagree and affirm.

         I.

         In 2014, Funny Guy sued Lecego and claimed that, from 2012 to 2013, Funny Guy had "provided certain information technology and related services" pursuant to a contract with Lecego. J.A. at 312.[2] When the parties terminated their agreement, a dispute arose over payment for Funny Guy's services and other issues. Funny Guy alleged that Lecego had agreed to pay approximately 97% of the fees claimed (amounting to $73, 290) in an "attempt to resolve" the dispute but later refused to do so. Id. at 312-14. Finding there was "no meeting of the minds as a matter of law" on the alleged compromise of the payment dispute, the trial court sustained Lecego's demurrer. Id. at 406.

         Less than a year later, Funny Guy again sued Lecego asserting two alternative theories of recovery, breach of contract and quantum meruit. This second complaint, like the first, alleged that Funny Guy had performed work for Lecego but was never paid for it. Compare id. at 6, with id. at 312, 314. Seeking $75, 790, [3] Funny Guy alleged that Lecego breached its oral agreement to pay for the services and that, even if there were no oral agreement, Lecego should still make the requested payment under quantum-meruit principles. Lecego filed a plea in bar and contended that res judicata precluded Funny Guy's second suit because these alternative theories of recovery could have been, and thus should have been, asserted in the first suit. The trial court agreed and dismissed the second suit with prejudice. See id. at 245, 300-01.

         II.

         The trial court correctly reasoned that Rule 1:6 prohibited Funny Guy from filing two separate lawsuits when one would have been perfectly sufficient. Drafted to have a pragmatically broad reach, Rule 1:6 revived the historic principles of res judicata and applied them to modern litigation. See infra Part II.B. Both the text and historical context of Rule 1:6 calibrate its scope to Virginia's statutes governing pleading and joinder of claims. Because Funny Guy could have joined all three of its claims in a single suit and no disqualifying principle of res judicata applies, Rule 1:6 prohibited Funny Guy from filing a second suit after losing its first suit on the merits.

         Funny Guy's argument to the contrary treats this case as two wholly separate disputes: Lecego's initial promise to pay, on one hand, and Lecego's promise to pay what it had earlier promised to pay, on the other. We find this distinction artificial and overly formalistic. This analysis comes uncomfortably close to reconstituting the "same evidence" test applied in Davis v. Marshall Homes, Inc., 265 Va. 159, 166-68, 171, 576 S.E.2d 504, 507-08, 510 (2003), that Rule 1:6 expressly rejected. For purposes of res judicata, the task of categorizing the cluster of facts that define a dispute is a pragmatic exercise that focuses on how the parties, not legal dictionaries, would view the conflict. From this perspective, there is no reason to subject the parties - and the judicial system - to two separate lawsuits to resolve one underlying dispute.

         A.

         The exact origins of res judicata cannot be found in any "statute or rule of the common law." Martin P. Burks, Common Law and Statutory Pleading and Practice § 357, at 672 (T. Munford Boyd ed., 4th ed. 1952).[4] Some contend that res judicata "bears a close resemblance to the [plea of] exceptio rei judicatae of the Roman law." Robert von Moschzisker, Res Judicata, 38 Yale L.J. 299, 299 (1929). "The Roman principle, based on the solemnity of the judicial pronouncement, was early adopted in English law, developing into the principle now known as merger and bar." Note, Developments in the Law - Res Judicata, 65 Harv. L. Rev. 818, 820 (1952) (footnote omitted).[5] "It is not too much to say that [res judicata] is a fundamental concept in the organization of every jural society." 2 Black, supra note 5, § 500, at 760.[6] It protects not only parties from having to try the same case twice but also society from having to pay the institutional cost of adjudicating needlessly fragmented litigation.[7]

         Res judicata involves both issue and claim preclusion. See generally Lee v. Spoden, 290 Va. 235, 245-46, 776 S.E.2d 798, 803-04 (2015). Issue preclusion bars relitigation of common factual issues between the same or related parties. "Under the concept of collateral estoppel, 'the parties to the first action and their privies are precluded from litigating [in a subsequent suit] any issue of fact actually litigated and essential to a valid and final personal judgment in the first action.'" Rawlings v. Lopez, 267 Va. 4, 4-5, 591 S.E.2d 691, 692 (2004) (alteration in original) (citation omitted). Claim preclusion, on the other hand,

bars the assertion of legal or equitable rights of action, even if they were not specifically resolved in earlier litigation. . . . Called "merger" when the claimant wins the first suit and "bar" when the claimant loses it, claim preclusion under the doctrine of res judicata treats unasserted claims as being subsumed in the disposition of the related, previously adjudicated, claims.

Kent Sinclair & Leigh B. Middleditch, Jr., Virginia Civil Procedure § 14.11[B][5], at 1214 (6th ed. 2014) (emphasis in original).

         For all of the legal argot making the doctrine sound tiresomely erudite, the thought is really no more complicated than saying that, as Henry Black put it, litigants must "make the most of their day in court." 2 Black, supra note 5, § 731, at 1096. With equal clarity, it could also be said: "The law should afford one full, fair hearing relating to a particular problem - but not two." Kent Sinclair, Guide to Virginia Law & Equity Reform and Other Landmark Changes § 11.01, at 246 (2006).

         Claim preclusion has always been the stepchild of pleading and joinder rules. "Determining which claims should have been brought in earlier litigation largely depends on which claims could have been brought." Id. § 11.2, at 247 (emphases in original); see also 2 Black, supra note 5, § 618, at 944-45. "Early American res judicata doctrine evolved in the shadow of these pleading rules and statutes that limited what one could litigate in a single case." Sinclair, supra, § 11.2, at 248. "The plaintiff, in order to have an effective remedy in the common law courts, must have been able to fit his problem into or within one of the fixed, established original writs or forms of actions, " which "dictated the type of process, the content of the declaration (the first pleading), the method of proof, and the type of remedy." W. Hamilton Bryson, Bryson on Virginia Civil Procedure § 6.02[2], at 6-7 to 6-8 (4th ed. 2005); see also Henry John Stephen, A Treatise on the Principles of Pleading in Civil Action 5-7 (Francis J. Troubat ed., 8th Am. ed. 1859).

         "At common law, joinder of tort and contract claims was forbidden." Sinclair & Middleditch, supra, § 8.6[B], at 706-07. Similar nonjoinder rules arose from the separation of law and equity.[8] Before the federal courts merged law and equity, legal and equitable claims "could not be united in the same suit in a court of the United States." Cherokee Nation v. Southern Kan. Ry., 135 U.S. 641, 651 (1890).[9] "[Some] jurisdictions, like Virginia, permitted legal claims to be asserted in a chancery suit under the 'clean up' doctrine, but only at the price of forfeiting the historic right to a jury." Sinclair, supra, § 11.2, at 248.[10] Although an equity court could grant legal remedies to achieve complete justice between the parties, the opposite was not true. A law court could not hear a claim for equitable remedies. See Simmons v. Miller, 261 Va. 561, 570 n.1, 544 S.E.2d 666, 672 n.1 (2001) (noting that an equitable action "may not be brought on the law side of the court"). The common-law doctrine of claim preclusion mirrored these inflexible pleading and joinder rules.

Because what could have been brought in the former suit should have been brought, the merger-bar principle of claim preclusion depended on the procedural constraints on the first suit. If the later asserted claim could not [have been] raised in the earlier trial or, if it could have been raised, but at an unacceptably high juristic cost (like losing the right to a jury), claim preclusion permitted the second trial - no matter that both trials involved the same contest between the same litigants. Though antithetical to the policies underlying res judicata, the second trial was a necessary accommodation of confused and peculiar procedural rules governing pleadings and joinder.

Sinclair, supra, § 11.2, at 248-49.

         Over time, courts developed analytical shortcuts to decide the easy cases. One of the most popular was the "same evidence" formulation. See Restatement of Judgments § 61, at 240 (1942) (stating that "the plaintiff is precluded from subsequently maintaining a second action based upon the same transaction, if the evidence needed to sustain the second action would have sustained the first action"). The first Restatement of Judgments applied this test to determine what constituted a single transaction for purposes of res judicata. However, "[a]lthough the 'same evidence' standard was '[one] of the tests' used at the time, it was not the only one." Nevada v. United States, 463 U.S. 110, 130 n.12 (1983) (second alteration in original) (quoting The Haytian Republic, 154 U.S. 118, 125 (1894)).

         This shortcut made clear when res judicata doubtlessly applied to preclude the second suit but said nothing about when it did not apply. In this way, the same evidence formulation was "a test for inclusion" rather than as a "test for exclusion." Casad & Clermont, supra note 5, at 66. Though the point was lost on some courts, the first Restatement explicitly stated:

Although it is true that the judgment in the prior action precludes the plaintiff from subsequently maintaining the second action based upon the same transaction if the evidence needed to sustain the second action would have sustained the first action, the negative is not true. Although the evidence needed to sustain the second action would not have sustained the first action, the plaintiff may be precluded by the judgment in the first action from maintaining the second action.

         Restatement of Judgments § 61 cmt. a, at 240 (emphasis added).

Identity of evidence supporting the two causes can show that the second action is so closely related to the first that only one lawsuit should be permitted. The lack of identity of evidence, however, does not necessarily mean that the second action should be allowed. Many cases recognized this, and this is the view reflected in the Restatements. Accordingly, other criteria have to be used to determine whether a second action should be precluded when it did not depend upon the same evidence that would have supported the first action.

Casad & Clermont, supra note 5, at 66 (footnotes omitted).

         "Definitions of what constitutes the 'same cause of action' have not remained static over time, " Nevada, 463 U.S. at 130, and thus, res judicata had to expand to parallel modern pleading and joinder reforms.[11] "In perfect symmetry, as the could-have-litigated category broadened, so too did the reach of the should-have-litigated principle." Sinclair & Middleditch, supra, § 14.11[B][5], at 1218-19. The second Restatement of Judgments reflects this broad view of res judicata, under which a prior final judgment on the merits of a cause of action extinguishes "all rights of the plaintiff to remedies against the defendant with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose." Restatement (Second) of Judgments § 24(1). Moreover,

What factual grouping constitutes a "transaction", and what groupings constitute a "series", are to be determined pragmatically, giving weight to such considerations as whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties' expectations or business understanding or usage.

Id. § 24(2); see also Sinclair & Middleditch, supra, § 14.11[B][5], at 1220, 1222. Because the transactional approach is consistent with the reasoning underlying early res judicata doctrine, it represents a refinement of, and not a departure from, traditional res judicata principles.

         B.

         Virginia law has historically recognized that a litigant must unite every joinable claim that he has against a particular defendant in one proceeding or risk the preclusion of his other claims. "Every litigant should have opportunity to present whatever grievance he may have to a court of competent jurisdiction; but having enjoyed that opportunity and having failed to avail himself of it, he must accept the consequences." Miller v. Smith, 109 Va. 651, 655, 64 S.E. 956, 957 (1909). Thus, the "effect of a final decree is not only to conclude the parties as to every question actually raised and decided, but as to every claim which properly belonged to the subject of litigation and which the parties, by the exercise of reasonable diligence, might have raised at the time." Smith v. Holland, 124 Va. 663, 666, 98 S.E. 676, 677 (1919) (emphasis added).[12] "Several statements of this underlying principle go back to the earliest formulations of Virginia res judicata law." Sinclair, supra, § 11.01, at 246. When a court has decided a party's claim regarding a particular "subject-matter" on the merits, that decision is "not now to be questioned in a subsequent controversy upon the same subject-matter between the same parties.'" Washington, Ohio & W. R.R. Co. v. Cazenove, 83 Va. 744, 752, 3 S.E. 433, 438 (1887).

         Early Virginia cases applying the merger-bar principles of res judicata focused on the subject matter of the underlying dispute - not the particular legal theories asserted, alternatively pled claims, tightly defined fact patterns, or formalistic distinctions between related rights of action. See, e.g., Martin v. Columbian Paper Co., 101 Va. 699, 701, 44 S.E. 918, 918-19 (1903) (noting that the two suits "involve the same subject-matter, and have a common object"); Howison v. Weeden, 77 Va. 704, 707 (1883) ("[I]f . . . the same subject matter has been once fully passed upon, and the sentence of this court pronounced between the same parties or their privies, then it is res judicata . . . ."). The problem with res judicata at that time was not scope limitations on the should-have-litigated aspect of the doctrine, but procedural limitations on the could-have-litigated aspect.

          As stated previously, a common-law plaintiff could not join tort and contract claims in the same suit. See Kavanaugh v. Donovan, 186 Va. 85, 93, 41 S.E.2d 489, 493 (1947); Gary v. Abingdon Publ'g Co., 94 Va. 775, 779, 27 S.E. 595, 596 (1897). In Virginia, that procedural limitation disappeared with the enactment of Code §§ 8.01-272 and 8.01-281, which allow plaintiffs to join tort and contract claims and to plead alternative theories of recovery. See Powers v. Cherin, 249 Va. 33, 37, 452 S.E.2d 666, 668 (1995). Both statutes employ the "same transaction or occurrence" test to define which claims a plaintiff may join. Code §§ 8.01-272, -281; see Fox v. Deese, 234 Va. 412, 422-23, 362 S.E.2d 699, 705 (1987).[13]

         As modern pleading reforms loosened the procedural limitations on res judicata, this Court, ironically, tightened the historic scope of the merger-bar principles of the doctrine. In Davis v. Marshall Homes, Inc., 265 Va. 159, 576 S.E.2d 504 (2003), the Court adopted a strict view of the same-evidence test that was wholly out of sync with the prior, far broader, same-subject-matter test. The "test" to determine whether different "claims are part of a single cause of action, " Davis stated, is "whether the same evidence is necessary to prove each claim." Davis, 265 Va. at 166, 576 S.E.2d at 507 (quoting Brown v. Haley, 233 Va. 210, 216, 355 S.E.2d 563, 567 (1987)). If the claims involve different, though related, fact patterns, Davis held, res judicata does not apply even if the claims all arise out of the same underlying dispute.

         Commentators argued that Davis "redefined the doctrine of res judicata, " John R. Walk, Annual Survey of Virginia Law: Civil Practice and Procedure, 39 U. Rich. L. Rev. 87, 91 (2004), causing it to become a "source of confusion" among experienced litigators and trial judges, Sinclair & Middleditch, supra, § 14.11[B][5], at 1216. Res judicata had become "'unglued' in Virginia, " Professor Costello stated, because "the rule was turned backwards and became detrimental to the basic policy of res judicata, rather than supportive of it." John L. Costello, Virginia Remedies § 7.11[1], at 7-40 (4th ed. 2011). One court presciently described Davis as a "temporary aberration" in Virginia res judicata law. Caperton v. A.T. Massey Coal Co., 679 S.E.2d 223, 262 n.45 ( W.Va. 2008), rev'd on other grounds, 556 U.S. 868, 890 (2009). Though harsh, such criticisms were not unfair, as scholars have for some time lamented the "frequent misadventures in attempting to transport 'cause of action' thinking from one procedural context to another" until courts began to recognize "that procedural reform ha[d] transformed the scope of claim preclusion." 18 Wright et al., supra note 8, § 4407, at 179.

         The conceptual flaw in Davis was the use of the same-evidence test as a rule of exclusion. That test asked whether "the evidence needed to sustain the second action would have sustained the first action." Restatement of Judgments § 61 cmt. a, at 240. However, though res judicata barred a second claim requiring consideration of the same evidence as the first claim, "the negative is not true. Although the evidence needed to sustain the second action would not have sustained the first action, the plaintiff may be precluded by the judgment in the first action from maintaining the second action." Id. Thus, the same-evidence formulation worked only as "a test for inclusion" rather than as a "test for exclusion." Casad & Clermont, supra note 5, at 66; see also Costello, supra, § 7.11[1], at 7-40.

         In 2004, the Boyd-Graves Conference[14] recommended that the General Assembly enact a statute to supersede Davis and to return Virginia res judicata law to the traditional same-subject- matter test. To accomplish that goal, the Conference recommended that the statute parallel the "same transaction or occurrence" formulation in Code §§ 8.01-272 and 8.01-281 and the second Restatement of Judgments. In accordance with this recommendation, the Rules Advisory Committee of the Judicial Council proposed Rule 1:6, which states, in relevant part,

A party whose claim for relief arising from identified conduct, a transaction, or an occurrence, is decided on the merits by a final judgment, shall be forever barred from prosecuting any second or subsequent civil action against the same opposing party or parties on any claim or cause of action that arises from that same conduct, transaction or occurrence, whether or not the legal theory or rights asserted in the second or subsequent action were raised in the prior lawsuit, and regardless of the ...

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