Essay Question 5.
In September 1997, P (a citizen of New York) and D (a citizen of New Jersey) entered into a lease, which was to run for five years (from January 1, 1998 to December 31, 2002). The terms of the lease was that D was to be given use of P’s commercial building in New York City, with $50,000 annual rent to be paid to P at the beginning of each year. Although it was not part of the lease, P knew that D was to pay $20,000 of the yearly rent from an “Encouragement Grant” D received annually from the City of New York. “Encouragement Grants” are intended to subsidize rent for those who start businesses in distressed neighborhoods. D’s intended business was a florist shop.
D took possession of the property in January of 1998 but moved out at the end of the year, claiming the property lacked the floor space and the foot traffic that P had promised. D never paid rent, including for the first year of use (1998). He promised P that he would pay him the 1998 rent when he could get the money together, but he refused to reoccupy the premises or pay for any of the remaining years under the lease. P was unable to find another tenant for the property.
P initiated suit against D in February of 2000 in the Federal District Court for the Southern District of New York. P asked for $100,000 in damages as compensation for the rent that should have been paid for 1999 and 2000. In his answer, D admitted entering into the lease and failing to pay the rent, but introduced the affirmative defense of fraud, because P materially misrepresented the floor space and foot traffic of the property. P made a motion for a more definite statement, on the ground that D’s answer failed to state with specificity the content of P’s misrepresentations concerning floor space and foot traffic. The court granted the motion. D amended his answer. But P, still dissatisfied by the level of specificity, made a motion to strike the affirmative defense, which was granted by the court. P then made a motion for a judgment on the pleadings. This also was granted and P was awarded a judgment of $100,000. D declined to appeal the judgment.
D refused to pay the rent due in 2001 and 2002. D also refused to pay P for the 1998 rent. In January of 2003, P once again sued D, this time in New York state court, for $160,000. $150,000 of the relief P requested represented the rents due in 1998, 2001 and 2002. The extra $10,000 was under a New York City law allowing those who inform the City that an “Encouragement Grant” is being misused to sue the grantee for $10,000. A condition for such a suit, however, is the issuance of a right-to-sue letter by the New York City Encouragement Grant Authority. Although P had informed the City of D’s misuse of the grant in late 1999, the Authority had not yet issued P a right-to-sue letter when P initially sued D in February of 2000. (It finally issued the letter in February of 2001.)
In his answer, D introduced two affirmative defenses: 1) that claim preclusion barred all of P’s actions and 2) that P had no right to the rent because of fraud – P materially misrepresented the floor space and foot traffic of the property.
Should D’s affirmative defense of claim preclusion succeed? Why or why not?
Does D’s affirmative defense of fraud have a chance of succeeding? Why or why
Is P claim precluded?
Many of you addressed the Erie question of what claim preclusion law applies here. We know that the claim preclusion law that applies is the law of the court where the claim precluding judgment was entered, not the law of the court where claim preclusion is being appealed to. But the court where the claim precluding judgment was entered in this question was a federal court in New York sitting in diversity (P's action for rent was presumably under state law), so the relevant claim preclusion law could be either New York or federal law. Accordingly, many of you engaged in the Erie analysis to determine which applied. But why is it necessary to answer the Erie question for this question? Federal law takes the "transactional" approach to the scope of a claim, as you should know. But so does New York law. See O'Brien v. City of Syracuse. To be sure, there are some questions (as we shall see) about the scope of a claim that are not answered simply by appeal to the transactional standard. But you don't know that New York and federal law differ on these topics. Knowing which law applies will not help you answer this question. I gave some points for a good Erie discussion, but you did not do well on this question unless you discussed other topics.
The issue therefore is the following: Under either federal or New York law, were the actions brought in New York state court barred because of the earlier judgment in federal court? The first step in answering the question is whether the judgment in federal court was one that had claim preclusive effect (that is, whether it was "on the merits" -- we know that it was final and valid). Is a judgment on the pleadings (a judgment that ultimately had its source in D's failure to abide by 9(b) pleading standards concerning fraud) on the merits? We did not answer this question in class, but some analogies with failure to state a claim were appropriate. Given that the dismissal of a plaintiff's action for failure to state a claim can have claim preclusive effect unless the court says the dismissal was without prejudice, it makes sense that a judgment on the pleadings against a defendant should also have claim preclusive effect. The plaintiff had an obligation to bring all causes of action concerning the same transaction against the defendant and the fact that the plaintiff received a judgment against the defendant solely because the defendant could not plead a valid defense should not change this fact.
Once we've determined that the judgment is on the merits and so has claim preclusive effect, it seems straightforward that the 1998 rent action should be claim precluded. Under the Sutcliffe case "claims for amounts due on running accounts, such as rent under a lease, must include all amounts due at the time action is brought" and the 1998 rent was due when the 1999 and 2000 rent actions were brought. By the same token, it seems clear that actions for the 2001 and 2002 rent should not be claim precluded, because these rents were not due at the time that the earlier action was brought.
But you were rewarded for not being too hasty here. The role of claim preclusion law is to encourage the plaintiff to bring all actions that were available to him at the time (provided that the actions together form a convenient litigation unit). D arguably anticipatorily repudiated the entire contract (except for the 1998 rent), including the 2001 and 2002 rent installments. For this reason, P knew that the actions for the 2001 and 2002 rent would have to be brought. It is very plausible that this subjected P to a duty under claim preclusion law to join them in the first action. You were heavily rewarded for worrying about this -- I did not expect you to know the answer. For a discussion, see Restatement 2nd Judgments section 26, comment g.
By the same token, D's promise to pay P the 1998 rent may have relieved P of the obligation to include an action for the 1998 rent in the earlier suit. After all, his failure to include the 1998 action was the result of reliance on a misrepresentation by D. Once again, you were heavily rewarded for worrying about this -- I did not expect an answer. For a discussion, see Restatement 2nd Judgments section 26, comment j.
What about the Encouragement Grant action (a surprisingly large number of you simply ignored this action)? A condition for bringing the action, namely the issuance of the right to sue letter, had not been fulfilled. Does that absolve P from any obligations under claim preclusion? To be sure, when an action cannot be brought in the forum at all (for example because there is no subject matter jurisdiction for it there) the plaintiff is not barred from bringing the action subsequently. But what if a mere condition for the action has yet to be fulfilled? Imagine, for example, that it is a condition that could be quickly and easily fulfilled -- surely then the plaintiff should not be relieved of his obligations under claim preclusion to join the action. Instead the law of claim preclusion would simply obligate the plaintiff to fulfill the condition so the action can be joined. But what if fulfilling the condition is one that is partially out of the plaintiff's control, as is the case in this question? Must he wait to bring suit until the condition is fulfilled? Some courts have held that he must. Boateng v. InterAmerican University, 210 F.3d 56, 62-63 (1st Cir. 2000) (plaintiff was claim precluded from bringing action in second suit even though the right-to-sue letter that was a condition for the action was not issued until after the judgment in the first suit). Once again, you were heavily rewarded for worrying about this -- I did not expect an answer.
Is D issue precluded?
The same issue of P's fraud concerning floor space and foot traffic that is D's defense in second suit was also introduced by D as a defense in the first suit. Is D issue precluded from reintroducing this defense? The important problem here is whether the determination that a party cannot plead fraud with the particularity sufficient to satisfy FRCP 9(b) means that the issue of fraud has been actually litigated and decided against that party.
We never discussed this in class. You were rewarded for worrying about it. The argument that D is indeed issue precluded is the following: D's failure to satisfy the standards for particularity under FRCP 9(b) must have meant that he possessed insufficient evidence of P's fraud. Because he had insufficient evidence, he could not be specific enough about P's fraud without violating Rule 11's requirement of evidentiary support for one's allegations. The fact that D has insufficient evidence is a reason to conclude that the issue of P's fraud has indeed been actually litigated. It has some analogies to the determination of an issue on summary judgment. But there are some disanalogies. D did not yet have the benefit of discovery. See Restatement 2nd Judgments section 27 comment d. Once again, you were heavily rewarded for worrying about this -- I did not expect this particular answer.Some discussed the question of whether the determination that there was no fraud (a determination that was made by the court when it refused to allow D to plead fraud in his answer) was essential to the judgment. It clearly was. It was only because of the court's refusal to allow D to plead fraud that P got his judgment on the pleadings.