X (a domiciliary of Nevada) established a trust for the benefit of twin brothers: P (a domiciliary of Oregon) and Y (a domiciliary of Oregon). Upon reaching the age of 50, P will receive 75% and Y 25% of the value of the trust. At the age of 25, P sued the trustee of the trust, D (a domiciliary of Nevada), in the federal district court for Northern District of Georgia. P alleged that D wrongly claimed ownership of a $200,000 parcel of land in the Northern District of Georgia. The land, P argued, belonged to the trust. Y testified as a witness in the case. The jury determined that the land is in fact D’s and the federal court issued a judgment for D.
Soon afterward, D dies and Z inherits his estate. Within a year, Y sues Z in state court in Georgia. Y claims that the $200,000 property that Z inherited in fact belongs to the trust. Z claims that Y is issue precluded from relitigating whether the property belongs to the trust. How should the state court rule?
First of all, it’s worth noting the Erie problem lurking in this question. We are trying to determine the issue preclusive effect of a judgment of a federal court sitting in diversity in Georgia. Which law applies – federal law or Georgia law? Semtek is not exactly on point, since it said only that state law applies to the claim preclusive effect of a dismissal, on statute of limitations grounds, issued by a federal court sitting in diversity.
But since you don’t know either Georgia or federal law on the particular issue preclusion question, I expected you only to identify the Erie problem without resolving it. You had to answer the question simply by relying on what you know in general about the law of issue preclusion.
One element of the question is easy – Z, as a successor in interest, is surely in privity with D. (We discussed this in class.) For this reason, whatever issue preclusion arguments D could have offered had he been sued by Y, Z can offer against Y as well. Accordingly, this is not an example of nonmutual issue preclusion, since the person taking advantage of issue preclusion was a party or in privity with a party in the earlier action.
But there is a problem with Z (or D) being able to issue preclude Y. Y was not a party in the earlier action. (Being a witness is not the same as being a party.) Nor can one say that Y was in privity with P. The mere fact that both P and Y had similar interests (getting as much into the trust as possible) is insufficient to create a relationship of privity. Consider the Showworld case (discussed in the 2008 class), in which the landlord and the tenant had similar interests (that the tenant would not be evicted) and yet no relationship of privity was found.
It is true that P had as strong an incentive to show that the land was part of the trust as Y would. But that is not enough to show privity. Consider a plane crash in which many people, including P and Y, were harmed. P suffered $150K in damages, and Y $50K in damages. It is true that P has at least as strong an incentive as Y to show that the airline was negligent. But it would be wrong to issue preclude Y from litigating the airline’s negligence simply because P had sued the airline individually and lost.
If there is no privity between Y and P, there is a problem with issue precluding Y, since the general rule is that someone who is not a party or in privity with a party in an earlier action cannot be issue precluded.
But there is a problem with not allowing issue preclusion too. If we don’t D (and Z) could be whipsawed. This is because Y was a necessary party in the earlier action. Y claims an interest in the property and is so situated that disposing of the action in Y’s absence will leave D (and Z) subject to a substantial risk of incurring inconsistent obligations. See FRCP 19(a). Even though it was determined with respect to P that D rather than the trust owns the property, it could later be determined with respect to Y that the trust, rather than D, owns the property. This is intolerable. Does poor D (and Z) own the property or not?
As we discussed in 2008 in connection with the Showworld case, there is a current tendency (on the cutting edge of issue preclusion law) to hold a necessary party who could have intervened but failed to do so issue precluded. The scenario in this question is a particularly strong case for such preclusion. Some of you pointed to such considerations as a reason to say that there was privity between P and Y. I’m not sure this should be called privity, but what mattered was that you recognized the argument for issue preclusion.
Could Y have intervened? Since he was a witness, he certainly knew about P’s action against D. The only problem is SMJ since Y’s action was for only $50K (25% of $200K property). But there would have been SMJ for Y’s action against D. P and Y were asserting a common and undivided right in the property, see Shields v Thomas, 58 U.S. (17 How.) 3 (1855), so Y should be able to aggregate his action against D with P’s $125K action against D to get above the jurisdictional minimum.